EU Accounting Rule 7: Property, Plant and Equipment PDF

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN UNION ACCOUNTING RULE 7 Property, Plant and Equipment  EUROPEAN COMMISSION Budget Budget execution...

EUROPEAN COMMISSION Budget Budget execution Accounting EUROPEAN UNION ACCOUNTING RULE 7 Property, Plant and Equipment  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 2 of 11 INDEX 1. Objective.......................................................................................................................................3 2. Scope.............................................................................................................................................3 3. Definitions.....................................................................................................................................3 4. Recognition...................................................................................................................................4 4.1 General recognition principle...............................................................................................4 4.2 Initial and subsequent costs..................................................................................................5 5. Measurement.................................................................................................................................5 5.1 Measurement at recognition.................................................................................................5 5.2 Elements of Cost...................................................................................................................5 5.3 Measurement of cost.............................................................................................................7 5.4 Measurement after recognition.............................................................................................7 6. Depreciation..................................................................................................................................7 7. Impairment....................................................................................................................................8 8. Derecognition................................................................................................................................8 9. Disclosures....................................................................................................................................9 10. Effective date...............................................................................................................................10 11. Reference to other rules...............................................................................................................10  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 3 of 11 1. Objective The objective of this EU accounting rule is to prescribe the accounting treatment for property, plant and equipment (tangible fixed assets) so that users of the EU financial statements can discern information about the EU's investments in or spending on property, plant and equipment. 2. Scope This EU accounting rule applies to accounting for all property, plant and equipment in the financial statements of the European Union and its consolidated entities, unless in the scope of another EU accounting rules (i.e. Leasing). 3. Definitions The following terms are used in this rule with the meanings specified: 1) Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity. 2) Property, Plant and Equipment are (tangible) items that: o Are held for use in the production or supply of goods or services, for rental or others, or for administrative purposes; and o Are expected to be used during more than one reporting period. 3) Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation and accumulated impairment losses. 4) Class of property, plant and equipment means a grouping of assets of a similar nature or function in the European Union's operations that is shown as a single item for the purpose of disclosure in the financial statements. 5) Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction. 6) Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. 7) Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 4 of 11 8) Entity-specific value is the present value of the cashflows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability. 9) Fair Value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 10) An impairment loss of a cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable amount. 11) An impairment loss of a non-cash generating asset is the amount by which the carrying amount of an asset exceeds its recoverable service amount. 12) Recoverable amount is the higher of a cash-generating asset's fair value less costs to sell and its value in use. 13) Recoverable service amount is the higher of a non-cash-generating asset's fair value less costs to sell and its value in use. 14) The Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. 15) Useful life is the period over which an asset is expected to be available for use by an entity. 16) Replacement cost is the cost the European Union would incur to replace the asset’s service potential. 17) Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from a disposal at the end of its useful life. 4. Recognition 4.1 General recognition principle 1) The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:  It is probable that future economic benefits or service potential associated with the item will flow to the EU; and  The cost or fair value of the item can be measured reliably. 2) This accounting rule does not prescribe what constitutes a fixed asset in detail. Thus judgment is required in applying the recognition criteria to EU entities specific circumstances. It may be appropriate to aggregate individually insignificant items to apply the criteria to the aggregate value (e.g. library books). Major spare parts can qualify as property, plant and equipment when  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 5 of 11 an EU entity expects to use them during more than one period or when they can only be used in connection with fixed assets. 4.2 Initial and subsequent costs 1) Fixed assets acquired to enable an EU entity to derive future economic benefits or service potential from related assets in excess of what could be derived had those items not been acquired qualify for recognition as assets. Although they are not directly increasing the future economic benefits or service potential of an EU entity it may be necessary to obtain the future economic benefits or service potential from its other assets. An example for this is the sprinkler system of a building. 2) Costs of the day-to-day servicing (repairs and maintenance) of a fixed asset are not recognised in the carrying amount of the item. These costs are recognised in the economic outturn account/statement of financial performance as incurred. 3) Parts of some items of fixed assets may require replacement at regular intervals (e.g. interior walls of a building). An EU entity recognises in the carrying amount of an item of property, plant and equipment (fixed assets) the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. For the derecognition of the replaced parts, see point 8 below. 4) A condition of continuing to operate an item of property, plant and equipment (for example, a vessel) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of previous inspection (as distinct from physical parts) is derecognised. This occurs regardless of whether the cost of the previous inspection was identified in the transaction in which the item was acquired or constructed. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. 5. Measurement 5.1 Measurement at recognition 1) An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost. 2) For non-exchange transactions EU Accounting Rule 17 is applicable. An EU entity first follows the provisions in EU Accounting Rule 17 for the decision on whether or not an asset needs to be recognised. If this assessment leads to the result that an asset in the scope of this EU Accounting Rule should be recognised, the following measurement principle applies. Where an asset is  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 6 of 11 acquired through a non-exchange transaction, its cost shall be measured at its fair value as at the date of acquisition. 5.2 Elements of Cost 1) The cost of an item of property, plant and equipment comprises: a) Its purchase price, including (if applicable) import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. b) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 2) Examples of directly attributable costs are: a) Costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; b) Costs of site preparation; c) Initial delivery and handling costs; d) Installation and assembly costs; e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition; and f) Professional fees. 3) Examples of costs that are not costs of an item of property, plant and equipment are: a) Advertising and promotional activities; b) Training costs; c) Administration and other general overhead costs; d) Costs of conducting business in a new location; e) Costs of opening a new business site. 4) Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying amount of that item. For example, the following costs are not included in the carrying amount of an item of property, plant and equipment: a) Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity; b) Initial operating losses, such as those incurred while demand for the item’s output builds up; and  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 7 of 11 c) Costs of relocating or reorganising part or all of the EU entities operations. 5) The cost of a self-constructed asset is determined using the same principles as for an acquired asset. This means that any internal surpluses in constructing an asset are eliminated and similarly the cost of abnormal amounts of wasted material, labour, or other resources incurred in self- constructing an asset is not included in the cost of an asset. 5.3 Measurement of cost 1) The cost of an item of property, plant and equipment is the cash price equivalent or, for an item acquired through a non-exchange transaction, its fair value at the recognition date. 2) If borrowing costs are involved, the difference between the cost of the asset and the total payment is recognised as interest over the period of credit or recognised in the carrying amount of the item. 3) Property, plant and equipment acquired in exchange for a non-monetary asset are measured at fair value. If it is not possible to determine the fair value or the fair value of the asset given up, the cost is measured at the carrying amount of the asset given up. 5.4 Measurement after recognition After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. 6. Depreciation 1) Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Land and buildings are separable assets and are accounted for separately, even when they are acquired together. Land has usually an unlimited useful life and therefore is not depreciated. Buildings have a limited useful life and therefore are depreciable assets. 2) A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge. 3) The depreciation charge for each period shall be recognised in the economic outturn account/statement of financial performance unless it is included in the carrying amount of another asset. 4) The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. The useful life is defined in terms of the asset's expected utility to the entity. It may be shorter or longer than the economic life.  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 8 of 11 5) The residual value and the useful life of an asset shall be reviewed at least at each annual reporting date and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with accounting rule 14. 6) Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases when the asset is derecognised. 7) The depreciation method shall reflect the pattern in which the asset's future economic benefits or service potential is expected to be consumed by the entity. It shall be reviewed at each balance sheet date and if necessary adjusted to changes as change in accounting estimates. In the EU entities the straight-line method should in general be used. 7. Impairment 1) For impairment of non-cash generating and cash generating property, plant and equipment EU accounting rule 18: Impairment of assets is applicable. 2) Compensation from third parties for items of property, plant and equipment that were impaired, lost or given up shall be included in surplus or deficit when the compensation becomes receivable. 8. Derecognition 1) The carrying amount of an item of property, plant and equipment shall be derecognised: (a) On disposal; or (b) When no future economic benefits or service potential is expected from its use or disposal. 2) The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in surplus or deficit when the item is derecognised. Gains shall not be classified as revenue. 3) The disposal of an item of property, plant and equipment may occur in a variety ways (e.g. by sale, by entering into a finance lease or by donation). In determining the date of disposal of an item, an entity applies the criteria in accounting rule 4 “Revenue from Exchange Transactions” for recognising revenue from the sale of goods. For leasing contracts, EU accounting rule 8: Leases is applicable. 4) If, under the recognition principle above, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of a replacement for part of the item, then it derecognizes the carrying amount of the replaced part regardless of whether the replaced part had been depreciated separately. If it is not practicable for an entity to determine the carrying  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 9 of 11 amount of the replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part was at the time it was acquired or constructed. 5) The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. 6) The consideration receivable on disposal of an item of property, plant and equipment is recognised initially at its fair value. If payment for the item is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognised as interest revenue in accordance with accounting rule 4 reflecting the effective yield on the receivable. 9. Disclosures 1) The financial statements shall disclose, for each class of property, plant and equipment recognised in the financial statements: (a) The measurement bases used for determining the gross carrying amount; (b) The depreciation methods used; (c) The useful lives or the depreciation rates used; (d) The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and (e) A reconciliation of the carrying amount at the beginning and end of the period showing: (i) Additions; (ii) Disposals; (iii) Acquisitions through entity combinations; (iv) Increases or decreases resulting from impairment losses (if any) recognised or reversed directly in net assets/equity; (v) Impairment losses recognised in surplus or deficit; (vi) Impairment losses reversed in surplus or deficit; (vii) Depreciation; and (viii) other changes. 2) The financial statements shall also disclose for each class of property, plant and equipment recognised in the financial statements: (a) The existence and amounts of restrictions on title, and property, plant and equipment pledged as securities for liabilities; (b) The amount of expenditures recognised in the carrying amount of an item of property, plant and equipment in the course of its construction; (c) The amount of contractual commitments for the acquisition of property, plant and equipment; and  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 10 of 11 (d) If it is not disclosed separately on the face of the statement of financial performance, the amount of compensation from third parties for items of property, plant and equipment that were impaired, lost or given up that is included in surplus or deficit; (e) Residual values; (f) The estimated costs of dismantling, removing or restoring items of property, plant and equipment..  EUROPEAN COMMISSION Budget Budget execution Accounting Version: 2 EU ACCOUNTING RULE 7: PROPERTY, PLANT AND EQUIPMENT Date: December 2011 Page 11 of 11 10. Effective date This rule shall be effective for annual financial statements covering periods beginning on or after 1 January 2012. 11. Reference to other rules This accounting rule is based on the following IPSAS standards: IPSAS 17 "Property, Plant and Equipment".