2024/07/29

LEARNING OUTCOMES
1. Explain the nature of property, plant and equipment
2. Explain the definition and recognition criteria of property,
plant and equipment
3. Initial and subsequent measurement of property plant and
equipment
4. Differentiate between subsequent expenditure that should
be recognised as an asset or an expense
5. Calculate and record depreciation
6. Account for the reassessment of useful lives and residual
values of PPE
7. Record disposal of PPE
8. Calculate and account for impairment losses
9. Calculate and account for revaluation increases and
decreases

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DERECOGNITION (PAR 67-71 IAS 16)

• Carrying amount of PPE is
derecognised when:
• It is disposed of (most
common)
• Scrap
• Sold
• Stolen
• Donated
• There are no future
economic benefits expected
from the use of the asset

What happens on disposal of PPE

Carrying Amount

Derecognise the
Derecognise the cost Recognise proceeds Recognise a gain or
accumulated
of the asset disposed received on disposal loss on disposal in
depreciation related
of of the asset profit and loss
to the disposed asset

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Net disposal
proceeds= Proceeds
less any fees or costs
relating to the
disposal.

How to calculate the profit on disposal?

Journal entries passed on disposal of

an item of PPE

1 2 3 4
Step 1: Eliminate the Step 2: Eliminate the Step 3: Recognise Step 4: Recognise profit
cost of the item of PPE accumulated proceeds on sale on sale
• Dr Asset disposal account (SFP) depreciation of the item • Dr Bank • Dr Asset disposal account
• Cr Asset (SFP) of PPE disposed of • Cr Asset disposal Account (SFP) • Cr Profit on sale (P/L)
• Dr Accumulated depreciation
• Cr Asset disposal Account

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Note! Based on the journal entries on the previous

slide you will note that a temporary account called the
asset disposal account is used to calculate the profit or
loss on disposal of an item of property, plant and
equipment

Example: Asset disposal

( page 340 of the
textbook)
• On 1 January 2016 the equipment account
of Computer World reflected a balance of
R100 000. On that date the accumulated
depreciation account reflected a balance of
R40 000. Depreciation is calculated at 20%
per annum on the diminishing balance
method. On 30 June 2016, the equipment
was sold for R50 000 in cash. The financial
year end is 31 December 2016

• Required: Prepare the journal entries and

general ledger accounts related to the
2016 financial year

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Workings:
Solution: Asset • Cost: R100 000

disposal (Page • Depreciation rate: 20% pa

• Accumulated depreciation at the beginning
341 of the of the year: R40 000
textbook) • Depreciation for 6 months to 30 June =
(100 000-40 000)*20%*(6/12) =6 000

• Accumulated depreciation at
disposal date: R40 000 + R6 000
= R46 000
Solution: • Cost at disposal date: R100 000
Asset • Carrying amount at disposal
date: R100 000 – R46 000 =
disposal R54 000
(Page 341 of • Proceeds on disposal: R50 000
• Profit/(Loss) on disposal: R50
the textbook) 000 – R54 000 = (R4 000)

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Journal entries on disposal

Date Description Debit Credit
30 June 2016 Depreciation 6 000
Accumulated depreciation 6 000
Journal entry processed to account for depreciation for 6 months
30 June 2016 Asset disposal account 100 000
Asset 100 000
Elimination of the cost of the asset on the date of disposal
30 June 2016 Accumulated depreciation 46 000
Asset disposal account 46 000
Elimination of the accumulated depreciation on the date of disposal

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Journal entries on disposal continued

Date Description Debit Credit
30 June 2016 Bank 50 000
Asset disposal 50 000
Journal entry processed to recognise proceeds received on disposal
30 June 2016 Loss on disposal 4000
Asset disposal account 4000
Journal entry processed to account for loss on disposal

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How would the general ledger

accounts look
Equipment
O/B 100 000 Asset disposal 100 000
Total 100 000 Total 100 000
C/B 0

Accumulated depreciation
Asset disposal 46 000 O/B 40 000
Depreciation 6 000
Total 46 000 Total 46 000
C/B 0

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How would the general ledger

accounts look
Asset disposal
Asset 100 000 Accumulated depreciation 46 000
Bank (proceeds) 50 000
Loss on disposal 4 000
Total 100 000 Total 100 000

Loss on disposal
Asset disposal 4 000 Profit or loss 4 000

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What happens when there is a disposal

but the proceeds are not cash? – Trade in
• The same steps as previously followed will still be
followed.
• There is an additional step: To recognise the new asset
received in the trade in.
Carrying Amount

Derecognise the
Derecognise the cost accumulated Recognise proceeds Recognise a gain or
Recognise the new
of the asset depreciation related received on disposal loss on disposal in
asset acquired
disposed of to the disposed of the asset profit and loss
asset

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Example: Trade In (page 342 of the

textbook)

At 1 January 2016 the machinery account of Computer World reflected a balance of R200 000.
At that date accumulated depreciation had a balance of R38 000. Machinery is depreciated on
the diminishing balance method at 10% p.a. On 30 June 2016 new machinery costing R500
000 was purchased. The old machinery was traded in for R150 000

Required: Prepare the asset, accumulated depreciation and asset disposal general ledger
accounts

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Solution: Trade in (page 342 of the

textbook)
• Workings:
• Cost: 200 000
• Accumulated depreciation at 1 Jan 2016: -38 000
• Carrying amount at 1 Jan 2016 162 000
• Depreciation rate 10% p.a
• Proceeds (trade in value) R150 000
• Cost of new asset acquired R500 000

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Solution: Trade in (page 342 of the

textbook)
Workings:
• Depreciation to June 2016:162 000*10%*(6/12) =8 100
• Accumulated depreciation at the date of disposal:
38 000+8 100 =46 100
• Carrying amount at the date of disposal:
200 000-46 100=R153 900
• Proceeds = Trade in value of 150 000
• Loss on disposal: 150 000-153 900 = -R3 900

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General ledger accounts

Equipment
O/B 200 000 Asset disposal 200 000
Asset disposal (new equipment 150 000
recognised as proceeds at the
trade in value
Bank (remaining cash paid) 350 000 C/B 500 000
Total 700 000 Total 700 000
Balance c/d 500 000 0

Accumulated depreciation
Asset disposal 46 100 O/B 38 000
Total Depreciation 8 100
Total 46 100 Total 46 100
C/B 0

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General ledger account

Asset disposal
Asset 200 000 Asset Equipment 150 000
(proceeds)
Accumulated depreciation 46 100
Loss on disposal 3 900
Total 200 000 Total 200 000

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LEARNING OUTCOMES
1. Explain the nature of property, plant and equipment
2. Explain the definition and recognition criteria of property,
plant and equipment
3. Initial and subsequent measurement of property plant and
equipment
4. Differentiate between subsequent expenditure that should
be recognised as an asset or an expense
5. Calculate and record depreciation
6. Account for the reassessment of useful lives and residual
values of PPE
7. Record the disposal of PPE
8. Calculate and account for impairment losses
9. Calculate and account for revaluation increases and
decreases

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Impairments
of PPE (IAS
16 and IAS
36)

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Impairment (Par 6 of IAS 16 & 36)

• The amount at which an asset is recognised after deducting accumulated
Carrying Amount depreciation and impairment

• The price that would be received to sell an asset or paid to transfer a liability in an
Fair value orderly transaction between market participants at the measurement date.

Impairment loss • Amount by which the carrying amount of the asset exceeds its recoverable amount

Recoverable amount • Higher of an assets fair value less cost to sell and value in use

Value in use (entity • The present value of the cashflows that an entity expects to arise from the
continuing use of the asset and from its disposal at the end of its useful life
specific value)

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Impairment (Par 6 of IAS 36)

Fair-Value
External

Value in use
Entity specific

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Impairment (Par 63 of IAS 16)

• Remember the recognition criteria
• Probable inflow of economic benefits
• Cost can be reliable measured
• How does PPE result in inflow of economic benefits
• Through use or sale
• What represents economic benefits of PPE
• Carrying amount (represents future economic benefits that will flow to
the entity)
• What happens when the amount that is probable to be
received from the use or sale of the asset is less than the
carrying amount?
• Need to reduce the carrying amount so that there is relevant and
faithfully represented information
The result is an impairment loss
(expense)

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The recoverable amount

• In determining an impairment loss the carrying amount is
always compared to the recoverable amount
• Where the carrying amount is greater than the recoverable
amount – Recognise an impairment loss!

Recoverable amount

Higher of
Value in use (benefits Fair value (SP on an
receive from use) active market) less cost
present value of future of disposal (benefits
cashflows expect from sale)

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How to calculate impairment

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When to recognise an impairment

loss: IAS 36
At the end of the reporting period assess whether there are any indicators that the asset may be
impaired, Par 9.

Indicators include:

• A decrease in the assets market value

• Changes in technology and the environment the entity operates in
• Obsolescence
• Decreased economic performance

Where there is an indicator of impairment, test for impairment by comparing the Carrying amount to the
recoverable amount. If the recoverable amount is lower than the carrying amount – Recognise an
impairment loss

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Impairment and IAS 36

Each reporting period, look if there is an indicator of impairment:

Indicators of impairment (par 12 IAS 36)

• External indicators
• Significant decline in the assets value
• Changes such as changes in technology or the market that have adverse effects on the
entity
• Increases in interest rates that affect discount rates used to calculate the value in use
• Internal indicators
• Evidence of damage or obsolescence
• Asset becomes idle within the organisation or plans for restructuring
• Economic performance of the entity it worse than expected

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Impairment loss
• Remember:
• Carrying amount > Recoverable amount =
impairment loss
• Recoverable amount> Carrying amount = No
impairment treat carry on as normal

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Example impairment (Page 346 of the

textbook)
• Computer World has an item of plant with a cost of R100 000 and accumulated
depreciation of R60 000. The plant is measured using the cost model and is
depreciated at 10% per annum on a straight line basis. There are indicators at 31
December 2016, the year end, that the asset may be impaired. The selling price on an
active market is R27 500 and costs of disposal are estimated to be R500. The
estimated cashflows are shown below. The prevailing interest rate is 10%

Year ending Cashflow Years

31/12/2017 15 000 1
31/12/2018 12 000 2
31/12/2019 8 000 3

• Required: calculate the recoverable amount of the plant. Prepare the journal entries to
account for the impairment.

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Solution impairment (Page 350 of the

textbook)
• Recoverable amount = Higher of value in use and fair value less the
cost of disposal
• Fair value less cost of disposal = 27 500-500 = R27 000
• Value in use: Use cash function on your calculator
• I = 10%
• Pmt 1 = Nil (payments occur at the end of the period)
• Pmt 2= 15 000
• Pmt 3= 12 000
• Pmt 4 = 8 000
• Solve for NPV
• Value is use = R29 565
• Higher of value in use and fair value less cost to sell is R29 565
(value in use)
• Therefore the recoverable amount is R29 565

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Solution impairment (Page 350 of the

textbook)
• Cost at 31 December 2016 = 100 000
• Acc Dep at 31 December 2016 = -60 000
• Carrying amount at 31 December 2016 = 40 000
• Recoverable amount is 29 565
• Carrying amount is higher than the recoverable amount.
Therefore there is impairment
• Impairment loss = 40 000-29 565 = R10 435

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Journals for impairment

Date Description Debit Credit
31/12/2016 Impairment loss 10 435
Accumulated impairment 10 435
and depreciation
Journal entry processed to account for impairment

Impairment reduces the carrying amount of the PPE through the

accumulated depreciation and impairment account (negative asset account)
The same as depreciation. Remember that the carrying amount after
depreciation and impairment is shown on the face of the statement of
financial position.

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Compensation for impairment (IAS 16

par 65-66)
• This would be insurance
• Business takes out insurance against loss or damage of assets
• Proceeds received from insurers to compensate for
impairment are included in profit and loss when received (par
65)
• Impairments and compensation received are two separate
events
• Compensation will not affect the impairment loss recognised
• Journal when compensation is received
Dr Bank
Cr Insurance proceeds income

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Example: Impairment with

compensation
• On 1 January 2017 a motor vehicle with a carrying
amount of R200 000(Cost of R300 000 and accumulated
depreciation of R100 000) was involved in an accident. On
this date the assessor estimated that the car was beyond
repair and should be written off. The vehicle was fully
insured. The insurance company paid out R230 000 cash
on 31 January 2017 to the entity. On 1 March 2017 a new
vehicle was for R300 000 cash to replace the old vehicle.
The vehicle was ready for use on this date. All vehicles are
depreciated over 5 years using the straight line method.
• Required: prepare the financial statements of Tsebo
Traders for the year ended 31 December 2017

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Workings
• Cost= 300 000
• Accumulated depreciation= 100 000
• Carrying amount = 200 000
• Recoverable amount = Nil
• Proceeds = 230 000
• New vehicle cost = 300 000
• Depreciation on new vehicle (300 000/5*(10/12))=R50 000
• Depreciation on old vehicle in the prior year = (300000/5)=
60 000
• Carrying amount of new vehicle (300 000-50 000)=250 000

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Financial statements
Statement of comprehensive income for the year ended 31 December 2017
2017 2016
Income
Insurance proceeds 230 000 0
Expenses
Depreciation -50 000 -60 000
Impairment loss -200 000 0

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Financial Statements
Statement of financial position as at 31 December 2017
2017 2016
Assets
Non-current assets 0
Property, plant and equipment 250 000 200 000
Current assets
Bank (x+230 000-300 000)

Note! The PPE is shown on the face of the statement of financial position at its carrying amount –
Cost less accumulated depreciation and impairment

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Questions?

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