Property, Plant and Equipment (IAS 16)

Property, Plant and Equipment (IAS 16) - Printable Version

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Property, Plant and Equipment (IAS 16) - danishayub_76 - 03-30-2009

Dear All.
Assalam O Alaikum.

I need help on the following question, which i didn't find the solution strictly in accordance in IAS 16.

Javed & Sons (Pvt) Limited, traded off its used plant and machinery for a new model. The old machinery, given off, had a book value of Rs.16,000 and fair value of Rs.12,000. The machine was bought two years back at a cost of Rs.24,000. However, the management traded it off for a new model having invoice price of Rs.32,000. In negotiations with the seller, a tradein- allowance of Rs.18,000 was agreed for the old machine.
Required In the light of IAS-16
(i) Calculate the cost of new machine.
(ii) Compute gain/ loss incurred in exchange transaction.
(iii) Record the transaction in the books of the company.

- nakaiun - 03-31-2009

for required a 14ooo (32-8)
for b 6000 gain as 18-12
after this u can do that [)]

- danishayub_76 - 03-31-2009

New Machine Dr. 26,000 (12+14)
Loss on Exchange Dr. 4,000 (12-16)
Party Payable Acc. Cr. 14,000 (32-18)
Book Value of Old Asst. Cr. 16,000

I have made the journal entry, but IAS 16 explains that such transactions shall be recorded at fair value unless the transaction lacks commercial substance or fair value of assets can't be obtained.

"Does it lacks commercial substance or not".

Best regards,

- nakaiun - 03-31-2009

for a 32-18=14 that what i thought im not confirm abt it

- kamranACA - 03-31-2009

Dears,

The cost of new machinery is the "amount actually payable to vendor" plus "fair value of the exchanged/traded out asset". Wherever exchange of asset would be made, it will be treated at fair value. The amount actually paid (apart from trading out/exchanging the asset) will be added in the fair value of such traded out/exchanged asset.

This is the key to the solution and has to be kept in mind for every exchange transaction.

In above case, the amount actually paid was 32-18 = 14, while the fair value of traded out asset was 12. Therefore the cost of traded in asset will be equal to the sum of both.

I refer you to study paragraphs 24, 25 and 26 of IAS-16, if you have the IFRS book with you. These paragraphs provide sufficient guideline required to solve your above query.

Please come back if reading of these paragraphs do not serve the purpose.

Please note, I tend to avoid replying PURELY academic queries. However, I am providing you the back ground to understand the impact of professional pronouncement on such transcations.

Regards,

KAMRAN.

- danishayub_76 - 04-01-2009

Thanks Kamran Bhai.

Infact, i didn't intend to get ready made solution of the exercise. I have read the IFRS book, it mentions that such items shall be recorded at fair value but recognition of loss on the basis of fair value is not mentioned or i might be failed to locate. However, i am extremely thankful for your Support.

Wishing you all the best/

Danish Ayub

- kamranACA - 04-01-2009

Dear,

The figure of loss has to be the balancing figure. There is no question on it. It is fully discussed by IAS-16. I refer you to study the "De-recognition" paragraphs (from 57 to 72) to understand it. For clarity I quote two paragraphs of IAS-16 (IFRS volumes updated 2008).

Paragraph 68 states

"The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognized (unless IAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue."

Paragraph 71 states

"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."

Since the proceed from disposal has to be taken the fair value of traded out asset (AS IT IS EXCHANGED BUT NOT SOLD), the difference of carrying amount (16,000) and proceed (12,000) will result in etermination of gain or loss.

I hope you will pick the concept.

Regards,

KAMRAN.

- m_zeeshanuddin_sa - 04-13-2009

Dear kamran Sb,

Does it mean that new machine's cost be "Fair Market value of Old Machine"+"Trade in Allowance"

or

New Machine 30,000 DR
Dep 8,000 DR
Loss 4,000 DR
Old Machine 24,000 CR
Cash 18,000 CR

Will it reflect true picture of transaction????

- danishayub_76 - 04-14-2009

Thanks Kamran Bhai....

Now it is clear.

- danishayub_76 - 04-14-2009

New machine 12+14
Loss 4
Old machinery cost 16
Cash 14
<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by m_zeeshanuddin_sa
 Dear kamran Sb,

Does it mean that new machine's cost be "Fair Market value of Old Machine"+"Trade in Allowance"

or

New Machine 30,000 DR
Dep 8,000 DR
Loss 4,000 DR
Old Machine 24,000 CR
Cash 18,000 CR

Will it reflect true picture of transaction????
<hr height="1" noshade id="quote"></blockquote id="quote">

- m_zeeshanuddin_sa - 04-17-2009

Dear Danish,

thanks

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by danishayub_76
 New machine 12+14
Loss 4
Old machinery cost 16
Cash 14
<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by m_zeeshanuddin_sa
 Dear kamran Sb,

Does it mean that new machine's cost be "Fair Market value of Old Machine"+"Trade in Allowance"

or

New Machine 30,000 DR
Dep 8,000 DR
Loss 4,000 DR
Old Machine 24,000 CR
Cash 18,000 CR

Will it reflect true picture of transaction????
<hr height="1" noshade id="quote"></blockquote id="quote">
<hr height="1" noshade id="quote"></blockquote id="quote">

- m_zeeshanuddin_sa - 04-20-2009

Dear,

I am not sure that we should be measuring the new asset's cost of FMV of Old Asset+Cash as the FMV of new asset is measurable, i.e its invoice price is available

- danishayub_76 - 04-20-2009

Dear M_zeeshanuddin_sa

Please go through the IFRS details. IAS 16 explains the following

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured atthe fair value unless
(a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS

- m_zeeshanuddin_sa - 04-20-2009

Dear Danish,

In this case we have the fair market value of the acquired Asset Available, i.e 32000

- danishayub_76 - 04-15-2011

Dear.
IAS 16 states that in Asset Exchange transaction the fair value of asset given up shall be used (if it is more reliable). So in this case, the fair value of asset given up is clearly mentioned while the acquired assets invoice price is given.

Regards,

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by m_zeeshanuddin_sa
 Dear Danish,

In this case we have the fair market value of the acquired Asset Available, i.e 32000
<hr height="1" noshade id="quote"></blockquote id="quote">