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+--- Thread: Questions regarding Assets and Depreciation (/thread-questions-regarding-assets-and-depreciation)
Questions regarding Assets and Depreciation - bilal azhar - 08-12-2009
I have two questions regarding fixed assets
(1) A company is charging depreciation on fixed assets as
"full year depreciation is charged in year of purchase and no depreciation is charged in year of disposal".
now if i want to change the above policy as full month depreciation is charged in month of purchase and no dep in month of disposal or depreciation on proratt basis on additions and disposal, then what should i do.i mean
(a) is it allowed
(b) what will be its effect.retrospective or perspective
(c) if no retrospective effect then do i need to disclose the change of this method.if yes then how should i disclose.
(d) how we will call this change of method as per ias-8. i mean is it change in estimate,change in policy,error etc.
(2). i just want to confirm that As per IAS-40 land and building held for rental purpose will be investment property. now if plant and machinery is used for rental purpose then will it be classified under ias-16.
and secondly a company is using a plant and machinery as a sample for its customers. company give machinery to customers for 2-3 months free of cost as a test product.after 2-3 months customer return the machine and it remains idle until next customer testing. will this machine be treated under IAS-16?
- kamranACA - 08-12-2009
Dear Bilal,
It's nice to see professional queries that you have asked.
Question 1
Change in depreciation method figured out by you is a Change in Accounting Estimate. It will be accounted for under IAS 8 prospectively thereby giving necessary disclosures of its impact on current and future periods. Since impact on future is not determinable a disclosure of such fact will be given along with the disclosure of impact on current period.
There is a detailed logic of concluding this, but for cutting the story short I let you know that Technical Advisory Committee of ICAP has given an Opinion on this issue which you can find from official website of ICAP by exploring last two or three volumes of "Selected Opinions".
I remember I had difference of opinion with my partners who wanted to treat it as change in policy and on my request one of my partners raised this query to Technical Advisory Committee and to my expectation the outcome was same what I concluded.
Question 2
I)
The plant and machinery are not the property and cannot be treated under Investment Properties as well. To my understanding it is a leasing arrangement. You can classify it as PPE and rent out on rentals treating it to be operating lease.
However, IFRIC-4, an interpretation issued, requires that if certain power plant makes dedicated generation for a buyer it should be de-recognised from PPE and treated as Leased out asset under finance lease arrangement. The revenue against sale of dedicated production of electricity is treated as finance lease rental by making suitable differentiation in Capacity charges and Energy charges.
However, since for the purpose of treating an arrangement as finance lease it has to meet detailed criteria of IAS 17 (which in case of dedicated power plants is supposed to be met) I believe simple leasing out of assets for shorter or even longer tenures does not make it finance lease arrangement.
Therefore, in my view it is operating lease of your PPE and guidance should be taken from IAS 17 regarding how an operating lease should be treated in the books of lessor.
II)
Prototypes having ability to generate eceonomic benefits for longer runs can be treated as Development Costs under IAS 38. However, criteria laid down by IAS 38 has to be met.
If it is a unique plant, it has been internally developed by the entity after some research, it can be marketed or used by the entity, and is being used as a prototype to generate business (and economic benefits) and is not used for any other purpose at all, it can be treated (capitalized) as Development Costs under IAS 38.
Detailed criteria of IAS 38 must be studies before concluding.
If it does not meet the said criteria, it can be capitalized as PPE since its cost cannot be treated as periodic revenue expense.
(PPE stands for propert, plant and equipment).
Regards,
Kamran.
- zia ahmad - 08-13-2009
relate to ur first question. i am adding my knowledgethat change in charge the depriciation policy.it is change in accounting estimte
under ias- 8. and u will apply it propectively. the logic behind it is this that u cannot
the adjust the deprication effect retrospectively. u can only apply the dep effect prospectivly.
and prospective effect is only in estimates.
well abt second question kamran sb has gave detailed knowledge. but i still not properly
understand the last two lines of 2(II).
regards
- wsafca - 08-13-2009
As for as question 1 is concerned i am of the view that it is change in accounting estimate because it is change in estimate of patteren of consumption of asset
Regards
Waqas Shabbir
- bilal azhar - 08-17-2009
thanks to all.
one more question i forget to ask is
is it possible that an asset except for land is treated as fixed asset and company is no charging depreciation on it.if yes can anybody give an example.
- kamranACA - 08-17-2009
IAS-16 requires charging depreciation from the date when asset is put into use till the date asset remains under use. (Reference Paragraph 50 and 55 of IAS-16).
Idle capacity tenure should be kept in view while arriving at the useful life and applicable depreciation rates. However, non-charging of depreciation for idle period (for example in seasonal industries like ice factories) is not allowed.
Once useful life has been deteremined and depreciation rates are finalized, charging of depreciation remains a MUST. If idle period was not taken into account while finalizing the depreciation rate, the same can be revised (as a change in Estimate) and lowered, if warranted.
Assets (only Land and Building) can be held as Investment Properties, if not utilized for operations; and are held for earning rentals or value appreciation. (Reference IAS-40). Investment properties can be accounted for either under fair value model or cost model. In case of cost model, depreciation is charged. In case of fair value model, these are stated on fair values, gains or losses being taken to Profit or Loss.
In all other cases depreciation has to be charged.
Regards,
KAMRAN.
- bilal azhar - 08-17-2009
"IAS-16 requires charging depreciation from the date when asset is put into use till the date asset remains under use. (Reference Paragraph 50 and 55 of IAS-16)."
As per my knowledge(may be wrong) depreciation must be charged on assets when they are available for use and not when they are put into use. Depreciation in case of temporary idle period is not allowed.i m not too sure about permanent idle assets.i think depreciation should not be charged on them.
SUpporse ABC company owns a building. it is being used by their related party without paying any charge. It is shown as asset in ABC company. But they are reluctant to charge depreciation on the logic that they are not using it. are they wrong?
- wsafca - 08-18-2009
Depreciation does not cease even when the asset becomes idle or is retired from active use unless the asset is fully depreciated.
Whether depreciation is to be charged or not also depends upon the method of charging depreciation.
When the depreciation is charged on production basis i.e on the basis of number of units produced in an year, then definitly there is no need to charge depreciation if the machinery remained idle.
Other wise depreciation shall not be charged if the asset is classified as held for sale.
I quoted para 55 if IAS 16
Regards
Waqas Shabbir
- kamranACA - 08-18-2009
Bilal,
Thanks for using actual words of IAS 16.
Normally "asset available for use" is considred a term that can be affected internally for desired accounting treatment, specially when, the finalization of internally constructed qualifying assets has to be certified by entity's own engineers. That's why I used the words "put into use". To me it stands for "asset available for use" since when it is put into use for commercial reasons it is proved that it was available for use.
Otherwise what you wrote is 100 percent correct.
As far as issue of building is concerned, the entity is not following correct treatment. If building is not used but leased, entity should decide some rental, put it into some agreement, derecognise the building from PPE and recognise it as Investment Property under IAS 40.
As said earlier, under IAS 40 it can be stated under cost model or fair value model.
Regards,
Kamran.
- wsafca - 08-19-2009
Dear Mr. Kamran
I know you becomes arrogant on my questions.. But what if they do not intend to charge any rentals. I think IAS 24 may give some guidelines on it. This "if" is not added of my own but have already been put in question.
- kamranACA - 08-19-2009
Dears
IAS 24 does not provide for distributing your assets free of cost to related parties. I wonder if IAS 24 allows to incorporate a company, collect public money, buy assets and hand over free of cost to others (may be related parties). I suggest reading preamble of IAS 24 and try to understand the intent of the pronouncements.
If the entity is owning a building, it must be incurring costs in connection with ownership that may be in the shape of maintenance, repair, insurance or at least opportunity cost of holding such asset.
One may read section 255 of Companies Ordinance 1984. The expenditure incurred by an entity must be for the sake of or in connection with its business. If the building is not being used but its expenditure (at least opportunity or financial cost of holding) is incurred, this will become illegal. This is not all about the answer but an example which I believe cannot make some readers understand.
Section 208 of CO84 lays down requirements for investment in associates. It stipulates that return from associate must not be lesser than the finance cost of the investing company. This is also an example to understand.
IAS 36 is there to raise impairment issues if building gives no returns (value in use analysis). This may result recognising impairment even more than the depreciation being avoided.
Related parties transactions have to be on fair values (IAS 24 and Fourth schedule to CO84 and listing regulations); and if it does not happen regulators are there to investigate the substance.
The Auditors' Review Report on Compliance With Code of Corporate Governance (in case of listed companies) will specially include an opinion on related parties transactions' approval procedures as per law.
IAS 16 requires re-assessing residual values and useful lives at least at each financial year end. If building does not have to cause flow of economic benefits, its useful life will raise issues for financial reporting and auditors as well and eventually for regulators.
It's not so simple to allow others to use entity's assets free of cost and thus undermining the interest of entity's own stakeholders.
I just quoted some examples and referred some related material and leave it to decision of the readers.
Since I doubt on the intent of raising the question, I don't consider necessary to provide exact answer.
Regards,
Kamran.
- wsafca - 08-19-2009
Dear Kamran bhai
I got your point..
I think i am waek in english, thats why people could not understand what i says.
I didnot said, IAS 24 allows this and that. I was actualy asking IAS 24 must have been prohibiting this (i.e giving asset free of cost).
IAS 24 prohibits as you mentioned
Related parties transactions have to be on fair values (IAS 24 and Fourth schedule to CO84 and listing regulations); and if it does not happen regulators are there to investigate the substance.
I am clear and thanks to you
I would like to mention here that, actualy i was looking somebody to teach me ,as I have to give exams of Module E, some one told me about this forum. I am here with a view to learn from the seniors.
Comments are for discussion not for contention
Hoping your assistance
Regards
Waqas Shabbir