08-12-2009, 12:45 PM
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.
