Far410 Chapter 5 Ppe Note

CHAPTER 5
MFRS 116:
PROPERTY, PLANT AND EQUIPMENT
TOPIC OUTCOME
At the end of the topic, students should be able to:
1. Apply the concepts and principles in assets, liabilities
and equity.
2. Understand the recognition and initial measurement,
subsequent measurement, derecognition and disclosure.

MFRS 116 – Identifying PPE
Definition or criteria of PPE:
 Property, plant and equipment are tangible items that:
(a) are held for

 use in the production (eg. machinery used in a production
line to manufacture cars); or
 supply of goods (eg. a retailer’s point-of-sale equipment) or
services (eg. an architect’s tools); or
 rental to others (eg. a car hire’s rental fleet); or
 administrative purposes (eg. computer equipment used by an
entity’s administration staff);
and
(b) are expected to be used during more than one period.

MFRS 116 – Recognition of PPE
 The cost of an item of property, plant and
equipment shall be recognised as an asset if:
 (a) it is probable that future economic

benefits associated with the item will flow to
the entity; and
 (b) the cost of the item can be measured
reliably
 (c) fully controlled by the entity
MFRS 116 – Initial Measurement
 An item of property, plant and equipment that qualifies
for recognition as an asset shall be measured at its costs.
 Cost is the amount of cash or cash equivalents paid to
acquire an asset at the time of its acquisition or
construction plus the fair value of other consideration
given.
 Costs include:
 Purchase price
 Any costs directly attributable to bringing the assets
to its current location and condition.

 The initial estimate of dismantling and removing the
item and restoring the site where it is located if the

entity is obliged to do so.
Example 1
 An entity acquires a ready-to-use
photocopier for use by its administration staff
in exchange for RM1,200 cash. The payment
is settled at the time that the entity receives
the photocopier).
Journal entry
Dr. Photocopy Machine RM1,200
Cr. Cash/Payable RM1,200
(To record initial measurement of PPE)
Example 2
 A brick manufacturer constructed a
showroom to market its own bricks.
 The costs to construct a showroom would
include many estimates such as costs of

material, labour, expenses.
Journal entry:
Dr. Showroom (material + labour + expenses)
Cr. Cash/Bank
Subsequent Expenditure
 The costs of the PPE can include more than the
purchase price.
 Eg. Routine repairs, maintenance and servicing
costs.
 Normally the above costs is recognised in the SOPL.
 However, if these subsequent expenditure
increase/enhance the value of assets, the
expenditure should be recognised as part of the
costs of assets.
 Eg. In aircraft industry, they need to replace its
seats several times during the life of the aircraft.
MFRS 116 – Subsequent Measurement
 An entity shall choose either the cost model or the revaluation
model as its accounting policy and shall apply that policy to an
entire class of property, plant and equipment.
 Cost model: 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
 Revaluation model: After recognition as an asset, an item of

property, plant and equipment whose fair value can be
measured reliably shall be carried at a revalued amount, being
its fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses.
MFRS 116 - Depreciation
 Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life.
 The depreciable amount of an asset shall be allocated on a

systematic basis over its useful life.
 Depreciable amount is the cost of an asset, or other amount

substituted for cost, less its residual value.
 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.
Methods of Depreciation
 The depreciation method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by
the entity.
 A variety of depreciation methods can be used:
 Straight Line Method
 Reducing/Diminishing Balance method
 Units of Production Method
 The depreciation charge for a period is usually recognised in SOPL.
Journal Entry:
Dr. Depreciation Expense - SOPL
Cr. Accumulated Depreciation - SOFP
(To record depreciation for the year)
Example 3
On 1 January 20X1, an entity acquires a ready-to-use photocopier
for use by its administration staff in exchange for RM12,000 cash.
The depreciation rate is 10% per annum.
Required:
1.Compute the depreciation expense for two years using the
following methods:
a) Straight Line method
b) Reducing Balance method
c) Units of Production method (Assuming the company photocopied
5,000 and 8,000 copies in Year 1 and 2 respectively. The machine is
estimated to make 100,000 copies over its 10-year life.)
2. Show the journal entries to record the above transactions.

Solution – Straight Line Method
Depreciation = Costs x %
Or
Depreciation = Costs – Residual Value
Useful Life
Useful life’ refers to the period that the asset is

expected to be used by the entity.
Year 1: RM12,000 x 10% = RM1,200

Year 2: RM12,000 x 10% = RM1,200
Solution – Reducing Balance Method
Depreciation = Carrying amount x %
Carrying amount = Cost – Accumulated

Depreciation
Year 1: RM12,000 x 10% = RM1,200

Year 2: (RM12,000 – RM1,200) x 10% = RM1,080
Solution – Units of Production
Method
Depreciation
= Cost x No. of work done in current year
Total estimated work done over the asset useful life
Year 1: RM12,000 x 5,000 = RM600

100,000
Year 2: RM12,000 x 8,000 = RM960

100,000
Question: Depreciation of PPE
On 1 January 20X1 an entity purchases a machine with a cost on initial recognition of RM1,100. At initial
recognition, it is estimated that the machine has a useful life of 5 years and a residual value of RM100.
The entity’s reporting date is 31 December. The fair value of the machine at 31 December 20X1, is
RM1,300. Show journal entries to record the depreciation of the machine for the year ended 31
December 20X2, assuming that the entity measures its PPE using:
(a) the cost model after initial recognition

Debit Depreciation Expense RM200
Credit Accumulated depreciation RM200
(To recognise depreciation for 20X2)
RM200 depreciation is calculated as (RM1,100 less RM100) ÷ 5 years × 1 year = RM200 where RM1,100
is the cost of the asset, RM100 is the estimated residual value of the asset, 5 years is the estimated
useful life of the asset and 1 year is the service potential of the asset ‘used up’ during 20X2.
(b) the revaluation model after initial recognition

Debit Depreciation Expense RM300
Credit Acumulated depreciation RM300
(To recognise depreciation for 20X2)
RM300 depreciation is calculated as (RM1,300 less RM100) ÷ 4 years × 1 year = RM300 when RM1,300
is the revalued amount of the asset, RM100 is the estimated residual value of the asset, 4 years is the
estimated useful life of the asset remaining after the asset’s revaluation and 1 year is the service
potential of the asset.
MFRS 116 – Derecognition of Assets
 The carrying amount of an item of property, plant
and equipment shall be derecognised:
 on disposal; or
 when no future economic benefits are expected
from its use or disposal.

 The gain or loss arising from the derecognition of
an item of property, plant and equipment shall be
included in SOPL when the item is derecognised.
 Gains shall not be classified as revenue (it is not
the main revenue from the ordinary activity of the
business)
Example
On 31 December 20X1 an entity disposes of a delivery vehicle costing
RM150,000 with an accumulated depreciation of RM110,000 in exchange
for RM100,000 cash.
What is the journal entry to derecognise the delivery vehicle?
Dr. Disposal RM150,000

Cr. Vehicle RM150,000
Dr. Acc. Depreciation RM110,000

Cr. Disposal RM110,000
Dr. Cash RM100,000

Cr. Disposal RM100,000
Dr. Disposal RM60,000

Credit SOPL ( gain on sale of PPE) RM60,000
MFRS 116 – Disclosure of PPE
(Notes to the Financial Statements)
 The entity should disclose its depreciation
policy and rate.
 A reconciliation of the carrying amount at the
beginning and end of each period is disclosed

in relation to the movement in PPE. The
movement would include purchase of
additional assets, sale or disposal of assets,
revaluation, depreciation etc.
 The reconciliation should be made separately
for each type of assets in the form of a table.

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CHAPTER 5

subsequent measurement, derecognition and disclosure.

(a) are held for

(b) are expected to be used during more than one period.

 (a) it is probable that future economic

 Any costs directly attributable to bringing the assets

to its current location and condition.

item and restoring the site where it is located if the

include many estimates such as costs of

 Cost model: After recognition as an asset, an item of property,

 Revaluation model: After recognition as an asset, an item of

 The depreciable amount of an asset shall be allocated on a

 Depreciable amount is the cost of an asset, or other amount

 The residual value of an asset is the estimated amount that an

 Reducing/Diminishing Balance method

 Units of Production Method

 The depreciation charge for a period is usually recognised in SOPL.

2. Show the journal entries to record the above transactions.

Useful life’ refers to the period that the asset is

Year 1: RM12,000 x 10% = RM1,200

Carrying amount = Cost – Accumulated

Year 1: RM12,000 x 10% = RM1,200

Year 1: RM12,000 x 5,000 = RM600

Year 2: RM12,000 x 8,000 = RM960

(a) the cost model after initial recognition

(b) the revaluation model after initial recognition

 when no future economic benefits are expected

from its use or disposal.

Dr. Disposal RM150,000

Dr. Acc. Depreciation RM110,000

Dr. Cash RM100,000

Dr. Disposal RM60,000

beginning and end of each period is disclosed

for each type of assets in the form of a table.

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