Treatment Of Tangible Assets Under IFRS
Treatment of Property, Plant And Equipment (PPE) under IFRS
First time adoption of IFRS for PPE
An entity can use fair value as deemed cost on First time adoption of IFRS
OR
It has to apply Retrospective application which means recalculate carrying amount of each PPE item according to IFRS since its purchase date including transaction cost, useful life and residual value.
Suggestion
However fair value as deemed cost is more appropriate since there would be practical difficulties for companies to do retrospective application from the date when the asset has been purchased.
Fair value for PPE
Fair value for Land and Buildings is usually determined from market based evidence by appraisal normally undertaken by professionally qualified valuation officers and for other items of PPE their market value is determined by appraisal.
If there is no market-based evidence of fair value because of special nature of asset then it has to be determined on basis of either Income Approach or Depreciated replacement cost approach.
Methods for Subsequent Measurement of PPE
There are 2 methods available for Subsequent measurement of PPE i.e. Revaluation Model and Cost Model.
However most of the LSE listed companies have adopted Cost Model. Generally companies who are in business of Investment property prefer revaluation model.
Suggestion
Cost model is preferable over revaluation model mainly because of the following reasons:
• Once revaluation model is adopted one has to do frequent revaluation as prescribed by IAS 16 which requires expertise of professional valuer which may not be cost effective for companies.
• Also if the property prices changes drastically one has to book the difference in Income Statement resulting in huge volatility which may not be accepted to management of company.
Reclassification
Movement from Cost Model to revaluation model is permitted however vice versa is not permitted which means if Revaluation model once followed cannot move to Cost Model.
Suggestion
Companies should carefully examine the impact before making policy and procedures in respect of the same.
Author: CA Shalini Tibe, IFRS Consultant
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