Beyond the First Glance: Subsequent Measurement Models for Property, Plant, and Equipment

Introduction

Imagine your business just bought a brand-new delivery van or a shiny piece of machinery. These big-ticket items, known as Property, Plant, and Equipment (PPE), are crucial for keeping your operations running smoothly. But once you’ve got these assets, how do you keep track of their value over time?

In the world of accounting, there are specific rules on how to measure and report the value of PPE after you’ve initially bought them. These rules help ensure your financial statements are accurate and up-to-date. If you're an accountant helping clients manage their books, understanding these rules is essential.

Let’s dive into the basics of these subsequent measurement models for PPE, using practical, everyday examples that make sense without any accounting jargon.

Initial Recognition and Measurement

When a business buys PPE, it first records these assets at their purchase cost. This cost includes not only the price tag but also any extra expenses to get the asset up and running, like installation fees or transportation costs. Read our recent article posted in Accounting Weekly about initial recognition.

Subsequent Measurement Models

After the initial purchase, IFRS for SMEs gives us two ways to measure these assets over time:

  1. Cost Model

  2. Revaluation Model

Cost Model

With the cost model, after buying the PPE, you keep recording it at its original cost but subtract any depreciation and impairment losses over time. This model is simple and easy to apply.

Revaluation Model

The revaluation model lets businesses adjust the value of PPE to its current market value, subtracting any depreciation and impairment losses. This needs to be done regularly to make sure the asset's value is always close to its fair market value.

Practical Application and Examples

Applying the Cost Model

Example 1:

Let’s say your small manufacturing company buys a machine for R200,000. You expect it to last for 10 years and have a resale value of R20,000 at the end.

  1. Initial Recognition:

    • Purchase Price: R200,000

    • Installation Costs: R10,000

    • Total Initial Cost: R210,000

  2. Annual Depreciation Calculation:

    • Depreciable Amount: R210,000 - R20,000 (residual value) = R190,000

    • Useful Life: 10 years

    • Annual Depreciation: R190,000 / 10 = R19,000

  3. Subsequent Measurement:

    • After Year 1:

      • Carrying Amount: R210,000 - R19,000 = R191,000

      • Depreciation is R19 000

      • Accumulated depreciation at end of year R19 000

    • After Year 2:

      • Carrying Amount: R191,000 - R19,000 = R172,000

      • Depreciation is R19 000

      • Accumulated depreciation at end of year R38 000

Applying the Revaluation Model

Example 2:

Imagine your retail company owns a building initially bought for R2,000,000. It’s supposed to last 40 years. After 5 years, you find out the building’s market value is now R2,500,000.

  1. Initial Recognition:

    • Cost of Building: R2,000,000

  2. Annual Depreciation (Before Revaluation):

    • Depreciable Amount: R2,000,000 (assuming no residual value)

    • Useful Life: 40 years

    • Annual Depreciation: R2,000,000 / 40 = R50,000

  3. Carrying Amount After 5 Years:

    • Cost: R2,000,000

    • Accumulated Depreciation: R50,000 x 5 = R250,000

    • Carrying Amount: R2,000,000 - R250,000 = R1,750,000

  4. Revaluation:

    • Fair Value: R2,500,000

    • Revaluation Surplus: R2,500,000 - R1,750,000 = R750,000

  5. Subsequent Depreciation (After Revaluation):

    • New Carrying Amount: R2,500,000

    • Remaining Useful Life: 35 years

    • Annual Depreciation: R2,500,000 / 35 = R71,429

Practical Considerations

Choosing the Right Model

When deciding between the cost model and the revaluation model, think about the following:

  • Cost Model:

    • It’s simple and easy to use.

    • Lower administrative costs.

    • Consistent values over time.

  • Revaluation Model:

    • Reflects current market values.

    • Can significantly affect financial statements.

    • Requires regular revaluations, which can be costly.

Keeping Accurate Records

No matter which model you choose, keeping detailed records of your PPE is essential. This includes:

  • Descriptions of each asset.

  • Purchase and disposal dates.

  • Costs associated with acquiring and maintaining the asset.

  • Depreciation methods and rates used.

  • Dates and results of revaluations.

Impact on Financial Statements

Each model affects financial statements differently:

  • Cost Model:

    • Stable and predictable values.

    • Simpler to prepare financial statements.

  • Revaluation Model:

    • Values can fluctuate with the market.

    • More complex but provides more relevant information.

Conclusion

Understanding how to measure PPE after their initial purchase is crucial for accountants helping clients in South Africa. Choosing between the cost model and the revaluation model depends on the specific needs and circumstances of the business. By using practical examples and keeping detailed records, accountants can ensure accurate financial reporting and provide valuable insights to their clients. Whether you stick with the straightforward cost model or opt for the more dynamic revaluation model, the key is consistency and accuracy in application.


Refer here to the IFRS® Foundation—Supporting Material for the IFRS for SMEs Standards - Module 17—Property, Plant and Equipment

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