Canadian SerieS
Guide to International Financial
Reporting Standards in Canada
IAS 16 Property, Plant and Equipment
Irene Wiecek, FCPA, FCA
Martha Dunlop, FCPA, FCA
Jane Bowen, FCPA, FCA
primary editor:
Alex Fisher, CPA, CA
June 2013
FINANCIAL REPORTING
Canadian Series
Guide to International Financial
Reporting Standards in Canada
IAS 16 Property, Plant and Equipment
Irene Wiecek, FCPA, FCA
Martha Dunlop, FCPA, FCA
Jane Bowen, FCPA, FCA
primary editor:
Alex Fisher, CPA, CA
June 2013
IAS 16 Property, Plant and Equipment
Table of Contents
Preface
1
Research Resources
4
Notice to Readers
4
Introduction to IAS 16
5
Standards Update
6
IASB
6
Methods of Depreciation and Amortization
6
Bearer Biological Assets
6
Annual Improvements
7
IFRIC
7
Key Standards Referred to in This Publication
8
IAS 16 Definitions
9
Overview of Key Requirements
10
Analysis of Relevant Issues
12
Scope
12
Recognition of Initial and Subsequent Costs
14
Items Acquired for Safety or Environmental Reasons
14
Spare Parts, Standby Equipment and Servicing Equipment
15
Subsequent Costs
15
Measurement at Recognition
17
Costs of a Self-Constructed Asset
18
Borrowing Costs
19
Cessation of Cost Recognition
20
Income and Related Expenses of Incidental Operations
20
Assets Acquired Using Government Grants
21
Assets Held under a Finance Lease
21
Non-Monetary Transactions
21
Transfers of Assets from Customers [IFRIC 18]
22
Subsequent Measurement
24
Cost Model
24
Revaluation Model
24
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Costs of Dismantling, Removal and Site Restoration
(Decommissioning Costs) and Changes to These Costs
31
Depreciation
33
Component Accounting
34
Residual Value
36
Useful Life
36
Depreciation Start Date
39
Depreciation End Date
40
Depreciation Method
40
Impairment and Compensation for Impairment
Compensation for Impairment
Derecognition of PP&E
43
44
44
Disclosure
46
Accounting Policy Choices
50
Significant Judgments and Estimates
53
Appendix A — Acronyms Used
55
List of Extracts
Extract 1 — Excerpt from The Brick Ltd. 2012 Financial Statements
Note 3 — Significant Accounting Policies13
Extract 2 — Excerpt from Sherritt International Corporation 2012
Financial Statements
Note 2 — Summary of Significant Accounting Policies15
Extract 3 — Excerpt from Air Canada 2012 Financial Statements
Note 2 — Basis of Presentation and Summary of Significant
Accounting Policies16
Extract 4 — Excerpt from Saskatchewan Transportation Company 2012
Financial Statements
Note 4 — Significant Accounting Policies16
Extract 5 — Excerpt from Bombardier Inc. 2012 Financial Statements
Note 2 — Summary of Significant Accounting Policies17
Table of Contents
Extract 6 — Excerpt from Rogers Communications Inc. 2012
Financial Statements
Note 2 — Significant Accounting Policies19
Extract 7 — Excerpt from Potash Corporation of Saskatchewan Inc. 2012
Financial Statements
Note 5 — Property, Plant and Equipment20
Extract 8 — Excerpt from Cenovus Energy Inc. 2012 Financial Statements
Note 3 — Summary of Significant Accounting Policies21
Extract 9 — Excerpt from the Great Canadian Gaming Corporation 2012
Financial Statements
Note 3 — Critical Accounting Estimates and Judgments22
Extract 10 — Excerpt from The Brick Ltd. 2012 Financial Statements
Note 3 — Significant Accounting Policies24
Extract 11 — Excerpt from Husky Energy Inc. 2012 Financial Statements
Note 3 — Significant Accounting Policies33
Extract 12 — Excerpt from Air Canada 2012 Financial Statements
Note 2 — Basis of Presentation and Summary of Significant
Accounting Policies35
Extract 13 — Excerpt from Westjet Airlines Ltd. 2012 Financial Statements
Note 1 — Statement of Significant Accounting Policies36
Extract 14 — Excerpt from Newalta Corporation 2012 Financial Statements
Note 2 — Significant Accounting Policies37
Extract 15 — Excerpt from Sears Canada Inc. 2012 Financial Statements
Note 2 — Significant Accounting Policies43
Extract 16 — Excerpt from Royal Bank of Canada 2012 Financial Statements
Note 2 — Summary of Significant Accounting Policies, Estimates
and Judgments43
Extract 17 — Excerpt from Shoppers Drug Mart Corporation 2012 Financial
Statements
Note 3 — Significant Accounting Policies45
Extract 18 — Excerpt from Telus Corporation 2012 Financial Statements
Note 15 — Property, Plant and Equipment50
Extract 19 — Excerpt from Enerflex Ltd. 2012 Financial Statements
Note 4 — Significant Accounting Estimates and Judgments54
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List of Illustrations
Illustration 1 — Included and Excluded Costs of PP&E
17
Illustration 2 — Application of the Revaluation Model
25
Illustration 3 — Recognition of Revaluation Changes
28
Illustration 4 — IFRIC 1 — Changes in Existing Decommissioning,
Restoration and Similar Liabilities
32
Illustration 5 — Determining the Expected Useful Life of an Item
of PP&E
37
Illustration 6 — Summary of Some IAS 16 Disclosure Requirements
46
Illustration 7 — Some Significant Judgments and Sources of Estimation Uncertainty Under IAS 16
53
1
IAS 16
Property, Plant
and Equipment
Preface
This publication is part of the Guide to International Financial Reporting Standards in Canada series published by the Chartered Professional Accountants
of Canada (CPA Canada) to support its members.
The objective of this publication, IAS 16 Property, Plant and Equipment, is
to help you understand IAS 16 and the IASB material that accompanies it.
The publication begins with an introduction and standards update and then
includes definitions, an overview chart, an analysis section, a section on
accounting policies and one on significant judgments and estimates.
Every attempt has been made to use plain language and to avoid mere
restatement of the IFRS standards although, where deemed necessary,
specific wording from the standards is referred to.
This publication has been carefully prepared, but it necessarily contains information in summarized form and is, therefore, intended for general guidance
only. It is not intended to be a substitute for detailed research or the exercise
of professional judgment.
The overview section takes a high-level look at the key requirements of the
standard in a chart format (the Overview chart). Specific “touchstone” references to IAS 16 are included in the Overview chart to help you navigate the
standard. These are not meant to be comprehensive references, rather a
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Guide to International Financial Reporting in Canada
starting point for your research. The Analysis section analyzes the more complex areas of the standard in more depth. Note that, where parts of the standard are more straightforward, they are included in the Overview chart only
as it is felt that this coverage is at a sufficient level.
Illustrations, examples and extracts have been used to explain a particular
concept and/or provide insight into how the standard is applied. Financial
statement note extracts have been selected to illustrate a particular point
but do not necessarily represent best practices.
Several features have been included to enhance understanding as follows:
1. Illustrations, including the following:
• charts
• decision trees
• summaries
These illustrations add value by summarizing, grouping, highlighting similarities/differences and working through decision processes in applying
the standard.
2. E
xamples
• IASB Illustrative Examples excerpts
• IASB examples excerpted from the standard
• other examples
These examples add value by showing how a particular part of the standard
might be applied in a specific situation. Note that IAS 16 does not include
any illustrative examples and therefore the examples included in this publication are not authoritative.
3. Extracts from the IASB standards, including the following:
• definitions
• select quotes
Even though every attempt has been made to use plain language, in some
cases, it has been important to use the specific wording in the standard to
get a point across.
4. Extracts from financial statements — financial statements of prominent
Canadian companies have been selected, including those that were recipients of the CPA Canada Corporate Reporting Awards. The report on the
Corporate Reporting Awards, including a list of winners, may be found at
www.cpacanada.ca.
The extracts included illustrate a particular aspect. It may be useful to
review the complete note, which may be found at www.sedar.com.
IAS 16 Property, Plant and Equipment
5. Non-IFRS Interpretations Committee insights — Items discussed but not
taken to the IASB agenda, referred to as NIFRICs (Non-IFRICs), have been
included because, in some cases, they provide insights into the standard
setting decision processes.
6. IFRS Discussion Group (IDG) insights — references to IDG discussions. The
IDG was established by the Canadian Accounting Standards Board (AcSB)
in 2009. Its aim is to provide a public forum for the discussion of issues
relating to IFRSs and to collect the views of Canadians experiencing issues
in implementing IFRSs. These discussions are not meant to provide authoritative guidance; however, they do help clarify issues and allow interested
parties to learn how others are working through their financial reporting
issues and applying judgment in the application of IFRSs. These have been
drawn from the publically available reports of the IDG meetings. The IDG’s
meetings are recorded and audio webcasts are archived on the AcSB
website (www.frascanada.ca). Discussants include preparers, practitioners,
regulators and users of financial statements.
7. References to other relevant CPA Canada material.
8. This publication is part of a series with various publication dates. The dates
have been noted on each publication.
Where necessary, icons have been used throughout the publication to refer to
many of these features so the reader can easily distinguish the sources of the
information.
Insight
Application insights explain, discuss and/or debate a particular
IFRS application issue.
Application insights include:
• NIFRICs (Non-IFRICs)
• IFRS Discussion Group reports
Viewpoints
E xa mple
Viewpoints refer to the Viewpoints: Applying IFRSs in the Mining Industry or the Viewpoints: Applying IFRSs in the Oil and
Gas Industry — a series of papers that addresses specific IFRS
application issues.
Examples illustrate how a particular part of an IFRS might be
applied in a specific situation.
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Guide to International Financial Reporting in Canada
Statistics
Resources
Statistics on particular IFRS application practices highlight
common practices and/or application approaches.
Resources include references to other relevant CPA Canada
material.
Research Resources
CPA Canada has compiled various IFRS technical summaries, practical application guides and frequently-asked-question documents aimed at supporting the
understanding and application of IFRSs. For more information on IFRSs visit
our website.
Notice to Readers
The Research, Guidance and Support Group of the Chartered Professional
Accountants of Canada (CPA Canada) commissioned this publication as part of
its continuing research program. The views and conclusions expressed in this
publication are those of the authors. They have not been adopted, endorsed,
approved or otherwise acted upon by a Board or Committee of CPA Canada
or any Provincial Institute / Ordre. CPA Canada and the authors do not accept
any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.
IAS 16 Property, Plant and Equipment
Introduction to IAS 16
IAS 16 prescribes the accounting treatment for property, plant and equipment
(PP&E) held for use in the production or supply of goods or services, for rental
to others or for administrative purposes, that are expected to be used for more
than one period. IAS 16 allows an accounting policy choice for PP&E: items
may be carried at cost or at a revalued amount.
IAS 16 provides guidance on what may, and what may not, be considered
PP&E, the recognition and measurement of initial and subsequent costs and
the derecognition of an item of PP&E.
IAS 16 includes a Basis for Conclusions document that summarizes the International Accounting Standards Board’s (IASB) considerations and conclusions
in the development of this standard. IAS 16 does not include any illustrative
examples.
The costs to dismantle, remove and restore items of PP&E are included in the
carrying amount of the asset. IFRIC 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities, provides guidance on accounting for the
effect of changes in the measurement of existing decommissioning liabilities
and discusses the related impact on PP&E.
IFRIC 18 Transfers of Assets from Customers, applies to the accounting for
transfers of items of PP&E by entities that receive such transfers from their
customers. This IFRIC provides guidance on the recognition and measurement
of such asset transfers.
This publication is based on the requirements of IFRS standards and interpretations for annual periods beginning January 1, 2013. Where appropriate,
for illustration purposes, certain note-disclosure examples are presented from
financial statements with annual periods ending before January 1, 2013.
This publication has not been updated since the publication date of
June 2013. Readers are cautioned that certain aspects of IFRSs may
have changed since the publication date.
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Guide to International Financial Reporting in Canada
Standards Update
IASB
Methods of Depreciation and Amortization
In December 2012, the IASB issued an Exposure Draft (ED), Clarification of
Acceptable Methods of Depreciation and Amortization (Proposed Amendments
to IAS 16 and IAS 38), based on a submission from the IFRS Interpretations
Committee. IAS 16.60 requires the depreciation method to reflect the pattern
in which an asset’s future economic benefits are expected to be consumed.
The proposed revisions are intended to clarify that revenue-based methods are
not acceptable methods of depreciating or amortizing an item of PP&E or an
intangible asset. This is because a revenue-based method reflects the economic benefits being generated from an asset rather than the expected pattern of consumption of the asset.
The proposed amendment also provides further guidance on the application
of the diminishing balance method of depreciation. This proposed guidance
clarifies that information about technical or commercial obsolescence of the
output of the asset (product or service) is relevant for estimating the pattern
of consumption of future economic benefits and the useful life of the asset. As
an example, the ED notes that an expected future reduction in the unit selling
price of the output, as a result of technical or commercial obsolescence, could
be an indication of the diminution of the future economic benefits of the asset.
The comment period on this ED closed April 2, 2013, and the expected completion date is the fourth quarter of 2013.
Bearer Biological Assets
The IASB has a limited-scope project to amend IAS 41 to address bearer biological assets (e.g., grapevines, dairy cows, etc.). These assets are accounted
for under IAS 41 at fair value less costs to sell based on the principle that the
transformation of bearer biological assets is best reflected by fair value measurement. The counter argument is that mature bearer biological assets are not
going through biological transformation and, as such, are similar to manufacturing assets and should be accounted for under IAS 16.
This project will focus on measurement of bearer biological assets that are
plants. This ED was issued on June 26, 2013, and was available for comment
until October 28, 2013.
IAS 16 Property, Plant and Equipment
Annual Improvements
2010 — 2012 cycle (ED issued May 2012)
The IASB proposes an amendment to IAS 16 to address concerns about the
computation of accumulated depreciation at the date of a revaluation of PP&E
for entities that apply the revaluation method to account for PP&E. The concern stems from differing practices in computing accumulated depreciation
for a revalued item where the residual value, the useful life or the depreciation
method is re-estimated before a revaluation.
When an item of PP&E is revalued, IAS 16 currently allows entities a choice to
(1) restate accumulated depreciation proportionately with the change in the
gross carrying amount of the asset, or (2) eliminate accumulated depreciation
against the gross carrying amount of the asset. A problem arises with the use
of method (1) if the residual value, useful life or depreciation method is reestimated before a revaluation adjustment. In these situations, the restatement
of accumulated depreciation proportionately would not result in the carrying
amount of the asset being equal to the revalued asset amount less the revalued accumulated depreciation. The proposed amendment to IAS 16 (and IAS
38) would state that the accumulated depreciation is computed as the difference between the gross and net carrying amounts. The proposed amendment
would also clarify that the determination of accumulated depreciation does not
depend on the selection of the valuation technique.
A similar amendment is proposed in IAS 38 for intangible assets measured
using the revaluation model.
It is expected that this amendment will be approved and issued in the fourth
quarter of 2013 and will be effective for annual periods beginning on or after
January 1, 2014, with early adoption permitted.
IFRIC
The Interpretations Committee received a request to address an issue related
to contractual arrangements within the scope of IFRIC 12, Service Concession
Arrangements. This request is to clarify in what circumstances contractual payments made by an operator under a service concession arrangement should:
1. be included in the measurement of an asset and liability at the start of the
concession; or
2. be accounted for as executory in nature (i.e., be recognized as expenses as
incurred over the term of the concession arrangement).
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At the January 2013 meeting, the Interpretations Committee tentatively
decided to recommend that the IASB amend IAS 16 to require the adjustments
of the carrying amount of a financial liability, other than those adjustments
for finance costs not eligible for capitalization in accordance with IAS 23,
be recognized as corresponding adjustments to the cost of the asset to the
extent that IAS 16 or IAS 38 requires them. The Interpretations Committee
also decided to propose amendments to IFRIC 12.
Key Standards Referred to in This Publication
The following is a list of standards mentioned in this publication. Names of the
standards have been included for the sake of clarity. The standards have been
separated into two groups for purposes of this list — primary and secondary.
The primary standards are the main standards that deal with the topic under
discussion (in this publication — property, plant and equipment). The secondary
standards are those referred to in this publication but not discussed in depth.
Primary standards:
IAS 16 Property, Plant and Equipment
IFRIC 1 Changes in Existing Decommissioning, Restoration and
Similar Liabilities
IFRIC 18 Transfers of Assets from Customers
Secondary standards:
IFRS 2 Share-based Payments
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 13 Fair Value Measurement
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 8 Accounting Policies, Changes in Estimates and Errors
IAS 12 Income Taxes
IAS 17 Leases
IAS 18 Revenue
IAS 20 Accounting for Government Grants and Disclosure
of Government Assistance
IAS 23 Borrowing Costs
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 40 Investment Property
IAS 41 Agriculture
IFRIC 12 Service Concession Arrangements
IAS 16 Property, Plant and Equipment
Subsequently, only the standard number will be referenced, not the name
(e.g., IAS 36).
IAS 16 Definitions
[IAS 16.6]
These definitions were taken directly from IAS 16.
Carrying amount
Carrying amount is the amount at which an asset is recognized after
deducting any accumulated depreciation and accumulated impairment losses.
Cost
Cost is the amount of cash or cash equivalents paid or the fair value
of the other consideration given to acquire an asset at the time
of its acquisition or construction or, where applicable, the amount
attributed to that asset when initially recognized in accordance with
the specific requirements of other IFRSs (e.g., IFRS 2 Share-based
Payment).
Depreciable amount
Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value.
Depreciation
Depreciation is the systematic allocation of the depreciable amount
of an asset over its useful life.
Entity-specific value
Entity-specific value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its
disposal at the end of its useful life or expects to incur when settling
a liability.
Fair value
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement.)
Impairment loss
An impairment loss is the amount by which the carrying amount of
an asset exceeds its recoverable amount.
Property, plant and
equipment
Property, plant and equipment are tangible items that:
1. are held for use in the production or supply of goods or services,
for rental to others or for administrative purposes; and
2. are expected to be used during more than one period.
Recoverable amount
Recoverable amount is the higher of an asset’s fair value less costs
to sell and its value in use (VIU).
Residual amount
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.
Useful life
Useful life is:
1. the period over which an asset is expected to be available for use
by an entity; or
2. the number of production or similar units expected to be obtained
from the asset by an entity.
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Overview of Key Requirements
The following chart provides a high-level overview of the key requirements of
IAS 16 and accompanying IASB support materials. The intent is not to repeat
the standard but to walk the reader through the main requirements in the
standard and identify the areas where detailed guidance is given and where
complexity in application exists. Areas of greater complexity will be covered
in more detail under the Analysis section of this publication.
As mentioned in the Preface, specific “touchstone” references to IAS 16 have
been inserted to help the reader navigate the standard. The referencing is not
meant to be all-inclusive but rather to give a starting point for further research
in the standard itself.
KEY REQUIREMENTS OF IAS 16
Scope — IAS 16.2 – .5
Assets Included within the Scope of IAS 16
• PP&E, including assets that are carried
at revalued amounts
• PP&E used to develop or maintain the
assets shown as excluded from the scope
of IAS 16
• measurement of investment property
(IAS 40) accounted for using the cost
model
• finance leases from the lessee perspective
(other than the recognition criteria, which
are included in IAS 17)
Assets Excluded from the Scope of IAS 16
• PP&E, classified as held for sale (IFRS 5)
• PP&E where another standard requires or
permits a different accounting treatment
(e.g., investment property (IAS 40))
• intangible assets (IAS 38)
• biological assets related to agricultural
activity (e.g., vines used to grow grapes
(IAS 41))
• recognition and measurement of exploration and evaluation assets (IFRS 6)
• mineral rights and mineral reserves
(e.g., oil and natural gas)
Recognition — IAS 16.7 – .14
General recognition criteria:
1. must be probable that an item of PP&E’s future economic benefits will flow to the entity;
and
2. the item of PP&E’s cost can be measured reliably.
Items acquired for safety and environmental reasons, certain spare parts, standby equipment,
servicing equipment and major inspection costs are recognized as they enable an entity to
obtain future economic benefits from other assets.
Measurement at recognition — IAS 16.15 – .28
An entity considers the IAS 16 recognition criteria for all PP&E costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of PP&E
and costs incurred subsequently to add to or replace part of PP&E.
An item of PP&E should be recognized at cost, which is the amount of cash or cash equivalents paid, or the fair value of other consideration given, to acquire an asset at the time of its
acquisition or construction.
There are specific elements to consider when assessing what contributes to the cost of an
item of PP&E, particularly when such an item is self-constructed rather than acquired. IAS 16
provides guidance as to what cost elements should be included and those that should be
excluded from the cost determination.
IAS 16 Property, Plant and Equipment
KEY REQUIREMENTS OF IAS 16
Measurement at recognition — IAS 16.15 – .28 (continued)
IAS 16 provides specific guidance for revenue from incidental operations, self-constructed
assets, non-monetary asset exchanges and costs of dismantling, removal and site restoration.
Other cost consideration issues included in the analysis section of this publication include:
• borrowing costs;
• assets acquired using government grants; and
• assets transferred from customers.
A subsequent expenditure on an asset is not capitalized if it is not probable that it will create
future economic benefit. The costs of day-to-day servicing of an item (i.e., repairs and maintenance) are recognized in profit and loss as incurred.
Measurement after recognition — IAS 16.29 – .66
Choice of two accounting policies by class of PP&E:
• cost model; or
• revaluation model.
Significant guidance is provided for the application of the revaluation model, including:
• when it can be used;
• determining asset classes;
• frequency of revaluations; and
• recognition of revaluation increases and decreases.
Each part of PP&E that is significant to the overall cost of an item should be separately depreciated, regardless of the accounting policy choice to measure PP&E using the cost model or
the revaluation model after recognition.
Depreciation is determined using the cost of an asset less its residual value over the estimated
useful life of the asset.
Entities need to review, at least at each annual reporting date, the residual values of their
PP&E assets, their estimated useful lives and the depreciation method used.
IAS 16 provides guidance on:
• when depreciation of an asset begins;
• how to determine an asset’s useful life;
• depreciation methods; and
• where depreciation is recognized.
An entity applies IAS 36 to determine whether an item of PP&E is impaired.
Derecognition — IAS 16.67 – .72
The carrying amount of a PP&E item should be derecognized:
1. on disposal; or
2. when no future economic benefits are expected from its use or disposal.
The carrying amount of a replaced part should be derecognized upon replacement.
Disclosure — IAS 16.73 – .79
Extensive disclosure requirements exist for each class of PP&E, including:
1. a reconciliation of the carrying amount at the beginning and end of the period
(including additions, write-downs and depreciation);
2. the measurement basis for each class of PP&E (cost or revaluation);
3. the depreciation methods used;
4. the useful lives or depreciation rate used; and
5. specific information when the revaluation method is used.
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Analysis of Relevant Issues
This section expands on certain areas of greater complexity and/or areas
requiring significant judgment.
Scope
[IAS 16.2 – .5]
Several other standards may be used in conjunction with, or in lieu of, IAS 16 to
recognize and measure PP&E.
IAS 16 does not apply to investment property such as land and buildings
used to earn rental income or held for capital appreciation purposes. Instead,
the provisions of IAS 40 apply. The IAS 16 cost model is relevant in circumstances where this policy is chosen for subsequent measurement of investment
properties.
The following examples look at the relationship between IAS 16 and IAS 40.
Application ExampleS
Relationship between IAS 16 and IAS 40
E xa mple
Company ABC is in the manufacturing business and owns several plants
(buildings and related machinery) across the country. Company ABC uses
each of these plants to make products that will ultimately be sold to generate revenue.
These plants are not considered investment property as they are used in
the production or supply of goods or services sold in the ordinary course of
business. As such, they are recognized under IAS 16 using the requirements
in this publication.
E xa mple
Company DEF is in the real estate business and has invested in several buildings in many cities across the country. Company DEF derives its revenue
from rental income and would recognize a capital gain or loss from the sale
of these buildings.
These buildings are considered investment property because they are held
to earn rentals and for capital appreciation purposes. As such, they are
recognized under IAS 40. Under this standard, Company DEF may choose to
measure the buildings after recognition by using either the fair value model
or the cost model. Should it choose the cost model, the requirements of
IAS 16 would apply.
establish the asset in working condition given its intended use. Cost also includes expenditures
for dismantling and removing items and restoring the site on which they were located, and
borrowing costs on qualifying assets. Purchased software and costs directly related to the
purchase and installation of such software are capitalized as IAS
a component
of related
equipment
16 Property,
Plant
and Equipment
when the software is integral to its functionality. Software that is not considered integral to the
functionality of equipment is classified as an intangible asset.
When parts of an item of property, plant and equipment have different useful lives, they are
accounted for as separate items (major components) of property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by
comparing
the proceeds
fromThe
disposal
withLtd.
the carrying
amount of property,
plant and
Extract
1 — Excerpt
from
Brick
2012 Financial
Statements
equipment and are recognized within other income (expense) on the consolidated statements of
Note 3 — Significant
Accounting Policies
comprehensive income.
3.9 Property, plant and equipment (in part)
3.9.2
Reclassification to investment property
Property, plant and equipment are used in the ordinary course of business in the production or
supply of goods or services or for administrative purposes. Investment property is property
held to earn rental revenue or for capital appreciation or both. When the use of a property
changes from use in the business to investment property, the property’s cost and accumulated
depreciation is reclassified from property, plant and equipment to investment property.
24
The following insight looks at accounting for the right to use land as to
whether IAS 16, IAS 17 or IAS 38 applies.
Application Insights
Purchase of right to use land
Source
NIFRIC
Meeting Date
September 2012
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
In January 2012, the Interpretations Committee received a request
to clarify whether the purchase
of a right to use land should be
accounted for as a:
• purchase of property, plant and
equipment;
• purchase of an intangible asset;
or
• lease of land.
In the fact pattern submitted, the
laws and regulations in the jurisdiction concerned do not permit
entities to own freehold title to land.
Instead, entities can purchase the
right to exploit or build on land.
According to the submitter, there is
diversity in practice in the jurisdiction on how to account for a land
right.
Reason for not adding to
the IFRIC agenda
The Interpretations Committee identified characteristics of a lease in the
fact pattern considered, in accordance with the definition of a lease
as defined in IAS 17. The Interpretations Committee noted that a lease
could be indefinite via extensions or
renewals and, therefore, the existence of an indefinite period does
not prevent the ‘right to use’ from
qualifying as a lease in accordance
with IAS 17. The Interpretations Committee also noted that the lessee has
the option to renew the right and
that the useful life for depreciation
purposes might include renewal
periods. Judgement will need to be
applied in making the assessment of
the appropriate length of the depreciation period.
The Interpretations Committee, notwithstanding the preceding observations, noted that the particular fact
pattern is specific to one jurisdiction.
Consequently, the Interpretations
Committee decided not to take this
issue onto its agenda.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
June 2013
13
14
Guide to International Financial Reporting in Canada
Recognition of Initial and Subsequent Costs
[IAS 16.7 – .14]
IAS 16 does not specifically address what items constitute PP&E but provides
general recognition guidance. The costs of an item of PP&E are capitalized
only if:
1. it is probable that future economic benefits from the item will flow to the
entity; and
2. the cost can be reliably measured.
The recognition criteria are based on the IASB’s Conceptual Framework for
Financial Reporting.
Judgment may be required to determine whether particular costs qualify for
recognition as PP&E in certain circumstances, some of which are outlined in
the following sub-sections.
Items Acquired for Safety or Environmental Reasons
[IAS 16.11]
IAS 16 provides specific guidance for PP&E acquired for safety or environmental reasons. A distinction is made for such PP&E because these assets generally
do not have a direct impact on increasing the future economic benefits of any
existing piece of PP&E. They may, however, allow an entity to obtain future
economic benefits from its other assets in excess of what it might have derived
had it not acquired the safety or environmental PP&E.
Application Example
Items acquired for safety or environmental reasons
E xa mple
Company ABC operates in the pharmaceutical industry. To run its plants it
must abide by several environmental and chemical safety standards. To do
so the company has hired several engineers to develop specific processes
that will ensure compliance. It has also acquired specified quality control and
monitoring equipment.
This equipment is not necessary for the production of goods and services,
yet it is important for ensuring compliance with the environmental and
chemical safety standards. The process development costs, as well as the
equipment, are capitalized under IAS 16.
IAS 16 Property, Plant and Equipment
Spare Parts, Standby Equipment and Servicing Equipment
[IAS 16.8]
Items such as spare parts, standby equipment and servicing equipment are
recognized as PP&E when they meet the definition of PP&E. Otherwise, such
items are classified as inventory.
2.8 Property, plant and equipment
Property, plant and equipment include capitalized development and pre-production expenditures that are recorded at cost less
Extract
2 — Excerpt
fromimpairment
Sherritt
Corporation
accumulated
depreciation and accumulated
losses. International
Cost includes expenditures that
are directly attributable 2012
to the
acquisition of the asset. Also included in the cost of property, plant and equipment are borrowing costs on qualifying capital
Financial
Statements
projects. These are incurred while construction is in progress and before the commencement of commercial production. Once
construction
of an asset is substantially
complete and the Accounting
asset is ready for its intended
use, the costs are depreciated.
Note
2 — Summary
of Significant
Policies
equipment
andand
land equipment (in part)
2.8 Plant,
Property,
plant
Plant, equipment and land includes assets under construction, equipment and processing, refining, power generation and other
Plant,
equipment
and land (in part)
manufacturing
facilities.
The Corporation recognizes major long-term spare parts and standby equipment as plant, equipment and land when the parts
and equipment are significant and are expected to be used over a period greater than a year, or when the parts and equipment
can be used only in connection with an item of plant, equipment and land. Major inspections and overhauls required at regular
intervals over the useful life of an item of plant, equipment and land are recognized in the carrying amount of the related item if
the inspection or overhaul provides benefit exceeding one year.
Subsequent Costs
Plant and equipment are depreciated using the straight-line method based on estimated useful lives, once the assets are available
for use. Plant and equipment may have components with different useful lives. Depreciation is calculated based on each
Repairs
and Maintenance
individual component’s useful life. New components are capitalized to the extent that they meet the recognition criteria of an
asset.
The carrying amount of the replaced component is derecognized, and any gain/loss is included in net earnings (loss). If
[IAS
16.12]
the carrying amount of the replaced component is not known, it is estimated based on the cost of the new component less
estimated depreciation. The useful lives of the Corporation’s plant and equipment are as follows:
IAS 16 applies the general recognition criteria to subsequent costs incurred to
Buildings and refineries
5 to 40 years
equipmenta previously recognized
5 to 50 years PP&E item. A subsequent expendiaddMachinery
to orand
service
Office equipment
3 to 35 years
tureFixtures
on an
asset is capitalized only3 when
and fittings
to 35 yearsit is probable that it will create future
Assets under construction
not depreciated during development period
economic benefit. The costs of day-to-day servicing of an item are described
Mining properties
as being
required for the repair and maintenance of an item of PP&E and these
Mining properties include acquisition costs and development costs related to mines in production, properties under development
and properties
held for future development.
Ongoing
costs relating to properties held for future development
costs
are recognized
in profit
andpre-development
loss as incurred.
are expensed as incurred, including property carrying costs, drilling and other exploration costs. Once a project is determined to
be commercially viable, development costs are capitalized. Development costs incurred to access reserves at producing
properties and properties under development are capitalized and are depreciated on a unit-of-production basis over the life of
such reserves. Reserves are measured based on proven and probable reserves.
Replacement Parts
[IAS 16.13]
Oil and gas properties
Oil and gas properties include acquisition costs and development costs related to properties in production, under development
Costs
incurred
subsequently
in order costs
to relating
add to,
replace
part
of, or service
an
and held
for future development.
Ongoing pre-development
to properties
held for
future development
are
capitalized as incurred, including exploration costs. Development costs incurred to access reserves at producing properties and
item are capitalized if they meet the recognition criteria. In such cases, the
properties under development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves.
Reserves are
measured based
proven andto
probable
reserves.
standard
requires
anonentity
derecognize
the carrying amount of the part
thatDerecognition
has been replaced. This applies whether or not the replaced item has been
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to
separately
identified and depreciated since acquisition. If the carrying amount
arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference
between
the
net
disposal
proceeds
and the carrying
amount of the item)
is included
net the
earnings
(loss) in the period thesuitably
item
of the replaced
part
cannot
be identified,
the
costinof
replacement,
is derecognized.
depreciated, can be used to estimate the carrying amount of the part being
Capitalization of borrowing costs
replaced
andonderecognized.
Borrowing costs
funds directly attributable to finance the acquisition, construction or production of a qualifying asset are
capitalized until such time as substantially all the activities necessary to prepare the qualifying asset for its intended use or sale
are complete. A qualifying asset is one that takes a substantial period of time to prepare the asset for its intended use. Where
money borrowed specifically to finance a project is invested to earn interest income, the income generated is also capitalized to
reduce the total capitalized borrowing costs.
Sherritt International Corporation
13
June 2013
15
16
option award
is expensed
on the
grant date.
Forcard
a stock
option
award attributable
to an Current
employee
who will
accounts
relating
to Air Canada
Vacations
credit
booking
transactions,
recorded under
liabilities,
forbecome
certain
eligiblerelated
to retire
during the vesting period, the fair value of the stock option award is recognized over the period from the
travel
activities.
grant date to the date the employee becomes eligible to retire. The Corporation recognizes compensation expense and a
Restricted
cashadjustment
with maturities
greater than
one year
thefair
balance
is recorded
in Deposits
corresponding
to Contributed
surplus
equalfrom
to the
value sheet
of thedate
equity
instruments
granted and
usingother
the
Guide
to International
Financial
Reporting
inwith
Canada
assets.
This restricted
cash
relates
funds
on deposit
various
financial
institutions
as collateral
for letters
of credit
Black-Scholes
option pricing
modeltotaking
into
consideration
forfeiture
estimates.
Compensation
expense
is adjusted
for
and
other items.
subsequent
changes in management’s estimate of the number of options that are expected to vest.
S) AIRCRAFT
FUEL
INVENTORY
AND as
SUPPLIES
INVENTORY
Grants
of PSUs are
accounted
for asAND
cash SPARE
settled PARTS
instruments
described
in Note 14. Accordingly, the Corporation
recognizes compensation expense at fair value on a straight line basis over the applicable vesting period, taking into
Inventories of aircraft fuel and spare parts, other than rotables, and supplies are measured at the lower of cost and net
consideration forfeiture estimates. Compensation expense is adjusted for subsequent changes in the fair value of the
realizable value, with cost being determined using a weighted average formula.
PSU and management’s current estimate of the number of PSUs that are expected to vest. The liability related to cash
settled
PSUs is recorded
Other long-term
liabilities.
to Noteor17reversals
for a description
of derivative
instruments
The
Corporation
did not in
recognize
any write-downs
onRefer
inventories
of any previous
write-downs
duringused
the
by the Corporation to hedge the cash flow exposure to PSUs.
periods presented.
Included in Aircraft
is $43 related
to spare
parts and supplies
consumed during the year
Extract
3 — Excerpt
frommaintenance
Air Canada
2012
Financial
Statements
(2011 – $39).
Air Canada also maintains an employee share purchase plan. Under this plan, contributions by the Corporation’s
Note
2 — Basis
of Presentation
and
Summary
of must
Significant
employees
are matched
to a specific percentage by
the Corporation.
Employees
remain with the Accounting
Corporation until
T) PROPERTY AND EQUIPMENT
March
31
of
the
subsequent
year
for
vesting
of
the
Corporation’s
contributions.
These
contributions are expensed in
Policies
Property
and equipment
is recognized
usingthe
thevesting
cost model.
Wages, salaries,
and benefits
expense over
period.Property under finance leases and the related obligation for
future lease payments
initially recorded
at an amount equal to the lesser of fair value of the property or equipment
J) Maintenance
and are
repairs
(in part)
J) the
MAINTENANCE
and
present value ofAND
thoseREPAIRS
lease payments.
Maintenance
and allocates
repair costs
both leased
andrecognized
owned aircraft
are charged
Aircraft
maintenance
as incurred,towith
The Corporation
theforamount
initially
in respect
of an to
item
of property
and equipment
its
the
exception
of maintenance
and repair costs
relatedeach
to return
conditions
on aircraft
operating
which are
significant
components
and depreciates
separately
component.
Property
and under
equipment
are lease,
depreciated
to
Saskatchewan
accrued
over
the
term
of
the
lease,
and
major
maintenance
expenditures
on
owned
and
finance
leased
aircraft,
which
are
estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight
capitalized
as
described
below
in
Note
2T.
equipment are componentized into airframe, engine, and cabin interior equipment and modifications. Airframe and
Transportation Company 2012 Ann
engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and
Maintenance and repair costs related to return conditions on aircraft leases are recorded over the term of the lease for
modifications
are depreciated
over the lesser
of 5 years or the remaining useful life of the aircraft. Spare engines and
T) Property
and
equipment
part)
the end of lease
maintenance
return(in
condition
obligations within the Corporation’s operating leases, offset by a prepaid
related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with
maintenance asset to the extent of any related power-by-the-hour maintenance service agreements or any recoveries
10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are
under aircraft subleasing arrangements. The provision is recorded within Maintenance provisions using a discount rate
amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and
taking into account the specific risks of the liability over the remaining term of the lease. Interest accretion on the
parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average
provision is recorded in Other non-operating expense. For aircraft under operating leases which are subleased to third
expected life between major maintenance events. Major maintenance events typically consist of more complex
parties, the expense relating to the provision is presented net on the income statement of the amount recognized for
inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are
any reimbursement of maintenance cost which is the contractual obligation of the sublessee. The reimbursement is
charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a
recognized when it is virtually certain that reimbursement will be received when the Corporation settles the obligation.
(continued)
straight-line basis over their useful lives not exceeding
50 years or the term of any related lease, whichever is less.
Any changes in the maintenance cost estimate, discount rates, timing of settlement or difference in the actual
Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is
maintenance cost incurred and the amount of the provision is recorded in Aircraft maintenance in the period.
depreciated over 3 to 25 years.
Notes to Financial Statements
c.Extract
Property 4 — Excerpt
and equipment from Saskatchewan Transportation
Property and equipment are recorded at cost less accumulated
Financial Statements
depreciation and any provisions for impairment. Cost includes
Note
4 — Significant
Accounting
expenditure
that is directly
attributable to Policies
the acquisition of the
asset. The and
cost of
self-constructed
assets includes materials,
c. Property
equipment
(in part)
services, direct labour and directly attributable overheads.
g.
The costs of maintenance, repairs, renewals or replacements which do
not extend productive life are charged to operations as incurred. The
costs of replacements and improvements which extend productive life
are capitalized. The cost of replacing part of an item of property and
equipment is recognized in the carrying amount of the item if it is
probable that the future economic benefits embodied within the part
will flow to the Company and its cost can be measured reliably. The
carrying amount of the replaced part is derecognized. The costs of
the day-to-day servicing of property and equipment are recognized in
total comprehensive loss as incurred.
When property and equipment are disposed of or retired, the
related costs and accumulated depreciation are eliminated from the
Major
Inspections
accounts.
Any resulting gains or losses are reflected in the
statement
[IAS
16.14] of comprehensive loss for the period.
Company recognizes
Company
2012 a portion of the capital grant as reve
year equivalent to the amount of depreciation recognized
13 with the grant funds.
assets acquired
10
Capital grants related to the acquisition of land and rela
recognized as a direct increase in retained earnings.
Depreciation of property and equipment
Depreciation is recorded on buildings, vehicles, and equi
the straight-line basis over the estimated productive life
asset. Depreciation commences when the property and e
ready for its intended use. The estimated useful life of p
equipment is based on manufacturer’s guidance, past exp
future expectations regarding the potential for technical
obsolescence. The estimated useful lives are reviewed an
any changes are applied prospectively.
The estimated useful lives of the major classes of propert
equipment are as follows:
Buildings
10 - 50 years
Vehicles
5 -15 years
Other equipment 3 - 10 years
h. Impairment of non-financial assets
d. Non-financial assets held for sale
ToNon-financial
continue operating,
certainasitems
PP&E
may
require major inspections
At each reporting date, the Company reviews the carrying
assets are classified
held forof
sale
if their
carrying
(for
example:
ships, etc.).
When
major inspections its
take
place, assets to determine whether there is an
non-financial
amount
will beaircrafts,
recovered principally
through
a salesuch
transaction
that
those
assets have suffered an impairment loss. If an
rather
than
through
continuing
use.
This
condition
is
regarded
as
the costs are recognized as a separate component, if the recognition criteria
indication exists, the recoverable amount of the asset is
met only when the sale is highly probable and the asset is available
areforsatisfied
and amortized over the period between scheduled inspections.
immediate sale in its present condition. Management must be
order to determine the extent, if any, of the impairment
Once
a
scheduled
inspection
has
taken place,
anyforremaining carrying amount
committed to the sale,
which should
be expected
to qualify
The recoverable amount is the higher of fair value less co
as athe
completed
sale inspection
within one year
fromthe
the unamortized
date of
of recognition
the cost of
previous
(i.e.,
portion)
mustin be
and
value
use. In assessing value in use, the estimated
classification.
derecognized and the new inspection cost capitalized.
flows are discounted to their present value using a discou
Non-financial assets classified as held for sale are measured at the
reflects current market assessments of the time value of m
lower of their previous carrying amount and fair value less costs to
the risks specific to the asset for which the estimates of
sell.
flows have not been adjusted.
e. Operating grant revenue
Operating grants from CIC are recognized as revenue when received.
f. Capital grant revenue
Capital grants related to depreciable property are deferred as received
and are recognized as revenue over the life of the asset. The
If the recoverable amount of an asset is estimated to be
carrying amount, the carrying amount of the asset is redu
recoverable amount. An impairment loss is recognized im
the statement of comprehensive loss.
Other long-term employee benefits are included in other liabilities.
Property, plant and equipment
PP&E are carried at cost less accumulated amortization and impairment losses. The cost of an item of PP&E
IAS 16 Property, Plant and Equipment
includes its purchase price or manufacturing cost, borrowing costs as well as other costs incurred in bringing the
asset to its present location and condition. If the cost of certain components of an item of PP&E is significant in
relation to the total cost of the item, the total cost is allocated between the various components, which are then
separately depreciated over the estimated useful lives of each respective component. The amortization of PP&E
is computed on a straight-line basis over the following useful lives:
Buildings
Equipment
Other
5 to 75 years
2 to 15 years
3 to 20 years
Extract 5 — Excerpt from Bombardier Inc. 2012 Financial Statements
The2 — Summary
amortization methodof
and useful
lives are reviewed
on a regular basis,
at least annually, and changes are
Note
Significant
Accounting
Policies
accounted for prospectively. The amortization expense and impairments are recorded in cost of sales, SG&A or
R&D expenses
the function of(in
thepart)
underlying asset. Amortization of assets under construction begins
Property,
plant based
and on
equipment
when the asset is ready for its intended use.
When a significant part is replaced or a major inspection or overhaul is performed, its cost is recognized in the
carrying amount of the PP&E if the recognition criteria are satisfied, and the carrying amount of the replaced part
or previous inspection or overhaul is derecognized. All other repair and maintenance costs are charged to income
when incurred.
Intangible assets
Internally generated intangible assets include development costs (mostly aircraft prototype design and testing
costs) and internally developed or modified application software. These costs are capitalized when certain criteria
for deferral such as proven technical feasibility are met. The costs of internally generated intangible assets
include the cost of materials, direct labour, manufacturing overheads and borrowing costs.
Measurement at Recognition
[IAS 16.15 – .28]
Acquired intangible assets include the cost of development activities carried out by vendors for which the
Corporation controls the underlying output of the usage of the technology, as well as the cost related to externally
PP&E
is initially
recognized
at cost. Cost is the cash price equivalent or fair value
acquired
licences, patents
and trademarks.
of other
consideration given at the recognition date. If payment is deferred
Intangible assets are recorded at cost less accumulated amortization and impairment losses and include goodwill,
aerospace
programcredit
tooling, as
well as other
assets such
as licenses,
patents
and price
trademarks.
Other
beyond normal
terms,
theintangible
difference
between
the
cash
equivalent
intangible assets are included in other assets.
and the total payment is recognized as interest over the period of credit unless
such interest is capitalized in accordance with IAS 23. Cost includes all expenditures directly attributed to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
IAS 16 provides guidance on the elements of the cost of an item of PP&E. The
following illustration summarizes some elements of the cost of PP&E and some
costs that are excluded. Note that this is not meant to be a comprehensive list.
Illustration 1 — Included and Excluded Costs of PP&E
142
Included
costs
Excluded costs
•
•
•
•
•
•
•
•
•
•
purchase price, including import duties
and non-refundable purchase taxes, after
deducting trade discounts and rebates
costs of site preparation (e.g., surveying,
clearing, leveling, grading, and other civil
engineering tasks involved in preparing
the site for construction)
initial delivery and handling costs
installation and assembly costs
costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced
while bringing the asset to that location
and condition (such as samples produced
when testing equipment)
costs of employee benefits (including
share-based payments) arising directly
from the acquisition or construction of
the PP&E
professional fees (e.g., legal, architectural,
engineering)
initial estimate of the costs of dismantling
and removing the item and restoring the
site where it is located to its original condition when an obligation to do so exists
•
•
•
•
•
•
costs of opening a new facility
costs of introducing a new product or
service (including costs of advertising and
promotional activities)
costs of conducting business in a new
location or with a new class of customer,
including costs of staff training
administrative and general overhead costs
training costs, including those incurred for
employees who must learn how to operate a new piece of equipment
costs incurred while an item capable
of operating in the manner intended
by management has yet to be brought
into use or is operated at less than full
capacity
initial operating losses, such as those
incurred while demand for the item’s
output builds up
costs of relocating or reorganizing part
or all of an entity’s operations
June 2013
17
18
Guide to International Financial Reporting in Canada
The following insight looks at costs of testing whether an asset is functioning
properly and the treatment of any proceeds before the asset is ready for commercial production.
Application Insights
Costs of testing
Source
NIFRIC
Meeting Date
July 2011
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
Reason for not adding to
the IFRIC agenda
The Interpretations Committee
received a request to clarify the
accounting for sales proceeds from
testing an asset before it is ready
for commercial production. The
submitted fact pattern is that of
an industrial group with several
autonomous plants being available
for use at different times. This group
is subject to regulation that requires
it to identify a ‘commercial production date’ for the whole industrial
complex. The question asked of the
Committee is whether the proceeds
from those plants already in operation can be offset against the costs
of testing those plants that are not
yet available for use.
The Committee noted that paragraph 17(e) of IAS 16 applies separately to each item of property, plant
and equipment. It also observed that
the ‘commercial production date’
referred to in the submission for
the whole complex was a different
concept from the ‘available for use’
assessment in paragraph 16(b) of
IAS 16. The Committee thinks that
the guidance in IAS 16 is sufficient
to identify the date at which an item
of property, plant and equipment
is ‘available for use’ and, therefore,
is sufficient to distinguish proceeds
that reduce costs of testing an asset
from revenue from commercial
production.
As a result, the Committee does not
expect diversity to arise in practice
and therefore decided not to add
this issue to its agenda.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
Costs of a Self-Constructed Asset
[IAS 16.22]
The costs of a self-constructed asset are determined using the same principles
as for an acquired asset. They normally include the direct costs of constructing the asset (e.g., the purchase price of raw materials including transportation,
handling and other direct costs, and direct labour costs).
g methods and assumptions for
with its defined benefit plans:
actuarially determined and takes
cted rates of salary increases, for
or future benefit increases;
If an entity makes similar assets for sale in the normal course of business, the
costs of the asset are usually the same as the costs of constructing an asset
for sale. Therefore, any internal profits are excluded.
IAS 16 specifically excludes the cost of abnormal amounts of wasted material,
labour
or other resources
incurred in self-constructing an asset.
(ii) Termination
benefits:
Termination benefits are recognized as an expense when the
Company6 — Excerpt
is committed
without
realistic
possibility of
Extract
from
Rogers
Communications
Inc. 2012 Financial
withdrawal, to a formal detailed plan to terminate employment
before the normal retirement date.
Statements
Note 2 — Significant Accounting Policies
(r)
Property, plant and equipment:
(r) (i)
Property,
plant and equipment: (in part)
Recognition and measurement:
(i) Items
Recognition
andare
measurement:
part)less accumulated
of PP&E
measured at(in cost
depreciation and accumulated impairment losses.
culating the expected return on
s are valued at fair value; and
Cost includes expenditures that are directly attributable to the
acquisition of the asset. The cost of self-constructed assets
includes the cost of materials and direct labour, any other costs
directly attributable to bringing the assets to a working
condition for their intended use, the costs of dismantling and
removing the items and restoring the site on which they are
located, and borrowing costs on qualifying assets. The
determination of directly attributable costs involves significant
management estimates. These estimates include certain direct
labour and direct costs associated with the acquisition,
construction, development or betterment of the Company’s
network are capitalized to PP&E, and interest costs which are
capitalized during construction and development of certain
PP&E.
plan amendments are expensed
nsolidated statements of income
ey are already vested. Unvested
deferred and amortized on a
r the average remaining vesting
to defined contribution plans are
mployee benefit expense in the
in the periods during which
ndered by employees.
bution plans are recognized as an
the consolidated statements of
hich related services are rendered
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
osses are determined at the end
he valuation of the plans and are
earnings.
IAS 16 Property, Plant and Equipment
The cost of new cable subscriber installation costs are capitalized
to cable and wireless network and is depreciated over the useful
lives of theCosts
related assets. Costs of other cable connections and
Borrowing
disconnections are expensed, except for direct incremental
[IAS 23.1 and .5]
installation costs related to reconnect Cable customers, which
are deferred to the extent of reconnect installation revenues.
IAS 23 establishes criteria for the recognition of borrowing costs as an element
and losses amount
on disposalofofaan
item of PP&E
are determined
of Gains
the carrying
qualifying
asset.
A qualifying asset is defined in
by comparing the proceeds from disposal with the carrying
IASamount
23 asof“an
asset
that
necessarily
takes
a
substantial
period of time to get
PP&E, and are recognized within other income in the
consolidated
statements of
income.
ready
for its intended
use
or sale”. IAS 23 does not provide guidance on what
constitutes a substantial period of time. This is a matter of judgment.
onsolidated statements of income over the estimated useful lives of the PP&E as follows:
are
E may have different useful lives.
methods, rates, and useful lives
hat take into account industry
tors. Depreciation methods, rates
d at least annually or when there
nd revised if the current method,
al value is different from that
of such changes is recognized in
ncome prospectively.
Basis
Estimated useful life
An entity must capitalize borrowing costs for qualifying assets that are directly
Diminishing balance
5 to 25 years
attributable to the acquisition, construction 3ortoproduction
of the qualifying asset.
Straight-line
30 years
Straight-line
Straight-line
Straight-line
Diminishing balance
4 to 10 years
3 to 5 years
Over shorter of estimated
useful life and lease term
3 to 20 years
are recorded on the consolidated statements of financial position
when the licence period begins and the program is available for use
and is amortized to other external purchases in the consolidated
statements of income over the expected exhibition period, which
ranges from one to five years. If programs are not scheduled, the
related program rights are considered impaired and written off.
Otherwise, they are subject to non-financial asset impairment testing
as intangible assets with finite useful lives. Program rights for multiyear sports programming arrangements are expensed as incurred,
June 2013
19
NOTE 5 PROPERTY, PLANT AND EQUIPMENT
20
Guide to International Financial Reporting in Canada
ACCOUNTING POLICIES
Any gain or loss arising on the disposal or retirement of an item of property,
plant and equipment is determined as the difference between the sale
Property, plant and equipment (which include certain mine development costs,
proceeds and the carrying amount of the asset, and is recognized in
pre-stripping costs and assets under construction) are carried at cost (which
operating income.
includes all expenditures directly attributable to bringing the asset to the
location and installing it in working condition for its intended use) less
ACCOUNTING ESTIMATES AND JUDGMENTS
accumulated
depreciation and any recognized impairment loss. Income or
Extract 7 — Excerpt from Potash Corporation of Saskatchewan Inc.
Determination of which costs are directly attributable (e.g., labor, overhead)
expenses derived from the necessity to bring an asset under construction to
2012 Financial Statements
and when income or expenses derived from an asset under construction is
the location and condition necessary to be capable of operating in the manner
Note
5 — Property,
Plant
and
Equipment
recognized
as part of the cost of the asset, are matters of judgment.
intended is recognized as part of the cost of the asset. The cost of property,
Capitalization
of costs ceases when an item is substantially complete and in
Accounting
Policies
(in part)
plant and equipment
is reduced
by the amount of related investment tax
the
location
and
condition necessary for it to be capable of operating in the
credits to which the company is entitled. Costs of additions, betterments,
manner
intended
by management. Determining when an asset, or a portion
renewals and borrowings during construction are capitalized. Borrowing costs
thereof, meets these criteria requires consideration of the circumstances and
directly attributable to the acquisition, construction or production of assets
the industry in which it is to be operated, normally predetermined by
that necessarily take a substantial period of time to ready for their intended
management
with reference to such factors as productive capacity. This
use are added to the cost of those assets, until such time as the assets are
determination
is a matter of judgment that can be complex and subject to
substantially ready for their intended use. The capitalization rate is based on
differing
interpretations
and views, particularly when significant capital
the weighted average interest rate on all of the company’s outstanding thirdprojects contain multiple phases over an extended period of time. When an
party debt. All other borrowing costs are charged through finance costs in the
item of property, plant and equipment comprises individual components for
period in which they are incurred. Each component of an item of property,
which different depreciation methods or rates are appropriate, judgment is
plant and equipment with a cost that is significant in relation to the item’s
used
in determining the appropriate level of componentization. Distinguishing
total cost is depreciated separately. When the cost of replacing part of an item
major
inspections and overhauls from repairs and maintenance, and
of property, plant
and equipment
is capitalized, the carrying amount of the
Cessation
of Cost
Recognition
determining
the appropriate life over which such costs should be amortized is
replaced
part is derecognized. The cost of major inspections and overhauls is
[IAS
16.20]
a matter of judgment.
capitalized and depreciated over the period until the next major inspection or
andthat
repaircosts
expenditures
not improve
or extend
It overhaul.
shouldMaintenance
be noted
arethat
nodolonger
capitalized
once
item
is in assets
the are depreciated using the units-ofCertainthe
mining
and milling
productive
life
are
expensed
in
the
period
incurred.
production method
basedmanon the shorter of estimates of reserves or service
location and condition necessary for it to be capable of operating
in the
lives. Pre-stripping
costs are depreciated on a units-of-production basis over
ner intended by management. This means that IAS 16 prohibits
the recognition
the ore mined from the mineable acreage stripped. Land is not depreciated.
of relocation and reorganization costs, costs incurred after the asset is capable
of being used and initial operating losses.
114 POTASHCORP
2012 ANNUAL
INTEGRATED
Income
and Related
Expenses
ofREPORT
Incidental Operations
[IAS 16.21]
Incidental income derived from operating PP&E prior to its substantial completion and readiness for use is recognized as part of the cost of the asset provided it is necessary to bring the asset to its intended use.
Income and related expenses of incidental operations that are not necessary
to bring an asset to the condition and location for its intended use, or that are
incurred after the asset is already in the location and condition necessary for
operating as intended, are recognized in profit or loss.
Application Example
Incidental income
E xa mple
Company ABC is about to construct a condominium project near a golf
course. Before construction begins, the land on which the project will be
situated is being used as a place where golfers may practice prior to beginning their games. The golf company must pay a rental fee to Company ABC
for the use of this land.
Revenues derived by ABC from the golf company are recognized in the
period when earned as they are not required to bring the asset to the condition and location for its intended use.
IAS 16 Property, Plant and Equipment
Assets Acquired Using Government Grants
[IAS 16.28 and IAS 20.24]
For many industries, the acquisition of certain assets is made possible by government grants. Government grants may take the form of subsidies, forgivable
loans or other similar mechanisms. IAS 20 prescribes the following treatment
for government grants related to PP&E:
• recognize
the grant FINANCIAL
as deferred
income to be recognized in profit or loss
NOTES TO CONSOLIDATED
STATEMENTS
All amounts in $ millions, unless otherwise indicated
on
a year
systematic
basis
over the useful life of the asset; or
For the
ended December
31, 2012
• deduct the grant in calculating the carrying amount of the asset. The
An impairment
loss on a financial
asset carried
at amortized
cost life
is calculated
as the difference asset
between the
grant
is recognized
in profit
or loss
over the
of a depreciable
amortized cost and the present value of the future cash flows discounted at the asset’s original effective interest
rate.aThe
carrying amount
of the asset is expense.
reduced through the use of an allowance account. Impairment losses on
as
reduced
depreciation
financial assets carried at amortized cost are reversed through net earnings in subsequent periods if the amount of
the loss decreases.
Extract
8 — Excerpt from Cenovus Energy Inc. 2012 Financial
Q) Borrowing Costs
Statements
Borrowing costs are recognized as an expense in the period in which they are incurred unless there is a qualifying
asset. Borrowing costs directly associated with the acquisition, construction or production of a qualifying asset are
Note
3 — Summary
of period
Significant
Accounting
Policies
capitalized
when a substantial
of time is required
to make the asset
ready for its intended use. Capitalization
of borrowing costs ceases when the asset is in the location and condition necessary for its intended use.
R) Government Grants
Government grants are recognized at fair value when there is reasonable assurance that the grants will be received
and the Company will comply with the conditions of the grant. Grants related to assets are recorded as a reduction
of the asset’s carrying value and are depreciated over the useful life of the asset. Grants related to income are
treated as a reduction of the related expense in the Consolidated Statements of Earnings and Comprehensive
Income.
S) Leases
Leases in which substantially all of the risks and rewards of ownership are retained by the lessor are classified as
operating
leases.
Operating
lease payments
are recognized as an expense on a straight-line basis over the lease
Assets
Held
under
a Finance
Lease
term.
[IAS
16.4where
andthe.27]
Leases
Company assumes substantially all the risks and rewards of ownership are classified as finance
leases within property, plant and equipment.
TheT)initial
measurement
cost for PP&E acquired under the form of a finance
Business
Combinations and of
Goodwill
Business
combinations are under
accountedthe
for using
the acquisition
of accounting
the identifiable
assets
lease
is determined
provisions
ofmethod
IAS 17.
Once ain which
leased
asset held
acquired, liabilities assumed and any non-controlling interest are recognized and measured at their fair value at the
date
of
acquisition.
Any
excess
of
the
purchase
price
plus
any
non-controlling
interest
over
the
fair
value
of
the
under a finance lease has been recognized, its subsequent measurement net
assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of the net assets
acquired
is credited
to net earnings.in IAS 16 (e.g., use of the cost model or revaluation
follows
the
requirements
At acquisition, goodwill is allocated to each of the CGUs to which it relates. Subsequent measurement of goodwill is
model
depreciation).
at costand
less any
accumulated impairment losses.
U) Provisions
Non-Monetary
Transactions
General
[IAS
16.24 – .26]
A provision
is recognized if, as a result
of a past event, the Company has a present obligation, legal or
constructive, that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will
be required to settle the obligation. Where applicable, provisions are determined by discounting the expected
future cash flows at a pre-tax credit-adjusted rate that reflects the current market assessments of the time value
of money and the risks specific to the liability. The increase in the provision due to the passage of time is
recognized as a finance cost in the Consolidated Statements of Earnings and Comprehensive Income.
Where an entity acquires an item of PP&E in exchange for a non-monetary
asset or assets, or a combination of monetary and non-monetary assets,
Decommissioning
measurement
atLiabilities
fair value is prescribed unless the exchange transaction lacks
Decommissioning liabilities include those legal or constructive obligations where the Company will be required to
commercial
substance or the fair value of neither the asset received nor the
retire tangible long-lived assets such as producing well sites, crude oil and natural gas processing facilities and
refining facilities. The amount recognized is the present value of estimated future expenditures required to settle
asset
given
up
is reliably measurable. If the acquired item is not measured at
the obligation using a credit-adjusted risk-free rate. A corresponding asset equal to the initial estimate of the
liability is capitalized as part of the cost of the related long-lived asset. Changes in the estimated liability resulting
fairfrom
value,
its cost is measured at the carrying amount of the asset given up.
revisions to expected timing or future decommissioning costs are recognized as a change in the
decommissioning liability and the related long-lived asset. The amount capitalized in property, plant and equipment
is depreciated over the useful life of the related asset. Increases in the decommissioning liabilities resulting from
the passage of time are recognized as a finance cost in the Consolidated Statements of Earnings and
Comprehensive Income.
Actual expenditures incurred are charged against the accumulated liability.
Cenovus Energy Inc.
18
Consolidated Financial Statements
June 2013
21
22
Guide to International Financial Reporting in Canada
An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to
change as a result of the transaction. An exchange transaction has commercial
substance if:
• the configuration (i.e., risk, timing and amount) of the cash flows of the
asset received differs from the configuration of the cash flows of the asset
transferred; or
• the entity-specific value of the portion of the entity’s operations affected by
the transaction changes as a result of the exchange; and
GREAT
CANADIAN
GAMING
CORPORATION
• the
difference
in the
points above is significant relative to the fair value of
Notes to the Consolidated Financial Statements
exchanged.
For thethe
Yearsassets
Ended December
31, 2012 and 2011
(Expressed in millions of Canadian dollars, except for per share information)
3.
Recall that entity-specific value is the present value of the cash flows an entity
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)
expects to arise from the continuing use of an asset and from its disposal at

Fair value of net assets acquired in business combinations
the end of its useful life or expects to incur when settling a liability.
The cost of an acquired business (“purchase price”) is assigned to the identifiable tangible and
intangible assets purchased and liabilities assumed on the basis of their fair values at the date of
For the
purpose of determining commercial substance, the entity-specific value
acquisition. The identification of assets purchased and liabilities assumed and the valuation thereof is
Where
appropriate, the
Company engages
valuators should
to assist in
of thespecialized
portionand
ofjudgmental.
the entity’s
operations
affected
by thebusiness
transaction
the valuation of tangible and intangible assets acquired. Any excess of purchase price over the fair
reflectvalue
post-tax
cash flows.
of the identifiable
tangible and intangible assets purchased and liabilities assumed is allocated to
goodwill.
Extract
from
the Great
Gaming
Corporation
2012
When 9 — Excerpt
a business combination
involves
contingent Canadian
consideration, an
amount equal
to the fair value of
the
contingent
consideration
is
recorded
as
a
liability
at
the
time
of
acquisition.
The
key
assumptions
Financial Statements
utilized in determining fair value may include probabilities associated with the occurrence of specified
events, financial
projections of the
acquired business,
timing of future cash flows, and the
Note future
3 — Critical
Accounting
Estimates
and the
Judgments
appropriate discount rate.

Fair value of assets acquired in business transactions with non-monetary consideration
The Company measures the fair value of assets acquired in business transactions with non-monetary
consideration at the fair value of the asset given up or the fair value of the asset received, whichever is
more reliably measurable. Measurement of fair value is based on an analysis of pertinent information
that may include third-party asset appraisals, market values evidenced from similar transactions, and
discounted cash flows.

Equity-settled share-based compensation
The Company
estimates
the Customers
cost of equity-settled
share-based
Transfers
of Assets
from
[IFRIC
18] compensation using the Black-Scholes
option pricing model. The model takes into account an estimate of the expected life of the option, the
current
price of the underlying
common
share, theor
expected
volatility,
an estimate
future dividends
on
In some
industries,
suppliers
of goods
services
require
(or of
allow)
their custhe underlying common share, the risk-free rate of return expected for an instrument with a term equal
tomers
toexpected
contribute
PP&E
cash
to construct
or acquire PP&E items)
to the
life of the
option,items
and the (or
expected
forfeiture
rate.
to support the customers’ ongoing access to a supply of goods or services.

Income taxes
Examples include PP&E to connect to utilities such as gas, electricity or water
Deferred tax assets and liabilities are due to temporary differences between the carrying amount for
and PP&E
provided
outsourcing
provider.
The
Interaccounting
purposes to
andan
theinformation
tax basis of certain
assets and liabilities,
as well
as IFRS
undeducted
tax
losses. Estimation is required for the timing of the reversal of these temporary differences and the tax
pretations
Committee
clarified
the
accounting
treatment
for
how
the
entity
rate applied. The carrying amounts of assets and liabilities are based on amounts recorded in the
financial
statements
and are subject to
thereceipt
accountingof
estimates
inherent(or
in those
balances.
The tax
receiving
the
PP&E recognizes
the
the assets
cash
specifically
basis of assets and liabilities and the amount of undeducted tax losses are based on the applicable
designated
forlegislation,
the acquisition
or construction
oftiming
PP&E
items)
from
itstemporary
customincome tax
regulations and
interpretations. The
of the
reversal
of the
differences and the timing of deduction of tax losses are based on estimations of the Company’s future
ers (IFRIC
18).
financial results.
Changesthat
in thetransfer
expected is
operating
results,
tax rates, legislation
or regulations,
and the if
Essentially,
treated
as aenacted
non-monetary
transaction.
Therefore,
Company’s interpretations of income tax legislation will result in adjustments to the expectations of
future
timing
difference reversals
may require meets
material deferred
tax adjustments.
a PP&E
item
received
from aand
customer
the definition
of an asset (i.e., the
item is a resource the entity controls as a result of past events and from which
Notes to the Consolidated Financial Statements
Page 18
IAS 16 Property, Plant and Equipment
future economic benefits are expected to flow), that item should be measured
at fair value as a non-monetary transaction as described above. If, however, the
customer continues to exercise control after ownership of the item is transferred, the item cannot be recognized as an asset.
It is important to note that government grants in the form of transfers of
resources to an entity in return for past or future compliance with certain conditions relating to the entity’s operating activities are excluded from IFRIC 18
and should be accounted for under IAS 20. In addition, IFRIC 18 does not apply
to agreements covering the transfer of infrastructure used in public-to-private
service concession arrangements and falling within the scope of IFRIC 12.
The following insight looks at the issue of how IFRIC 18 applies to customer
transfer of assets within the scope of IFRIC 18. Note the date of the NIFRIC.
Even though some NIFRICs are older, they still provide some insight into how
the standards are interpreted by the standard setters.
Application Insights
Applicability of IFRIC 18 to the customer
Source
NIFRIC
Meeting Date
July 2009
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
Reason for not adding
to the IFRIC agenda
The IFRIC received a request to provide guidance on how the customer
should account for a transfer of
assets that is in the scope of IFRIC
18 for the recipient. The IFRIC noted
that IFRIC 18 addresses only the
accounting by the recipient of the
transferred assets.
Therefore, the IFRIC concluded
that the agenda criteria were not
met mainly because IFRSs already
provide relevant guidance, and it did
not expect divergent interpretations
in practice. Therefore, the IFRIC
decided not to add this issue to
its agenda.
The IFRIC also noted that the
accounting by customers transferring assets should be consistent with
the principles in IFRIC 18 that, in a
normal trading transaction, transfers
of assets include exchanges of other
goods, services or both. The IFRIC
noted that other IFRSs provide relevant guidance for accounting for the
goods or services received or given
up in the exchange transaction.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
June 2013
23
24
Guide to International Financial Reporting in Canada
Subsequent Measurement
The Brick Ltd.
[IAS
16.29 – .66]
Notes to the Consolidated Financial Statements
December 31, 2012 and December 31, 2011
IAS
16 permits
entities
to choose
between
two accounting policy models for
(thousands
of Canadian
dollars except
for share and
per share amounts)
subsequent measurement of PP&E:
it is probable that there will be sufficient taxable profits against which to utilize the benefits of
• the cost
model;differences
or
the temporary
and they are expected to reverse in the foreseeable future.
• the revaluation model.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profits will be available
Model
to allow all or part of the asset to be recovered.
Cost
[IAS 16.30]
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
period in which the liability is settled or the asset realized, based on tax rates (and tax laws)
that cost
have been
enacted
or substantively
enacted
by is
the recognized
end of the reporting
Theit is
Under the
model,
once
an item of
PP&E
as anperiod.
asset,
measurement of deferred tax liabilities and assets reflects the tax consequences that would
carried at
its from
costtheless
any
accumulated
accumulated
follow
manner
in which
the Companydepreciation
expects, at the endand
of theany
reporting
period, to
recover
or settle This
the carrying
amount
of its assets method
and liabilities.
impairment
losses.
is the
traditional
of accounting for PP&E.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off
Extract
10 — Excerpt
from
The
Brick and
Ltd.
2012
income
tax assets against
income
tax liabilities
when
they Financial
relate to incomeStatements
taxes levied by
the same taxation authority
and the Company
intends to settle its income tax assets and
Note 3 — Significant
Accounting
Policies
liabilities on a net basis.
3.9
3.9.1
Property, plant and equipment
Recognition and measurement
Items of property, plant and equipment are carried at cost less accumulated depreciation and
accumulated impairment losses.
Cost includes expenditures directly attributable to the acquisition of the asset and required to
establish the asset in working condition given its intended use. Cost also includes expenditures
for dismantling and removing items and restoring the site on which they were located, and
borrowing costs on qualifying assets. Purchased software and costs directly related to the
purchase and installation of such software are capitalized as a component of related equipment
when the software is integral to its functionality. Software that is not considered integral to the
functionality of equipment is classified as an intangible asset.
When parts of an item of property, plant and equipment have different useful lives, they are
accounted for as separate items (major components) of property, plant and equipment.
Revaluation Model
Gains and losses on disposal of an item of property, plant and equipment are determined by
[IAS 16.31 – .42]
comparing the proceeds from disposal with the carrying amount of property, plant and
equipment and are recognized within other income (expense) on the consolidated statements of
Once a model
is selected,
it applies to an entire class of PP&E. Thus, if an item
comprehensive
income.
of3.9.2
PP&EReclassification
is revalued, to
the
entire
class of PP&E to which that asset belongs has
investment property
to be revalued
to prevent
selective
revaluation.
A class
of PP&E
is defined
as
Property, plant
and equipment
are used in
the ordinary course
of business
in the production
or
supply
of
goods
or
services
or
for
administrative
purposes.
Investment
property
is
property
a grouping of assets of a similar nature and use in an entity’s operations. The
held to earn rental revenue or for capital appreciation or both. When the use of a property
followingchanges
illustration
includes
examples
separate
asset cost
classes
identified in
from use in
the business
to investmentofproperty,
the property’s
and accumulated
IAS 16. depreciation is reclassified from property, plant and equipment to investment property.
24
IAS 16 Property, Plant and Equipment
Illustration 2 — Application of the Revaluation Model
Examples of separate asset classes
Land
Land and buildings
Machinery
Ships
Aircraft
Motor vehicles
Furniture and fixtures
Office equipment
Judgment must be applied in the determination of PP&E asset classes. Each
entity should analyze its specific operations to determine those classes. Asset
classes may be narrower than those identified above. As an example, in the
airline industry, engines or flight equipment may be considered specific asset
classes rather than the more all-encompassing notion of “aircraft.”
The revaluation model is available to classes of PP&E whose fair value can be
reliably measured. If the fair value cannot be reliably measured, the cost model
must be selected.
Under the revaluation model, a class of PP&E is carried at its fair value at the
date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is determined from a market perspective by applying the requirements of IFRS 13.
The revaluation model is generally used by companies having assets that tend
to appreciate in value, such as buildings and land not accounted for under
IAS 40. In particular, this model is informative for land assets since land is not
depreciated and revaluation would reflect appreciation in value over time —
although recent economic trends have shown that asset appreciation is not
a guarantee.
As a matter of interest, few companies in Europe, Australia, Canada and
other areas use the revaluation model and those that do limit its use to
a few selected classes.
June 2013
25
26
Guide to International Financial Reporting in Canada
Selecting and Deselecting the Revaluation Model Policy
[IAS 8.14, .17, .19, .22 – .25 and .29]
The change in accounting policy from the cost model to the revaluation model
should be treated as a change in accounting policy in accordance with IAS 16
rather than IAS 8. The change is treated as a revaluation during the period the
revaluation model is first applied and, therefore, prior periods are not adjusted.
This means it is not necessary to restate prior periods for the carrying value
and depreciation and impairment charges for the revalued items. This is an
exception from the IAS 8 requirement to account for voluntary changes in
accounting policies retrospectively.
Deselecting the revaluation model is more problematic. IAS 8 permits a voluntary change in accounting policy only if the change results in the financial
statements providing reliable and more relevant information about the effects
of transactions, other events or conditions on the entity’s financial position,
financial performance or cash flows. The revaluation model is thought to provide information more relevant and reliable than that obtained under the cost
model; therefore, it may be difficult to assert that the change results in more
relevant information. However, circumstances such as a new limitation in determining a reliable fair value could force such a reversion. This could mean that
the revaluation does not result in reliable information.
Thus, an entity choosing to revert back to the cost model would have to justify
that choice under IAS 8 and apply the change retrospectively (i.e., as if it had
always been applied), unless it is impracticable to do so. This means the entity
would have to restate the carrying values, including accumulated depreciation
and accumulated impairments and the effects on profit or loss and equity, as
if the revaluation model had not been adopted as an accounting policy choice.
The entity would also apply the IAS 8 disclosure requirements for a voluntary
change in accounting policy.
Frequency of Revaluations
[IAS 16.31 and .34]
Companies should revalue their PP&E with sufficient regularity to ensure the
carrying amount does not differ materially from what they would determine
using fair value at the end of the reporting period.
IAS 16 Property, Plant and Equipment
The frequency of revaluations depends on the changes in the fair values of
the PP&E items. If there is a material difference between the fair value of an
asset and its carrying amount, it needs to be revalued. There is no requirement
to conduct an annual revaluation of assets; if, however, the value of an asset
fluctuates a great deal, it should be revalued annually. For example, where
asset values change very little, they can possibly be revalued every three-tofive years.
The items within a class of PP&E are revalued simultaneously to avoid selective
revaluation of assets and the reporting of amounts in the financial statements
that are a mixture of costs and fair value.
Accounting for a Revaluation
[IAS 16.35 and .39 – .40]
When a PP&E item is revalued, any accumulated depreciation at the date of
the revaluation is treated in one of two ways:
1. It is restated proportionately with the change in the gross carrying amount
of the asset so that the carrying amount of the asset after revaluation
equals its revalued amount. This method is often used when an asset is
revalued by applying an index to determine its replacement cost (see
IFRS 13).
2. It is eliminated against the gross carrying amount of the asset and the net
amount is restated to the asset’s revalued amount. This method is often
used for buildings.
Note: Refer to the Standards Update section in this publication. A proposed
amendment to IAS 16 would change the guidance in (1) above and state that
accumulated depreciation is computed as the difference between the gross and
net carrying amounts. The amendment will also clarify that the determination
of accumulated depreciation does not depend on the selection of the valuation
technique.
These two methods will result in the same net balance sheet amount for PP&E
although the gross amounts reported (i.e., cost and accumulated depreciation)
will differ. The effect on the income statement and the other comprehensive
income will be the same.
June 2013
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Guide to International Financial Reporting in Canada
The following illustration indicates the recognition of a change from
a revaluation.
Illustration 3 — Recognition of Revaluation Changes
Initial revaluation increase
•
included in other comprehensive income (OCI) and accumulated in equity under the heading “revaluation surplus”.
Initial revaluation decrease
•
included in profit or loss.
Subsequent revaluation
increase
•
included in OCI and increases revaluation surplus unless
it reverses a revaluation decrease of the same asset previously recognized in profit or loss.
recognition in profit or loss is limited to the previously
recognized decreases in that asset.
no net gain should be recognized in income over the useful life of a revalued asset.
•
•
Subsequent revaluation
decrease
•
•
included in profit or loss unless any credit balance exists
in the revaluation surplus for that asset. In this case, the
decrease is recognized in OCI and the revaluation surplus
to the extent that any credit balance exists for that asset.
carrying a negative revaluation reserve for any asset is not
permitted.
The following three examples illustrate the calculation of a revaluation. Note
that in the first two examples, the impact of depreciation has been ignored
to simplify the calculations. The impact of depreciation is demonstrated in
the third example. The following abbreviations are used in these examples:
CA = carrying amount FV = fair value OCI = other comprehensive income
Application Example
Initial revaluation is an increase in carrying amount
E xa mple
This is a simplified example, excluding depreciation, to demonstrate recognition of revaluation adjustments.
ABC Ltd. has elected to use the revaluation model to account for its building.
There is only one building in the asset class. The building cost is $500,000.
Revaluation
FV
Difference
between
FV and CA
#1
$600,000
+$100,000
+$100,000
0
#2
$400,000
-$200,000
-$100,000
-$100,000
#3
$750,000
+$350,000
+$250,000
+$100,000
Recognized
in OCI
Recognized
in profit or loss
IAS 16 Property, Plant and Equipment
Application Example
Initial revaluation is an increase in carrying amount
At the first revaluation, a $100,000 increase in the carrying amount of the building and a corresponding increase in OCI is recognized. A revaluation surplus of $100,000 is included as a
separate line item in equity.
At the second revaluation, the carrying amount of the building is decreased by $200,000,
which represents the difference between the carrying amount of the building before revaluation ($600,000) and the revalued amount (fair value of $400,000). Because the second
revaluation decreases the carrying amount, the decrease is applied first to the revaluation
surplus balance. A reversal of $100,000 will be recognized in OCI and a loss of $100,000
will be recognized in profit or loss.
For the third revaluation, the carrying amount of the building has increased $350,000, which
represents the difference between the carrying amount of the building before the revaluation ($400,000) and the revalued amount (fair value of $750,000). An amount of $100,000
is recognized in profit or loss to reverse the loss recognized in the previous revaluation. The
remaining $250,000 is recognized in OCI. A revaluation surplus of $250,000 is included as
a separate line item in equity.
Application Example
Initial revaluation is a decrease in carrying amount
E xa mple
This is a simplified example, excluding depreciation, to demonstrate recognition of revaluation adjustments.
ABC Ltd. has elected the revaluation model to account for its building. There
is only one building in the asset class. The building cost is $500,000.
Revaluation
FV
Difference
between
FV and CA
#1
$400,000
-$100,000
0
-$100,000
#2
$700,000
+$300,000
+$200,000
+$100,000
#3
$350,000
-$350,000
-$200,000
-$150,000
Recognized
in OCI
Recognized
in profit or loss
At the first revaluation, a $100,000 decrease in the carrying amount of the building and a
corresponding charge to profit or loss is recognized (there is no revaluation surplus related
this asset).
At the second revaluation, the carrying amount of the building is increased by $300,000,
which represents the difference between the carrying amount of the building before revaluation ($400,000) and the revalued amount (fair value of $700,000). The $100,000 loss recognized for the previous revaluation is reversed, with the difference of $200,000 recognized in
OCI. A revaluation surplus of $200,000 is included as a separate line item in equity.
For the third revaluation, the carrying amount of the building has decreased to $350,000,
which represents the difference between the carrying amount of the building before the
revaluation ($700,000) and the revalued amount (fair value of $350,000). The decrease is
applied first to the revaluation surplus balance. A reversal of $200,000 will be recognized
in OCI and a loss of $150,000 will be recognized in profit or loss.
June 2013
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Guide to International Financial Reporting in Canada
Application Example
Initial revaluation is a decrease in carrying amount
E xa mple
This example includes the impact of revaluation adjustments and the effect
on depreciation.
ABC Ltd. has elected the revaluation model to account for its building. There
is only one building in the asset class. The building cost is $1 million and
is being depreciated on a straight-line basis over its estimated useful life
of 20 years.
Year
CA at
the end of
the year
FV at
the end
of the
year
Difference
CA — FA
Depreciation
for the year
(in profit
or loss)
Revaluation
recognized
in OCI
Revaluation
recognized
in profit
or loss
1
$950,000
$950,000
0
$50,000
0
0
2
$900,000
$900,000
0
$50,000
0
0
3
$850,000
$850,000
0
$50,000
0
0
4
$800,000
$600,000
-$200,000
$50,000
0
-$200,000
5
$562,500
($600,000
– $37,500)
$562,500
0
$37,500
($600,000
/16)
0
0
6
$525,000
$525,000
0
$37,500
0
0
7
$487,500
$700,000
+$212,500
$37,500
$50,000
$162,500
In years one through three the carrying amount approximates fair value. Depreciation is
$50,000 yearly ($1,000,000 / 20 years).
At the end of the fourth year, when the carrying amount is $800,000, a revaluation results in a
revaluation adjustment of -$200,000 recognized in profit or loss. Depreciation is $50,000 for
year four but decreases to $37,500 for year five based on the carrying amount of $600,000
at the beginning of the year and an estimated remaining useful life of 16 years.
At the end of the seventh year, when the carrying amount is $487,500, the fair value is
$700,000. This results in a revaluation adjustment of $212,500. To determine the amount to
recognize in profit or loss, the loss previously recognized in profit or loss and the reduction in
depreciation as a result of the revaluation adjustment need to be considered. The portion of
the revaluation adjustment recognized in profit or loss is equal to $200,000 (the reversal of
the previous revaluation loss) less an adjustment for the extra depreciation that would have
been recognized in profit or loss without the revaluation adjustment (($50,000 – $37,500) ×
3 years = $37,500). Thus $162,500 is a credit to profit or loss and the remainder is recognized
in OCI ($212,5000 – $162,500 = $50,000). A revaluation surplus of $50,000 is included as
a separate line item in equity. This represents the excess of the carrying amount using the
revaluation method ($700,000) over what it would have been using the cost method, with
no revaluations recognized (($1,000,000 – ($50,000 × 7 years) = $750,000).
IAS 16 Property, Plant and Equipment
Transferring the Revaluation Surplus to Retained Earnings
[IAS 16.41]
A portion of the revaluation surplus related to the depreciated asset may be
realized during the useful life of the asset by transferring an amount equivalent
to the difference between the depreciation calculated on the asset’s revalued
carrying amount and the depreciation calculated on its original cost from the
revaluation surplus to retained earnings. These transfers do not go through
profit or loss. Alternatively, the whole of the surplus can be transferred to
retained earnings when the asset is retired or disposed of.
Costs of Dismantling, Removal and Site Restoration
(Decommissioning Costs) and Changes to These Costs
[IAS 16.16 and .18, IAS 37.10, .14 and .36 and IFRIC 1]
Many entities have obligations to dismantle, remove and restore items of PP&E.
Under IAS 16, the cost of an item of PP&E includes the costs an entity incurs
for dismantling, removing the item and restoring the site on which it is located,
either at acquisition or after having used the asset during a particular period
for purposes other than to produce inventories during that period.
IAS 37 provides guidance on when these costs are recognized and how the
amount is determined. A provision for decommissioning, site restoration and
similar liabilities is recognized when:
1. the entity has a present obligation (legal or constructive1) as a result of a
past event;
2. an outflow of resources to settle the obligation is probable; and
3. a reliable estimate of the obligation can be made.
Obligations for dismantling, removal or site restoration are measured at management’s best estimate of the expenditure required to settle the obligation at
the end of the reporting period. A corresponding cost is added to the carrying
amount of the PP&E item.
IFRIC 1 was developed to provide guidance on changes in the measurement of
an existing decommissioning or restoration obligation triggered by a change in
the estimated timing or amount of the outflow of resources required to settle
the obligation, or in the discount rate.
1
A constructive obligation is an obligation derived from an entity’s actions where an established pattern of
past practice, published policy or a sufficiently specific current statement indicating to other parties that
it will accept certain responsibilities have created a valid expectation on the part of other parties that the
entity will discharge those responsibilities.
June 2013
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Guide to International Financial Reporting in Canada
The following illustration summarizes the guidance in IFRIC 1.
Illustration 4 — IFRIC 1 — Changes in Existing Decommissioning, Restoration and Similar Liabilities
Cost model used for PP&E
Revaluation model used for PP&E
The change is added to, or deducted from,
the costs of the related asset.
• The amount deducted should not exceed
the carrying amount of the asset. Any
excess should be recognized in profit
or loss.
• An increase in the carrying amount of the
asset as a result of an increase in the obligation may trigger an asset impairment
test. If indicators of impairment exist, the
asset should be tested in accordance with
IAS 36 by comparing the carrying amount
of the asset to its recoverable amount
(i.e., higher of fair value less costs of
disposal and VIU.
The change is recognized either in the revaluation surplus or deficit previously recognized.
• A decrease in the obligation is recognized
in OCI and increases the revaluation surplus in equity unless it reverses a revaluation deficit recognized previously in profit
or loss. If, so, this portion is recognized in
profit or loss.
• If the liability decrease exceeds the carrying amount that would have been recognized had the asset been measured using
the cost model, the excess is recognized
in profit or loss.
• An increase in the obligation is recognized in profit or loss unless there is a
credit balance in the revaluation surplus
related to the asset. If so, the increase is
recognized in OCI to the extent of the
credit balance in the revaluation surplus
in equity.
• The change in the obligation may be
an indication that the asset has to be
revalued. If a revaluation is necessary,
the entire class has to be revalued.
Once the related asset has reached the end of its useful life, all subsequent
changes in the liability must be recognized in profit or loss as they occur.
Moreover, the unwinding of the discount should be recognized in profit
or loss as a finance cost. Under IAS 23, capitalization is not permitted.
IAS 16 Property, Plant and Equipment
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment
losses recognized with respect to CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and
then to reduce the carrying amounts of the other assets in the CGU or group of CGUs on a pro rata basis. Impairment losses are
recognized in depletion, depreciation, amortization and impairment in the consolidated statements of income.
Impairment losses recognized for other assets in prior years are assessed at the end of each reporting period for any indications
Extract
11 — Excerpt from Husky Energy Inc. 2012 Financial Statements
that the impairment condition has decreased or no longer exists. An impairment loss is reversed only to the extent that the
carrying
amount of the asset or CGU
does not exceed the
carrying amount that would have been determined, net of depletion,
Note
3 — Significant
Accounting
Policies
depreciation and amortization, if no impairment loss had been recognized.
i) Asset Retirement Obligations (“ARO”)
A liability is recognized for future legal or constructive retirement obligations associated with the Company's assets. The Company
has significant obligations to remove tangible assets and restore land after operations cease and the Company retires or
relinquishes the asset. The retirement of Upstream and Downstream assets consists primarily of plugging and abandoning wells,
removing and disposing of surface and subsea plant and equipment and facilities, and restoring land to a state required by
regulation or contract. The amount recognized is the net present value of the estimated future expenditures determined in
accordance with local conditions, current technology and current regulatory requirements. The obligation is calculated using the
current estimated costs to retire the asset inflated to the estimated retirement date and then discounted using a credit-adjusted
risk free discount rate. The liability is recorded in the period in which an obligation arises with a corresponding increase to the
carrying value of the related asset. The liability is progressively accreted over time as the effect of discounting unwinds, creating
an expense recognized in finance expenses. The costs capitalized to the related assets are amortized in a manner consistent with
the depletion, depreciation and amortization of the underlying assets. Actual retirement expenditures are charged against the
accumulated liability as incurred.
Liabilities for ARO are adjusted every reporting period for changes in estimates. These adjustments are accounted for as a change
in the corresponding capitalized cost, except where a reduction in the provision is greater than the undepreciated capitalized cost
of the related assets, in which case the capitalized cost is reduced to nil and the remaining adjustment is recognized in net
earnings. In the case of closed sites, changes to estimated costs are recognized immediately in net earnings. Changes to the
amount of capitalized costs will result in an adjustment to future depletion, depreciation and amortization, and finance expenses.
Estimating the ARO requires significant judgment as restoration technologies and costs are constantly changing, as are regulatory,
political, environmental and safety considerations. Inherent in the calculation of the ARO are numerous assumptions including the
ultimate settlement amounts, future third-party pricing, inflation factors, risk free discount rates, credit risk, timing of settlement
and changes in the legal, regulatory, environmental and political environments. Future revisions to these assumptions may result
in material changes to the ARO liability. Adjustments to the estimated amounts and timing of future ARO cash flows are a regular
[IAS
16.6 and
.43 – .62]
occurrence
in light of
the significant judgments and estimates involved.
Depreciation
and Other
Contingent
Mattersto income for depreciation based on an
IASj) 16Legal
requires
an annual
charge
allocation
ofliabilities
the cost
less
itsareresidual
itscircumstance
useful life,
Provisions and
for legalof
andan
otherasset,
contingent
matters
recognized invalue,
the periodover
when the
becomes
probable that a future cash outflow resulting from past operations or events will occur and the amount of the cash outflow can be
including
any idleTheperiod
or period
in whichofthe
assetrequires
is retired
fromof active
use.
reasonably estimated.
timing of recognition
and measurement
the provision
the application
judgment to
existing facts and circumstances, which can be subject to change, and the carrying amounts of provisions and liabilities are
Depreciation
may
be
nil,
however,
if
a
usage
method
is
applied
and
there
is
no
reviewed regularly and adjusted accordingly. The Company is required to both determine whether a loss is probable based on
judgment and from
interpretation
laws and regulations, and determine that the loss can be reasonably estimated. When a loss is
production
theofasset.
recognized, it is charged to net earnings. The Company continually monitors known and potential contingent matters and makes
appropriate provisions when warranted by the circumstances present.
The mechanics of depreciation are the same for the cost and revaluation model
k) Share Capital
in that
“cost” or “revalued amount,” less any residual value, is amortized over
Preferred
shares
areof
classified
equity since
they are cancellable
and redeemable
only at the
option and dividends
are
the useful
life
an as
asset.
Although,
as we
have seen
in Company's
the application
examdiscretionary and payable only if declared by the Board of Directors. Incremental costs directly attributable to the issuance of
ples
in and
the
section
the as
application
of the
the
shares
stock
options areon
recognized
a deduction from equity,
net ofrevaluation
tax. Common sharemodel,
dividends are
paidmechanics
out in common
shares or in cash, and preferred share dividends are paid in cash. Both common and preferred share dividends are recognized as
of calculating
distributions within the
equity.depreciation expense under the revaluation model may pose
some difficulties, the determination of depreciation remains fundamentally the
same under both models.
Consolidated Financial Statements 17 recognized in profit or loss unless an
A depreciation charge for each period is
asset’s future economic benefits are absorbed in producing other assets, in
80 Husky Energy Inc. 2012 Annual Report
which
case the depreciation charge is included in the carrying amount of those
assets. For example, the depreciation of a manufacturing plant and equipment
is included in the costs of conversion of inventories.
June 2013
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34
Guide to International Financial Reporting in Canada
Component Accounting
[IAS 16.43 – .47]
IAS 16 requires the application of component accounting. The main objective
of component accounting is to ensure the costs of an asset’s significant components are depreciated over their appropriate useful lives, rather than the
useful life of the asset taken as a whole. Note that a separate component can
be either physical (e.g., a motor on an aircraft) or nonphysical (e.g., a major
overhaul or inspection).
The allocation of cost to components requires judgment and careful analysis of
facts and circumstances. There is no prescribed methodology for determining
significant components.
One could, however, consider the use of a valuator to determine values of
assets and components. Alternatively, insurance appraisal reports may have
components listed for significant assets, which could be useful in determining the value of significant components. Where an entity has several locations
(e.g., a company with relatively homogeneous manufacturing plants around the
world) it might consider using a pilot-project approach. Under a pilot project,
the company would pick one plant for evaluation by valuators, engineers or
other appropriate personnel. Their findings would then be applied to the other
plants in the organization and produce results not materially different from
what might have been obtained had all individual plants been evaluated on
their own. One must recall that the components must be significant to the
overall asset. Therefore, the asset should not have a significant number of
components.
Each component part of a PP&E item costing a significant amount in relation
to the item’s total cost is depreciated separately. When, however, significant
parts of a PP&E item have the same useful lives and depreciation method, they
may be grouped together for depreciation purposes.
As an example, a building may have several components (e.g., the roof, door
frames, walls, floors, elevators, escalators, etc.), but only some of these components may be considered significant. In addition, the walls, doorframes and
floors may all have the same useful lives and can be grouped together.
IAS 16 Property, Plant and Equipment
2012 Consolidated Financial Statements and Notes
2012 Consolidated Financial Statements and Notes
at the average market
price for the period and the difference between the number of shares and the number of shares
Application
Example
at the average market
price for the period and the difference between the number of shares and the number of shares
assumed to be purchased are included in the calculation. The number of shares included with respect to performance-
assumed to be purchased are included in the calculation. The number of shares included with respect to performancebased employee
share
and PSUs are treated as contingently issuable shares because their issue is contingent
Allocation
of cost
tooptions
components
based employee share options and PSUs are treated as contingently issuable shares because their issue is contingent
upon satisfying specified conditions in addition to the passage of time. If the specified conditions are met, then the
upon satisfying specified conditions in addition to the passage of time. If the specified conditions are met, then the
number of shares included
is alsoacquires
computed using
the treasury
method unless
they areproposes
anti-dilutive.
ABC Ltd.
a building.
Anstock
insurance
valuator
number of shares included
is also computed using
the treasury
stock
method unless
they are anti-dilutive.that the building has two significant components (i.e., the roof and the elevators) repreP) CASH AND CASH EQUIVALENTS
P) CASH AND CASH
EQUIVALENTS
senting
15% and 18% respectively of the relative fair value of the building.
Cash and cash equivalents
include $218
to investments
with original
maturities
three
months
or less at to
The building
waspertaining
acquired
for $750,000
and its
usefulof
was
determined
Cash and cash equivalents
include $218
pertaining
to investments
with original
maturities
oflife
three
months
or less at
December 31, 2012be
($356
at December
31, 2011).
acceptances
and bankers’
50as
The roof
and Investments
elevatorsinclude
have bankers’
an estimated
useful
life of discount
15 years
December 31, 2012 ($356
asyears.
at December
31, 2011).
Investments
include
bankers’
acceptances
and bankers’
discount
notes, which may be liquidated promptly and have original maturities of three months or less.
25 years
respectively.
The
building
is measured
using the cost model.
notes, which may beand
liquidated
promptly
and have original
maturities
of three
months or less.
simplicity, residual value is deemed to be nil.
Q) SHORT-TERMFor
INVESTMENTS
Q) SHORT-TERM INVESTMENTS
investments,
comprised of bankers’
acceptances and bankers’ discount notes, have original maturities over
TheShort-term
components
are depreciated
as follows:
Short-term
investments,
comprised of bankers’
acceptances and bankers’ discount notes, have original maturities over
E xa mple
three months, but not more than one year.
three months, but not more than one year.
R) RESTRICTED CASH
Component
R) RESTRICTED CASH
Carrying amount
Useful life
Depreciation
The Corporation has recorded Restricted cash under Current assets representing funds held in trust by Air Canada
The (15%)
Corporation has recorded Restricted cash under Current15assets
representing funds held in trust by Air Canada
Roof
Vacations in accordance with$112,500
regulatory requirements governingyears
advance ticket sales, as well$7,500
as funds held in escrow
Vacations in accordance with regulatory requirements governing advance ticket sales, as well as funds held in escrow
accounts relating to Air Canada Vacations credit card booking transactions, recorded under Current liabilities, for certain
accounts relating to Air Canada Vacations credit card booking transactions, recorded under Current liabilities, for certain
Elevator
(18%)
$135,000
25 years
$5,400
travel related
activities.
travel related activities.
Restricted(67%)
cash with maturities
greater than one year from the
date is recorded
in Deposits and other
Building
$502,500
50 balance
years sheet
$10,050
Restricted cash with maturities
greater than one year from the
balance
sheet date is recorded
in Deposits and other
assets. This restricted cash relates to funds on deposit with various financial institutions as collateral for letters of credit
assets. This restricted cash relates to funds on deposit with various financial institutions as collateral for letters of credit
and other items.
Total
and other items.
$750,000
$22,950
S) AIRCRAFT FUEL INVENTORY AND SPARE PARTS AND SUPPLIES INVENTORY
S) AIRCRAFT FUEL INVENTORY AND SPARE PARTS AND SUPPLIES INVENTORY
If the
building
is depreciated
asparts,
a single
unitrotables,
ratherand
than
as component
depreciation
Inventories
of aircraft
fuel and spare
other than
supplies
are measured atparts,
the lower
of cost and net
Inventories
of aircraft fuel and spare/parts,
other than
rotables,
supplies are
measured at the lower of cost and net
would
be $15,000
50 years),
which
is and
relatively
realizable
value, with($750,000
cost being determined
using a weighted
average
formula.lower than $22,950 above.
realizable value, with cost being determined using a weighted average formula.
The Corporation did not recognize any write-downs on inventories or reversals of any previous write-downs during the
The Corporation did not recognize any write-downs on inventories or reversals of any previous write-downs during the
periods presented. Included in Aircraft maintenance is $43 related to spare parts and supplies consumed during the year
periods presented. Included in Aircraft maintenance is $43 related to spare parts and supplies consumed during the year
(2011 – $39).
Extract
12 — Excerpt from Air Canada 2012 Financial Statements
(2011 – $39).
NoteT)2 — Basis
of EQUIPMENT
Presentation and Summary of Significant Accounting
PROPERTY AND
T) PROPERTY AND EQUIPMENT
Property and equipment is recognized using the cost model. Property under finance leases and the related obligation for
Policies
Property and equipment is recognized using the cost model. Property under finance leases and the related obligation for
future lease payments are initially recorded at an amount equal to the lesser of fair value of the property or equipment
future lease and
payments
are initially recorded
at an amount equal to the lesser of fair value of the property or equipment
T) Property
equipment
part)
and the present value
of those lease(in
payments.
and the present value of those lease payments.
The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its
The Corporation allocates the amount initially recognized in respect of an item of property and equipment to its
significant components and depreciates separately each component. Property and equipment are depreciated to
significant components and depreciates separately each component. Property and equipment are depreciated to
estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight
estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight
equipment are componentized into airframe, engine, and cabin interior equipment and modifications. Airframe and
equipment are componentized into airframe, engine, and cabin interior equipment and modifications. Airframe and
engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and
engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and
modifications are depreciated over the lesser of 5 years or the remaining useful life of the aircraft. Spare engines and
modifications are depreciated over the lesser of 5 years or the remaining useful life of the aircraft. Spare engines and
related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with
related parts (“rotables”) are depreciated over the average remaining useful life of the fleet to which they relate with
10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are
10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are
amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and
amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and
parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average
parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average
expected life between major maintenance events. Major maintenance events typically consist of more complex
expected life between major maintenance events. Major maintenance events typically consist of more complex
inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are
inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are
charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a
charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a
straight-line basis over their useful lives not exceeding 50 years or the term of any related lease, whichever is less.
straight-line basis over their useful lives not exceeding 50 years or the term of any related lease, whichever is less.
Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is
Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is
depreciated over 3 to 25 years.
depreciated over 3 to 25 years.
13
13
June 2013
35
36
Guide to International Financial Reporting in Canada
Residual Value
[IAS 16.6 and .51 – .54]
Notes to Consolidated Financial Statements
For16.6
the years
ended December
31, 2012 and 2011
IAS
provides
a detailed
definition of the residual value of an asset. Resid(Stated in thousands of Canadian dollars, except share and per share amounts)
ual value should reflect the amount an entity would currently receive from
1. Statement of significant accounting policies (continued)
the(i)disposal
of an asset after deducting estimated costs of disposal if it were
Inventory
already
of
the
ageatand
inofthe
condition
expected
at determined
the end
its first-out
useful
life.
Inventories are valued
the lower
cost and
net realizable value,
with cost being
on aof
first-in,
basis
and a
specific item basis depending on the nature of the inventory. The Corporation’s inventory balance consists of aircraft fuel, deicing fluid, retail merchandise and aircraft expendables.
IAS(j)16
requires an annual review of the residual value of an asset. If a change
Property and equipment
is required,
should
be ataccounted
forto as
a change
in an
accounting
estimate
Property anditequipment
is stated
cost and depreciated
its estimated
residual value.
Assets
under finance leases
are initially
recorded at the present value of minimum lease payments at the inception of the lease. Expected useful lives and depreciation
(unless
thearechange
reflects a correction of an error).
methods
reviewed annually.
Asset class
Basis
Rate
Aircraft,13 — Excerpt
net of estimated residual
value Westjet Airlines Ltd.
Straight-line
20 years
Extract
from
2012 Financial
Engine, airframe and landing gear overhaul
Straight-line
Straight-line
Ground property and equipment
Straight-line
Spare
engines
and
rotables,
net
of
estimated
residual
value
Note 1 — Statement of Significant AccountingStraight-line
Policies
Buildings
Straight-line
Leaseholdand
improvements
Straight-line
(j) Property
equipment (in part)
Assets under finance leases
Straight-line
Live satellite television equipment
Statements
8 to 15 years
10 years/Term of lease
5 to 25 years
20 years
40 years
5 years/Term of lease
Term of lease
Estimated residual values of the Corporation’s aircraft range between $4,000 and $6,000 per aircraft. Spare engines have a
residual value equal to 10% of the original purchase price. Residual values, where applicable, are reviewed annually against
prevailing market rates at the consolidated statement of financial position date.
Major overhaul expenditures are capitalized and depreciated over the expected life between overhauls. All other costs relating to
the maintenance of fleet assets are charged to the consolidated statement of earnings on consumption or as incurred.
Rotable assets is
are recognized
purchased, depreciated
disposed
on a asset’s
pooled basis.carrying
When parts areamount
purchased, the
cost is addedits
to
Depreciation
as and
long
as ofthe
exceeds
the pool and depreciated over its useful life of 20 years. The cost to repair rotable parts is recognized in maintenance expense as
incurred.
residual
value. In circumstances where the residual value of an asset increases
(k) Intangible assets
to an amount greater than its carrying amount, the depreciation charge is zero
Included in intangible assets are costs related to software, landing rights and other. Software and landing rights are carried at
until the
residual
falls
the
amount.
cost less
accumulatedvalue
amortization
and below
are amortized
on aasset’s
straight-linecarrying
basis over their
respective useful lives of five and 20
years. Expected useful lives and amortization methods are reviewed annually.
(l) Impairment
Useful Life
Property and equipment and intangible assets are grouped into cash generating units (CGUs) and reviewed for impairment when
[IAS 16.6,
.56 – .59]
events or.50 – .51
changes in and
circumstances
indicate that the carrying value of the CGU may not be recoverable. When events or
circumstances indicate that the carrying amount of the CGU may not be recoverable, the long-lived assets are tested for
recoverability by comparing the recoverable amounts, defined as the greater of the CGU’s fair value less cost to sell or value-inuse, with the
amount
of theis:
CGU. Fair value is defined as the amount for which an asset could be exchanged, or a
The useful
lifecarrying
of an
asset
liability settled, between knowledgeable willing parties, in an arm’s length transaction. Value-in-use is defined as the present
value
of
the
cash
flows
expected
from
future use
eventual sale ofto
the be
asset available
at the end of itsfor
useful
life. Ifby
the an
carrying
• the period over which antheasset
isorexpected
use
value of the CGU exceeds the greater of the fair value less cost to sell and value-in-use, an impairment loss is recognized in net
earnings or
for the difference. Impairment losses may subsequently be reversed and recognized in earnings due to changes in
entity;
events and circumstances, but only to the extent of the original carrying amount of the asset, net of depreciation or
amortization,
had the
impairment not
recognized.
• the
number
oforiginal
production
orbeen
similar
units an entity expects to obtain from
the asset.
The useful life of an asset is defined in terms of the asset’s expected utility to
the entity and may sometimes be shorter than its economic life.
The estimation of the useful life of an asset is a matter of judgment based on
the experience of the entity with similar assets. The illustration below lists facWestJet Year End 2012 │ 11
tors included in IAS 16 that should be considered in determining the expected
useful life.
IAS 16 Property, Plant and Equipment
Illustration 5 — Determining the Expected Useful Life of an Item
of PP&E
Examples of factors to consider in determining an asset’s expected useful life include:
•
expected usage assessed by reference to the asset’s expected capacity or physical output.
•
expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used, the repair and maintenance program and the
care and maintenance of the asset while idle.
•
technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the
asset.
•
legal or similar limits on the use of the asset, such as the expiry dates of related leases.
Land and building are separate assets and accounted for separately. With
some exceptions (e.g., quarries and landfill sites) land has an unlimited useful
life and is not depreciated. In cases where land has a limited useful life, it is
depreciated in a manner that reflects the benefits to be derived from it. If the
cost of the land includes costs of site dismantlement, removal and restoration
costs, these costs are depreciated over the period of benefits obtained by
incurring those costs.
C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated amortization and impairment. Amortization rates
IAS 16 requires the useful life of an asset be reviewed on an annual basis;
are calculated to amortize the costs, net of residual value, over the assets’ estimated useful lives. Significant parts of
anyproperty,
changes
are
accounted
for as
a change
inamortized
an accounting
estimate.
plant and
equipment
that have different
depreciable
lives are
separately.
Plant and equipment is principally depreciated at rates of 5-10% of the declining balance (buildings, site improvements,
Extract
14 — Excerpt
from
Newalta
2012
tanks and mobile
equipment) or from
5-14 years
straight line Corporation
(vehicles, computer hardware
andFinancial
software and leasehold
improvements), depending on the expected life of the asset. Some equipment is depreciated based on utilization rates.
Statements
The utilization rate is determined by dividing the cost of the asset by the estimated future hours of service. Residual
Note
2 — Significant
Accounting
Policies
values,
up to 20% of original cost,
may be established for
buildings, site improvements, and tanks. These residual values
are not depreciated.
Theand
estimated
useful lives,(in
residual
values and amortization methods are reviewed at the end of
C) Property,
plant
equipment
part)
each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
Landfill assets represent the costs of landfill available space, including original acquisition cost, incurred landfill
construction and development costs, including gas collection systems installed during the operating life of the site,
and capitalized landfill closure and post-closure costs. The cost of landfill assets, together with projected landfill
construction and development costs for permitted capacity, is amortized on a per-unit basis as landfill space is
consumed. Management annually updates landfill capacity estimates, based on survey information provided by
independent engineers, and projected landfill construction and development costs. The impact on annual amortization
expense of changes in estimated capacity and construction costs is accounted for prospectively.
D) PERMITS AND OTHER INTANGIBLE ASSETS
Permits and other intangible assets are stated at cost, less accumulated amortization and impairment, and consist
of certain production processes, trademarks, permits and agreements which are amortized over the period of the
contractual benefit of 8 to 20 years on a straight line basis. Certain permits are deemed to have indefinite lives and
therefore are not amortized. There are nominal fees to renew these permits provided that Newalta remains in good
standing with regulatory authorities.
E) LEASES
Lessee
All of the Corporation’s leases are classified as operating leases and the leased assets are not recognized in the
Corporation’s consolidated balance sheets. Payments made under operating leases are recognized in profit or loss on
a straight-line basis over the term of the lease unless another systematic basis is representative of the time pattern of
the user’s benefit, including any rent-free periods. Lease incentives are recognized as an integral part of the total lease
expense, over the term of the lease.
June 2013
Leases where the Corporation assumes substantially all the risks and rewards of ownership would be classified as
finance leases and the corresponding asset would be classified as property, plant and equipment and the liability as
obligations under finance lease.
37
38
Guide to International Financial Reporting in Canada
The following viewpoint is industry specific and is included to illustrate some of
the judgment involved in the determination of the useful life of an asset.
Application Viewpoints
Depletion of a Mine in the Production Phase: Useful Life of the Mine
The Mining Industry Force on IFRSs has issued a Viewpoint discussing some
of the accounting considerations for determining the useful life of a mine.
Viewpoints
The Viewpoint Series is available online at www.cpacanada.ca/ifrs
Application Insights
Useful life of leasehold improvements
Source
IFRS Discussion group
The following insights were obtained from a publicly available IFRS Discussion Group report.
Insight
Meeting Date
April 19, 2012
Topic
IAS 16: Useful Life of Leasehold Improvements
Insights
IAS 16 Property, Plant and Equipment requires the depreciable amount of an
asset to be allocated on a systematic basis over its useful life.
In determining a “lease term”, IAS 17 Leases requires that a renewal option
not be reflected unless it is “reasonably certain” that the option will be
exercised. The issue considered by the Group was whether the lease term
represents the useful life for leasehold improvements under IAS 16 when the
lessee is not reasonably certain it will exercise an option to extend a lease.
Fact Pattern:
• A lessee enters into an operating lease for an office property that has:
oo
an initial term of five years; and
oo
an option for the lessee to extend the lease for a further five years
at market rates.
• Upon commencement of the lease term, the lessee:
oo
spends $2 million on an immovable leasehold improvement specific
to the property, that has an economic life of seven years; and
oo
expects to exercise the extension option, but is not reasonably
certain it will do so.
Should the useful life of the leasehold improvements be the shorter of the
lease term and the asset’s economic life (i.e., five years) (View A) or the
asset’s expected economic life (i.e., seven years) (View B)?
Proponents of View A refer to paragraph 56(d) of IAS 16 and the definition
of lease term under IAS 17, arguing that a consistent approach to amortization should be used.
Proponents of View B give more weight to paragraphs 56(a) and 57 of
IAS 16, focussing on the expected use of the asset.
IAS 16 Property, Plant and Equipment
Application Insights
Useful life of leasehold improvements
The Group’s Discussion
Group members noted that it is difficult to understand how the lessee in this
fact pattern can expect to exercise the extension option but not be reasonably certain it will do so. As a result, Group members questioned how often
the fact pattern would occur in practice.
Several Group members observed that there is a relatively unclear distinction between expected and reasonably certain. They expressed the view that
expected and reasonably certain do not represent different thresholds.
Group members also noted that, from a practical perspective, management
would align the lease term with the economic life of significant leasehold
improvements and, in most cases, a financial statement preparer would
arrive at compatible approaches.
Group members made several other observations, including that there may
be an economic incentive to renew the lease and that only IAS 16 applies to
the amortization of the asset (i.e., IAS 17 does not apply).
The Group agreed that this issue should not be brought to the attention of
the IFRS Interpretations Committee because the issue is not expected to
arise in practice frequently.
Written reports and audio webcasts of the Group’s discussion for each agenda topic are available online at www.frascanada.ca.
Depreciation Start Date
[IAS 16.55]
Depreciation of an asset begins when the asset is available for use. This means
that it should be in the location and condition necessary for it to be capable of
operating in the manner intended by management.
The starting date for depreciating a major spare part or standby equipment
classified as PP&E is generally the date it is available for use.
Application Example
Depreciation of standby equipment
E xa mple
ABC Ltd. owns a specialized piece of equipment powered by a generator
24 hours a day, all year round. ABC also has another generator installed
and ready for use should the operating generator break down.
The standby generator is classified as PP&E when it meets the definition of
PP&E (i.e., held for use in the production or supply of goods and services,
for rental to others, or for administrative purposes, and expected to be used
during more than one period (IAS 16.8)). Since amortization should begin
when the standby generator is “available for use,” it should be amortized as
soon as it begins serving as a backup for the operating generator.
The method of amortization will depend on what is considered a systematic
basis over its useful life. If the generator’s useful life is based on the passage
of time, it will be amortized along with the one being used; if it is based on
usage, there may be no measured amount of amortization until it is actually
put into use.
June 2013
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40
Guide to International Financial Reporting in Canada
Depreciation End Date
[IAS 16.55]
IAS 16 indicates depreciation of an asset ceases at the earlier of the date
the asset is classified as held for sale (or included in a disposal group classified as held for sale), in accordance with IFRS 5, and the date the asset is
derecognized.
Depreciation Method
[IAS 16.60 – .61]
IAS 16 specifies that the depreciation method must closely reflect the way an
entity consumes an asset’s future economic benefits over the asset’s estimated
useful life.
An annual review of the depreciation method applied to an item of PP&E is
required.
Acceptable Depreciation Methods
[IAS 16.62]
IAS 16 provides a variety of depreciation methods for allocating the depreciable amount of an asset on a systematic basis over its useful life, such as:
• the straight-line method (constant charge over the asset’s useful life);
• the diminishing balance method (decreasing charge over the asset’s useful
life); and
• the units of production method (charge based on the expected use or output of the asset).
The standard is not prescriptive. Entities should choose the method that most
closely reflects their expected pattern of consumption of the asset’s future
economic benefits. That method should be applied consistently from period
to period unless there is a change in the expected pattern of consumption of
those future economic benefits.
As noted in the Standards Update section of this publication, in December
2012 the IASB issued an ED proposing a narrow-scope amendment to IAS 16.
The objective of the proposed amendment is to ensure preparers do not use
revenue-based methods to calculate charges for the depreciation or amortization of items of PP&E or intangible assets. The proposed amendment also provides further guidance in the application of the diminishing balance method.
IAS 16 Property, Plant and Equipment
Application statistics
CICA Survey of Selected Accounting Policies of Junior Oil and Gas Entities —
January 2013
Statistics
In practice, oil and gas properties are depleted by analogy to IAS 16 and
IAS 38. The unit of production method is most commonly used to deplete
such assets. In a survey of select junior oil and gas company financial statements, 90% disclosed the use of proved and probable reserves for application of this method and 7% disclosed the use of proved reserves.
The publication is available online at www.cpacanada.ca/ifrs
The following two insights look at methods of depreciation. Note the date
of the NIFRICs. Even though some NIFRICs are older, they still provide some
insight into how the standards are interpreted by the standard setters.
Application Insights
Depreciation of fixed assets
Source
NIFRIC
Meeting Date
May 2004
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
The Committee considered a potential issue as to whether the production method of depreciation could
be used under IAS 16 Property,
Plant and Equipment if an asset is
not consumed (worn down) directly
in relation to the level of use. For
example, if a road with a greater
capacity than current demands is
built, should depreciation in the
initial period be lower than in later
periods, if usage is expected to
increase over the life of the asset?
Reason for not adding
to the IFRIC agenda
The IFRIC agreed that this was foremost a conceptual area and decided
not to add it to the IFRIC agenda.
However, the IFRIC recommended
that this topic be considered by
the Board as part of the Concepts
project.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
June 2013
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42
Guide to International Financial Reporting in Canada
Application Insights
IAS 16 and IAS 17: Depreciation of assets leased under operating leases
Source
NIFRIC
Meeting Date
November 2004
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
The IFRIC considered whether interest methods of depreciation were
permissible under IFRSs. Use of such
methods would permit an entity
to depreciate an asset that is not a
receivable in much the same way as
if it were a receivable, with the result
that the depreciated amount of the
asset reflects the present value of
future net cash flow expected from it.
Reason for not adding
to the IFRIC agenda
The IFRIC noted that, while deliberating certain issues related to service
concessions, it had considered
whether it would be appropriate to
use an interest method of depreciation. In that discussion, it concluded
that using an interest method of
depreciation was not appropriate.
The IFRIC concluded that there was
nothing unique about assets leased
under operating leases in service
concessions that would cause it
to reach a different conclusion
about the use of interest methods
of depreciation. It noted that the
Basis for Conclusions in the future
Interpretations on service concessions would include a discussion of
its conclusions on interest methods
of depreciation.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
Changes in Depreciation Method
[IAS 16.61]
If there is a significant change in the expected pattern of consumption of an
asset’s future economic benefits, the depreciation method should be adjusted
to reflect the changed pattern. This change would be recognized as a change
in accounting estimate (unless the change is to correct an error), in line with
IAS 8.
Short-term investments include investments with maturities between 91 to 364 days from the date of purchase.
2.7 Inventories
Inventories are measured at the lower of cost and net realizable value. Cost is determined
the weighted
average
cost
method,
IAS 16using
Property,
Plant
and
Equipment
based on individual items. The cost is comprised of the purchase price, plus the costs incurred in bringing the inventory to its
present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated
costs to sell. Rebates and allowances received from vendors are recognized as a reduction to the cost of inventory, unless the
rebates clearly relate to the reimbursement of specific expenses. A provision for shrinkage and obsolescence is calculated based
on historical experience. All inventories consist of finished goods.
2.8 Property, plant and equipment
Property, plant
and equipment are measured
cost or deemed
cost less accumulated
depreciation
and accumulated
impairment
Extract
15 — Excerpt
from atSears
Canada
Inc. 2012
Financial
Statements
losses. Costs include expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets
includes
site preparation costs, design
and engineering fees,
freight (only on initial freight costs incurred between the vendor and
Note
2 — Significant
Accounting
Policies
the Company), installation expenses and provincial sales tax (Saskatchewan, Manitoba and Prince Edward Island), and is net of
2.8 any
Property,
plant
and equipment
(in of
part)
vendor subsidies
or reimbursements.
An allocation
general and specific incremental interest charges for major construction
projects is also included in the cost of related assets.
When the significant parts of an item of property, plant and equipment have varying useful lives, they are accounted for as separate
Goodwill
components
of property,
plant and equipment.
Depreciation
is calculated
on the
the purpose
depreciable
amount of
the asset
or significant
Goodwill
is allocated
to cash-generating
units or groups
of cash-generating
units based
(CGU) for
of impairment
testing,
which
is
undertaken
the lowest
at whichwhich
goodwill
monitored
Impairment
is value.
performed
annually as is
at
componentat thereof,
if level
applicable,
is isthe
cost of for
theinternal
asset ormanagement
significantpurposes.
component
less its testing
residual
Depreciation
August
1, or more
frequently
if there are method
indications
impairment
maycomponent
have occurred,
the recoverable
of a CGU with
recognized
using
the straight-line
forthat
each
significant
of by
ancomparing
item of property,
plant amount
and equipment
anditsis
carrying amount. The recoverable amount of a CGU is the higher of its value in use and its fair value less costs to sell. Value in use is the present
recorded
“Selling,
administrative
and aother
value
of theinexpected
future
cash flows from
CGU.expenses” in the Consolidated Statements of Net Earnings (Loss) and Comprehensive
Income
(Loss)judgment
. The estimated
useful
lives are the
2 tomodel
13 years
forused
equipment
and fixtures
and 10 to
50 years
forCGU,
buildings
and building
Significant
is involved
in estimating
inputs
to determine
the recoverable
amount
of our
in particular
future
cash
flows, discount
and terminal
duevalues
to the uncertainty
in the timing
and for
amount
of cash
flows
and
the forward-looking
improvements.
Therates
estimated
usefulgrowth
lives,rates,
residual
and depreciation
methods
property,
plant
and
equipment
are reviewed
nature
of these
Future
cash flows arewith
based
financial
plans
agreed by
which arefor
estimated
based on forecast
annually
and inputs.
adjusted,
if appropriate,
theoneffect
of any
changes
in management
estimates accounted
on a prospective
basis. results,
business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital,
adjusted
for
CGU-specific
risks
and
currency
exposure
as
reflected
by
differences
in
historical
and
expected
inflation.
CGU-specific
risks
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets
or,include
where
country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and
shorter,
the
term
of
the
relevant
lease,
unless
it
is
reasonably
certain
that
the
Company
will
obtain
ownership
by
the
end
of the
price risk (including product pricing risk and inflation). Terminal growth rates reflect the gross domestic product and inflation for the countries
lease which
term. the CGU operates. Changes in these assumptions may impact the amount of impairment loss recognized in Non-interest expense.
within
The carrying amount of a CGU includes the carrying amount of assets and goodwill allocated to the CGU. If the recoverable amount is less
Thethe
gain
or loss
arising
on the disposal
retirement
itemthe
ofcarrying
property,
plantofand
is determined
as and
the then
difference
than
carrying
value,
the impairment
loss isorallocated
firstof
to an
reduce
amount
anyequipment
goodwill allocated
to the CGU
to the
other
non-financial
assetsfrom
of the
CGU
based onand
the the
carrying
amount
of each
Any impairment
loss is charged
to income in
between
the proceeds
sale
orproportionately
the cost of retirement
carrying
amount
ofasset.
the asset,
and is recognized
in the Consolidated
the
period in which
impairment
is identified.
Goodwill is stated
at cost
less accumulated impairment losses. Subsequent reversals of
Statements
of NettheEarnings
(Loss)
and Comprehensive
Income
(Loss).
goodwill impairment are prohibited.
Upon
disposal
of
a
portion
of
a
CGU,
the
carrying
amount
of
goodwill
relating
to the portion
of and
the CGU
sold is included
in the determination
For a discussion on the impairment of tangible assets refer to Note 2.11. Property,
plant
equipment
are reviewed
at the end of
of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU.
Impairment and Compensation for Impairment
[IAS 16.63 – .66]
An impairment loss is the amount by which the carrying amount of an asset
each reporting period to determine whether there is an indicator of impairment.
exceeds
its recoverable amount. Recoverable amount is defined in IAS 16 as
Other intangibles
Intangible
assets are
recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and their fair
2.9 Investment
property
thevalue
higher
of an
asset’s
toa straight-line
sell orbasis
itsover
VIU.
can be measured
reliably.
Intangiblefair
assetsvalue
with a finiteless
life are costs
amortized on
their estimated useful lives,
The Company’s
property
consists
of vacantofland
which isat not
in its operations. Investment property is
generally
from 10 toinvestment
20 years, and
are assessed
for indicators
impairment
eachcurrently
reporting used
period.
If there at
is an
that less
a finite-life
intangible
asset may be
impaired, an impairment test is performed by comparing the carrying
measured
its indication
deemed cost
accumulated
impairment
losses.
amount of the intangible asset to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we
estimate
recoverable
of theproperty
CGU to which
the assetusing
belongs.
If the recoverable
amount
of the
asset (or
CGU)
is less thancomparable
its carrying
The fairthe
values
of the amount
investment
is estimated
observable
data based
on the
current
cost
of acquiring
amount,
the within
carryingthe
amount
of the
intangible
is written down
its recoverable
amount as
an impairment
loss.
properties
market
area
and the asset
capitalization
of thetoproperty’s
anticipated
revenue.
The Company
engages independent
An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the
qualified
third
parties
to conduct
appraisals
of its investment
property.loss is subsequently reversed, the carrying amount of the asset
asset
(or CGU)
since
the last
impairment
loss was recognized.
If an impairment
(or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have been determined (net of amortization) had
there been no prior impairment. Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives
and recoverable amounts of our intangible assets, and assessing whether certain events or circumstances constitute objective evidence of
impairment. To make these estimates, management relies on sales projections, allocated costs and risk-adjusted discount rates that take into
consideration the market environment and our business objectives. Changes
56 in these assumptions may impact the amount of impairment loss
recognized in Non-interest expense. We do not have any intangible assets with indefinite lives.
To determine whether a PP&E item is impaired, an entity applies IAS 36. This
standard provides guidance as to when to assess impairment, how to determine the recoverable amount and when to recognize an impairment loss.
It also provides guidance on reversal of impairment losses. When there is
a subsequent increase in the recoverable amount of an impaired asset, the
previously recognized impairment loss is reversed. For PP&E assets carried at
Other
cost,
the ofamount
of the recovery is limited to the carrying value of the asset
Translation
foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at the balance sheet
date.would
Foreign exchange
gains
and losses
resulting from the translation
of these items arehad
recognized
Non-interest income in loss
that
have
been
determined
(net and
ofsettlement
depreciation)
noinimpairment
the Consolidated Statements of Income.
assets and
liabilities
are measured
at historical
cost are translated
Canadian dollars at historical
rates.that an
been Non-monetary
recognized
for
thethatasset
in prior
years.
This into
requirement
means
Non-monetary financial assets classified as AFS securities, such as equity instruments, that are measured at fair value are translated into
Canadian
dollars
at
rates
prevailing
at
the
balance
sheet
date,
and
the
resulting
foreign
exchange
gains
and
losses
are
recorded
in Otherof
entity must be able to reconstruct the pre-impairment carrying amount
components of equity until the asset is sold or becomes impaired.
Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars are translated into Canadian dollars at
therates
asset.
prevailing at the balance sheet date, and income and expenses of these foreign operations are translated at average rates of exchange for
the reporting period.
Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of related hedges
Extract
from
Royal
Bank
of
Canada
Financial
are reported in16 — Excerpt
Other components of equity
on an after-tax
basis. Upon
disposal
or partial
disposal of a2012
foreign operation,
an appropriate portion
of the accumulated net translation gains or losses is included in Non-interest income.
Statements
Premises and equipment
Note
2 — Summary
of
Accounting
Policies,
Estimates
Premises
and equipment includes
land,Significant
buildings, leasehold improvements,
computer equipment,
furniture, fixtures
and other equipment, and
are stated at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the purchase price, any costs directly
attributable
to bringing the asset to the location and condition necessary for its intended use, and the initial estimate of any disposal costs.
and
Judgments
Depreciation is recorded principally on a straight-line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings, 3
to 10 years for
computer
equipment, and
7 to part)
10 years for furniture, fixtures and other equipment. The amortization period for leasehold
Premises
and
equipment
(in
improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured
of renewal, up to a maximum of 10 years. Land is not depreciated. Gains and losses on disposal are recorded in Non-interest income.
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be
impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount. Where it is not possible to
estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs and test for
impairment at the CGU level. An impairment charge is recorded to the extent the recoverable amount of an asset (or CGU), which is the higher of
fair value less costs to sell and value in use, is less than its carrying amount. Value in use is the present value of the future cash flows expected
to be derived from the asset (or CGU).
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an
impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount
that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is
adjusted to reflect the revised carrying amount.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2012
105
June 2013
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Guide to International Financial Reporting in Canada
Compensation for Impairment
[IAS 16.65]
If an entity receives third-party compensation for PP&E items that were
impaired, lost or given up, the compensation is recognized in profit or loss
when receivable.
Derecognition of PP&E
[IAS 16.67 – .72]
The carrying amount of an item of PP&E is derecognized:
• on disposal; or
• when no future economic benefits are expected from its use or disposal.
The disposal date is the date at which the criteria for recognizing revenue from
the sale of goods in IAS 18 are met. IAS 17 applies to disposal by a sale and
leaseback.
An entity is required to derecognize the carrying amount of a part of a PP&E
item if that part has been replaced and the entity has included the cost of the
replacement part in the carrying amount of the item. This is required even if
the part was not a significant component and was, therefore, not depreciated
separately.
When a PP&E item is disposed of, the gain or loss on disposal is included in
profit or loss unless IAS 17 requires otherwise on the sale and leaseback of an
asset. The gain or loss is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset.
Consideration receivable is recognized at fair value and, if payment is deferred,
the compensation is recognized at the cash price equivalent; any difference
between the recognized amount and the nominal amount is recognized as
interest revenue reflecting the effective yield on the receivable. The gain or
loss arising from derecognition of a PP&E item is not classified as revenue.
The following insight looks at the issue of classification of revenue from the
sale of assets held for rental. Note the date of the NIFRIC. Even though some
NIFRICs are older, they still provide some insight into how the standards are
interpreted by the standard setters.
IAS 16 Property, Plant and Equipment
Application Insights
IAS 16 Property, Plant and Equipment — Sale of assets held for rental
Source
NIFRIC
Meeting Date
May 2007
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
Reason for not adding to
the IFRIC agenda
The IFRIC was asked to provide
The IFRIC noted that IAS 16 paraguidance on the accounting for
graph 68 states that gains arising
sales of assets held for rental. Some
from derecognition of an item of
entities sell assets after renting
property, plant and equipment shall
them out to third parties. In such
not be classified as revenue. Also,
circumstances, it appears that the
when the asset is classified as held
(j) Business Combinations
asset is manufactured or acquired
for sale under IFRS 5 Non-current
the Company applieswith
the acquisition
method in accounting
combinations.
a dual intention,
to rent for
it business
out
Assets Held for Sale and Disconand to sell it. The issue is whether
tinued Operations, IFRS 5 paraon acquisition, the assets, including intangible assets, and any liabilities assumed are measured at their fair value. purchase
the sale of such an asset should be
graph 24 refers to the derecognition
price allocations may be preliminary when initially recognized and may change pending finalization of the valuation of the assets
presented gross (revenue and costs
requirements of paragraphs 67 – 72
acquired. purchase price allocations are finalized within one year of the acquisition and prior periods are restated to reflect any
of sales) or net (gain or loss) in the
of IAS 16, thereby confirming that
adjustments to the purchase price allocation made subsequent to the initial recognition.
income statement.
gains should not be classified as
the determination of fair values, particularly for intangible assets, is based on management’s
estimates andsome
includes
assumptions
revenue. However,
believed
in the
some
limited
circumstances,
on the timing and amount of future cash flows. the Company recognizes asthat,
goodwill
excess
of the purchase
price of an
reporting
revenue
the
acquired business over the fair value of the underlying net assets, including
intangible gross
assets, at
the date in
of acquisition.
income
statement
would
con-over
transaction costs are expensed as incurred. the date of acquisition is the date
on which
the Company
obtainsbe
control
sistent
with
the
Framework
parathe acquired business.
graph 72, with IAS 18 Revenue, IAS 2
(k) Inventory
Inventories, and IAS 40 Investment
with
thelower
prohibition
inventory is comprised of merchandise inventory, which includes prescriptionProperties
inventory, andand
is valued
at the
of cost and
on
offsets
in
IAS
1
Presentation
of
estimated net realizable value. Cost is determined on the first-in, first-out basis. Cost includes all direct expenditures and other
Financial Statements.
appropriate costs incurred in bringing inventory to its present location and condition. the Company classifies rebates and other
consideration received from a vendor as a reduction to the cost of inventory unless
the rebate
relates
to the
reimbursement
For this
reason,
the
IFRIC
decidedof
a selling cost or a payment for services.
to draw the issue to the attention of
the Board and not to take the item
onto to its own agenda.
net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling expenses.
(l) Property and Equipment and Investment Property
Details of the issues that have been considered by the IFRIC but not added to its agenda are
(i) Recognition and Measurement
available online at www.ifrs.org/.
items of property and equipment are carried at cost less accumulated depreciation and any recognized impairment losses
(see (p) impairment).
Cost includes
expenditures that are
directlyShoppers
attributable to theDrug
acquisition
of the asset.
the cost of self-constructed
Extract
17 — Excerpt
from
Mart
Corporation
2012 assets
includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition
Financial Statements
for their intended use, and, where applicable, the costs of dismantling and removing the items and restoring the site on which
Note
Accounting
Policies
they3 — Significant
are located. Borrowing costs
are recognized as part
of the cost of an asset, where appropriate.
purchased software
that is integral to and
the functionality
of the related
equipment
(l) Property
and Equipment
Investment
Property
(inis capitalized
part) as part of that equipment.
When componentsand
of property
and equipment (in
have part)
different useful lives, they are accounted for as separate items of property
(i) Recognition
Measurement
and equipment.
gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal
with the carrying amount of property and equipment and are recognized net, within operating and administrative expenses,
in net earnings.
Fully depreciated items of property and equipment that are still in use continue to be recognized in cost and accumulated
depreciation.
(ii) Subsequent Costs
the cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item if it is probable
that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably.
the carrying amount of the replaced part is de-recognized. the costs of repairs and maintenance of property and equipment
are recognized in earnings as incurred.
June 2013
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Guide to International Financial Reporting in Canada
An entity that, in the course of its ordinary activities, routinely sells PP&E items
held for rental to others, should transfer such assets to inventory at their carrying amount when they cease to be rented and are held for sale. The proceeds
from the sale of such assets should be recognized as revenue in accordance
with IAS 18. In such cases, IFRS 5 does not apply.
Disclosure
[IAS 16.73 – .79]
For many entities, PP&E is a major part of the statement of financial position.
The depreciation of these assets can have a material impact on profit or loss.
Thus, it is not surprising that IAS 16 includes significant disclosure requirements. The following chart summarizes some of the disclosures relating to
PP&E.
Illustration 6 — Summary of Some IAS 16 Disclosure Requirements
Type
Disclosure
Disclosures for each class of
PP&E
•
•
•
•
Reconciliation of the carrying
amount at beginning and end
of the period
•
•
•
•
•
•
•
•
Depreciation
•
measurement bases (e.g., cost model) used in determining
gross carrying amount
depreciation methods used (e.g., straight line)
useful lives or depreciation rates
gross carrying amounts and accumulated depreciation,
including impairment losses at the beginning and end of
the period
additions
depreciation
impairment losses recognized or reversed in profit or loss
increases or decreases resulting from revaluations and
from impairment losses recognized or reversed in other
comprehensive income
net exchange differences arising on the translation of the
financial statements from the functional currency into a
different presentation currency, including the translation
of a foreign operation into the presentation currency of
the reporting entity
assets classified as held for sale or included in a disposal
group classified as held for sale in accordance with IFRS 5
acquisitions through business combinations
other changes
depreciation, whether recognized in profit or loss or as a
part of the cost of other assets, during a period, as well as
accumulated depreciation at the end of the period
IAS 16 Property, Plant and Equipment
Type
Disclosure
Estimate changes
•
•
Revaluation model
•
•
•
•
•
•
nature and effect of any change in a PP&E accounting
estimate that has an effect in the current period or is
expected to have an effect in subsequent periods
changes in estimate could relate to:
oo
residual values
oo
estimated costs of dismantling, removing and restoring items of PP&E
oo
useful lives
oo
depreciation methods
effective date of revaluation
whether an independent valuer was involved
for each revalued PP&E class, the carrying amount that
would have been recognized had the assets been carried
under the cost model
the revaluation surplus, indicating the change for the
period and any restrictions on the distribution of the balance to shareholders
additional disclosures required by IFRS 13
a change in the revaluation surplus arising from a change
in the liability for an existing decommissioning, restoration
or similar liability (IAS 1 requires disclosure in the statement of comprehensive income of each component of
other comprehensive income or expense IFRIC 1 6(d))
Constructed assets
•
the amount of expenditures recognized in the carrying
amount of a PP&E item in the course of its construction
Impaired assets
•
the amount of compensation from third parties for items
of PP&E that were impaired, lost or given up, included in
profit or loss (if not separately presented in the statement
of comprehensive income)
disclosures required by IAS 36
•
Restrictions and
commitments
•
•
Disclosures encouraged but
not required
•
•
•
•
the existence and amounts of restrictions on title and
PP&E pledged as security for liabilities
the amount of contractual commitments for the acquisition of PP&E
temporarily idle PP&E
fully depreciated PP&E still in use
PP&E retired from active use but not classified as held for
sale
fair value of PP&E recognized under the cost model when
materially different from the carrying amount
June 2013
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Guide to International Financial Reporting in Canada
IAS 16 suggests but does not require disclosure of the gross carrying amount
of fully depreciated PP&E still in use. As IAS 16 requires a review of the useful
life, residual value and depreciation method at least at each financial year-end,
the existence of such assets is likely to be rare.
More general disclosure requirements under IAS 1 must also be met as they
relate to PP&E. These include accounting policies, significant judgments made
in applying accounting policies and sources of estimation uncertainty. Examples include:
• IAS 1.117 requires that the entity disclose a summary of significant accounting policies. This is especially important where there are accounting policy
choices.
• IAS 1.122 requires disclosure of judgments made in the process of applying
the entity’s accounting policies that have the most significant effect on the
amounts recognized in the financial statements.
• IAS 1.125 requires disclosure of information about the future and other major
sources of estimation uncertainty at the end of the reporting period that
have a significant risk of resulting in material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Application Resources
Disclosure checklist
Resources
To ensure compliance with IAS 16, the use of a disclosure checklist is
recommended.
CPA Canada has compiled numerous IFRS presentation and disclosure
checklists available for download at www.cpacanada.ca/ifrs.
The following insight looks at the disclosure of temporarily idle assets or assets
under construction when further construction has been postponed. Note the
date of the NIFRIC. Even though some NIFRICs are older, they still provide
some insight into how the standards are interpreted by the standard setters.
IAS 16 Property, Plant and Equipment
Application Insights
Disclosure of idle assets and construction in progress
Source
NIFRIC
Meeting Date
May 2009
The following insights were obtained from “IFRIC — items not taken onto the
agenda” report.
Insight
Issue
The IFRIC received a request for
more guidance on the extent of
required disclosures relating to property, plant and equipment temporarily idle or assets under construction
when additional construction has
been postponed. In accordance with
paragraph 74(b) of IAS 16, an entity
is required to disclose the amount of
expenditures recognised in the carrying amount of an item of property,
plant and equipment in the course
of its construction. Paragraph 79(a)
encourages an entity to disclose
the amount of property, plant and
equipment that is temporarily idle.
Reason for not adding
to the IFRIC agenda
Given the requirements of IAS 16
and IAS 1, the IFRIC did not expect
significant diversity in practice and
decided not to add this issue to its
agenda. However, the IFRIC recommended that the Board should
undertake a review of all disclosures
encouraged (but not required) by
IFRSs with the objective of either
confirming that they are required
or eliminating them.
The IFRIC also noted that paragraph
112(c) of IAS 1 requires an entity to
provide in the notes information that
is not presented elsewhere in the
financial statements that is relevant
to their understanding. The IFRIC
noted that disclosure regarding idle
assets might be particularly relevant
in the current economic environment. Consequently, the IFRIC
expected that entities would provide
information in addition to that specifically required by IAS 16 whenever
idle assets or postponed construction projects become significant.
Details of the issues that have been considered by the IFRIC but not added to its agenda are
available online at www.ifrs.org/.
June 2013
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Guide to International Financial Reporting in Canada
The following extract provides an example of a reconciliation of the carrying
amounts of assets at the beginning and end of the period.
Extract 18 — Excerpt from Telus Corporation 2012 Financial Statements
Note 15 — Property, Plant and Equipment
15
FINANCIAL STATEMENTS & NOTES: 15
Property, plant and equipment
(millions)
At cost
As at January 1, 2011
Additions (1)
Additions arising from business
acquisitions (Note 16(e))
Dispositions, retirements and other
Reclassifications
As at December 31, 2011
Additions (1)
Additions arising from business
acquisitions (Note 16(e))
Dispositions, retirements and other
Reclassifications
Network assets
Buildings and
leasehold
improvements
Assets under
finance lease
Other
Land
Assets under
construction
Total
$ß22,691
516
$ß2,351
20
$ß21
1
$ß1,550
41
$ß49
7
$ß438
887
$ß27,100
1,472
–
(220)
779
11
(8)
99
–
1
–
7
(51)
75
–
(1)
–
–
–
(953)
18
(279)
–
23,766
569
2,473
21
23
–
1,622
42
55
–
372
980
28,311
1,612
–
(1,126)
795
–
(16)
142
–
(17)
–
2
(80)
38
–
–
–
–
–
(975)
2
(1,239)
–
As at December 31, 2012
$ß24,004
$ß2,620
$ß 6
$ß1,624
$ß55
$ß377
$ß28,686
Accumulated depreciation
As at January 1, 2011
Depreciation
Dispositions, retirements and other
$ß16,555
1,091
(218)
$ß1,443
121
(4)
$ß10
2
8
$ß1,261
117
(39)
$ßß –
–
–
$ßß –
–
–
$ß19,269
1,331
(253)
As at December 31, 2011
Depreciation
Dispositions, retirements and other
17,428
1,192
(1,127)
1,560
126
(12)
20
3
(17)
1,339
101
(92)
–
–
–
–
–
–
20,347
1,422
(1,248)
$ß17,493
$ß1,674
$ß 6
$ß1,348
$ßß –
$ßß –
$ß20,521
As at December 31, 2012
Net book value
As at December 31, 2011
$ß 6,338
$ß 913
$ß 3
$ß 283
$ß55
$ß372
$ß 7,964
As at December 31, 2012
$ß 6,511
$ß 946
$ßß –
$ß 276
$ß55
$ß377
$ß 8,165
(1) For the year ended December 31, 2012, additions include $49 (2011 – $15) in respect of asset retirement obligations (see Note 19(a)).
The gross carrying amount of fully depreciated property, plant and
equipment that was still in use as at December 31, 2012, was $2.9 billion
(2011 – $3.0 billion).
As at December 31, 2012, our contractual commitments for the
acquisition of property, plant and equipment were $187 million over
a period through to 2014 (2011 – $188 million over a period through
to 2013).
Accounting Policy Choices
The following chart summarizes some significant accounting policy choices in
IAS 16.
Reference
Policy choice
Alternatives
Insights
IAS 16.29
Measurement of PP&E
after recognition
1. Cost model
2. Revaluation model
The policy choice is
made for each class of
PP&E and must apply to
the entire class.
A class of PP&E is a
grouping of assets of a
similar nature and use in
an entity’s operations.
TELUS 2012 ANNUAL REPORT . 147
IAS 16 Property, Plant and Equipment
Reference
Policy choice
Alternatives
Insights
IAS 16.35
Revaluation of depreciable assets
When an item of PP&E
is revalued, any accumulated depreciation at
the date of revaluation
is treated in one of two
ways:2
1. Restate proportionately with the
change in the gross
carrying amount of
the asset so that
the carrying amount
of the asset after
revaluation equals
its revalued amount
2. Eliminate against
the gross carrying
amount of the asset
and the net amount
restated to the
revalued amount of
the asset
Alternative 1 is often
used when an asset is
revalued by means of
applying an index to
determine its replacement cost (see IFRS 13).
1. Transfer revaluation
surplus to retained
earnings on asset
derecognition
2. Transfer a relevant
portion of the
revaluation surplus
to retained earnings as the asset
is depreciated,
with the balance
remaining (if any)
transferred on asset
derecognition
3. No transfer of
revaluation surplus
to retained earnings
Alternative 1 may
involve transferring the
whole of the surplus
when the asset is
retired or disposed of.
IAS 16.41
Transferring revaluation
surplus
Alternative 2 is often
used for buildings.
For alternative 2, the
amount of the surplus
transferred would be
the difference between
depreciation based on
the revalued carrying
amount of the asset
and depreciation based
on the asset’s original
cost.
2 Note: Refer to the Standards Update section in this publication. A proposed amendment to IAS 16 would
change the guidance in (1) below and state that accumulated depreciation is computed as the difference
between the gross and net carrying amounts. The amendment will also clarify that the determination of
accumulated depreciation does not depend on the selection of the valuation technique.
June 2013
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Guide to International Financial Reporting in Canada
Reference
IAS 16.41
(continued)
Policy choice
Alternatives
Insights
The revaluation surplus
transfers referred to in
IAS 16.41 are implied to
be at the option of the
reporting entity, rather
than being mandated
by the Standard. There
would, therefore,
appear to be another
alternative — to make no
reserve transfer (alternative 3). That option
would, however, result
in the permanent retention of the portion of
the revaluation reserve
relating to assets that
have been fully depreciated or disposed of.
Transfers from revaluation surplus to retained
earnings are not made
through profit or loss.
IAS 16 Property, Plant and Equipment
Significant Judgments and Estimates
The following chart summarizes some possible significant judgments and
sources of estimation uncertainty required by IAS 16. This is not meant to be
an exhaustive list and other judgments and/or estimates most certainly exist
within IAS 16.
Illustration 7 — Some Significant Judgments and Sources of Estimation
Uncertainty Under IAS 16
Judgments
Sources of estimation uncertainty
Policy choice
• whether to measure PP&E using the cost
model or the revaluation model value
(IAS 16.29)
Both cost model and revaluation model
• determination of the residual value of
a depreciable item of PP&E
• determination of the useful life of a
depreciable item of PP&E
• timing and amount of costs of dismantling, removal and site restoration and
changes to these costs
• discount rate to be used for the above
• recoverability of tangible capital assets
• estimate of the recoverable amount for
impairment testing
Both cost model and revaluation model
• unit of measure for recognition of an item
of PP&E (i.e., the amount of aggregation)
• determination of which costs (initial and
subsequent) meet the recognition criteria
of IAS 16, including which costs are
directly attributable (e.g., safety equipment, spare parts, replacement parts,
inspection costs and costs for self-constructed assets)
• significant components of assets and the
allocation of costs to components (for
depreciation)
• selection of depreciation methods and
depreciation start date
• how much detail to provide in note
disclosures
• assessment of impairment under IAS 36
• when an item of PP&E should be
derecognized.
Revaluation model
• determination of fair value of revalued
items of PP&E
Revaluation model
• frequency of revaluations
• how to treat accumulated depreciation on
revaluation of an item of PP&E (IAS 16.35)
• when to transfer a revaluation surplus to
retained earnings (IAS 16.41)
June 2013
53
NOTES TO ThE CONSOLIDATED fINANCIAL STATEMENTS
54
4. SIGNIFICANTFinancial
ACCOUNTING
ESTIMATESin
AND
JUDGMENTS
Guide NOTE
to International
Reporting
Canada
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent
liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to
the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting
policies, management has made the following judgments, estimates and assumptions which have the most significant effect on
Extract
19 — Excerpt
from financial
Enerflex
Ltd. 2012STATEMENTS
Financial Statements
the
amounts
recognized
in the
consolidated
statements:
NOTES
TO ThE
CONSOLIDATED
fINANCIAL
Note 4 — Significant
Accounting
Estimates and Judgments
> Revenue Recognition – Long-Term
Contracts
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of-
NOTE 4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS
completion approach of accounting for performance of production-type contracts. This approach to revenue recognition
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and
requires management to make a number of estimates and assumptions surrounding the expected profitability of the
assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent
contract, the estimated degree of completion based on cost progression and other detailed factors. Although these
liabilities, at the end of the reporting period. Estimates and judgments are continually evaluated and are based on historical
factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions
experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
could lead to changes in the revenues recognized in a given period.
However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to
> Provisions for Warranty
the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical
policies, management has made the following judgments, estimates and assumptions which have the most significant effect on
experience under contractual warranty obligations or specific provisions created in respect of individual customer issues
the amounts recognized in the consolidated financial statements:
undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the
settlement
and the
timing of any
resolution with the relevant customer.
> likely
Revenue
Recognition
– Long-Term
Contracts
The Company reflects revenues generated from the assembly and manufacture of projects using the percentage-of> Property, Plant and Equipment
completion approach of accounting for performance of production-type contracts. This approach to revenue recognition
Property, plant and equipment are stated at cost less accumulated depreciation, including any asset impairment losses.
requires management to make a number of estimates and assumptions surrounding the expected profitability of the
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated
contract, the estimated degree of completion based on cost progression and other detailed factors. Although these
useful lives of property, plant and equipment are reviewed on an annual basis. Assessing the reasonableness of
factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions
the estimated useful lives of property, plant and equipment requires judgment and is based on currently available
could lead to changes in the revenues recognized in a given period.
information. Property, plant and equipment are also reviewed for potential impairment on a regular basis or whenever
events or changes
in circumstances indicate that the carrying amount may not be recoverable.
> Provisions
for Warranty
Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical
Changes in circumstances, such as technological advances and changes to business strategy can result in actual
experience under contractual warranty obligations or specific provisions created in respect of individual customer issues
useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and
undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the
methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated
likely settlement and the timing of any resolution with the relevant customer.
useful lives of property, plant and equipment or future cash flows constitute a change in accounting estimate and are
applied prospectively.
> Property,
Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation, including any asset impairment losses.
> Allowance for Doubtful Accounts
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated
An allowance for doubtful accounts is made when there is objective evidence that the collection of the full amount
useful lives of property, plant and equipment are reviewed on an annual basis. Assessing the reasonableness of
is no longer probable under the terms of the original invoice. Impaired receivables are derecognized when they are
the estimated useful lives of property, plant and equipment requires judgment and is based on currently available
assessed as uncollectible. Amounts estimated represent management’s best estimate of probability of collection of
information. Property, plant and equipment are also reviewed for potential impairment on a regular basis or whenever
amounts from customers.
events or changes in circumstances indicate that the carrying amount may not be recoverable.
> Impairment of Inventory
Changes in circumstances, such as technological advances and changes to business strategy can result in actual
The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of
useful lives and future cash flows differing significantly from estimates. The assumptions used, including rates and
inventory items based on historical usage patterns, known changes to equipment or processes and customer demand
methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated
for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and
useful lives of property, plant and equipment or future cash flows constitute a change in accounting estimate and are
timing of inventory impairment.
applied prospectively.
82
> Allowance for Doubtful Accounts
An allowance
for ltd.
doubtful accounts is made when there is objective evidence that the collection of the full amount
EnErflEx
is no longer probable under the terms of the original invoice. Impaired receivables are derecognized when they are
assessed as uncollectible. Amounts estimated represent management’s best estimate of probability of collection of
amounts from customers.
> Impairment of Inventory
The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of
inventory items based on historical usage patterns, known changes to equipment or processes and customer demand
for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and
timing of inventory impairment.
82
EnErflEx ltd.
IAS 16 Property, Plant and Equipment
Appendix A — Acronyms Used
AcSB
Accounting Standards Board
CPA Canada
Chartered Professional Accountants of Canada
ED
Exposure Draft
IAS
International Accounting Standard
IASB
International Accounting Standards Board
IDG
IFRS Discussion Group
IFRIC
IFRS Interpretations Committee
IFRS
International Financial Reporting Standard
NIFRIC
Non-IFRS Interpretations Committee abstract
OCI
Other comprehensive income
PP&E
Property, plant and equipment
VIU
Value in use
June 2013
55
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