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Public Finance Management Act, 1999 (Act No. 1 of 1999)

Notices

Standards of Generally Accepted Municipal Accounting Practice (GAMAP) in terms of Section 91

GAMAP 17 : Property, Plant and Equipment

 

Introduction

 

Standards of Generally Accepted Municipal Accounting Practice (GAMAP)

 

The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).

 

The Board must determine GRAP for:

(a) departments (national and provincial);
(b) public entities;
(c) constitutional institutions;
(d) municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and
(e) Parliament and the provincial legislatures.

 

The above are collectively referred to as "entities" Standards of GRAP.

 

The Board considers that the Standards of GAMAP constitute GRAP for municipalities.

 

GAMAP is an interim solution until such time as it is replaced by a Standard of GRAP.

 

Any limitation of the applicability of specific Standards is made clear in those Standards.

 

The Standard of GAMAP on Property, Plant and Equipment is set out in paragraphs .01 - .88. All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP, the Preface to Standards of GAMAP and the Framework for the Preparation and Presentation of financial Statements.

 

Reference may be made here to a Standards of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

 

Objective

 

The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment. The principal issues in accounting for property, plant and equipment are the timing of recognition of the assets, the determination of their carrying amounts and the depreciation charges to be recognised in relation to them, and the determination and accounting treatment of impairments to the carrying amounts.

 

Scope

 

.01 An entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for property, plant and equipment, except:
(a) When a different accounting treatment has been adopted in accordance with another Standard of Generally Accepted Municipal Accounting Practice or International Public Sector Accounting Standard or a Statement of Generally Accepted Accounting Practice.
(b) Investment property as this is dealt with in the International Public Sector Accounting Standard on Investment Property, and
(c) Heritage assets. However, the disclosure requirements of paragraphs .75, .76 and .79 apply to those heritage assets that are recognised.

 

.02 This Standard applies to property, plant and equipment including infrastructure assets and community assets.

 

.03 This Standard does not apply to:
(a) forests and similar regenerative natural resources, and
(b) mineral rights, the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.

 

However, this Standard does apply to property, plant and equipment used to develop or maintain the activities or assets covered in par .03(a) or (b) but which are separable from those activities or assets.

 

.04 This Standard also does not apply where other Standards of Generally Accepted Municipal Accounting Practice or an International Public Sector Accounting Standard or a Statement of Generally Accepted Accounting Practice applies. For example, the International Public Sector Accounting Standard on Investment Property provides guidance on valuing of investment property.

 

Heritage Assets

 

.05 This Standard does not require an entity to recognise heritage assets that would otherwise meet the definition of, and recognition criteria for, property, plant and equipment. If an entity does recognise heritage assets, it must apply the disclosure requirements of this Standard and may, but is not required to, apply the measurement requirements of this Standard.

 

.06 Some assets are described as "heritage assets" because of their cultural, environmental or historical significance. Examples of heritage assets include historical buildings and monuments, archaeological sites, conservation areas and nature reserves, and works of art. Certain characteristics, including the following, are often displayed by heritage assets (although these characteristics are not exclusive to such assets):
(a) Their value in cultural, environmental, educational and historical terms is unlikely to be fully reflected in a financial value based purely on a market price,
(b) Legal and/or statutory obligations may impose prohibitions or severe restrictions on disposal by sale,
(c) They are often irreplaceable and their value may increase over time even if their physical condition deteriorates, and
(d) It may be difficult to estimate their useful lives, which in some cases could be several hundred years.

 

Entities may have large holdings of heritage assets that have been acquired over many years and by various means, including purchase, donation, bequest and sequestration. These assets are rarely held for their ability to generate cash inflows, and there may be legal or social obstacles to using them for such purposes.

 

.07 Some heritage assets have service potential other than their heritage value, for example, an historic building being used for office accommodation. In these cases, they may be recognised and measured on the same basis as other items of property, plant and equipment. For other heritage assets, their service potential is limited to their heritage characteristics, for example, monuments and ruins. The existence of alternative service potential can affect the choice of measurement base.

 

.08 The disclosure requirements in paragraphs .75 to .81 require entities to make disclosures about recognised assets. Therefore, entities that recognise heritage assets are required to disclose in respect of those assets such matters as, for example:
(a) the measurement basis used,
(b) the depreciation method used, if any,
(c) the gross carrying amount,
(d) the accumulated depreciation at the end of the period, if any, and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing certain components thereof.

 

Definitions

 

.09 The following terms are used in this Standard with the meanings specified:

 

Class of property, plant and equipment means a grouping of assets of a similar nature or function in an entity’s operation, that is shown as a single item for the purpose of disclosure in the financial statements.

 

Property, plant and equipment are tangible assets that:

(a) are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and
(b) are expected to be used during more than one reporting period.

 

Investment properties are defined in the International Public Sector Accounting Standard on Investment Property.

 

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

 

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

 

Useful life is either:

(a) the period of time over which an asset is expected to be used by the entity, or
(b) the number of production or similar units expected to be obtained from the asset by the entity.

 

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.

 

Residual value is the net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.

 

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

 

Carrying amount is the amount at which an asset is included in the statement of financial position after deducting any accumulated depreciation and any impairment losses thereon.

 

Recoverable amount is the amount that the entity expects to recover from the future use of an asset, including residual value on disposal.

 

Recognition of property, plant and equipment

 

.10 An item of property, plant and equipment shall be recognised as an asset when:
(a) it is probable that future economic benefits or service potential associated with the asset will flow to the entity, and
(b) the cost or fair value of the asset to the entity can be measured reliably.

 

.11 Property, plant and equipment is often a major portion of the total assets of an entity and, therefore, is significant in the presentation of its financial position. Furthermore, the determination of whether an expenditure represents an asset or an expense can have a significant effect on an entity's reported surplus or deficit from operating activities.

 

.12 In determining whether an item satisfies the first criterion for recognition, an entity needs to assess the degree of certainty attached to the flow of future economic benefits or service potential on the basis of the available evidence at the time of initial recognition. Existence of sufficient certainty that the future economic benefits or service potential will flow to the entity necessitates an assurance that the entity will receive the rewards attached to the asset and will undertake the associated risks. This assurance is usually only available when the risks and rewards have passed to the entity. Before this occurs, the transaction to acquire the asset can usually be cancelled without significant penalty and, therefore, the asset is not recognised.

 

.13 The second criterion for recognition is usually readily satisfied because the exchange transaction evidencing the purchase of the asset identifies its cost. In the case of a self-constructed asset, a relevant and reliable measurement of the cost can be made from the transactions with parties external to the entity for the acquisition of the materials, labour and other inputs used during the construction process. In addition, as outlined in paragraphs .24 to .27 of this Standard, under certain circumstances cost is determined by reference to fair value.

 

.14 In identifying what constitutes a separate item of property, plant and equipment, judgement is required in applying the criteria in the definition to specific circumstances. It may be appropriate to aggregate individually insignificant items, such as mowers and brushcutters, and to apply the criteria to the aggregate value. Most spare parts and servicing equipment are usually carried as inventory and recognised as an expense as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when the entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment and their use is expected to be irregular, they are accounted for as property, plant and equipment and are depreciated over a time period not exceeding the useful life of the related asset.

 

.15 In certain circumstances, it is appropriate to allocate the total expenditure on an asset to its component parts and account for each component separately. This is the case when the component assets have different useful lives or provide benefits to the entity in a different pattern, thus necessitating the use of different depreciation rates and methods. For example, a sewerage purification works and the sewerage reticulation network may need to be treated as separate depreciable assets if they have different useful lives.

 

.16 Property, plant and equipment may be acquired for safety or environmental reasons. The acquisition of such property, plant and equipment, while not directly increasing the future economic benefits or service potential of any particular existing asset, may be necessary in order for the entity to obtain the future economic benefits or service potential from its other assets. When this is the case, such acquisitions of property, plant and equipment qualify for recognition as assets, in that they enable future economic benefits or service potential from related assets to be derived by the entity in excess of what it could derive if they had not been acquired. However, such assets are only recognised to the extent that the resulting carrying amount of such an asset and related assets does not exceed the total economic benefits or service potential that the entity expects to recover from their continued use and ultimate disposal. For example, an entity may have to install new plant in respect of its effluent treatment processes in order to comply with environmental requirements. The related plant enhancements are recognised as an asset to the extent they are recoverable because, without them, the entity is unable to treat and dispose of effluent.

 

Classification of property, plant and equipment

 

.17 Not only does there need to be classifications of assets between property, plant and equipment, there also needs to be further classifications in a public sector environment. Property, plant and equipment should also be classified into infrastructure assets, community assets, heritage assets and investment properties. The purpose of this classification is to develop a benchmark accounting treatment to assist in the measurement of property, plant and equipment and to assist users to understand better the nature of the assets included as property, plant and equipment.

 

.18 Infrastructure assets are any assets that are part of a network of similar assets. Examples of infrastructure assets are roads, water reticulation schemes, sewerage purification and trunk mains.

 

.19 Community assets are any assets that contribute to the community's well-being. Examples are parks, libraries and fire stations.

 

.20 Heritage assets are culturally significant resources. Examples are works of art, historical buildings and statues.

 

.21 Other assets are assets utilised in operations. Examples are plant and equipment.

 

.22 Some assets are commonly described as "infrastructure assets". While there is no universally accepted definition of infrastructure assets, these assets usually display some or all of the following characteristics:
(a) They are part of a system or network,
(b) They are specialised in nature and do not have alternative uses,
(c) They are immovable, and
(d) They may be subject to constraints on disposal.

 

.23 ownership of infrastructure-assets is not confined to entities, significant infrastructure assets are frequently found in the public sector. Infrastructure assets meet the definition of property, plant and equipment and should be accounted for in accordance with this Standard.

 

Initial measurement of property, plant and equipment

 

.24 An item of property, plant and equipment which qualifies for recognition as an asset shall initially be measured at its cost

 

.25 Where an asset is acquired at no cost, or for a nominal cost, its cost is its fair value as at the date of acquisition.

 

.26 An item of property, plant and equipment may be gifted or contributed to the entity. For example, land may be contributed to an entity by a developer at nil or nominal consideration, to enable the entity to develop parks, roads and paths in the development. An asset may also be acquired at nil or nominal consideration through the exercise of powers of sequestration. Under these circumstances the cost of the item is its fair value as at the date it is acquired, contributed or gifted.

 

.27 For the purposes of this Standard, the initial recognition of an item of property, plant and equipment, acquired at no or nominal cost, at its fair value consistent with the requirements of paragraph.25, does not constitute a revaluation. Accordingly, the revaluation requirements in paragraph .41, and the supporting commentary in paragraphs .42 to .44, only apply where an entity elects to revalue an item of property, plant and equipment in subsequent reporting periods.

 

Components of cost

 

.28 The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, and any directly attributable costs of bringing the asset to working condition for its intended use. Any trade discounts and rebates are deducted in arriving at the purchase price.

Examples of directly attributable - costs are:

(a) the cost of site preparation,
(b) initial delivery and handling costs,
(c) installation costs,
(d) professional fees such as for architects and engineers, and
(e) the estimated cost of dismantling the asset and restoring the site, to the extent that it is recognised as a provision. Guidance on accounting for provisions is found in the Standard of Generally Accepted Municipal Accounting Practice on Provisions, Contingent Assets and Contingent Liabilities.

 

.29 When payment for an item of property, plant and equipment is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as an interest expense over the period of credit. Reference should be made to the International Public Sector Accounting Standard on Borrowing Costs for guidance.

 

.30 Administration and other general overhead costs are not a component of the cost of property, plant and equipment unless they can be directly attributed to the acquisition of the asset or bringing the asset to its working condition. Similarly, start-up and similar costs do not form part of the cost of an asset unless they are necessary to bring the asset to its working condition. Initial operating losses incurred prior to an asset achieving planned performance are recognised as an expense.

 

.31 The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of producing the assets for sale (see the Standard of Generally Accepted Municipal Accounting  Practice on Inventories). Therefore, any internal surpluses are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour or other resources incurred in the production of a self-constructed asset is not included in the cost of the asset.

 

.32 The cost of an asset held by a lessee under a finance lease is determined using the principles set out in the International Public Sector Accounting Standard on Leases.

 

Exchanges of assets

 

.33 An item of property, plant and equipment may be acquired in exchange or part exchange for a dissimilar item of property, plant and equipment or other asset. The cost of such an item is measured at the fair value of the asset received, which is equivalent to the fair value of the asset given up adjusted by the amount of any cash or cash equivalents transferred.

 

.34 An item of property, plant and equipment may be acquired in exchange for a similar asset that has a similar use in the same line of operations and which has a similar fair value. An item of property, plant and equipment may also be sold in exchange for an equity interest in a similar asset. In both cases, no gain or loss is recognised on the transaction. Instead, the cost of the new asset is the carrying amount of the asset given up. However, the fair value of the asset received may provide evidence of an impairment in the asset given up. Under these circumstances the asset given up is written down and this written-down value is assigned to the new asset. Examples of exchanges of similar assets include the exchange of aircraft, hostels and other real estate properties. If other assets such as cash are included as part of the exchange transaction this may indicate that the items exchanged do not have a similar value.

 

Subsequent expenditure

 

.35 Subsequent expenditure relating to an item of property, plant and equipment that has already been recognised shall be added to the carrying amount of the asset when it is probable that future economic benefits or service potential over the total life of the asset in excess of the most recently assessed standard of performance of the existing asset, will flow to the entity. All other subsequent expenditure shall be recognised as an expense in the period in which it is incurred.

 

.36 Subsequent expenditure on property, plant and equipment is only recognised as an asset when the expenditure improves the condition of the asset, measured over its total life, beyond its most recently assessed standard of performance. Examples of improvements that result in increased future economic benefits or service potential include the following:
(a) Modification of an item of plant to extend its useful life, including an increase in its capacity,
(b) Upgrading machine parts to achieve a substantial improvement in the quality of output, and
(c) Rehabilitation of a road enabling a substantial reduction in previously assessed maintenance costs.

 

.37 Expenditure related to repairs or maintenance of property, plant and equipment are made to restore or maintain the future economic benefits or service potential that an entity can expect from the most recently assessed standard of performance of the asset. As such, they are usually recognised as an expense when incurred. For example, the cost of servicing or overhauling plant and equipment is usually an expense since it restores, rather than increases, the most recently assessed standard of performance.

 

.38 The appropriate accounting treatment for expenditure incurred subsequent to the acquisition of an item of property, plant and equipment depends on the circumstances, which were taken into account on the initial measurement and recognition of the related item of property, plant and equipment and whether the subsequent expenditure is recoverable. For instance, when the carrying amount of the item of property, plant and equipment already takes into account a loss in economic benefits or service potential, the subsequent expenditure to restore the future economic benefits or service potential expected from the asset is capitalised, provided that the carrying amount does not exceed the total economic benefits or service potential that the entity expects to recover from the continued use and ultimate disposal of the item. This is also the case when the purchase price of an asset already reflects the entity's obligation to incur expenditure in the future, which is necessary to bring the asset to its working condition. An example of this might be the acquisition of a building requiring renovation. In such circumstances, the subsequent expenditure is added to the carrying amount of the asset to the extent that it can be recovered from future use of the asset.

 

.39 Major components of some items of property, plant and equipment may require replacement at regular intervals. For example, a reservoir may require relining after a specified number of hours of usage or components of a sewerage purification works may need replacing during the lifetime of the works, or a road may need resurfacing every few years, a furnace may require relining after a specified number of hours of usage. The components are accounted for as separate assets because they have useful lives different from those of the items of property, plant and equipment to which they relate. Therefore, provided the recognition criteria in paragraph .10 are satisfied, the expenditure incurred in replacing or renewing the component is accounted for as the acquisition of a separate asset and the replaced asset is written off.

 

Measurement subsequent to initial recognition

 

Benchmark treatment

 

.40 Subsequent to initial recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

 

Allowed alternative treatment for property

 

.41 Subsequent to initial recognition as an asset, an item of land and buildings shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent impairment losses. Revaluations shall be made with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date. The accounting treatment for revaluations is set out in paragraphs .48 and .49.

 

Revaluations of land and buildings

 

.42 The fair value of land and buildings is usually their market value, determined by appraisal. An appraisal of the value of an asset is normally undertaken by a member of the valuation profession who holds a recognised and relevant professional qualification. For many assets, the fair value will be readily ascertainable by reference to quoted prices in an active and liquid market. For example, current market prices can usually be obtained for land and non-specialised buildings.

 

.43 The frequency of revaluations depends upon the movements in the fair values of land and buildings being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. Some land and buildings may experience significant and volatile movements in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for land and buildings with only insignificant movements in fair value. Instead, revaluation every three or five years may be sufficient.

 

.44 When land and buildings are revalued, any accumulated depreciation at the date of the revaluation is either:
(a) 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 means of an index to its depreciated replacement cost, or
(b) eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. . For example, this method is used for buildings which are revalued to their market value.

 

The amount of the adjustment arising on the restatement or elimination of accumulated depreciation forms part of the increase or decrease in carrying amount which is dealt with in accordance with paragraphs .48 and .49.

 

.45 When land and buildings are revalued, the entire class of property to which that asset belongs shall be revalued. In other words, if land is revalued, then all land within that classification must be revalued. If land and buildings within that classification are revalued, then all land and buildings must be revalued.

 

.46 A class is a grouping of assets of a similar nature or function in an entity's operations. The following are examples of separate classes:
(a) Land,
(b) Operational buildings,
(c) Office buildings,
(d) Roads
(e) Machinery,
(f) Electricity transmission networks,
(g) Motor vehicles,
(h) Furniture and fixtures, and
(i) Office equipment.

 

.47 The items within the class are revalued simultaneously in order to avoid selective revaluation of assets and the reporting of amounts in the financial statements which are a mixture of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets is completed within a short period of time and provided the revaluations are kept up to date.

 

.48 When an asset's carrying amount of a class of assets is increased as a result of a revaluation, the increase shall be credited directly to non-distributable reserves under the heading revaluation surplus. However, a revaluation increase shall be recognised as revenue to the extent that it reverses a revaluation decrease of the same class of assets previously recognised as an expense.

 

.49 When the carrying amount of a class of assets is decreased as a result of a revaluation the decrease shall be recognised as an expense. However, a revaluation decrease shall be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same class of assets.

 

.50 Some or all of the revaluation surplus included in net assets may be transferred directly to the accumulated surpluses or deficits when the surplus is realised. The surplus may be realised, in part or in whole, on the retirement or disposal of some or all of the assets within the land and buildings to which the surplus relates. However, some of the surplus may be realised as the land and buildings are used by the entity, in such a case, the amount of the surplus realised is the difference between depreciation based on the revalued carrying amount of the land and buildings and depreciation based on the land and building’s original cost. The transfer from revaluation surplus to the accumulated surpluses or deficits is not made through the statement of financial performance.

 

Depreciation

 

.51 The depreciable amount of an item of property, plant and equipment shall be allocated on a systematic basis over its useful life. The depreciation method used shall reflect the pattern in which the asset‘s economic benefits or service potential is consumed by the entity. The depreciation charge for each period shall be recognised as an expense unless it is included in the carrying amount of another asset.

 

.52 As the economic benefits or service potential embodied in an asset are consumed by the entity, the carrying amount of the asset is reduced to reflect this consumption, normally by charging an expense for depreciation. A depreciation charge is made even if the value of the asset exceeds its carrying amount.

 

.53 The economic benefits or service potential embodied in an item of property, plant and equipment is consumed by the entity principally through the use of the asset. However, other factors such as technical obsolescence and wear and tear while an asset remains idle often result in the diminution of the economic benefits or service potential that might have been expected to be available from the asset. Consequently, all the following factors need to be considered in determining the useful life of an asset:
(a) The expected usage of the asset by the entity. Usage is assessed by reference to the asset’s expected capacity or physical output,
(b) The expected physical wear and tear, which depends on operational factors such as the number of shifts for which the asset is to be used and the repair and maintenance program of the entity, and the care and maintenance of the asset while idle,
(c) Technical 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, and
(d) Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

 

.54 The useful life of an asset is defined in terms of the asset's expected utility to the entity. The asset management policy of an entity may involve the disposal of assets after a specified time or after consumption of a certain proportion of the economic benefits or service potential embodied in the asset. Therefore, the useful life of an asset may be shorter than its economic life. The estimation of the useful life of an item of property, plant and equipment is a matter of judgement based on the experience of the entity with similar assets.

 

.55 Land and buildings are separable assets and are dealt with separately for accounting purposes, even when they are acquired together. Land normally has an unlimited life and, therefore, is not depreciated. Buildings have a limited life and, therefore, are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the useful life of the building.

 

.56 The depreciable amount of an asset is determined after deducting the residual value of the asset. In practice, the residual value of an asset is often insignificant and, therefore, is immaterial in the calculation of the depreciable amount. When the benchmark treatment is adopted and the residual value is likely to be significant, the residual value is estimated at the date of acquisition and is not subsequently increased for changes in prices. However, when the allowed alternative treatment is adopted in respect of property, a new estimate is made at the date of any subsequent revaluation of the asset. The estimate is based on the residual value prevailing at the date of the estimate for similar property assets that have reached the end of their useful lives and have operated under conditions similar to those in which the property asset will be used.

 

.57 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. The methods include the straight-line method, the diminishing balance method or sum of the units method. Straight-line depreciation results in a constant charge over the useful life of the asset. The diminishing balance method results in a decreasing charge over the useful life of the asset. The sum of the units method results in a charge based on the expected use or output of the assets. The method used for an asset is selected based on the expected pattern of economic benefits or service potential and is consistently applied from period to period unless there is a change in the expected pattern of economic benefits or service potential from that asset.

 

.58 The depreciation charge for a period is usually recognised as an expense. However, in some circumstances, the economic benefits or service potential embodied in an asset are absorbed by the entity in producing other assets rather than giving rise to an expense. In this case the depreciation charge comprises part of the cost of the other asset and is included in its carrying amount. For example, the depreciation of manufacturing plant and equipment is included in the costs of conversion of inventories (see the Standard of Generally Accepted Municipal Accounting Practice on Inventories).

 

Review of useful life

 

.59 The useful life of an item of property, plant and equipment shall be reviewed periodically and, if expectations are significantly different from previous estimates, the depreciation charge for the current and future periods shall be adjusted.

 

.60 During the life of an asset it may become apparent that the estimate of the useful life is inappropriate. For example, the useful life may be extended by subsequent expenditure on the asset which improves the condition of the asset beyond its most recently assessed standard of performance. Alternatively, technological changes or changes in the market for the products may reduce the useful life of the asset. In such cases, the useful life and, therefore, the depreciation rate is adjusted for the current and future periods.

 

.61 The repair and maintenance policy of the entity may also affect the useful life of an asset. The policy may result in an extension of the useful life of the asset or an increase in its residual -value. However, the adoption of such a policy does not negate the need to charge depreciation. Conversely, some assets may be poorly maintained or maintenance may be deferred indefinitely because of budgetary constraints. Where asset management policies exacerbate the wear and tear of an asset, its useful life should be reassessed and adjusted accordingly.

 

Review of depreciation method

 

.62 The depreciation method applied to property, plant and equipment shall be reviewed periodically and, if there has been a significant change in the expected pattern of economic benefits or service potential from those assets, the method shall be changed to reflect the changed pattern. When such a change in depreciation method is necessary the change shall be accounted for as a change in accounting estimate and the depreciation charge for the current and future periods shall be adjusted.

 

Recovery of the carrying amount

 

Impairment losses

 

.63 To determine whether a cash generating asset is impaired, an entity applies the International Accounting Standard on lmpairment of Assets that contains guidance on reviewing the carrying amount of assets held for generating positive cash flows, determining the recoverable amount of such assets and the recognition of impairment losses.

 

.64 In instances where a non-cash generating asset is impaired, the guidance as set out in paragraphs .66 to .68 should be followed.

 

.65 The International Accounting Standard on Business Combinations provides guidance on impairment losses recognised on cash generated assets before the end of the first annual accounting period commencing after a business combination that is an acquisition.

 

.66 The carrying amount of an item or a group of identical items of property, plant and equipment shall be reviewed periodically in order to assess whether or not the recoverable amount has declined below the carrying amount. When such a decline has occurred, the carrying amount shall be reduced to the recoverable amount. The amount of the reduction shall be recognised as an expense immediately, unless it reverses a previous revaluation in which case it shall be charged to a non-distributable reserve in accordance with paragraph .49.

 

.67 The cost or revalued amount of an item of property, plant and equipment is normally recovered on a systematic basis over the useful life of the asset. If the usefulness of an item or a group of identical items is impaired, for example by damage or technological obsolescence or other economic factors, the recoverable amount may be less than the carrying amount of the asset. In such circumstances, a write-down of the asset is necessary. A write-down may also be necessary when an item of property, plant and equipment remains idle for a considerable period either prior to it being put into use or during its useful life.

 

.68 The recoverable amount of individual assets, or group of identical assets, is determined separately and the carrying amount is reduced to recoverable amount on an individual asset, or group of identical assets, basis. However, there may be circumstances when it may not be possible to assess the recoverable amount of an asset on this basis, for example when all of the plant and equipment in a sewerage purification work is used for the same purpose. In such circumstances, the carrying amount of each of the related assets is reduced in proportion to the overall decline in recoverable amount of the smallest grouping of assets for which it is possible to make an assessment of recoverable amount.

 

Subsequent increase in recoverable amount - benchmark treatment

 

.69 A subsequent increase in the recoverable amount of an asset, dealt with in accordance with the benchmark treatment described in paragraph .66 shall be written back when the circumstances and events that led to the write-down or write-off cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future. The amount written back shall be reduced by the amount that would have been recognised as depreciation had the write-down or write-off not occurred.

 

Retirements and disposals

 

.70 An item of property, plant and equipment shall be eliminated from the statement of financial position on disposal or when the asset is permanently withdrawn from use and no future economic benefits or service potential are expected from its disposal.

 

.71 Gains or losses arising from the retirement or disposal of an item of property, plant and equipment shall be determined as the difference between estimated net disposal proceeds and the carrying amount of the assets. For the purposes of display in the financial statements, the gain or loss shall be included in the statement of financial performance as an item of revenue or expense, as appropriate.

 

.72 When an item of property, plant and equipment is exchanged for a similar asset, under the circumstances described in paragraph .33, the cost of the acquired asset is equal to the carrying amount of the asset disposed of and no gain or loss results.

 

.73 Sale and leaseback transactions are accounted for in accordance with the International Public Sector Accounting Standard on Leases.

 

.74 Property, plant and equipment that is retired from active use and held for disposal is carried at its carrying amount at the date when the asset is retired from active use. At least at each reporting date, an entity tests the asset for impairment of assets and recognises any impairment loss either in terms of the International Accounting Standard on impairment of Assets if the asset is of a cash generating nature, or in terms of paragraphs .66 to .69 if the asset is of a non-cash generating nature.

 

Disclosure

 

.75 The financial statements shall disclose, for each class of property, plant and equipment recognised in the financial statements the following:
(a) The measurement bases used for determining the gross carrying amount. When more than one basis has been used, the gross carrying amount for that basis in each category shall be disclosed,
(b) The depreciation methods used,
(c) The useful lives or the depreciation rates used,
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period, and
(e) A reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions,
(ii) disposals,
(iii) acquisitions through business combinations,
(iv) increases or decreases during the period resulting from revaluations under paragraphs .47, .48 and .49 and from impairment losses (if any) recognised or reversed directly in net assets,
(v) impairment losses (if any) recognised in the statement of financial performance during the period,
(vi) impairment losses (if any) reversed in the statement of financial performance during the period,
(vii) depreciation, and
(viii) other movements.

 

.76 The financial statements shall also disclose for each class of property, plant and equipment recognised in the financial statements:
(a) the existence and amounts of restrictions on title for property, plant and equipment pledged as security for liabilities,
(b) the accounting policy for the estimated costs of restoring the site of items of property, plant and equipment,
(c) the amount of expenditures on account of property, plant and equipment in the course of construction, and
(d) the amount of commitments for the acquisition of property, plant and equipment.

 

.77 The selection of the depreciation method and the estimation of the useful life of assets are matters of judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or depreciation rates, provides users of financial statements with information, which allows them to review the policies selected by management and enables comparisons to be made with other entities. For similar reasons, it is necessary to disclose the depreciation allocated in a period and the accumulated depreciation at the end of that period.

 

.78 An entity discloses the nature and effect of a change in an accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods in accordance with the Standard of Generally Recognised Accounting Practice on Accounting Policies, Changes in Accounting Estimates and Errors. Such disclosure may arise from changes in estimate with respect to:
(a) residual values,
(b) the estimated costs of dismantling and removing items of property, plant and equipment,
(c) useful lives, and
(d) depreciation method.

 

.79 When property is stated at revalued amounts, the following shall be disclosed:
(a) the basis used to revalue property,
(b) the effective date of the revaluation,
(c) whether an independent valuer was involved,
(d) the nature of any indices used to determine replacement cost, and
(e) the revaluation surplus, indicating the movement for the period.

 

.29 An entity discloses information on impaired property, plant and equipment under the International Accounting Standard on Impairment of Assets in addition to the information required by paragraph .75(e)(iv) to (vi).

 

.81 Financial statement users also find the following information relevant to their needs:
(a) the carrying amount of temporarily idle property, plant and equipment,
(b) the cost or fair value of any fully depreciated property, plant and equipment that is still in use,
(c) the carrying amount of property, plant and equipment retired from active use and held for disposal, and
(d) when the benchmark treatment is used, the fair value of property, plant and equipment when this is materially different to the carrying amount.

 

Therefore, entities are encouraged to disclose these amounts.

 

Transitional Provisions

 

.82 An entity that adopts accrual accounting for the first time in accordance with this Standard may initially recognise property, plant and equipment at cost or fair value. For items of property, plant and equipment that were acquired at no cost, or for a nominal cost, cost is the item’s fair value as at the date of acquisition. Any adjustment to the amount of property, plant and equipment included in the statement of financial position shall be adjusted against the opening balance of the accumulated surplus or deficit in the Statement of Changes in Net Assets.

 

.83 Where an asset that was previously recognised by the entity which does not meet the recognition criteria as determined in paragraph .10 of the Standard when applying the Standard for the first time, the asset shall be derecognised in the statement of financial position. The adjustment to the previous carrying amount shall be reported by adjusting the opening balance of the accumulated surplus or deficit.

 

.84 When applying this Standard for the first time, an entity may control assets that it has not previously recognised. When the recognition criteria as determined in paragraph .70 have been met, the asset needs to be recognised in the statement of financial position at fair value.

 

.85 When the first-time application of this Standard results in a change in accounting policy or estimate, reference shall be made to the Standard of Generally Recognised Accounting Practice on Accounting Policies, Changes in Accounting Estimates and Errors.

 

.86 Entities are not required to recognise property, plant and equipment for reporting periods beginning on a date within three years following the date of first adoption of the Standard.

 

.87 When an entity takes advantage of the transitional provision in paragraph .86, that fact should be disclosed. Information on the progress on the major classes of assets that have not been recognised by virtue of paragraph .86 should also be disclosed. When an entity takes advantage of the transitional provision in paragraph .86 for a second reporting period, details of the assets or classes of assets that were not recognised at the previous reporting date but which are now recognised should be disclosed.

 

Effective date

 

.88 This Standard of Generally Accepted Municipal Accounting Practice becomes effective for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(1)(b) of the Public Finance Management Act, (Act No. 1 of 1999) as amended.