Assalamualaikum and hi everyone. This presentation is on MFRS 116, Property, Plan and Equipment and this MFRS 116 is equivalent to IAS 16 at the international level and this presentation will be divided into several parts, a part A until part E and this will be a comprehensive step-by-step lecture together with illustrative examples on accounting for PPE. Let's start. These are the lesson outcomes. The first one is that you should be able to define the property plan and equipment and then explain the recognition criteria.
Then determine the initial cost. This is not covered. The initial cost is not covered in this video.
This will be covered in the following video. General entries for the initial cost and the presentation of financial statement explaining the accounting entries for subsequent cost the presentation and disclosure in the financial statement explain the accounting treatment for the subsequent measurement subsequent measurement that will be discussed here which is cost model and revaluation model as well as we will also learn this later in the following videos following few more videos i mean which is on deprecation, accounting treatment for deprecation of course, and accounting treatment for the recognition of property, plan and equipment, stating the disclosure requirements of MFRS 116 on PPE, and also to prepare the disclosure notes showing the movement of the PPE after one particular accounting period or in our case here, Let's look at the next section, which is the start. What are the examples of PPE?
These are some of the common examples of PPE, machineries, aeroplanes, the buildings, the heavy equipment used perhaps for construction. You have this delivery truck, maybe you have also land that is used for the... whatever purpose under PPE and then this is office furniture fixtures and these are office equipment these are just some examples of PPE and if you can recall the objective of financial reporting as prescribed in the conceptual framework it is to provide information about the reporting entity that is useful to existing and potential investor and also to other creditors in making decision about providing resources to the entity.
And what we are going to do now is to link that with the information that relates to be useful relating to the company's property plan and equipment. Why information about company's PPE is useful to investor? These are some of the reasons because investor will need to decide whether to buy shares or not to buy the shares from the entity that use this PPE to generate income or to generate future economic benefits for the entity. At the same time, they also like to assess the potential return from investing into the entity and how does the entity make use of the PPE in generating more income because later income will have to be distributed. if that is a profit distributed by way of dividends.
So, this potential returns or dividends will normally depend on property plan equipment and the prospect of how it is being used to generate future cash inflow, net cash inflow for the reporting entity or for the company that is being invested by this potential investor or the existing investor. And the potential investor also need to assess the amount, the total amount, timing and also the uncertainty of this future cash inflow how long will it take to the asset for generating the income for the entity the scope of mfrs 116 now first is that we will look at what is not within the scope this is not within the scope non-current asset health for sale this is under a different mfrs mfrs MFRS 5, this is investment property not under MFRS 116 although land can be under MFRS 116 or land can be under MFRS. a 1 for 0 investment property but it depends on how it is being used. Biological asset, this is under MFRS 1 for 1. Exploration for and evaluation mineral resources is not under this MFRS.
Same as the mineral rights and mineral reserve. Before we look at whether there is an item of PPE, the most important thing is to decide on the judgment whether or not the first thing is, is there any element of the financial statement to be specific is there any element of asset is there any item of an asset does the reporting entity have an asset if to answer the question is the item is an asset is that you need to check that it can only be classified as an asset in the financial statement provided that it meets the definition of an asset and it also The case here is that the definition of asset here is definition given in the conceptual framework. What is the definition in the conceptual framework?
In the conceptual framework, the definition of asset is present economic resource controlled by the entity as a result of past event. So it's about the resources under the control of the entity as a result of a purchase or acquisition of the asset. perhaps in the past. And economic resources give the right for the entity to produce economic benefits.
So it will give the potential by having the control of a particular asset. There will be a right for the use of the asset to help producing future or potential economic benefits. These are the criteria that are being used to determine the existence of asset. That is as per the conceptual framework where the first one is about control should be there and what is under control is the economic resources and that was as a result of past event.
And then the second one is that there is a right. Either the right, the right can be right that correspond to an obligation or the right that does not correspond to an obligation. of another party.
So we'll go into that later. That was already explained in the topic, conceptual framework. You can check that video as well. And the next one is that you can only say that the asset meet the criteria under the conceptual framework if it has the potential to produce economic benefits from the use of the asset.
Let's look at the first example. Example 1. Terra Cruz owns and operates a ferry that transports passengers. So this is the function of the ferry to transport the passenger, motor vehicles and goods. And this is providing some service, providing service. So the main business operation is to provide service, ferry service, ferrying the goods, ferrying the passenger and ferrying also the motor vehicles.
1st January they purchased the asset so this is the date of purchase and that was 1000 cash. That was a new ferry. There was few more perhaps before this and they bought a new one. An entity expects that the new ferry will be able to operate for the next 20 years by before it can be scrapped.
Next, the question here is whether or not the ferry is an asset to the reporting entity Muttiara Coast. So if you refer to the definition of asset that was given in the conceptual framework, it is about present economic resources as a result of past events and it's about having a right to use the asset that will help to have a potential to produce economic benefits. Let's see how that definition is being used in this particular situation. The ferry is an asset because it meets the definition. It means a definition of asset as follows.
So the first part is to relate to the present economic resource by the entity. So it is a present economic resource. What is the economic resource here? It is the ferry. It is being controlled by the entity because the company has the discretion to provide the transportation service using the ferry.
The second one is as a result of past event. And that past event is where evidenced by the purchase of the ferry on 1st of January 2017. The third one is on the ride. The ride is here where the company has the right to use the ferry, where the ferry is a ride that gives the company expectation or the potential to collect cash inflow from the customer who use the service.
So that relates to potential economic benefits, which is as a result of the rides. Next one is on classification. After the asset has met the definition, the ferry has met the definition, the next thing is for us or for the decision is to decide is it going to fall under which particular MFRS. So which standards does the ferry or the particular asset relates to? Is the asset here the ferry for example a PPE?
Is that an item of? inventory or is it an item of biological asset right or perhaps asset held for resale or maybe an investment property so which of this so if you look at our situation this is not the case so it is likely to be a PPE but we need to give a reason why so is the asset a PPE that is the question So before we can classify, do the classification that the ferry which is the asset is a PPE, you must make sure or we must make sure that it meet the definition of property plan and equipment. The definition is being met. So when the definition is being met, let us check the definition of PPE first. What is actually a PPE?
Earlier on I showed the examples but here this is the definition. under the MFRS 116 itself that defines PPE as tangible items. Tangible items are items that has physical form. It has physical form and it also has physical, you can also say physical substance. Physical form, physical substance.
So there is the existence of this asset, physical. nature of it is there. So it should be a tangible item. If it's an intangible item, that is not a PPE. And that, according to the standard, that are held for use in production, maybe used in a factory, or, the word is or, production of goods, perhaps, supply of goods, maybe the asset is used to deliver goods, to supply goods, supply of service, like perhaps the ferry just now was to supply service.
For rental to others, let's say you have a car and car is for rental so that is also a PPE because it is a tangible item. For admin purpose, maybe the office equipment that I showed earlier that was for admin purpose and most importantly is also it fulfill that the so-called more than one period usage. So these are basically the function of the asset or the use of it. and it should fulfill the first one tangible item the second one or this any one of the five and the third one which is expected to be used for more than one year so if that fulfills that it will be a ppe let's see that these are some example of it mutiara cruise the same company just now the issue is whether or not the ferry Here, is it an item of PPE? The particular here is the same as what we have already read much earlier.
So here, if you read, the ferry is being used to transport the passenger. And of course, a ferry has tangible form. It is made of steel, made of metal. And that is the service where they provide transportation service. so the business or the principal activities of the company is to provide service ferrying service and that was purchased on 1st of january 2007 and this ferry is expected to be in operation for the next 20 years so this is more than one year more than one reporting period right so let's see whether it is a item of ppe So before we can look at that, we need to recall the definition again.
The definition says that it is a tangible item that first one is met here. And we need to go and pick up which one relates to our case. So this is the one supply of service.
As I say, it does not need to fulfill everything. It just one of it will do as long as it is a tangible item or it fulfill any of these five function or five usage. The next one is how long do we expect to use it if it's to be used for more than one period or more than one year, 10 years, 5 years, 20 years that is also an item of PPE.
So it looks like it met the definition. Let's see how things. Yes, the fairies is an item of PPE. Give the reason.
Why? The reason here is because it is a tangible item which is made of steel. Right, so this relates to the first part of the definition.
It is held for supply of service. This relates to the function of what ferry is used for, for supply of service, which is to ferry the customers, their vehicle and their goods. And the third one is that it is expected to be used for how long? Here, as long as more than one period. Here is to be used for more than one period that has a useful life of 20 years.
Next example is on this company that ordered a machine which is another PPE and that was imported from India and it was delivered on 1st August. So it's the date of delivery is where we said there is an asset and this is just the date that you purchase the order. So this is where the asset has actually been in existence. But our focus here is not to look at the asset. but we want to see whether the new machine could it be considered as a PPE.
So the estimated useful life is 10 years and the machine will be used in the production of furniture. So it is to be held in a production of a furniture, maybe a lot of different designs perhaps. So explain whether the machine is an item of PPE in accordance with MFRS 116 property plan and equipment.
So it's similar to what we have done. First thing is to always check the definition. Those three things in the definition, tangible item, the function here and also the how long it is expected to be used, more than one period. Then decide whether the machine is an item of PPE here. The reason is because it is a tangible item.
So the first one is matte and then it is made of steel, made of metal. And the second one is what it is being held for or what is the function of ferry in the business. It is held for use in production that is used to produce furniture.
So that relates to the first function that is out of the five that can be considered as PPE. The third one is it is expected to be used for more than one period and here the ferry has an estimated life of 10 years. Next one is the recognition of property, plant and equipment.
After we have classified the item property, plant and equipment, the next stage is to decide whether should we include or not those property, plant and equipment or the ferry or the machinery. in the statement of financial position. So if the asset should be included in the statement of financial position or shall we include any expenses related to the acquisition of the ferry, expenses that are not going to be capitalized but the one that is part of the expenses incurred should be included in the statement of profit or loss. So that is normally the process of inclusion of an element or item that means the definition of asset, liabilities, income, expenses and also the equity.
But in our case, our focus is on the definition of asset, whether or not should we include or not the recognition of or the classification item just now was for the PPE. shall that be included in the statement of financial position as to be reported in the financial statement. So this is actually answering the question of what is recognition.
process of including that in the statement of financial position or showing that in the financial statement the the correct financial statement recognition criteria according to mfrs 116 we are focusing on the recognition criteria under mfrs 116 because standards will normally override whatever in the conceptual framework even if the recognition criteria of an asset in the conceptual framework is not Similar here. So recognition criteria of the MFRS 116, it says that the first one shall be recognized if and only if. It means that both must be satisfied, which is it is probable that future economic benefits that is associated with the asset, the PPE, will flow to the entity.
So meaning that the asset, the PPE asset should be able to generate future economic benefits. and there will be cash inflow to the company. Second one is that the cost of the PPE, the item here is asset, can be measured reliably.
So you can estimate how much is the cost of that PPE. The next one is, this is the summary of the recognition criteria of PPE taken from the FRS box. And the recognition of PPE, so let's go into detail what is meant by it is probable that future economic benefits associated with the item will flow to the entity flow to the entity when i say flow to the entity means that it will flow into the entity and that will involve economic benefits like cash inflow to the entity by way of revenue that is as a result of production of goods in the case of the machine that was producing furniture just now.
So the management of the business would usually not purchase PPE unless it is going to be used for the future economic benefits. Meaning that they are going to purchase PPE if that can help generating the future economic benefits, the cash inflow to the company. Entities usually acquire property, plant and equipment to generate income either directly or indirectly. The office supplies, sorry, the office equipment does not directly generate income.
It generates income indirectly. However, if it's talking about machine that was used to manufacture goods for sale or machine that was used to manufacture furniture just now, that was a direct income. it can also be the indirectly for example the head office building that houses the staff who administer the building that generates the cash inflow so if that is just supplying service so the service is to whatever let's say we are providing some kind of banking service which is physical banking service so therefore we still need a building although the most of the business has been automated but somehow building is still needed to house the staff to administer the building other business to generate the cash in flow so the indirect use of the building to generate the cash inflow and under the cost can be measured reliably the second criteria the cost can be measured meaning that you can estimate how much is the cost this will be covered later under measurement but what The cost is normally related to the purchase price of the asset. And cost normally involves estimation. Let's say if you talk about construction of a bridge, for example, you may have some construction costs.
Or maybe if we talk about a retail outlet being constructed, of course, the construction cost of the retail outlet is also very important. if you decide later that that will be used as a showroom for example to market the car so the showroom is used to market whatever cars that are the business of the entity but the showroom is need to be also estimated in terms of the cost of the showroom itself the construction of the showroom that was used to as a way to market the And that will include many estimates. So there should be estimate that we include and that should be reliably measured. The next example is related to recognition. This is about FG Berhad, an auto dealer.
The company purchased a new trailer. So this is the PPE, a new trailer. And the trailer was used to deliver imported car to the customer. So maybe from the place where it is being delivered in the country and to the next destination. is using the so-called delivery trailer, maybe from the port, the port where you have it being delivered if you import the car.
This question, whether or not, describe the recognition criteria for the new trailer. Can we recognize or not the new trailer under MFRS 116? Okay, according to MFRS 116, the new trailer can be recognized as asset of the company and to be included where? In the statement of financial position under the non-current asset, under the non-current asset SPPE.
If it is probable that the future economic benefits will flow to the entity, not the one that not related to the asset, but the one associated with the item will flow to the entity. So here you can see that the new trailer was purchased to transport the imported cars to the customer. And when you transport the imported car to the customer, it will generate income for the company because later customer will buy the cars and indirectly the delivery trailer will help generating the income for the company.
of the item can be measured reliably so a company can measure the cost of the trailer reliably that has to be proven in the initial measurement but here normally there is always a price for the trailer and that has been reliably measured so the sentence that is in red here are referring to the recognition criteria as per mfrs 116 and the sentence that are still in black in this point in this answer is referring to the explanation. That's it for the first part and of part A and this is these are our references and I thank you for watching I'll see you in the next part, part B. With that bye bye and Assalamualaikum.