04 May 2020
The recognition and measurement of existing, or additions to, property, plant and equipment may be significantly affected by changes resulting from coronavirus. This could include changes to strategy, decreases in expected future cash flows or costs incurred as result of delays to the development or manufacture of assets.
What does FRS 102 say?
FRS 102 (section 17) states that the recognition criteria for property, plant and equipment tangible assets is:
- it is probable that future economic benefits associated with the item with flow to the entity; and
- the cost of the item can be measured reliably.
Upon initial recognition, assets must be recognised at cost which includes legal fees, costs associated with bringing the asset to the location and condition necessary to be used by the business, costs associated with dismantling, and any borrowing costs that can be capitalised.
An entity has a choice as to whether to capitalise borrowings costs (section 25). Only those costs that are directly attributable to the asset can be capitalised (ie costs that would not have been incurred if the expenditure on the asset had not been made). The entity should:
- capitalise borrowing costs as part of the cost of a qualifying asset from the point when it:
- first incurs both expenditure on the asset and borrowing costs;
- and undertakes activities necessary to prepare the asset for its intended use or sale;
- suspend capitalisation during extended periods where active development of the asset has paused; and
- cease capitalisation when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
FRS 102 (paragraph 17.15) explains that entities have a choice to subsequently measure the property, plant and equipment recognised using either the cost or revaluation model.
Under the cost model the asset is measured at cost less accumulated impairment losses.
Under the revaluation model, the property, plant and equipment should be measured at the fair value at the date of revaluation less any subsequent depreciation and impairment losses.
- Any increases in an assets value as a result of a revaluation is taken to other comprehensive income and accumulated in equity.
- Any decrease in an asset’s valuation is firstly taken to other comprehensive income to reverse previously recognised gains. To the extent that the devaluation exceeds previous revaluation gains, the excess shall be recognised in profit or loss.
Practical impact and interpretation for preparers
- The requirement for future economic benefits to flow to the entity may now mean that some costs do not meet the recognition criteria to be capitalised as property, plant and equipment.
- Where assets have been purchased for a revenue stream or branch of the business that is being discontinued as a result of coronavirus, the entity will need to consider the treatment of the assets recognised for that specific stream or business.
- Under FRS 102, a decision to sell an asset on to a third party does not require a transfer from non-current to current assets, even if it is being actively marketed for sale. Instead, the asset should remain in fixed assets, but the decision to dispose of the asset is an indicator of impairment.
- The impact of coronavirus may mean that there are reductions to the useful lives or residual values of assets. As a result, accelerated depreciation is required to be taken to the P&L.
- Where an entity has a policy of capitalising borrowing costs, any delays to the development of an asset may mean that the capitalisation of borrowing costs may need to be suspended and instead expensed to the P&L.
- Entities should review their internal processes for capitalising asset purchases to ensure that only costs meeting the recognition criteria are capitalised as property, plant and equipment, including the capitalisation of borrowing costs. The costs of bringing the asset to the location and condition necessary to be used by the business may be greater than originally forecast if the impact of coronavirus has caused delays to the asset manufacture process.
- Where entities hold assets under the revaluation model, they should ensure that they have complete records of the historic gains recognised in other comprehensive income so that impairment losses can be correctly used to reduce the revaluation reserve in the first instance.
- Entities should review the useful lives and residual values attributed to any tangible assets to ensure that they remain appropriate in light of the current economic environment.