IFRS INSIGHTS IAS 16 – Property plant and equipment - IMPACT OF ADOPTION By Gobeze Dessalegn It is known that Ethiopia has formally adopted International Financial Reporting Standards (IFRS) as its financial reporting framework. This article intends to clarify whether revaluation of Property, Plant and Equipment (PPE), customarily known as fixed assets, is mandatory or not. This is because not only of the fact that the revaluation process requires entities to incur extra costs but also, probably most importantly, because there is inconsistency and confusion among finance executives and disagreements with external auditors whether to revalue the PPEs or not. Besides, there are very few individuals qualified to conduct the revaluation process. As a result, I thought it would be apt to accentuate the quandaries related with revaluation. |
Revaluation is the positive difference between an asset's fair market value and its original cost, minus depreciation, primarily performed to reflect the current market value of the asset. This does not mean that the current market value of an asset is always necessarily greater than its carrying amount, (its cost less accumulated depreciation less any accumulated impairment). Why do we revalue assets? The purpose of a revaluation is to bring into the books the fair market value of fixed assets. This may be helpful in order to decide whether to invest in another business or to prepare one or more of business’s assets for sales negotiations. Other uses of revaluation
financial institutions by mortgaging its fixed assets;
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Is revaluation mandatory under IFRS? In IFRS, the accounting for fixed assets is covered as provided in IAS 16 ‘Property, Plant and Equipment’ (PPE). Apart from usual definition of key terminologies related with PPEs and the presentation and disclosure requirements, the standard specifies the recognition criteria and initial and subsequent measurements of PPEs. Whether to revalue PPEs or not is a question of subsequent measurement. As per IAS 16, PPEs are initially (upon recognition) measured at cost. The most common malpractice in Ethiopia, however, is the meaning we associate with ‘cost’. Most accountants in Ethiopia consider cost to be only invoice price. Yet, it goes far beyond that, including all costs that are directly attributable to the acquisition and/or construction of the asset until it is made readily available for use. It even includes certain borrowing costs and future costs of dismantling the asset and site restoration. IAS 16 permits the choice of two alternative treatments in respect of subsequent measurement of PPEs:
Hence, revaluation of PPE as per IFRS is an accounting policy choice, never mandatory. |
Choice of accounting policy Accounting policy shall be chosen not arbitrarily, not because it is simple or requires lesser cost, but because it is believed that the chosen alternative results in relevant and reliable financial information to be used by readers of the financial statements to make informed decisions. The need We revalue Property plant and equipment (PPE) in Ethiopia not because the adoption of IFRS compels us, rather because the ever sky rocketing costs of acquiring and/or constructing property, coupled with accelerated depreciation rates (to conform with the tax laws) used by most reporting entities, leaves us no option, but to revalue voluntarily (at least for major classes of PPE such as buildings, motor vehicles and machineries, if not necessarily for all) so that our financial reports will show those relevant and reliable financial information the users so desire.. |
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Conclusion Given the current market and inflation trend in Ethiopia, revaluation of land (right of use as per IFRS 16), building, motor vehicles and machinery is a practical obligation. If not done, auditors should challenge the preparers of financial statements and get reasonable assurance that the accounting policy choice is in conformity with the requirement of IAS 8 and IAS 16 Property, Plant, and equipment. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it. |
Gobeze Dessalegn Ethio–China Friendship Avenue Mina Building 5th Floor Tel: +251 115 52 76 66/67 | Mobile: +251 930 366275 Fax: +251 115 52 83 84 This email address is being protected from spambots. You need JavaScript enabled to view it. www.hstet.com |
Thomas Mulugeta Associate Director Ethio–China Friendship Ave Mina Building 5th Floor Tel: +251 115 52 76 66 | Mobile: +251 911631923 Fax: +251 115 52 83 84 This email address is being protected from spambots. You need JavaScript enabled to view it. www.hst-et.com |