IAS 16 and cash flow

IAS 16: Plant, Property and Equipment

IAS 16 is standard to prescribe the accounting treatment for property, plant and equipment hence users of the financial statements can use information about an entity’s investment in its property, plant and equipment and the changes in such investment.

The principal issues in accounting for property, plant and equipment are the recognition of the assets, the determination of their carrying amounts and the depreciation charges are to be recognized.

·        Property, plant and equipment are tangible

·        Cost of an item of property, plant and equipment shall be recognized as an asset;

·        Cost of property, plant and equipment includes;

(a)   Its purchase price,

(b) Including import duties

(c) Non-refundable purchases taxes, after deducting trade Discounts and rebates.

(d) Cost incurred to bring it to the point of allocation.

·       Measurement after recognition;

Plant, property and equipment can be measured from any one of the following models.

(a) Cost model

(b)  Revaluation model

(a)  Cost Model:

Cost model is that plant, property and equipment shall be carried at its cost less accumulated depreciation and any accumulated impairment losses

(b) Revaluation Model:

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

·       Depreciation:

It  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, less its residual value.

·        The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another asset.  The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

·        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.

·       Disclosure

For each class of property, plant, and equipment, disclose: [IAS 16.73]

·         basis for measuring carrying amount

·         depreciation method(s) used

·         useful lives or depreciation rates

·         gross carrying amount and accumulated depreciation and impairment losses

STATEMENT OF CASH FLOWS

INTRODUCTION:
        Cash flow is an important consideration for all companies The statement is one of the major financial statements required for companies to provide information to investors, creditors, and other that is in compliance with generally accepted accounting principles 

PURPOSE OF THE STATEMENT:
         The objective of a statement of cash flows is to provide information about the cash receipts and cash payments of a business entity during the accounting period.

Methods of cash flow statement

• Direct Method
• Indirect Method 

Classification of Cash Flow Statement: Cash flow statement can be divided into three parts;

• Operating activities
• Investing activities 
• financing activities

Operating Activities:

The operating activities section shows the cash effects of revenue and expense transactions.

CASH RECEIPTS

• Collections from customers for sales of goods and services 
• Interest and dividends receives

CASH PAYMENTS

• Payment to suppliers of merchandise and services, Including payments to employees
• Payment of interest
• Payments of income taxes

Investing Activities:

Cash flows relating to investing activities present the cash effects of transactions involving plant assets, intangible assets, and investments .
CASH RECEIPTS

• Cash proceeds form selling investment and plant and intangible assets
• Cash proceeds from collecting principal amounts on loans 

CASH PAYMENTS

•  Payments to acquire investments and plant and intangible assets
• Amounts advanced to borrowers

Financing Activities

Cash flows classified as financing activities include the following items that result from debt and equity financing transactions.

CASH RECEIPTS

• Proceeds from both short term and long term borrowing 
• cash received from owners

CASH PAYMENTS

• Repayment of amounts borrowed 
• Payments to owners such as cash dividends