In the second part of a series on MPERS, Ramesh Ruben Louis explores the exemptions for property, plant and equipment
This article was first published in the January 2016 Malaysia edition of Accounting and Business magazine.
The treatment of property, plant and equipment on transitioning to the Malaysian Private Entity Reporting Standards (MPERS) is one of the major concerns of preparers of financial statements of private entities as it entails a number of ways or options to account for the transitional requirements. In this article, we will explore the exemptions in accounting for property, plant and equipment at the date of transition from the existing Private Entity Reporting Standard (PERS).
Paragraph 35.10 provides the following two exemptions relating to measuring assets (which include property, plant and equipment, investment properties and intangible assets) at the date of transition:
- fair value as deemed cost
- revaluation as deemed cost.
Fair value as deemed cost
A first-time adopter may elect to measure an item of property, plant and equipment, an investment property or an intangible asset on the date of transition to MPERS at its fair value and use that fair value as its deemed cost at that date in accordance with paragraph 35.10(c). Fair value is defined as the amount at which an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction.
If an entity measures its property, plant and equipment using a cost model under the existing PERS, it can elect to use fair value as the deemed cost. In such cases, the entity would have to determine the fair value either by reference to market price or carry out a valuation using a valuer or by performing some calculations/estimations using certain valuation techniques. If an entity uses fair value as deemed cost for any items, it adjusts retained earnings and property, plant and equipment in its opening statement of financial position on the date of transition (for FYE 31 December 2016, the date of transition would be at 1 January 2015) for the effects of measuring the property, plant and equipment at its deemed cost (fair value on 1 January 2015). It is important to note that if the entity did not elect to use the exemption in paragraph 35.10(c), it would, in accordance with paragraph 35.7(c) and paragraphs 17.9-17.26, continue to state the property, plant and equipment under the cost-depreciation-impairment model in accordance with Section 17.
Revaluation as deemed cost
A first-time adopter may elect to use a previous revaluation (determined under PERS) of an item of property, plant and equipment, an investment property or an intangible asset at, or before, the date of transition to MPERS as its deemed cost at the revaluation date. This is provided in paragraph 35.10(d).
ABC’s first financial statements that conform to MPERS are presented for the year ended 31 December 2016. Those financial statements include only one year of comparative information (ie 2015). The entity’s financial statements for the year ended 31 December 2015 were presented in accordance with PERS. In accordance with its previous financial reporting framework, the entity measured its property, plant and equipment at revalued amounts (ie fair value less accumulated depreciation less impairment losses) with revaluation increases included in revaluation reserve. The entity last revalued its property, plant and equipment to fair value on 31 December 2014.
Paragraph 17.15 requires the measurement of all items of property, plant and equipment after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses. However, on the date of transition to MPERS (ie at 1 January 2015), in accordance with paragraph 35.10(d), the entity can elect to measure its property, plant and equipment at its deemed cost (ie its revalued amount (fair value) determined on 31 December 2014). Accordingly, no adjustments would be made to retained earnings at 1 January 2015 (the date of transition to MPERS) for property, plant and equipment. It must be noted, however, that if the entity did not elect to use the exemption in paragraph 35.10(d), it would, in accordance with paragraph 35.7(c) and paragraphs 17.9-17.26, adjust equity and property, plant and equipment in its opening statement of financial position on the date of transition (ie at 1 January 2015) for the effects of measuring the property, plant and equipment under the cost-depreciation-impairment model in accordance with Section 17. In other words, the property, plant and equipment would be restated to what would have been the carrying amount if revaluation effects were never recognised in the first place.
Asset revaluation reserve
As the revaluation model is no longer an available option for measuring and recognising property, plant and equipment, there are concerns relating to the revaluation reserve arising from previously revalued assets under PERS that are brought forward on the date of transition to MPERS as the deemed cost. Section 35 of the MPERS does not provide any explicit prescription on how to deal with this revaluation reserve. As such, preparers would have to refer to the treatment under the Malaysian Financial Reporting Standards (MFRS) on how to treat this reserve. Referring to MFRS for such situations is in accordance with paragraph 10.4, which states that if MPERS does not specifically address a transaction, other event or condition, an entity’s management shall use its judgement in developing and applying an appropriate accounting policy. In making this judgement, paragraph 10.6 further states that management may consider the requirements and guidance in MFRSs dealing with similar and related issues. This is applicable when the MPERS does not prescribe any requirements and guidance in dealing with similar and related issues, and the definitions, recognition criteria and in the absence of measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2, Concepts and Pervasive Principles.
Under the transition exemption of MFRS 1, First-time Adoption of Malaysian Financial Reporting Standards, any existing revaluation reserve relating to previous revaluation of property, plant and equipment (and investment property) is reclassified to retained earnings or a separate component of equity but is not described as revaluation reserve. The most likely treatment to adopt for private entities here would be to transfer the reserve to retained earnings, based on the practice of most entities during the MFRS transition.
Investment property being recognised as PPE on date of transition
Another effect of transition to MPERS would be on investment properties that could consequently impact property, plant and equipment as well. Paragraph 16.1 states that only investment property whose fair value can be measured reliably without undue cost or effort on an ongoing basis is accounted for in accordance with this section at fair value through profit or loss. All other investment property is accounted for as property, plant and equipment using the cost-depreciation- impairment model in Section 17 and remains within the scope of Section 17 unless a reliable measure of fair value becomes available and it is expected that fair value will be reliably measurable on an ongoing basis.
In accordance with this prescription, any investment property currently measured and recognised at cost (or at revaluation) under PERS that cannot be measured reliably at fair value at the date of transition and thereafter will have to be recognised and treated as property, plant and equipment under MPERS. The carrying amount (at cost or revaluation) of the investment property just before the date of transition shall be used as the opening deemed cost of the ‘now’ property, plant and equipment (paragraph 35.10(c) and 35.10(d) exemptions applies, where applicable) for MPERS.
Given the various methods/options for dealing with the transitional requirements for property, plant and equipment upon the adoption of MPERS, mainly arising because of the prohibition of using the revaluation model for recognition and measurement, preparers of MPERS-compliant financial statements have to seriously consider which option best suits their circumstances. In the event that private entities wish to continue with the revaluation model for measuring and recognising property, plant and equipment beyond 1 January 2016, adopting MFRS instead would the viable choice.
Ramesh Ruben Louis is a professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory