This time, we discuss the comparison of the financial reporting requirements for property, plant and equipment under MPSAS 17, MFRS 116 and Section 17 of MPERS. All three standards define property, plant and equipment consistently where they are tangible items or assets that:
- Are held for use in the production or supply of goods or services, for rental to others or for administrative purposes.
- Are expected to be used during more than one reporting period.
Similar to other articles, we highlight to you significant differences in the financial reporting requirements under the three standards. If you wish to understand which entity use which financial reporting framework, head out to Financial Reporting Frameworks in Malaysia.
Let us now take a look at the differences between the three standards.
Comparison of the scope of property, plant and equipment
In term of scoping, we do not observe significant differences between the three standards except the following:
Bearer plants
Although MFRS 116 scopes out biological assets related to agricultural activities from its scope, entities account for bearer plants in accordance with the standard. In contrast, MPSAS 17 and Section 17 do not scope in bearer plant. This means, entities using MPSAS or MPERS account for their bearer plants under MPSAS 27 Agriculture and Section 34 Specialised Activities instead of this standard.
Public sector specific assets meeting definition of property, plant and equipment
MPSAS 17 further explained that the standard is applicable to specialist military equipment and infrastructure assets. These two types of assets are common in the public sector. The standard, however, does not define what is infrastructure assets. In fact, there is also no universally accepted definition of infrastructure assets.
Nevertheless, MPSAS 17 states that infrastructure assets usually display some or all of the following characteristics:
- Firstly, they are part of a system or network.
- Secondly, they are specialised in nature and do not have alternative uses.
- Thirdly, they are immovable.
- Lastly, they may be subject to constraints on disposal.
In addition, MPSAS 17 also states that it does not require or prohibit the recognition of heritage assets. However, if public sector entities recognised heritage assets, they must apply the disclosure requirements in MPSAS 17. This means public sector entities may apply the measurement requirements in MPSAS 17 for heritage assets.
Investment property
MPERS generally requires entities to measure their investment property at fair value. However, entities apply Section 17 if the fair value of investment property cannot be measured reliably without undue cost or effort on an ongoing basis. Note that this requirement is an exception. Once the fair value becomes available and is reliably measured on an ongoing basis, entities account them under Section 16 Investment Property.
Similar requirement is not available in MPSAS 17 and MFRS 116 for investment property.
Comparison of the measurement of property, plant and equipment
Let’s now understand the significant differences in the measurement of property, plant and equipment.
Initial measurement of property, plant and equipment
MPSAS 17 requires entities to initially measure property, plant and equipment at their costs. Additionally, MPSAS 17 also includes a requirement to measure a non-exchange transaction. It is also common for public sector entities to acquire an asset through a non-exchange transaction. In this situation, entities will need to measure the asset at its fair value as at the date of acquisition.
MFRS 116 and Section 17 also require entities to measure an asset at its cost on initial recognition. However, there is no non-exchange transaction requirement in MFRS 116 and Section 17. A non-exchange transaction is generally not applicable in the private sector. This is because entities in private sector conduct their business at arm’s length.
Directly attributable costs of property, plant and equipment
Currently, there are no differences on how entities account for directly attributable costs in MPSAS 17 and MFRS 116. Both standards state that the directly attributable costs include the costs of testing whether the asset is functioning properly. Entities deduct the net proceeds from selling any items produced while bringing the asset to that location and condition from the costs.
Moving forward, entities applying MFRS can no longer deduct the net proceeds against the costs of property, plant and equipment. This may also be the case for entities that early apply the amendments before its effective date. Accordingly, the amendments may cause a difference on how entities account for this cost.
Borrowing costs
We also note a significant difference on how entities treat borrowing costs related to the property, plant and equipment. To understand this, head out to our article, Borrowing Costs: Comparison between MPSAS 5, MFRS 123 and Section 25 of MPERS.
Revaluation increases and decreases of property, plant and equipment
MPSAS 17 requires entities to account for revaluation increases or decreases directly to revaluation surplus in net assets/equity, with a limitation for revaluation decrease. Unlike MPSAS 17, MFRS 116 and Section 17 require entities to recognise it in other comprehensive income and accumulated in equity. The other comprehensive income component is not available in MPSAS literature.
Interestingly, MPSAS 17 also allows entities to offset revaluation increases and decreases for individual assets against one another within that class. In contrast, MFRS 116 and Section 17 require entities to match the revaluation increases or decreases on an individual item basis.
Depreciation of property, plant and equipment
MPSAS 17 and MFRS 116 require entities to review the residual value, the useful life and the depreciation method of an asset, at least at each financial year end. Section 17, however, requires entities to review them only when there is an indication of significant changes.
Additionally, MFRS 116 explicitly states that a depreciation method based on revenue that is generated by an activity that includes the use of an asset is not appropriate. MPSAS 17 and Section 17, however, do not explicitly prohibit it.
Impairment of property, plant and equipment
All three standards require entities to assess property, plant and equipment for impairment. However, the method of assessing the recoverable amount is different in MPSAS 17. This is because MPSAS 17 requires entities to apply MPSAS 21 Impairment of Non-Cash Generating Assets for property, plant and equipment. MPSAS 21 introduces different techniques of deriving the asset’s recoverable amount.
Conclusion
The above sums up our observation on the significant differences in the financial reporting requirements for property, plant and equipment under the three standards.
We will continue to bring you comparisons for other standards in our future articles. In the meantime, you can read other relevant articles in the Financial Accounting section.