PPE are tangible assets held for use in service delivery, for rental, or for administrative purposes for more than one period. This includes buildings, infrastructure (roads, bridges), vehicles, and equipment.

• Recognition Criteria
  1. It is probable that future economic benefits or service potential will flow to the entity.
  2. The cost of the asset can be measured reliably.
• Initial Measurement
• • Measured at cost, which includes the purchase price plus any directly attributable costs (e.g., site preparation, installation).
  • Assets acquired through non-exchange transactions (e.g., donations) are measured at their fair value at the date of acquisition.
• Subsequent Measurement
• • Entities must choose a policy for each class of PPE:
    • Cost Model: Asset is carried at cost less accumulated depreciation and accumulated impairment losses.
    • Revaluation Model/ Current Value Model: Asset is carried at a revalued amount (its fair value) less subsequent depreciation and impairment. Revaluation increases are credited to a revaluation surplus in net assets/equity.
• Depreciation
• • The depreciable amount (cost less residual value) of an asset is allocated systematically over its useful life.
  • Depreciation begins when the asset is available for use and is recognized as an expense in the Statement of Financial Performance.
  • Land is generally not depreciated as it has an indefinite useful life.

Example: PPE Acquisition, Depreciation, and Revaluation

A County Government purchases a new administrative building on July 1, 2021, for Ksh 100,000,000. The building has an estimated useful life of 50 years and a nil residual value. The County Government uses the straight-line method for depreciation and has a policy of revaluing its buildings every three years. On June 30, 2024, the building is revalued to Ksh 105,000,000 by a professional valuer.

Step 1: Initial Recognition (July 1, 2021)

The building is initially recognized at its cost.

Journal Entry:

• Dr Property, Plant, and Equipment (Building) Ksh 100,000,000
• Cr Cash/Bank Ksh 100,000,000 (To record the acquisition of the new building)

Step 2: Annual Depreciation Calculation

The annual depreciation is calculated by allocating the cost over the building’s useful life.

• Cost: Ksh 100,000,000
• Useful Life: 50 years
• Annual Depreciation Expense: Ksh 100,000,000 / 50 years = Ksh 2,000,000

For each year ended June 30, 2022, 2023, and 2024, the following journal entry would be made: Journal Entry:

• Dr Depreciation Expense Ksh 2,000,000
• Cr Accumulated Depreciation (Building) Ksh 2,000,000 (To record annual depreciation on the building)

Step 3: Carrying Amount Before Revaluation (June 30, 2024)

Before the revaluation, we need to determine the building’s carrying amount (book value).

• Period of Depreciation: 3 years (from July 1, 2021, to June 30, 2024)
• Accumulated Depreciation: Ksh 2,000,000/year × 3 years = Ksh 6,000,000
• Carrying Amount: Cost – Accumulated Depreciation
  • Ksh 100,000,000 – Ksh 6,000,000 = Ksh 94,000,000

Step 4: Accounting for the Revaluation (June 30, 2024)

The revaluation gain is the difference between the revalued amount and the carrying amount at the date of revaluation.

• Revalued Amount: Ksh 105,000,000
• Carrying Amount: Ksh 94,000,000
• Revaluation Surplus (Gain): Ksh 105,000,000 – Ksh 94,000,000 = Ksh 11,000,000

Journal Entries for Revaluation: First, eliminate the accumulated depreciation against the cost of the asset.

1. Dr Accumulated Depreciation (Building) Ksh 6,000,000
2. Cr Property, Plant, and Equipment (Building) Ksh 6,000,000 (To eliminate accumulated depreciation)

This brings the carrying amount of the asset in the books down to Ksh 94,000,000. Next, revalue the asset up to its fair value and recognize the gain in equity.

1. Dr Property, Plant, and Equipment (Building) Ksh 11,000,000
2. Cr Revaluation Surplus (Net Assets/Equity) Ksh 11,000,000 (To record the revaluation gain on the building)

After these entries, the building is recorded on the Statement of Financial Position at its revalued amount of Ksh 105,000,000.

Step 5: Subsequent Depreciation (From July 1, 2024, onwards)

Depreciation for future years will be based on the new revalued amount and the remaining useful life.

• New Carrying Amount: Ksh 105,000,000
• Remaining Useful Life: 50 years – 3 years = 47 years
• New Annual Depreciation: Ksh 105,000,000 / 47 years = Ksh 2,234,043 (approx.)