Guide to International Financial Reporting Standards in Canada IAS 16 Property, Plant and Equipment

Transcription

1 Canadian SerieS Guide to International Financial Reporting Standards in Canada IAS 16 Property, Plant and Equipment Irene Wiecek, FCPA, FCA Martha Dunlop, FCPA, FCA Jane Bowen, FCPA, FCA primary editor: Alex Fisher, CPA, CA June 2013 FINANCIAL REPORTING

2

3 Canadian Series Guide to International Financial Reporting Standards in Canada IAS 16 Property, Plant and Equipment Irene Wiecek, FCPA, FCA Martha Dunlop, FCPA, FCA Jane Bowen, FCPA, FCA primary editor: Alex Fisher, CPA, CA June 2013

4

5 IAS 16 Property, Plant and Equipment iii Table of Contents Preface 1 Research Resources 4 Notice to Readers 4 Introduction to IAS 16 5 Standards Update 6 IASB 6 Methods of Depreciation and Amortization 6 Bearer Biological Assets 6 Annual Improvements 7 IFRIC 7 Key Standards Referred to in This Publication 8 IAS 16 Definitions 9 Overview of Key Requirements 10 Analysis of Relevant Issues 12 Scope 12 Recognition of Initial and Subsequent Costs 14 Items Acquired for Safety or Environmental Reasons 14 Spare Parts, Standby Equipment and Servicing Equipment 15 Subsequent Costs 15 Measurement at Recognition 17 Costs of a Self-Constructed Asset 18 Borrowing Costs 19 Cessation of Cost Recognition 20 Income and Related Expenses of Incidental Operations 20 Assets Acquired Using Government Grants 21 Assets Held under a Finance Lease 21 Non-Monetary Transactions 21 Transfers of Assets from Customers [IFRIC 18] 22 Subsequent Measurement 24 Cost Model 24 Revaluation Model 24 June 2013

6 iv Guide to International Financial Reporting in Canada Costs of Dismantling, Removal and Site Restoration (Decommissioning Costs) and Changes to These Costs 31 Depreciation 33 Component Accounting 34 Residual Value 36 Useful Life 36 Depreciation Start Date 39 Depreciation End Date 40 Depreciation Method 40 Impairment and Compensation for Impairment 43 Compensation for Impairment 44 Derecognition of PP&E 44 Disclosure 46 Accounting Policy Choices 50 Significant Judgments and Estimates 53 Appendix A Acronyms Used 55 List of Extracts Extract 1 Excerpt from The Brick Ltd Financial Statements Note 3 Significant Accounting Policies 13 Extract 2 Excerpt from Sherritt International Corporation 2012 Financial Statements Note 2 Summary of Significant Accounting Policies 15 Extract 3 Excerpt from Air Canada 2012 Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies 16 Extract 4 Excerpt from Saskatchewan Transportation Company 2012 Financial Statements Note 4 Significant Accounting Policies 16 Extract 5 Excerpt from Bombardier Inc Financial Statements Note 2 Summary of Significant Accounting Policies 17

7 Table of Contents v Extract 6 Excerpt from Rogers Communications Inc Financial Statements Note 2 Significant Accounting Policies 19 Extract 7 Excerpt from Potash Corporation of Saskatchewan Inc Financial Statements Note 5 Property, Plant and Equipment 20 Extract 8 Excerpt from Cenovus Energy Inc Financial Statements Note 3 Summary of Significant Accounting Policies 21 Extract 9 Excerpt from the Great Canadian Gaming Corporation 2012 Financial Statements Note 3 Critical Accounting Estimates and Judgments 22 Extract 10 Excerpt from The Brick Ltd Financial Statements Note 3 Significant Accounting Policies 24 Extract 11 Excerpt from Husky Energy Inc Financial Statements Note 3 Significant Accounting Policies 33 Extract 12 Excerpt from Air Canada 2012 Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies 35 Extract 13 Excerpt from Westjet Airlines Ltd Financial Statements Note 1 Statement of Significant Accounting Policies 36 Extract 14 Excerpt from Newalta Corporation 2012 Financial Statements Note 2 Significant Accounting Policies 37 Extract 15 Excerpt from Sears Canada Inc Financial Statements Note 2 Significant Accounting Policies 43 Extract 16 Excerpt from Royal Bank of Canada 2012 Financial Statements Note 2 Summary of Significant Accounting Policies, Estimates and Judgments 43 Extract 17 Excerpt from Shoppers Drug Mart Corporation 2012 Financial Statements Note 3 Significant Accounting Policies 45 Extract 18 Excerpt from Telus Corporation 2012 Financial Statements Note 15 Property, Plant and Equipment 50 Extract 19 Excerpt from Enerflex Ltd Financial Statements Note 4 Significant Accounting Estimates and Judgments 54 June 2013

8 vi Guide to International Financial Reporting in Canada List of Illustrations Illustration 1 Included and Excluded Costs of PP&E 17 Illustration 2 Application of the Revaluation Model 25 Illustration 3 Recognition of Revaluation Changes 28 Illustration 4 IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 32 Illustration 5 Determining the Expected Useful Life of an Item of PP&E 37 Illustration 6 Summary of Some IAS 16 Disclosure Requirements 46 Illustration 7 Some Significant Judgments and Sources of Estimation Uncertainty Under IAS 16 53

9 1 IAS 16 Property, Plant and Equipment Preface This publication is part of the Guide to International Financial Reporting Standards in Canada series published by the Chartered Professional Accountants of Canada (CPA Canada) to support its members. The objective of this publication, IAS 16 Property, Plant and Equipment, is to help you understand IAS 16 and the IASB material that accompanies it. The publication begins with an introduction and standards update and then includes definitions, an overview chart, an analysis section, a section on accounting policies and one on significant judgments and estimates. Every attempt has been made to use plain language and to avoid mere restatement of the IFRS standards although, where deemed necessary, specific wording from the standards is referred to. This publication has been carefully prepared, but it necessarily contains information in summarized form and is, therefore, intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. The overview section takes a high-level look at the key requirements of the standard in a chart format (the Overview chart). Specific touchstone references to IAS 16 are included in the Overview chart to help you navigate the standard. These are not meant to be comprehensive references, rather a June 2013

10 2 Guide to International Financial Reporting in Canada starting point for your research. The Analysis section analyzes the more complex areas of the standard in more depth. Note that, where parts of the standard are more straightforward, they are included in the Overview chart only as it is felt that this coverage is at a sufficient level. Illustrations, examples and extracts have been used to explain a particular concept and/or provide insight into how the standard is applied. Financial statement note extracts have been selected to illustrate a particular point but do not necessarily represent best practices. Several features have been included to enhance understanding as follows: 1. Illustrations, including the following: charts decision trees summaries These illustrations add value by summarizing, grouping, highlighting similarities/differences and working through decision processes in applying the standard. 2. Examples IASB Illustrative Examples excerpts IASB examples excerpted from the standard other examples These examples add value by showing how a particular part of the standard might be applied in a specific situation. Note that IAS 16 does not include any illustrative examples and therefore the examples included in this publication are not authoritative. 3. Extracts from the IASB standards, including the following: definitions select quotes Even though every attempt has been made to use plain language, in some cases, it has been important to use the specific wording in the standard to get a point across. 4. Extracts from financial statements financial statements of prominent Canadian companies have been selected, including those that were recipients of the CPA Canada Corporate Reporting Awards. The report on the Corporate Reporting Awards, including a list of winners, may be found at The extracts included illustrate a particular aspect. It may be useful to review the complete note, which may be found at

11 IAS 16 Property, Plant and Equipment 3 5. Non-IFRS Interpretations Committee insights Items discussed but not taken to the IASB agenda, referred to as NIFRICs (Non-IFRICs), have been included because, in some cases, they provide insights into the standard setting decision processes. 6. IFRS Discussion Group (IDG) insights references to IDG discussions. The IDG was established by the Canadian Accounting Standards Board (AcSB) in Its aim is to provide a public forum for the discussion of issues relating to IFRSs and to collect the views of Canadians experiencing issues in implementing IFRSs. These discussions are not meant to provide authoritative guidance; however, they do help clarify issues and allow interested parties to learn how others are working through their financial reporting issues and applying judgment in the application of IFRSs. These have been drawn from the publically available reports of the IDG meetings. The IDG s meetings are recorded and audio webcasts are archived on the AcSB website ( Discussants include preparers, practitioners, regulators and users of financial statements. 7. References to other relevant CPA Canada material. 8. This publication is part of a series with various publication dates. The dates have been noted on each publication. Where necessary, icons have been used throughout the publication to refer to many of these features so the reader can easily distinguish the sources of the information. Insight Viewpoints E xa mple Application insights explain, discuss and/or debate a particular IFRS application issue. Application insights include: NIFRICs (Non-IFRICs) IFRS Discussion Group reports Viewpoints refer to the Viewpoints: Applying IFRSs in the Mining Industry or the Viewpoints: Applying IFRSs in the Oil and Gas Industry a series of papers that addresses specific IFRS application issues. Examples illustrate how a particular part of an IFRS might be applied in a specific situation. June 2013

12 4 Guide to International Financial Reporting in Canada Statistics Statistics on particular IFRS application practices highlight common practices and/or application approaches. Resources Resources include references to other relevant CPA Canada material. Research Resources CPA Canada has compiled various IFRS technical summaries, practical application guides and frequently-asked-question documents aimed at supporting the understanding and application of IFRSs. For more information on IFRSs visit our website. Notice to Readers The Research, Guidance and Support Group of the Chartered Professional Accountants of Canada (CPA Canada) commissioned this publication as part of its continuing research program. The views and conclusions expressed in this publication are those of the authors. They have not been adopted, endorsed, approved or otherwise acted upon by a Board or Committee of CPA Canada or any Provincial Institute / Ordre. CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.

13 IAS 16 Property, Plant and Equipment 5 Introduction to IAS 16 IAS 16 prescribes the accounting treatment for property, plant and equipment (PP&E) held for use in the production or supply of goods or services, for rental to others or for administrative purposes, that are expected to be used for more than one period. IAS 16 allows an accounting policy choice for PP&E: items may be carried at cost or at a revalued amount. IAS 16 provides guidance on what may, and what may not, be considered PP&E, the recognition and measurement of initial and subsequent costs and the derecognition of an item of PP&E. IAS 16 includes a Basis for Conclusions document that summarizes the International Accounting Standards Board s (IASB) considerations and conclusions in the development of this standard. IAS 16 does not include any illustrative examples. The costs to dismantle, remove and restore items of PP&E are included in the carrying amount of the asset. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, provides guidance on accounting for the effect of changes in the measurement of existing decommissioning liabilities and discusses the related impact on PP&E. IFRIC 18 Transfers of Assets from Customers, applies to the accounting for transfers of items of PP&E by entities that receive such transfers from their customers. This IFRIC provides guidance on the recognition and measurement of such asset transfers. This publication is based on the requirements of IFRS standards and interpretations for annual periods beginning January 1, Where appropriate, for illustration purposes, certain note-disclosure examples are presented from financial statements with annual periods ending before January 1, This publication has not been updated since the publication date of June Readers are cautioned that certain aspects of IFRSs may have changed since the publication date. June 2013

14 6 Guide to International Financial Reporting in Canada Standards Update IASB Methods of Depreciation and Amortization In December 2012, the IASB issued an Exposure Draft (ED), Clarification of Acceptable Methods of Depreciation and Amortization (Proposed Amendments to IAS 16 and IAS 38), based on a submission from the IFRS Interpretations Committee. IAS requires the depreciation method to reflect the pattern in which an asset s future economic benefits are expected to be consumed. The proposed revisions are intended to clarify that revenue-based methods are not acceptable methods of depreciating or amortizing an item of PP&E or an intangible asset. This is because a revenue-based method reflects the economic benefits being generated from an asset rather than the expected pattern of consumption of the asset. The proposed amendment also provides further guidance on the application of the diminishing balance method of depreciation. This proposed guidance clarifies that information about technical or commercial obsolescence of the output of the asset (product or service) is relevant for estimating the pattern of consumption of future economic benefits and the useful life of the asset. As an example, the ED notes that an expected future reduction in the unit selling price of the output, as a result of technical or commercial obsolescence, could be an indication of the diminution of the future economic benefits of the asset. The comment period on this ED closed April 2, 2013, and the expected completion date is the fourth quarter of Bearer Biological Assets The IASB has a limited-scope project to amend IAS 41 to address bearer biological assets (e.g., grapevines, dairy cows, etc.). These assets are accounted for under IAS 41 at fair value less costs to sell based on the principle that the transformation of bearer biological assets is best reflected by fair value measurement. The counter argument is that mature bearer biological assets are not going through biological transformation and, as such, are similar to manufacturing assets and should be accounted for under IAS 16. This project will focus on measurement of bearer biological assets that are plants. This ED was issued on June 26, 2013, and was available for comment until October 28, 2013.

15 IAS 16 Property, Plant and Equipment 7 Annual Improvements cycle (ED issued May 2012) The IASB proposes an amendment to IAS 16 to address concerns about the computation of accumulated depreciation at the date of a revaluation of PP&E for entities that apply the revaluation method to account for PP&E. The concern stems from differing practices in computing accumulated depreciation for a revalued item where the residual value, the useful life or the depreciation method is re-estimated before a revaluation. When an item of PP&E is revalued, IAS 16 currently allows entities a choice to (1) restate accumulated depreciation proportionately with the change in the gross carrying amount of the asset, or (2) eliminate accumulated depreciation against the gross carrying amount of the asset. A problem arises with the use of method (1) if the residual value, useful life or depreciation method is reestimated before a revaluation adjustment. In these situations, the restatement of accumulated depreciation proportionately would not result in the carrying amount of the asset being equal to the revalued asset amount less the revalued accumulated depreciation. The proposed amendment to IAS 16 (and IAS 38) would state that the accumulated depreciation is computed as the difference between the gross and net carrying amounts. The proposed amendment would also clarify that the determination of accumulated depreciation does not depend on the selection of the valuation technique. A similar amendment is proposed in IAS 38 for intangible assets measured using the revaluation model. It is expected that this amendment will be approved and issued in the fourth quarter of 2013 and will be effective for annual periods beginning on or after January 1, 2014, with early adoption permitted. IFRIC The Interpretations Committee received a request to address an issue related to contractual arrangements within the scope of IFRIC 12, Service Concession Arrangements. This request is to clarify in what circumstances contractual payments made by an operator under a service concession arrangement should: 1. be included in the measurement of an asset and liability at the start of the concession; or 2. be accounted for as executory in nature (i.e., be recognized as expenses as incurred over the term of the concession arrangement). June 2013

16 8 Guide to International Financial Reporting in Canada At the January 2013 meeting, the Interpretations Committee tentatively decided to recommend that the IASB amend IAS 16 to require the adjustments of the carrying amount of a financial liability, other than those adjustments for finance costs not eligible for capitalization in accordance with IAS 23, be recognized as corresponding adjustments to the cost of the asset to the extent that IAS 16 or IAS 38 requires them. The Interpretations Committee also decided to propose amendments to IFRIC 12. Key Standards Referred to in This Publication The following is a list of standards mentioned in this publication. Names of the standards have been included for the sake of clarity. The standards have been separated into two groups for purposes of this list primary and secondary. The primary standards are the main standards that deal with the topic under discussion (in this publication property, plant and equipment). The secondary standards are those referred to in this publication but not discussed in depth. Primary standards: IAS 16 Property, Plant and Equipment IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 18 Transfers of Assets from Customers Secondary standards: IFRS 2 Share-based Payments IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 13 Fair Value Measurement IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 8 Accounting Policies, Changes in Estimates and Errors IAS 12 Income Taxes IAS 17 Leases IAS 18 Revenue IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 23 Borrowing Costs IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 40 Investment Property IAS 41 Agriculture IFRIC 12 Service Concession Arrangements

17 IAS 16 Property, Plant and Equipment 9 Subsequently, only the standard number will be referenced, not the name (e.g., IAS 36). IAS 16 Definitions [IAS 16.6] These definitions were taken directly from IAS 16. Carrying amount Cost Depreciable amount Depreciation Entity-specific value Fair value Impairment loss Property, plant and equipment Recoverable amount Residual amount Useful life Carrying amount is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other IFRSs (e.g., IFRS 2 Share-based Payment). Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Entity-specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.) An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Property, plant and equipment are tangible items that: 1. are held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and 2. are expected to be used during more than one period. Recoverable amount is the higher of an asset s fair value less costs to sell and its value in use (VIU). 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. Useful life is: 1. the period over which an asset is expected to be available for use by an entity; or 2. the number of production or similar units expected to be obtained from the asset by an entity. June 2013

18 10 Guide to International Financial Reporting in Canada Overview of Key Requirements The following chart provides a high-level overview of the key requirements of IAS 16 and accompanying IASB support materials. The intent is not to repeat the standard but to walk the reader through the main requirements in the standard and identify the areas where detailed guidance is given and where complexity in application exists. Areas of greater complexity will be covered in more detail under the Analysis section of this publication. As mentioned in the Preface, specific touchstone references to IAS 16 have been inserted to help the reader navigate the standard. The referencing is not meant to be all-inclusive but rather to give a starting point for further research in the standard itself. KEY REQUIREMENTS OF IAS 16 Scope IAS Assets Included within the Scope of IAS 16 PP&E, including assets that are carried at revalued amounts PP&E used to develop or maintain the assets shown as excluded from the scope of IAS 16 measurement of investment property (IAS 40) accounted for using the cost model finance leases from the lessee perspective (other than the recognition criteria, which are included in IAS 17) Assets Excluded from the Scope of IAS 16 PP&E, classified as held for sale (IFRS 5) PP&E where another standard requires or permits a different accounting treatment (e.g., investment property (IAS 40)) intangible assets (IAS 38) biological assets related to agricultural activity (e.g., vines used to grow grapes (IAS 41)) recognition and measurement of exploration and evaluation assets (IFRS 6) mineral rights and mineral reserves (e.g., oil and natural gas) Recognition IAS General recognition criteria: 1. must be probable that an item of PP&E s future economic benefits will flow to the entity; and 2. the item of PP&E s cost can be measured reliably. Items acquired for safety and environmental reasons, certain spare parts, standby equipment, servicing equipment and major inspection costs are recognized as they enable an entity to obtain future economic benefits from other assets. Measurement at recognition IAS An entity considers the IAS 16 recognition criteria for all PP&E costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of PP&E and costs incurred subsequently to add to or replace part of PP&E. An item of PP&E should be recognized at cost, which is the amount of cash or cash equivalents paid, or the fair value of other consideration given, to acquire an asset at the time of its acquisition or construction. There are specific elements to consider when assessing what contributes to the cost of an item of PP&E, particularly when such an item is self-constructed rather than acquired. IAS 16 provides guidance as to what cost elements should be included and those that should be excluded from the cost determination.

19 IAS 16 Property, Plant and Equipment 11 KEY REQUIREMENTS OF IAS 16 Measurement at recognition IAS (continued) IAS 16 provides specific guidance for revenue from incidental operations, self-constructed assets, non-monetary asset exchanges and costs of dismantling, removal and site restoration. Other cost consideration issues included in the analysis section of this publication include: borrowing costs; assets acquired using government grants; and assets transferred from customers. A subsequent expenditure on an asset is not capitalized if it is not probable that it will create future economic benefit. The costs of day-to-day servicing of an item (i.e., repairs and maintenance) are recognized in profit and loss as incurred. Measurement after recognition IAS Choice of two accounting policies by class of PP&E: cost model; or revaluation model. Significant guidance is provided for the application of the revaluation model, including: when it can be used; determining asset classes; frequency of revaluations; and recognition of revaluation increases and decreases. Each part of PP&E that is significant to the overall cost of an item should be separately depreciated, regardless of the accounting policy choice to measure PP&E using the cost model or the revaluation model after recognition. Depreciation is determined using the cost of an asset less its residual value over the estimated useful life of the asset. Entities need to review, at least at each annual reporting date, the residual values of their PP&E assets, their estimated useful lives and the depreciation method used. IAS 16 provides guidance on: when depreciation of an asset begins; how to determine an asset s useful life; depreciation methods; and where depreciation is recognized. An entity applies IAS 36 to determine whether an item of PP&E is impaired. Derecognition IAS The carrying amount of a PP&E item should be derecognized: 1. on disposal; or 2. when no future economic benefits are expected from its use or disposal. The carrying amount of a replaced part should be derecognized upon replacement. Disclosure IAS Extensive disclosure requirements exist for each class of PP&E, including: 1. a reconciliation of the carrying amount at the beginning and end of the period (including additions, write-downs and depreciation); 2. the measurement basis for each class of PP&E (cost or revaluation); 3. the depreciation methods used; 4. the useful lives or depreciation rate used; and 5. specific information when the revaluation method is used. June 2013

20 12 Guide to International Financial Reporting in Canada Analysis of Relevant Issues This section expands on certain areas of greater complexity and/or areas requiring significant judgment. Scope [IAS ] Several other standards may be used in conjunction with, or in lieu of, IAS 16 to recognize and measure PP&E. IAS 16 does not apply to investment property such as land and buildings used to earn rental income or held for capital appreciation purposes. Instead, the provisions of IAS 40 apply. The IAS 16 cost model is relevant in circumstances where this policy is chosen for subsequent measurement of investment properties. The following examples look at the relationship between IAS 16 and IAS 40. Application ExampleS Relationship between IAS 16 and IAS 40 E xa mple Company ABC is in the manufacturing business and owns several plants (buildings and related machinery) across the country. Company ABC uses each of these plants to make products that will ultimately be sold to generate revenue. These plants are not considered investment property as they are used in the production or supply of goods or services sold in the ordinary course of business. As such, they are recognized under IAS 16 using the requirements in this publication. E xa mple Company DEF is in the real estate business and has invested in several buildings in many cities across the country. Company DEF derives its revenue from rental income and would recognize a capital gain or loss from the sale of these buildings. These buildings are considered investment property because they are held to earn rentals and for capital appreciation purposes. As such, they are recognized under IAS 40. Under this standard, Company DEF may choose to measure the buildings after recognition by using either the fair value model or the cost model. Should it choose the cost model, the requirements of IAS 16 would apply.

21 establish the asset in working condition given its intended use. Cost also includes expenditures for dismantling and removing items and restoring the site on which they were located, and borrowing costs on qualifying assets. Purchased software and costs directly related to the purchase and installation of such software are capitalized as IAS a component 16 Property, of related Plant equipment and Equipment when the software is integral to its functionality. Software that is not considered integral to the functionality of equipment is classified as an intangible asset. 13 When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by Extract comparing 1 Excerpt the proceeds from from The disposal Brick with Ltd. the carrying 2012 Financial amount of property, Statements plant and equipment and are recognized within other income (expense) on the consolidated statements of Note 3 comprehensive Significant income. Accounting Policies 3.9 Property, plant and equipment (in part) Reclassification to investment property Property, plant and equipment are used in the ordinary course of business in the production or supply of goods or services or for administrative purposes. Investment property is property held to earn rental revenue or for capital appreciation or both. When the use of a property changes from use in the business to investment property, the property s cost and accumulated depreciation is reclassified from property, plant and equipment to investment property. 24 The following insight looks at accounting for the right to use land as to whether IAS 16, IAS 17 or IAS 38 applies. Application Insights Purchase of right to use land Source NIFRIC Meeting Date September 2012 The following insights were obtained from IFRIC items not taken onto the agenda report. Insight Issue In January 2012, the Interpretations Committee received a request to clarify whether the purchase of a right to use land should be accounted for as a: purchase of property, plant and equipment; purchase of an intangible asset; or lease of land. In the fact pattern submitted, the laws and regulations in the jurisdiction concerned do not permit entities to own freehold title to land. Instead, entities can purchase the right to exploit or build on land. According to the submitter, there is diversity in practice in the jurisdiction on how to account for a land right. Reason for not adding to the IFRIC agenda The Interpretations Committee identified characteristics of a lease in the fact pattern considered, in accordance with the definition of a lease as defined in IAS 17. The Interpretations Committee noted that a lease could be indefinite via extensions or renewals and, therefore, the existence of an indefinite period does not prevent the right to use from qualifying as a lease in accordance with IAS 17. The Interpretations Committee also noted that the lessee has the option to renew the right and that the useful life for depreciation purposes might include renewal periods. Judgement will need to be applied in making the assessment of the appropriate length of the depreciation period. The Interpretations Committee, notwithstanding the preceding observations, noted that the particular fact pattern is specific to one jurisdiction. Consequently, the Interpretations Committee decided not to take this issue onto its agenda. Details of the issues that have been considered by the IFRIC but not added to its agenda are available online at June 2013

22 14 Guide to International Financial Reporting in Canada Recognition of Initial and Subsequent Costs [IAS ] IAS 16 does not specifically address what items constitute PP&E but provides general recognition guidance. The costs of an item of PP&E are capitalized only if: 1. it is probable that future economic benefits from the item will flow to the entity; and 2. the cost can be reliably measured. The recognition criteria are based on the IASB s Conceptual Framework for Financial Reporting. Judgment may be required to determine whether particular costs qualify for recognition as PP&E in certain circumstances, some of which are outlined in the following sub-sections. Items Acquired for Safety or Environmental Reasons [IAS 16.11] IAS 16 provides specific guidance for PP&E acquired for safety or environmental reasons. A distinction is made for such PP&E because these assets generally do not have a direct impact on increasing the future economic benefits of any existing piece of PP&E. They may, however, allow an entity to obtain future economic benefits from its other assets in excess of what it might have derived had it not acquired the safety or environmental PP&E. Application Example Items acquired for safety or environmental reasons E xa mple Company ABC operates in the pharmaceutical industry. To run its plants it must abide by several environmental and chemical safety standards. To do so the company has hired several engineers to develop specific processes that will ensure compliance. It has also acquired specified quality control and monitoring equipment. This equipment is not necessary for the production of goods and services, yet it is important for ensuring compliance with the environmental and chemical safety standards. The process development costs, as well as the equipment, are capitalized under IAS 16.

23 IAS 16 Property, Plant and Equipment 15 Spare Parts, Standby Equipment and Servicing Equipment [IAS 16.8] Items such as spare parts, standby equipment and servicing equipment are recognized as PP&E when they meet the definition of PP&E. Otherwise, such items are classified as inventory. 2.8 Property, plant and equipment Property, plant and equipment include capitalized development and pre-production expenditures that are recorded at cost less Extract 2 Excerpt from Sherritt International Corporation 2012 accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Also included in the cost of property, plant and equipment are borrowing costs on qualifying capital Financial Statements projects. These are incurred while construction is in progress and before the commencement of commercial production. Once Note 2 Summary of Significant Accounting Policies construction of an asset is substantially complete and the asset is ready for its intended use, the costs are depreciated. 2.8 Plant, Property, equipment plant and land equipment (in part) Plant, equipment and land includes assets under construction, equipment and processing, refining, power generation and other Plant, equipment and land (in part) manufacturing facilities. The Corporation recognizes major long-term spare parts and standby equipment as plant, equipment and land when the parts and equipment are significant and are expected to be used over a period greater than a year, or when the parts and equipment can be used only in connection with an item of plant, equipment and land. Major inspections and overhauls required at regular intervals over the useful life of an item of plant, equipment and land are recognized in the carrying amount of the related item if Subsequent Costs the inspection or overhaul provides benefit exceeding one year. Plant and equipment are depreciated using the straight-line method based on estimated useful lives, once the assets are available Repairs and Maintenance for use. Plant and equipment may have components with different useful lives. Depreciation is calculated based on each individual component s useful life. New components are capitalized to the extent that they meet the recognition criteria of an [IAS 16.12] asset. The carrying amount of the replaced component is derecognized, and any gain/loss is included in net earnings (loss). If the carrying amount of the replaced component is not known, it is estimated based on the cost of the new component less estimated depreciation. The useful lives of the Corporation s plant and equipment are as follows: IAS 16 applies the general recognition criteria to subsequent costs incurred to Buildings and refineries Machinery and equipment Office equipment Fixtures and fittings Assets under construction Mining properties 5 to 40 years 5 to 50 years 3 to 35 years 3 to 35 years not depreciated during development period add to or service a previously recognized PP&E item. A subsequent expenditure on an asset is capitalized only when it is probable that it will create future economic benefit. The costs of day-to-day servicing of an item are described as being required for the repair and maintenance of an item of PP&E and these Mining properties include acquisition costs and development costs related to mines in production, properties under development costs are recognized in profit and loss as incurred. and properties held for future development. Ongoing pre-development costs relating to properties held for future development are expensed as incurred, including property carrying costs, drilling and other exploration costs. Once a project is determined to be commercially viable, development costs are capitalized. Development costs incurred to access reserves at producing Replacement Parts properties and properties under development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves. Reserves are measured based on proven and probable reserves. [IAS 16.13] Oil and gas properties Oil and gas properties include acquisition costs and development costs related to properties in production, under development Costs incurred subsequently in order to add to, replace part of, or service an and held for future development. Ongoing pre-development costs relating to properties held for future development are capitalized as incurred, including exploration costs. Development costs incurred to access reserves at producing properties and item are capitalized if they meet the recognition criteria. In such cases, the properties under development are capitalized and are depreciated on a unit-of-production basis over the life of such reserves. standard Reserves are requires measured based an onentity proven andto probable derecognize reserves. the carrying amount of the part that Derecognition has been replaced. This applies whether or not the replaced item has been An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to separately identified and depreciated since acquisition. If the carrying amount arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference of the between replaced the net disposal part proceeds cannot and the carrying be identified, amount of the item) the is included cost inof netthe earnings replacement, (loss) in the period thesuitably item is derecognized. depreciated, can be used to estimate the carrying amount of the part being Capitalization of borrowing costs replaced and derecognized. Borrowing costs on funds directly attributable to finance the acquisition, construction or production of a qualifying asset are capitalized until such time as substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. A qualifying asset is one that takes a substantial period of time to prepare the asset for its intended use. Where money borrowed specifically to finance a project is invested to earn interest income, the income generated is also capitalized to reduce the total capitalized borrowing costs. Sherritt International Corporation 13 June 2013

24 accounts option award relating is expensed to Air Canada on the Vacations grant date. credit For card a stock booking option transactions, award attributable recorded under to an Current employee liabilities, who will for become certain travel eligible related to retire activities. during the vesting period, the fair value of the stock option award is recognized over the period from the grant date to the date the employee becomes eligible to retire. The Corporation recognizes compensation expense and a Restricted corresponding cash adjustment with maturities to Contributed greater than surplus one year equal from to the the fair balance value sheet of the date equity is recorded instruments Deposits granted and using other 16 Guide assets. Black-Scholes to International This restricted option pricing cash Financial relates model to taking funds Reporting into on deposit consideration in with Canada various forfeiture financial estimates. institutions Compensation as collateral expense for letters is adjusted of credit for and subsequent other items. changes in management s estimate of the number of options that are expected to vest. Grants S) AIRCRAFT of PSUs are FUEL accounted INVENTORY for as AND cash SPARE settled PARTS instruments AND as SUPPLIES described INVENTORY in Note 14. Accordingly, the Corporation recognizes compensation expense at fair value on a straight line basis over the applicable vesting period, taking into Inventories of aircraft fuel and spare parts, other than rotables, and supplies are measured at the lower of cost and net consideration forfeiture estimates. Compensation expense is adjusted for subsequent changes in the fair value of the realizable value, with cost being determined using a weighted average formula. PSU and management s current estimate of the number of PSUs that are expected to vest. The liability related to cash The settled Corporation PSUs is recorded did not in recognize Other long-term any write-downs liabilities. on Refer inventories to Note or 17 reversals for a description of any previous of derivative write-downs instruments during used the by the Corporation to hedge the cash flow exposure to PSUs. Extract periods presented. 3 Excerpt Included in Aircraft from maintenance Air Canada is $43 related 2012 to spare Financial parts and supplies Statements consumed during the year (2011 $39). Air Canada also maintains an employee share purchase plan. Under this plan, contributions by the Corporation s Note employees 2 Basis are matched of Presentation to a specific percentage by and the Corporation. Summary Employees of must Significant remain with the Accounting Corporation until T) PROPERTY AND EQUIPMENT Policies March 31 of the subsequent year for vesting of the Corporation s contributions. These contributions are expensed in Property Wages, salaries, and equipment and benefits is recognized expense over using the the vesting cost model. period. Property under finance leases and the related obligation for J) Maintenance future lease payments and are repairs initially recorded (in part) at an amount equal to the lesser of fair value of the property or equipment and J) the MAINTENANCE present value of AND those REPAIRS lease payments. The Maintenance Corporation and allocates repair costs the for amount both leased initially and recognized owned aircraft in respect are charged of an to item Aircraft of property maintenance and equipment as incurred, to with its the significant exception components of maintenance and depreciates and repair costs separately related each to return component. conditions Property on aircraft and under equipment operating are lease, depreciated which are accrued over the term of the lease, and major maintenance expenditures on owned and finance leased aircraft, which Saskatchewan to are Transportation Company 2012 Ann estimated residual values based on the straight-line method over their estimated service lives. Aircraft and flight equipment capitalized as are described componentized below in into Note airframe, 2T. engine, and cabin interior equipment and modifications. Airframe and engines are depreciated over 20 to 25 years, with 10% to 20% estimated residual values. Cabin interior equipment and Maintenance and repair costs related to return conditions on aircraft leases are recorded over the term of the lease for T) Property modifications the end of lease and are depreciated maintenance equipment over return (in the lesser condition part) of 5 years or the remaining useful life of the aircraft. Spare engines and obligations within the Corporation s operating leases, offset by a prepaid related parts ( rotables ) are depreciated over the average remaining useful life of the fleet to which they relate with maintenance asset to the extent of any related power-by-the-hour maintenance service agreements or any recoveries 10% to 20% estimated residual values. Cabin interior equipment and modifications to aircraft on operating leases are under aircraft subleasing arrangements. The provision is recorded within Maintenance provisions using a discount rate amortized over the term of the lease. Major maintenance of airframes and engines, including replacement spares and taking into account the specific risks of the liability over the remaining term of the lease. Interest accretion on the parts, labour costs and/or third party maintenance service costs, are capitalized and amortized over the average provision is recorded in Other non-operating expense. For aircraft under operating leases which are subleased to third expected life between major maintenance events. Major maintenance events typically consist of more complex parties, the expense relating to the provision is presented net on the income statement of the amount recognized for inspections and servicing of the aircraft. All maintenance of fleet assets provided under power-by-the-hour contracts are any reimbursement of maintenance cost which is the contractual obligation of the sublessee. The reimbursement is charged to operating expenses in the income statement as incurred, respectively. Buildings are depreciated on a recognized when it is virtually certain that reimbursement will be received when the Corporation settles the obligation. straight-line basis over their useful lives not exceeding 50 years or the term of any related lease, whichever is less. Any changes in the maintenance cost estimate, discount rates, timing of settlement or difference in the actual Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is maintenance cost incurred and the amount of the provision is recorded in Aircraft maintenance in the period. depreciated over 3 to 25 years. c. Extract Property 4 and Excerpt equipment from Saskatchewan Transportation Company recognizes 2012 a portion of the capital grant as reve Property and equipment are recorded at cost less accumulated year equivalent to the amount of depreciation recognized Financial Statements depreciation and any provisions for impairment. Cost includes assets acquired 13 with the grant funds. Note expenditure 4 Significant that is directly Accounting attributable to Policies the acquisition of the 10 Capital grants related to the acquisition of land and rela c. Property asset. The and cost of equipment self-constructed (in part) assets includes materials, recognized as a direct increase in retained earnings. services, direct labour and directly attributable overheads. Notes to Financial Statements (continued) The costs of maintenance, repairs, renewals or replacements which do not extend productive life are charged to operations as incurred. The costs of replacements and improvements which extend productive life are capitalized. The cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in total comprehensive loss as incurred. The estimated useful lives of the major classes of propert When property and equipment are disposed of or retired, the equipment are as follows: related costs and accumulated depreciation are eliminated from the Buildings years Major accounts. Inspections Any resulting gains or losses are reflected in the Vehicles 5-15 years [IAS statement 16.14] of comprehensive loss for the period. Other equipment 3-10 years d. Non-financial assets held for sale h. Impairment of non-financial assets To Non-financial continue operating, assets are classified certain as items held for of sale PP&E if their may carrying require major inspections At each reporting date, the Company reviews the carrying (for amount example: will be aircrafts, recovered principally ships, etc.). through When a sale such transaction major inspections its take non-financial place, assets to determine whether there is an the rather costs than are through recognized continuing as use. a separate This condition component, is regarded if as the recognition that those criteria assets have suffered an impairment loss. If an met only when the sale is highly probable and the asset is available indication exists, the recoverable amount of the asset is are satisfied and amortized over the period between scheduled inspections. for immediate sale in its present condition. Management must be order to determine the extent, if any, of the impairment Once committed a scheduled to the sale, inspection which should has be expected taken place, to qualify any forremaining carrying amount recognition as a completed sale within one year from date of The recoverable amount is the higher of fair value less co of the cost of the previous inspection (i.e., the unamortized portion) classification. and value must in be use. In assessing value in use, the estimated derecognized and the new inspection cost capitalized. flows are discounted to their present value using a discou Non-financial assets classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. reflects current market assessments of the time value of m the risks specific to the asset for which the estimates of flows have not been adjusted. e. Operating grant revenue Operating grants from CIC are recognized as revenue when received. f. Capital grant revenue Capital grants related to depreciable property are deferred as received and are recognized as revenue over the life of the asset. The g. Depreciation of property and equipment Depreciation is recorded on buildings, vehicles, and equi the straight-line basis over the estimated productive life asset. Depreciation commences when the property and e ready for its intended use. The estimated useful life of p equipment is based on manufacturer s guidance, past exp future expectations regarding the potential for technical obsolescence. The estimated useful lives are reviewed an any changes are applied prospectively. If the recoverable amount of an asset is estimated to be carrying amount, the carrying amount of the asset is redu recoverable amount. An impairment loss is recognized im the statement of comprehensive loss.