Property, plant, and equipment: Tips for a correct application of the CPC 27 AND ICPC 10Mariana Haritoff
There are two basic IFRS concepts which the administrators should always bear in mind: the essence on the form and accounting at fair value. This means, in plain language, that accounting records and their relevant explanatory notes should make sense for statement readers, as should the entire control and review process of these amounts disclosed. Each accounting pronouncement, therefore, bears its own dynamic for the recognition, measurement, disclosure, and, lastly, record update and review, according to the essence of each asset group. This is not different with property, plant, and equipment, in spite of most administrators’ belief that the CPC 27 ended with the initial recognition and its practical breakdowns: deemed cost application and review of economic useful life. And what about updating and reviewing? Let’s delve into this a little further.
Correct putting in place of CPC 27 does not end with the initial recognition phase. This requires a change in the manner by which these assets are managed, a change to company processes, as clearly presented in the accounting pronouncement in its interpretation, ICPC 10. We should keep in mind that, prior to IFRS, property, plant, and equipment management was performed by the company’s operating area, notably project and industrial engineering. Accounting posted only the invoices, in the specific “fixed asset” category, and applied the depreciation index pursuant to income tax tables. That is, a market player, upon reading a company’s financial statements, only had the notion of the historical cost of a certain asset, and no information on the efficiency of their management or fair value on report date.
If we read CPC 27 and its interpretation, ICPC 10, with due attention, we will see that the change is much more encompassing than a simple initial recognition, despite the Brazilian version forbidding, for the time being, a periodical reappraisal process. Starting by paragraph 30 of CPC 27, which introduces the impairment test concept for the property, plant, and equipment. Unlike the indefinite-life intangible assets, the impairment test should only be carried out upon evidence of their undervaluation. This can only be ascertained, in this new IFRS world, in case the property, plant, and equipment management system (controller’s/accounting) is integrated to the company’s production and engineering systems. Only then may be detected signs of technical/economic obsolescence, wear and maintenance, capacity underutilization, and so on. This is what a statement reader expects, active property, plant, and equipment management! Has your company already promoted this integration?
Another important paragraph which refers to a periodic review of the CPC 27 is number 51: “Residual value and the useful life of an asset are reviewed at least at the end of each financial year, and, if expectations doffer from prior estimates, the change should be accounted for as a change of accounting estimate”. Few companies have carried out this review. The correct and less burdensome form to do so for a company is by calling, at the end of each financial year, the consultant who has drawn up the asset useful life review report, to carry out a review and issue a report, with the relevant ART (Anotação de Responsabilidade Técnica – Technical Responsibility Note – issued by the CREA).
The above points are only the main examples of correct monitoring and periodic review of the property, plant, and equipment, in compliance with the CPC 27. Call one of our consultants for a complete presentation on the subject and on its benefits: it will be a great pleasure for us!
(Luiz Paulo Silveira | Technical Vice-President, Apsis Consultoria)