Week 3

Question 1

PPE is initially recognised at cost. To recognise a cost outlay as an asset, the following criteria must be satisfied:

Answer 1

– it is probable that economic benefits will flow to the entity (not necessarily generated by the asset)

– the cost can be reliably measured.

Paragraph 7 of AASB 116/IAS 16

Question 2

Where no new future economic benefits are expected to flow to the entity

Answer 2

costs incurred should be expensed (e.g. repairs but not betterments)

Question 3

Component parts (with different useful lives) are

Answer 3

required to be identified and accounted for separately.

Example: not enough to recognise aircraft as a single asset- the engine, frame and fittings of an aircraft are likely to have different useful lives.

Question 4

Initial measurement of cost

PPE is initially measured at the cost of the asset which includes

Answer 4

Purchase price (at fair value) (includes duties and taxes after deducting rebates and discounts)

Directly attributable costs (required to bring the asset to the location and condition necessary for it to operate)

Initial estimate of costs of dismantling, removing the item or restoring the site (at present value)

Question 5

PPE to be measured at either

Answer 5

cost or fair value

the policy chosen must apply to the whole class of assets

Question 6

Entities may switch from fair value to cost… i.e. revaluation model to cost model

Answer 6

Entities may switch from fair value to cost for justifiable reasons (will make the financial statements more useful to users; in particular, will the information be more relevant and/or more reliable — a requirement under AASB 108/IAS 8 paragraph 14.

and with adequate disclosures and need to adjust the information prepared previously if the switch is to cost.

Question 7

Cost model

Answer 7

AASB 116 requires that assets are carried at cost less any accumulated:

– Depreciation
– Impairment losses.

Question 8

Revaluation model is to be used

Answer 8

AASB 116 allows the revaluation model to be used for classes of assets.

Question 9

Features of revaluation model

Answer 9

• Any revaluation of PPE must be to fair value.
• Market price is to be used where an active and liquid

market exists.

• Frequency of revaluations is not specified, but must be

performed with sufficient regularity such that the carrying

amount of assets is not materially different from their FV.

• Revaluation is performed on a class basis (requires class of assets to be revalued), but accounting

for revaluation is performed on an asset-by-asset basis.

Question 10

Revaluation model

If FV(fair value)>CA:

Answer 10

there is an increase in the fair value of the asset

revaluation increment (potential profit – recognised as other comprehensive income (OCI), not profit and loss and is accumulated in equity as asset revaluation surplus (ASR)).

which is reported under reserves section under statement of financial position

Question 11

Revaluation model

If FV(fair value)<ca:>
</ca:>

Answer 11

revaluation decrement (potential loss – recognised as part of profit and loss).

Question 12

To account for revaluation increments/decrements for depreciable assets, we can use the net method or gross method

net method

Answer 12

Net method - General procedure:
• Any balance of accumulated depreciation is credited to the asset account prior to revaluation, so the amount recognised for the asset is the revalued amount.

Question 13

To account for revaluation increments/decrements for depreciable assets, we can use the net method
or the gross method.

Gross method

Answer 13

Accumulated depreciation may be restated proportionately with the change in gross carrying amount of the asset, so the carrying amount after revaluation is the revalued amount.

Question 14

revaluation model an asset is

Answer 14

initially recorded at cost but subsequently its carrying amount is increased to account for any appreciation in value.

Question 15

The difference between cost model and revaluation model

Answer 15

revaluation model allows both downward and upward adjustment in value of an asset while cost model allows only downward adjustment due to impairment loss

revaluation model: impairment loss is recognised as revalaution decrement cost model: impairment loss is recognised directly in P&L

Question 16

Transfers may be made from the asset revaluation surplus (ARS) in the following circumstances:

Answer 16

– When a revalued asset is derecognised (i.e. scrapped or sold): the balance in the ARS may be transferred to retained earnings.

– When a revalued asset is being depreciated: the ARS may be progressively transferred to retained earnings over the useful life of the asset.

– Bonus shares may be issued from the ARS.

Question 17

Impairment loss has occurred when

Answer 17

an asset’s carrying amount (CA) is more than its recoverable amount (RA).

Question 18

Entities are required to conduct impairment tests to

Answer 18

ensure their assets are not overstated

Question 19

Not all assets require impairment test. Notable exclusions:

Answer 19

– Inventories

– Deferred tax assets
– Assets held for resale.

Question 20

The following assets must be tested annually:

Answer 20

– Intangibles with indefinite useful lives
– Intangibles not yet available for use
– Goodwill acquired in a business combination.

Question 21

External indicators of impairment include

Answer 21

– Decline in market value – technological advancements

– Adverse changes in entity’s environment/market – eg a competitor may have patented a new product, significant drop in commodity prices, for example, would have an adverse impact on the estimation of future cash flows when determining an asset’s value in use.

– Increases in interest rates – increases the discount rate which affects assessment of an entity’s present value of future cash flows.

Question 22

Internal indicators include:

Answer 22

– Obsolescence or physical damage

– Change in asset use – has the asset become idle?

– An asset’s economic performance being worse than expected.

Question 23

If carrying amount (CA) > recoverable amount (RA) –

Answer 23

an imapirmentl loss has occured and the asset needs to be written down to its RA (AASB 136).

Question 24

If carrying amount (CA) > recoverable amount (RA) – asset needs to be written down to its RA (AASB 136).

Carrying amount

Answer 24

cost of asset (or revalued amount) less acc. depreciation and impairment losses thereon.

Question 25

If carrying amount (CA) > recoverable amount (RA) – asset needs to be written down to its RA (AASB 136).

Recoverable amount

Answer 25

higher of:
• Fair value, less costs to sell (or net selling price): amount obtained from the sale of an asset less the costs of disposal.
• Value in use: present value of the future cash flowsexpected to be derived from an asset.

Question 26

Fair value is determined using the following ‘value hierarchy’:

Answer 26

• Price in a binding sale agreement
• Market price (current bid price)
• Appropriate estimation (e.g. using NPV calculations).

Question 27

Costs of disposal include

Answer 27

• legal fees
• stamp duty
• costs of removing the asset etc.

Question 28

what is an impairment loss

Answer 28

he amount by which the carrying amount of an asset or CGU exceeds its recoverable amount.

Question 29

Intangible assets acquired externally (either separately or as part of a business combination) can be recognised if

Answer 29

the general recognition criteria for assets are satisfied.

Question 30

The expenditure incurred internally to generate future economic benefits does not

Answer 30

The expenditure incurred internally to generate future economic benefits does not normally result in the recognition of an intangible asset – instead, a so called internally generated goodwill may be created, but that cannot be recognised as an asset.

Question 31

Also, AASB 138 specifically states that

Answer 31

internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets.

– The expenditure on those cannot be distinguished from the cost of developing the business as a whole.

Question 32

recognition of intangible assets

With regards to R&D activities,

Answer 32

With regards to R&D activities, the research expenditure is to be written off as expense as incurred:

– No intangible asset arising from research (or from the research phase of an internal R&D project) shall be recognised.

Question 33

the development expenditure can be capitalised and recognised as

i.e. intangible asset can only be recognised from development outlays if

Answer 33

“Deferred development costs”

all the criteria from para 57 AASB 138 are met

– technical feasibility of completing

– intention to complete and use or sell

– ability to use or sell

– availability of resources

– existence of a market or internal usefulness.

– ability to measure costs reliably.

Question 34

what Costs are included as part of deferred development costs:

Answer 34

all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management (AASB 138, par. 66).

Question 35

Examples of directly attributable costs are:

Answer 35

costs of materials and services used;

costs of employee benefits arising from generation of the intangible asset;

fees to register a legal right;

amortisation of patents and rights used.

Question 36

Additional key issues on regarding R&D expenditure:

Where the total of the deferred development costs exceeds the expected recoverable amount (RA),

Answer 36

the deferred development costs must be written down to the RA.

Question 37

Additional key issues on regarding R&D expenditure:

Expenditure written off in one period

Answer 37

cannot be subsequently written back onto the balance sheet.

Question 38

Initial measurement of Intangible assets acquired from an external party separately?

Answer 38

intangible assets obtained by separate acquisition are initially measured at cost:

– Cost can usually be measured reliably, although there may be issues where the acquirer is giving up non-monetary assets rather than cash.

Question 39

Intangible assets acquired as part of a business combination are

Answer 39

are initially measured at fair value in accordance with AASB 3 Business Combinations.

– Fair value measures used may include:
• quotedmarketpricesinanactivemarket
• recent transactions in the same or similar items

Question 40

initial measurement of Intangible assets internally generated

Answer 40

Intangible assets internally generated (i.e. deferred development costs) are initially measured at cost.

Question 41

intangible asset with finite useful life

Answer 41

Amortized on a systematic basis over its useful life

Question 42

intangible asset with infinite useful life

Answer 42

Tested for impairment by comparing its recoverable amount with its carrying amount annually and whenever there is an indication that the intangible asset may be impaired.

Question 43

The residual value of intangible assets with finite lives is

Answer 43

generally considered to be zero, unless:

– there is a commitment by a third party to purchase the asset at the end of its useful life, or

– there is an active market for the asset, and the residual amount can be determined by reference to that market and it is probable that the market will still exist at the end of the useful life of the asset.

Question 44

Active market is defined as

Answer 44

(AASB 13):

– A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis

Question 45

Amortisation method should

Answer 45

reflect the pattern in which the economic benefits are derived - if the pattern cannot be determined reliably, the straight-line amortisation method is to be used.

Question 46

Amortisation charges to be expensed unless

Answer 46

another standard requires the amount to be included in the carrying amount of another asset.

Question 47

can intangible assets be revalued?

Answer 47

Only the externally acquired intangible assets are permitted to be revalued, but only if there is an “active market” for them.

• It is ‘uncommon’ for active markets to exist for most intangible assets because of their unique nature.

Where revaluation occurs it must be to fair value.

Revaluations should be done regularly.

Any subsequent amortisation charges to be based on revalued amount taking into account remaining useful life.

Question 48

AASB138 places a number of severe restrictions on

Answer 48

the recognition of internally generated intangible assets and on revaluation of those assets.

Question 49

AASB138 places a number of severe restrictions on the recognition of internally generated intangible assets and on revaluation of those assets.

Requirement that all research expenditure be written off as incurred is very conservative?

Answer 49

Discourage entities from undertaking certain research as it will impact negatively on profits

Question 50

• Only allowed to revalue identifiable intangible assets if there is an ‘active’ market for them; however

Answer 50

ctive markets do not exist for the vast majority of intangible assets.

– In most cases where intangible assets are recognised they will be recorded at cost, less accumulated amortisation, rather than being shown at their fair value, with ‘fair value’ potentially being more relevant to users of financial statements.

Question 51

How may expected economic benefits arise?

Answer 51

because of use of that asset in conjunction with other assets

Paragraph 11 of AASB 116/IAS 16 notes that certain assets may not of themselves generate future benefits, but instead the assets may be necessary for the entity as a whole to generate future benefits

Question 52

measured reliably’ refers to recognition of PPE only where the measurement purports to

Answer 52

faithfully represent the economic substance of the item and is free from material error or bias. As a result of reliable measurement, users can depend on this information to make economic decisions

Question 53

to determine which costs can be capitalised into the cost of the asset,

Answer 53

the following question is asked.

Are the costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management?

According to paragraph 16 of AASB 116/IAS 16, if the answer is ‘yes’, then the costs are capitalised into the cost of the asset; if the answer is ‘no’, then the costs are expensed and recognised in profit or loss.

Question 54

At the point of initial recognition of an item of PPE, the asset is measured at cost, which is the purchase price plus directly attributable costs and dismantling, removal, and/or restoration costs. After this initial recognition, an entity has a choice regarding the measurement basis to be adopted. Paragraph 29 of AASB 116/IAS 16 details two possible measurement models:

Answer 54

the cost model

the revaluation model.

Question 55

under the revaluation model

Answer 55

assets are measured at fair value

Question 56

purpose of the impairment test is

Answer 56

to determine whether the carrying amount of an asset exceeds its recoverable amount.

The evidence of impairment relates to variables that may support the belief that the book value of the asset under investigation overstates the future cash flows expected to be generated from its use or sale.

Question 57

Under the cost model

Answer 57

impairment loss is recognised directly in profit and loss

Question 58

There are other intangible assets that can never be recognised, regardless of whether they meet the recognition tests.

Answer 58

Research costs.

Specific internally generated intangible assets.

Question 59

There are other intangible assets that can never be recognised, regardless of whether they meet the recognition tests.

research costs

Answer 59

These costs must always be expensed. This non-recognition applies only to internally generated research and not to in-process research acquired from other entities

Question 60

There are other intangible assets that can never be recognised, regardless of whether they meet the recognition tests.

some internally generated intangible assets

Answer 60

The reason for non-recognition relates to the perceived inability to be able to measure the cost of these assets as they are internally generated. The cost of developing these assets is seen to be indistinguishable from the cost of developing the business as a whole

Question 61

If all these recognition criteria are met for development outlay to be recognised as an intangible asset as per para 57 AASB 138

Answer 61

the asset is measured at cost, being the sum of expenditure incurred from the point of time the recognition criteria are met. Any expenditure on development while the recognition criteria are not met must be expensed.

Question 62

the criteria from paragraph 57 of AASB 138/IAS 38 are met:

Answer 62

the technical feasibility of completing the intangible asset so that it will be available for use or sale;

its intention to complete the intangible asset and use or sell it;

its ability to use or sell the intangible asset;

how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset;

the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

its ability to measure reliably the expenditure attributable to the intangible asset during its development.

(Loftus 159)

Loftus, Janice, Ken Leo, Noel Boys, Belinda Luke, Sorin Daniliuc, Hong Ang, Karyn Byrnes. Financial Reporting. John Wiley & Sons Australia,, 05/2015. VitalBook file.