C15: PROPERTY, PLANT AND EQUIPMENT PART 1

Question 1

What is the related accounting standard for PPE?

Answer 1

PAS 16 Property, Plant and Equipment

Question 2

Explain the objective of PAS 16 and the principal issues to be recognized.

Answer 2

The objective of PAS 16 is to prescribe accounting treatment for property, plant and equipment.

The principal issues are the (1) recognition assets (ppe), (2) the determination of their carrying amounts, and (3) the depreciation charges and impairment losses to be recognized in relation to them.

Question 3

Explain the Scope of the PAS 16.

Answer 3

PAS 16 applies to the accounting for property, plant and equipment with exceptions to other assets that require the need for a different accounting standard, having not met the definition or requisites for an asset to be recognized as PPE.

Some examples of different accounting treatments:
a) assets held for sale under PFRS 5
b) assets classified as an investment property under PAS 40, however the same cost model approach used in PAS 16 is also used in PAS 40.
c) biological assets related to agricultural activity, aside from bearer plants not used as an agricultural produce under PAS 41.
d) exploration and evaluation of assets recognized under PFRS 6.

However, PAS 16 applies to the PPE used to develop or maintain these categories of assets.

Question 4

List the major characteristics in the definition of Property, Plant and Equipment.

Answer 4

PPE are non-current tangible assets, used in business for production or supply of goods or services, for rentals to others, and for administrative purposes, and is expected to be used more than a period.

Major characteristics of PPE:
1) It is tangible.
2) It is used in business, e.g. used for production of goods or services, for rentals, and for administrative purposes.
3) Long-term in nature. It is expected to be used for more than one period.

Question 5

Discuss the recognition of a PPE as an asset.

Answer 5

Items of property, plant and equipment shall be recognized as an asset when it is probable that:
a) future economic benefits associated with the PPE will flow to the entity; and
b) the cost of the PPE can be measured reliably.

Question 6

Discuss when are spare parts and stand-by equipments recognized as a PPE.

Answer 6

If a spare part and a stand-by equipment falls under the definition of a ppe, e.g. long-term, it is recognized as one.

But if it is used for short-term, it is classified as inventory.

Question 7

Why are safety and environmental equipments usually recognized as PPE?

Answer 7

They are necessary in obtaining future economic benefits from other assets.

Ex: a factory may be required to install safety environmental equipment by the government, or otherwise the authorities will shut down the factory.

Question 8

What is the initial measurement of an item of PPE?

Answer 8

An item of PPE is initially measured at cost.

Question 9

Define cost as the initial measurement of a PPE and list the 3 major elements of cost.

Answer 9

Cost is the amount of cash or cash equivalent as a payment and the fair value of the other consideration given to acquire the PPE at the time of its acquisition or construction.

3 major elements of Cost:
1) Purchase Price (PP) incl. import duties and non-refundable taxes, after deducting trade discounts and rebates.
2) Directly Attributable Costs (DACs) to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the management.
3) Initial estimate of costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs.

Question 10

List the examples of Directly Attributable Costs (DiAtCo or DACs).

Answer 10

T-P2-RIDE DACs:
1. Testing
2. Preparation of site
3. Professional fees
4. Removal of the asset and Restoration of the site
5. Installation
6. Delivery or Freight charges
7. Employee benefits

Question 11

List the examples of costs that are expensed outright.

Answer 11

Costs that are expensed outright:
1. Opening a new facility
2. Advertisement and promotional activities for a new product/service
3. Staff training, conducting business in a new location
4. Administration and other general overhead costs
5. Whenan asset operated at less than full capacity
6. Asset’s initial operating losses
7. Relocation and reorganizing part or all of an entity’s operations

Question 12

Discuss the cessation of capitalization costs of an item of PPE.

Answer 12

Capitalization of costs ceases when the PPE is (a) in the location and is (b) in the condition necessary for it to operate in the manner intended by the management. Therefore, costs incurred in using or redeploying the PPE are not capitalized.

Question 13

Cost includes all costs necessary to bring the asset to working condition for its intended use.

Answer 13

TRUE

Question 14

What are the ways of acquiring a property?

Answer 14

1. Cash basis
2. On account subject to cash discount
3. Installment basis
4. Issuance of share capital
5. Issuance of bonds payable
6. Exchange
7. Donation
8. Government Grant
9. Construction

Question 15

Cite some separate classes of PPE.

Answer 15

A class of PPE is a grouping assets with similar nature and use in an entity’s operations.

The following are examples of separate classes of PPE:
a. land
b. land and buildings
c. machinery
d. ships
e. aircraft
f. motor vehicles
g. furniture and fixtures
h. office equipment
i. bearer plants

Question 16

(a) Discuss land (property) classified as PPE and the costs included to the capitalization of the asset.

Answer 16

A land (property) is classified as an asset under PPE if it is used in the entity’s operations as owner occupied property.
Ex:
a) land on which the entity’s office building was constructed
b) land used as plant site
c) land held for future plant site

Cost of land:
a. Purchase price
b. broker’s commissions
c. titling costs
d. professional fees regarding the acquisition of the property
e. recording fees
f. unpaid taxes prior to date of acquisition assumed by the buyer. taxes incurred after acquisition = expense
g. assumption of any liens mortgages, or encumbrances on the property
h. special assessments for local government maintained improvements. ex: pavements, streetlights, sewers, drainage systems
i. option paid to acquire land. option paid on items not acquired = expense
j. inducing tenats to vacate premises, costs of relocating anf reconstructing property belonging to others
k. initial estimate of restoration costs = entity’s present obligation
l. any add. land improvements that have indefinite useful life. ex: costs of draining, grading, clearing, leveling and filling, surveying, subdividing, and other permanent improvements

Question 17

Discuss land improvements as a PPE.

Answer 17

Land improvements are enhancements to the land which have a definite useful life, thus recognized separately from land (property) and are subject to depreciation.
Ex: private driveways, walks, fences, parking lots, drainages and water systems, cost of trees, shrubs, plants and other landscaping.