Ch 7 - Tangible assets

Question 1

Definition of PPE (property, plant and equipment) under IAS 16.

Answer 1

PPE
- are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes,
and
- are expected to be used during more than one period.

Question 2

Cost of acquisition of PPE represents:

Answer 2

cash or cash equivalents paid to obtain the asset and to bring it to the location and condition necessary for its intended use.

Question 3

List 5 examples of cost of acquisition, attributable to cost of acquisition of PPE.

Answer 3

1. Cost of site preparation.
2. Initial delivery and handling costs.
3. Installation costs.
4. Professional fees such as for architects and engineers, and
5. Estimated cost of dismantling and removing the asset and restoring the site.

Question 4

Definition of depreciation.

Answer 4

Depreciation is systematic allocation of the depreciable amount of an asset over its useful life.

Question 5

How is residual value defined?

Answer 5

Residual value is 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.

Question 6

Definition of useful (service, economic) life of an asset.

Answer 6

Useful life is:

• the period over which an asset is expected to be available for use by an entity, or
• the number of production or similar units expected to be obtained from the asset by an entity.

Question 7

Definition of carrying amount (book value) of an asset.

Answer 7

Carrying amount is the amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment losses.

Question 8

Definition of recoverable amount.

Answer 8

Recoverable amount:the higher of an asset’s fair value less costs of disposal (sometimes called net selling price) and its value in use

Question 9

Definition of fair value.

Answer 9

Fair value: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.

Question 10

Definition of value in use.

Answer 10

Value in use:the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Question 11

List 5 indications of impairment of tangible assets.

Answer 11

External sources of impairment:

• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• net assets of the company higher than market capitalization

Internal sources of impairment:

• obsolescence or physical damage
• asset is idle, part of a restructuring or held for disposal
• worse economic performance than expected
• for investments in subsidiaries, JV or associates, the carrying amount is higher than the carrying amount of the investee’s assets, or a dividend exceeds the total comprehensive income of the investee

(list is not exhaustive)