CP-04 (Property, plant and equipment) Flashcards
(17 cards)
Property, plant and equipment (PPE)
Tangible items that are both:
* held for use in the production or supply of goods or services, for rental to others or for administrative purposes; and
* expected to be used during more than one period.
Subsequent costs in PPE
In terms of costs incurred subsequently to add to, replace part of, or service the item, the practical application is that:
* Repairs and maintenance expenditure should be recognised in profit or loss as incurred
* Replacement parts should be capitalised, provided the original cost of the items they replace is derecognised (ie, treated as disposed of) at the time of the replacement.
Elements of cost of property, plant and equipment
The cost of a PPE item comprises:
* purchase price, including all non-recoverable duties and taxes but net of trade discounts;
* costs directly attributable to bringing the asset to the location and condition.
* the initial estimate of dismantling and site restoration costs.
Directly attributable costs of PPE
Directly attributable costs include:
* employee benefits arising directly from construction or acquisition of the item; and
* site preparation, delivery, installation and assembly costs, costs of testing whether the asset is functioning as expected, and professional fees (eg, legal costs and architects’ fees).
Measurement of cost of PPE
Cost is measured as the cash price at the time of recognition or the fair value of other consideration provided. The cash price is discounted if payment is deferred beyond normal credit terms.
Where there is an exchange of items of PPE such that there is no cash price, cost should be measured at fair value.
IAS 23
Borrowing Costs
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense.
Qualifying asset
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. This typically means the asset needs significant construction, production, or development efforts before it can be put into operation.
Bearer Plants
Bearer plants are living plants that are used in the production or agricultural product supply are expected to bear produce for more than one period.
Examples: Mango trees, Apple trees, Tea bushes, Oil palm trees, Rubber trees, Grape vines etc.
Accounting Treatment:
Bearer plants are treated like (PPE) under IAS 16, meaning:
»Capitalized and depreciated over their useful life.
»Produce growing on the plant is still treated under IAS 41(Agriculture).
Residual value
Residual value represents the estimated value of an asset after it has been fully depreciated or at the end of its useful life.
Residual value is often estimated as the fair market value of the asset at the end of its useful life, less any disposal costs.
Depreciation in Straight-line method
A simple way to calculate depreciation, a financial accounting method that allocates the cost of an asset over its useful life.
Formula:
Annual Depreciation Expense = (Cost - Salvage Value) / Useful Life
Depreciation in Diminishing (or reducing) balance method
Calculates depreciation by applying a fixed percentage to the asset’s reducing balance (or book value) each year. This means the depreciation expense is highest in the initial years and decreases over time.
This method is often used for assets that depreciate more rapidly in the early years of their life, such as computers or vehicles.
Formula:
Depreciation =
BookValueatBeginningofYear (cost minus accumulated depreciation) × DepreciationRate
Depreciation in Units of production method
The units of production method (also known as units of activity method) is a depreciation method used in accounting to allocate the cost of a fixed asset over its useful life based on the actual usage or output (rather than time). This method is particularly suitable for assets whose wear and tear depends more on how much they are used than how long they are owned.
Depreciation Expense = (Cost - Salvage Value) / Total Expected Production * Units Produced
Accounting for revaluations
- Revaluation gains are recognised in other comprehensive income and form part of equity as a revaluation surplus.
- Revaluation losses are recognised as an expense in profit or loss unless they relate to an earlier revaluation surplus.
- After revaluation, depreciation is based on the revalued amount.
Residual value
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.
Impairment of Assets (IAS-36)
Whenever an asset’s recoverable amount falls to an amount less than its carrying amount, it is said to be impaired.
Costs of disposal
Incremental costs directly attributable to the disposal of an asset or cash generating unit excluding finance costs and income tax expense.
Derecognition of PPE
- PPE disposed of should be removed (derecognised) from the statement of financial position and a gain or loss on disposal recognised in profit or loss.
- When the decision is made to sell a non-current asset, it may be classified as ‘held for sale’ if IFRS 5 criteria are met.
- An asset held for sale is measured at the lower of:
– Its carrying amount
– Its fair value less costs to sell - No depreciation is charged on a held for sale asset.
