M2: Assets (PPE IAS 16) Flashcards
(30 cards)
What is PPE?
(PPE) “are tangible items that are held 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 for more than one period”.
When should PPE be capitalised into the financial statements?
1) “It is probable that future economic benefits associated with the item will flow to the entity”
2) “The cost of the item can be reliably measured”
What items should I include in the cost of the asset?
1) Purchase price (Includes; import duties, Non-refundable taxes Less; Trade discounts and
rebates (ignore settlement)
2) Directly attributable costs (Includes; Employee benefits, Site preparation, Initial delivery & handling, Installation & assembly, Cost of testing (less any proceeds from selling), Professional fees)
3) Initial estimate of costs of dismantling &
removing item and restoring site
4) Borrowing costs
If there is subsequent expenditure on assets, when do you capitalise vs put to the P&L?
Capitalise if increases capacity to produce economic benefits
Expense to SPL if no increase to capacity to produce economic benefits
What should you do if there is a significant part being replaced on an asset? (Whats the process)
If there are significant parts of an asset being replaced, the cost should be capitalised, depreciated and the replaced part derecognised. The resulting gain or loss on the derecognised part is recorded in
the SPL.
When should costs of inspection be capitalised/P&L?
Costs of inspection should be capitalised and depreciated over expected time until next inspection.
What is the key rule when it comes to PPE?
Capitalisation must cease when asset is READY for use (even if it not being used)
State examples of what should not be capitalised?
Costs of opening a new facility
Costs of introducing a new product, including costs of advertising
Costs of conducting a new business in a new location, including staff training
Administration and other general overheads
Initial operating losses and any costs of relocating or reorganising
What is the journal entry to account for replacing an asset (exchanging an asset)?
DR Asset giving up – accumulated depreciation
DR Asset received – cost (use Fair value if available, if not use Fair value of asset given up)
DR Loss / CR Profit on exchange
CR Asset giving up – cost
Journal for exchange of assets
What are borrowing costs? & When and how much do you capitalise?
Borrowing costs are costs associated with money borrowed to buy an asset e.g. loan from bank/financing.
Capitalise:
funds borrowed specifically: actual borrowing costs less income on temporary investment of funds
funds borrowed generally: weighted average borrowing costs (excl. specific borrowing costs) x weighted average expenditure
What is the maximum amount that can be capitalised for borrowing costs?
The maximum amount that can be capitalised is the amount of interest actually charged by the bank.
When do you start, stop,suspend borrowing costs on assets?
START: When expenditure on Depreciation on qualifying asset starts
SUSPEND: Any period of inactivity. During this time expensed.
STOP: When asset READY for use or sale ( any
remaining interest expensed)
What is the difference between the revaluation and cost models?
Two models: Cost and Revaluation
Cost - is just the cost of the asset minus accumulated depreciation.
Revaluation - Revalue asset to fair value on a consistent basis
What happens when we sell an asset?
We derecognise the asset, record any gain or loss on sale in the SPL and transfer any existing
revaluation surplus to retained earnings.
What do we do if we previously down valued our PPE and then we subsequently value it upwards at a later date?
We put the excess to the OCI section
What do we do if we revalued downwards after previously doing an upwards revaluation?
We do the excess to the profit and loss expense
How/Where do we tell the users of the FS about our revaluations?
(SoFP, SPL, OCI, Notes)
SOFP: Carrying amount included Within Non-current assets figure. Revaluations within revaluation
reserve in equity.
SPL: Depreciation and losses
OCI: Any revaluation surplus is disclosed under “other comprehensive income that will NOT be
reclassified to profit or loss”.
Notes: Accounting policy note, reconciliation between opening and closing PPE cost and accumulated
depreciation for asset class for current and prior year. Revaluation details and details on borrowing
costs.
What do we assume in RP2 for depreciation on disposal?
We assume there is no depreciation in the month of disposal UNLESS TOLD OTHERWISE IN THE QUESTION.
What are the rules surrounding when to revalue assets if the business chooses revaluation over the cost model for their assets?
Revaluations must be made regularly, so that the carrying amount does not differ materially from the fair value at the year-end date.
All assets of the same class (assets of similar nature and use grouped together such as equipment or property) must be revalued at the same time. A rolling basis may be used, provided it is over a short period and the revaluations are kept up to date. [38
What determines when the assets should be revalued?
The definition of regularly will depend
on the nature of the volatility of the asset being revalued (that is, how much fair value will
change at each year-end date).
What are the common ways to measure fair value?
1) Income Approach (using cash flows generated and required rate of return)
2) Depreciated replacement cost (cost to replace asset new with adjustment for condition).
What is the process for calculating depreciation when we decide to switch from historical cost to revaluation model at the start of the year?
START OF THE YEAR:
Calculate the revaluation increase or decrease by comparing fair value to the opening carrying amount of the asset.
Calculate depreciation charge for the year based
on the revalued amount
What is the process for calculating depreciation when we decide to switch from historical cost to revaluation model during the year?
DURING THE YEAR:
Calculate depreciation charge up to the date of the
revaluation on the original cost/previous valuation.
Calculate the revaluation increase or decrease by
comparing fair value to the carrying amount of the asset on the date of revaluation.
Calculate the depreciation charge for the remainder of the year on the revalued amount.
What is the process for calculating depreciation when we decide to switch from historical cost to revaluation model at the end of the year?
END OF THE YEAR:
Calculate depreciation charge for the year on
original cost/previous valuation.
Calculate the revaluation increase or decrease by comparing fair value to the closing carrying amount.
You do not need to calculate any additional
depreciation charge on the revalued amount in the current period.
