PPE

Question 1

What is a tangible item?

Answer 1

An item that can be physically touched. Expected to be used for more than one period (non-current)

Question 2

What is the recognition of PPE?

Answer 2

• Its probable that future economic benefits will flow to the entity
• The cost of the item can be measured reliably.

Question 3

What is the measurement of PPE?

Answer 3

• Purchase price including any duties and non-refundable taxes, after deducting trade discounts.
• Costs directly attributable to bringing the asset to the required location/condition to operate as intended (e.g., delivery costs, installation costs)

Question 4

What will happen to directly attributable costs?

Answer 4

Any costs used to get asset in working order will be CAPITALISED

Question 5

What happens to other costs?

Answer 5

Costs excluded from directly attributable ones such as Admin and general overheads etc will not be capitalised and should be written off to the P&L.

Question 6

What happens to subsequent costs?

Answer 6

These may be capitalised if enhances the economic benefit provided by the item (e.g., increases the revenue capable by the generated asset like an extension)

NOTE - any repair work is debited to P&L.

Question 7

What are borrowing costs?

Answer 7

Costs incurred by an entity in connection with borrowing funds to construct an asset.

Question 8

When may a business capitalise borrowing costs?

Answer 8

When they would have been avoided if expenditure on the asset had not been made.

Question 9

Formula if borrowings taken for purpose of asset?

Answer 9

borrowing costs incurred - income from temporary investment if surplus borrowings.

Question 10

Formula if taken from general borrowings?

Answer 10

Weighted average cost of borrowings X expenditure on asset.

Question 11

When may you start capitalising borrowing costs?

Answer 11

Expenditure on asset incurred
Borrowing costs incurred
Activities to prepare the asset for use or sale are in progress (e.g. construction, drawing up plans)

NOTE - holding an asset for development without any associated activities isn’t enough to qualify for capitalisation

Question 12

When should you stop capitalising?

Answer 12

• Extended periods when business suspends active development of qualifying asset.
• all activities to prepare asset for use/sale is complete.

Question 13

What are the entry’s for the purchase of an asset?

Answer 13

Dr Land and Buildings
Cr Finance cost

Question 14

What is depreciation?

Answer 14

Cost or valuation of asset - its residual value

Question 15

What is an assets useful life?

Answer 15

Period for which an asset is expected to be available for use.
need to consider capacity, physical wear/tear etc.

Question 16

What is an assets residual value?

Answer 16

The estimated amount that an entity would currently obtain from disposal if at end of useful life.

Question 17

When should depreciation commence?

Answer 17

When the asset is available for normal use.
Should continue until asset is fully depreciated, sold or classified as ‘held for sale’

Question 18

What happens when land and buildings are acquired together?

Answer 18

They should be separated. This is because land is considered to have an infinite life so never depreciates where as buildings do.

Question 19

What happens if there is a change to depreciation?

Answer 19

• Method of depreciation should be reviewed each year and changed if no longer reflects pattern of use of asset.
• Residual value and useful life should be reviewed and changed if needed
• When a change arises, new method or estimate is applied to the carrying value at the date of change.

Question 20

What happens if PPE has separate components?

Answer 20

e.g., cruise ship has engine, interior etc.
Cost of replacing components may be capitalised. Prior to this the old component needs to be derecognised.

Question 21

What are major overhauls?

Answer 21

Some items of PPE require regular overhauls/inspection in order to be used (helicopters)
Cost of overhaul can be capitalised.
Prior to this any subsequent overhaul or inspection should be derecognised.

Question 22

What happens if overhaul/inspection is carried our at predetermined intervals?

Answer 22

Derecognition can be achieved by making the useful life of the asset = the inspection interval

Question 23

What is the revaluation model?

Answer 23

This is its fair value minus any subsequent accumulated depreciation and impairment losses.

Revaluations need to be updated so that SOFP value doesn’t differ materially from fair value.

Question 24

What is an assets fair value?

Answer 24

Fair value is the asset’s estimated sale price that would be agreed upon by willing buyer and seller, assuming both parties are knowledgeable and enter transaction freely.

Question 25

What is the entry’s for an upward revaluation?

Answer 25

Dr Cost - with difference between fair value and cost
Dr Accumulated dep - to eliminate the value of any depreciation to date
Cr Revaluation surplus - Balancing figure (fair value- carrying amount)

Question 26

What would formula for depreciation be after revaluation?

Answer 26

(revalued amount-estimated residual value) / remaining useful life

Question 27

What are the entry’s if downward revaluation?

Answer 27

Dr P&L expense (carrying amount - fair value)
Cr PPE

Question 28

What are the entry’s if asset had been upward revalued now downward?

Answer 28

Dr revaluation surplus (up to any remaining surplus)
Dr P&L - with any excess fall in value not reversing revaluation
Cr - PPE

Question 29

What is impairment?

Answer 29

Tells you how much to reduce (impair) the SOFP value of assets, how much they should be impaired by and how it should be accounted for.

Question 30

When should an impairment be carried out?

Answer 30

• Annually for certain assets such as intangibles with indefinite life.
• Where there are indications of impairment for other assets.

Question 31

What are external indications of an impairment?

Answer 31

Decline in market value
Changes to environment in which they operate
increase in interest rates
value of entity less then asset value

Question 32

What are internal indications of impairment?

Answer 32

Asset damaged or obsolete
Changes have occurred (wont generate expected benefits)
evidence available to suggest asset wont perform as expected

Question 33

When does an impairment occur?

Answer 33

If the carrying amount (amount in SOFP) is greater then the recoverable amount (amount its worth by selling or using)

Question 34

What are the entry’s for an impairment?

Answer 34

Dr P&L expense
Cr PPE

Question 35

What is a cash generating unit?

Answer 35

The smallest group of assets for which independent cash flows can be identified and measured. (e.g. each individual McDonalds as cant value each fryer)

Question 36

When impairing a CGU must allocate in what order?

Answer 36

1) Any asset specifically impaired
2) Goodwill
3) Other asset on a pro rata basis
4) No asset can be shown at less then its recoverable amount

Question 37

When should a non-current asset be classified as ‘held for sale’?

Answer 37

when its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Question 38

What is necessary for non-current asset to be ‘held for sale’?

Answer 38

Asset available for immediate sale
Sale must be highly probable (management must be committed, active program to locate buyer)
Sale is expected to be completed withing 12 months
Must be unlikely that plan will be changed or withdrawn

Question 39

What happens when an asset is held for sale under the cost model?

Answer 39

Must be measured as the lower of the carrying amount and fair value - costs to sell.

Stop depreciating as treated as inventory
present it in SFP as current asset.

Question 40

What happens when asset is held for sale under the revaluation model?

Answer 40

Before being held for sale the asset should be revalued so that carrying amount will be at fair value.

Therefore immediately when sold any cost to sell can be recognised as an impairment loss.

Question 41

What happens when an asset is scrapped?

Answer 41

Depreciate it until it is scrapped. Then recognise any profit/loss on disposal as the different between the proceeds (if any) and carrying amount.

Question 42

What is disclosed on financial statements to do with PPE?

Answer 42

what model was used
depreciation method used
useful life used
changes in accounting enteries

Question 43

What should be disclosed about imapirments?

Answer 43

amount impairment loss charged for period and what was included
amount of impairment on revalued assets recognised as a reduction in the revaluation surplus
disclosure of nature if cost

Question 44

What is a discontinued operation?

Answer 44

A component of an entity that has either been disposed of or classified as held for sale.

Question 45

What to do about a discontinued operation?

Answer 45

Disclose the information separately. Like profit after tax and any profit/loss on disposal on face of P&L.

Separate line ‘assets held for sale’. if disposed of no longer be there.

Question 46

Why is revaluation non-distributable?

Answer 46

You cant pay dividends out of it

Question 47

What is an optional reserve transfer?

Answer 47

This is a transfer between retained earnings and revaluation surplus for depreciation based on original cost and revalued amount. As if value moved up then deprecation will be bigger and stakeholders will be disadvantaged.