PPE Flashcards
(47 cards)
What is a tangible item?
An item that can be physically touched. Expected to be used for more than one period (non-current)
What is the recognition of PPE?
- Its probable that future economic benefits will flow to the entity
- The cost of the item can be measured reliably.
What is the measurement of PPE?
- 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)
What will happen to directly attributable costs?
Any costs used to get asset in working order will be CAPITALISED
What happens to other costs?
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.
What happens to subsequent costs?
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.
What are borrowing costs?
Costs incurred by an entity in connection with borrowing funds to construct an asset.
When may a business capitalise borrowing costs?
When they would have been avoided if expenditure on the asset had not been made.
Formula if borrowings taken for purpose of asset?
borrowing costs incurred - income from temporary investment if surplus borrowings.
Formula if taken from general borrowings?
Weighted average cost of borrowings X expenditure on asset.
When may you start capitalising borrowing costs?
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
When should you stop capitalising?
- Extended periods when business suspends active development of qualifying asset.
- all activities to prepare asset for use/sale is complete.
What are the entry’s for the purchase of an asset?
Dr Land and Buildings
Cr Finance cost
What is depreciation?
Cost or valuation of asset - its residual value
What is an assets useful life?
Period for which an asset is expected to be available for use.
need to consider capacity, physical wear/tear etc.
What is an assets residual value?
The estimated amount that an entity would currently obtain from disposal if at end of useful life.
When should depreciation commence?
When the asset is available for normal use.
Should continue until asset is fully depreciated, sold or classified as ‘held for sale’
What happens when land and buildings are acquired together?
They should be separated. This is because land is considered to have an infinite life so never depreciates where as buildings do.
What happens if there is a change to depreciation?
- 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.
What happens if PPE has separate components?
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.
What are major overhauls?
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.
What happens if overhaul/inspection is carried our at predetermined intervals?
Derecognition can be achieved by making the useful life of the asset = the inspection interval
What is the revaluation model?
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.
What is an assets fair value?
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.
