Week 3 & 4 Flashcards
(14 cards)
What is the criteria for a NCA to be classified as PPE?
- Probable economic benefit (increasing or enhancing asset)
- Cost of the item can be measured reliably
What happens to items that do not meet the requirements to be capitalised?
- Expenditure that does not provide probable economic benefit or can be reliable measured must be expensed to the P&L account
- E.g , day-to-day servicing of asset, repair and maintenance of an asset as this maintains economic benefit but does not create additional economic benefit => revenue expenditure
What is componentisation and how does it apply to PPE?
- Components of PPE assets do not have identical useful lives. They may wear out or depreciate at different rates etc.
- Each component is then separately depreciated asset
Which assets can be depreciated?
All assets EXCEPT land (have an infinite life) and assets under construction because when you’re building it it’s not being used
What is a qualifying asset?
An asset which takes a substantial period to get ready for its intended use or sale e.g asset under construction, inventories, investment properties
What are borrowing costs?
Interest and other costs incurred in connection with borrowing funds
How should borrowing costs be accounted for?
- Start capitalising borrowing costs when company:
Incurs expenditure on the asset and
Incurs borrowing costs and
Undertaken activities that are necessary to prepare the asset for its intended use - Capitalisation stops when asset is ready for use or construction is substantially complete
What is the revaluation model and how is it applied to PPE?
- It is optional
- If an item of PPE is revalued, the entire class of PPE to which item belongs is revalued
- Uses FV
- Often carried out every 3-5 years
What are the advantages of the revaluation model?
- Provide up-to-date value
- Could deter the company from being taken over from another
- Having higher figure and healthy financial statements from an investor’s view it is less risky and can borrow more money (more security)
What are the disadvantages of the revaluation model?
- Costly
- If you’re an Ltd there’s no point in doing it
- Depreciation expense increase so decreases profit
What is the treatment of revaluation surplus reserve account following revaluation?
- Transferred to retained earnings when asset is derecognised (i.e disposed of)
- Transferred to retained earnings as the asset is used - amount transferred is difference between depreciation based on revalued amount and depreciation based on original cost (permitted annual transfer of the excess depreciation)
What is investment property?
- Property (land or buildings - or part of a building - or both) held:
To earn rentals
Or for capital appreciation
Or both
DIFFERENT FROM OWNER-OCCUPIED PROPERTY as it generates cash flows independently of the other assets held by the business
How do ancillary services and part-owner occupancy affect whether an asset is Investment Property or PPE?
- If a significant level of service is provided (e.g cleaning, security, maintenance), asset is NOT investment property
- Investment properties sometimes have a dual purpose, i.e they can be used partly as an investment property and partly as owner-occupied property (PPE):
If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use by the business i.e owner occupied e.g A company owns a holiday resort comprising a hotel, casino, sports centre and golf course. The company operates all of the resort except for the casino which is leased out. The casino should be treated as investment property. The rest of the resort is PPE
Does revaluation make financial statements more useful?
- Increase in value adds to relevance and faithful representation of figures as more up-to-date. HOWEVER, since market values don’t need to be adjusted annually may become out-of-date
- Market value detracts from accuracy, as values to some degree are based on opinion
- Argued revaluation works against concept of prudence
- Revaluations are optional so making comparisons between companies can be difficult
