Week 4: PPE Flashcards
What is Impairment
When the carrying value of an asset in the
balance sheet is greater than the
recoverable amount
When does Impairment Occur (2)
- Balance sheet amount is revised to
recoverable amount (higher of net selling
price or value in use) - Impairment loss is w/o to Profit and Loss unless asset previously revalued in which case eliminate
revaluation surplus first
External Indicators
A fall in the market value of the asset ;
Material adverse changes in :regulatory
environment; the market; market rates of
return
Internal Indicators
Material changes in operations; major
reorganisation; loss of key personnel; loss-
making situation
What is Investment Property
An interest in land and/or buildings:
- Construction work and
development have been completed
- Held for its investment potential
(capital appreciation, rental income or both),
any rental income being negotiated at arm’s
length
Name an Asset which has unlimited Economic Life (1)
Land
What is Residual Value
The residual value is the amount that a company expects to receive for an asset at the end of its service life less any anticipated disposal costs
What is Useful Economic Life
The period of time over which the entity expects to derive economic benefits from the asset
i.e. the period over which an asset is expected to be
available for use
Four things to Determine Depreciation Charge (4)
- cost/valuation of the asset
- useful economic life of the asset
- residual value of the asset
- method of depreciation
Examples Of Subsequent Expenditure which is Capitalised (3)
- Modification of an item of plant to extend its
useful economic life or increase capacity - Upgrading machine parts to achieve a subsequent
improvement in quality of output - Adoption of new production processes enabling
substantial reduction in previously assessed
operating costs
What is a Qualifying Asset
A qualifying asset is an asset that takes a
substantial time to get ready for use or sale e.g.
ships, aircraft
Arguments in Favor of capitalising interest costs (4)
- Costs of borrowing to allow construction of a non-current asset is no different from other costs which are capitalised, interest costs directly
attributable to asset - Improved matching of income and expenses.
- Interest incurred with a view to future benefit, it
is appropriate to treat interest as part of asset
which generates future benefit - Capitalisation provides greater comparability
between companies which develop their own assets
and those which buy similar completed assets
Arguments against capitalising interest costs (3)
- Illogical to treat borrowing costs during the period of construction of an asset differently from those incurred when asset is in use
- Borrowing costs usually incurred to support all of the activities of the business – it would be arbitrary for finance to be matched against specific assets
- Capitalisation of borrowing costs will result in the
carrying value of an asset on the balance sheet being
dependent on method of financing
What can be included in Production Costs? (3)
Purchase price of raw materials and consumables
- Labour costs of own employees (e.g. site workers,
in-house architects and surveyors) arising from
construction, or acquisition of specific PPE - Costs directly attributable to production
What cannot be included in Production Costs? (2)
- Administration and other general overhead excluded
- Costs of opening a new facility, introducing new product or service, conducting business in a new location not included in cost PPE
