06. Non-current Assets Flashcards
What are the two recognition criteria for PPE under IAS 16?
- It is probable that future economic benefits associated with the asset will flow to the entity.
AND - The cost of the asset can be measured reliably
What is the definition of PPE under IAS 16?
PPE are tangible items that:
- are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes.
- are expected to be used during more than one period.
IAS 16 PPE states that PPE should be measured initially at cost. What are some the costs which may be included initially?
- Purchase price, including import duties and non-refundable purchase taxes (after deducting trade discounts and rebates).
- Directly attributable costs of bringing the asset to the location and condition necessary for it to operate as intended.
- Decommissioning costs.
If items are sold during the testing stage of PPE, how should these proceeds and their associated costs be treated?
Sales proceeds from test products should be recognised as revenue and their associated production costs recognised in the SOPL.
What are the two models for PPE to be subsequently measured using under IAS 16?
- Cost model - cost less accumulated depreciation and accumulated impairment losses.
- Revaluation model - revalued amount less accumulated depreciation and accumulated impairment losses.
To use the revaluation model under IAS 16, what are the required criteria? How are movements in the revalued amount recognised in the FS?
Criteria:
1. Fair value must be reliably measurable.
- Revaluations must be carried out with sufficient regularity such that the carrying amount does not differ materially from fair value at any reporting date.
- The model is an accounting policy choice, so if an item is revalued, all assets in the class must be revalued.
Effect on FS:
Upward revaluations are presented in OCI and disclosed as an item not to be recycled to P&L in subsequent periods. If there was a previous downward revaluation in P&L, the upward reval should be charged to P&L until the downward reval is reversed and then the remainder goes to OCI. SOFP has revaluation surplus.
A downward reval goes to P&L unless reversing previous upward movement in OCI. In this case, first reverse movement in OCI then charge the rest to P&L.
How are the following PPE related subsequent costs recognised in the FS under IAS 16?
- running costs
- part replacement
- major inspection or overhaul costs
- Running costs aka repairs and maintenance are meant to restore or maintain future economic benefits not enhance them. Hence they are expensed in P&L as they are incurred.
- Part replacement - so some PPE like airplanes are just multiple component parts which can require replacement at different intervals ie different useful lives. Replacement parts should be capitalised in SOFP and the replaced parts recognised.
- Major inspection or overhaul costs - in order to operate, some assets eg airplanes require regular inspections for faults. These inspection costs should be capitalised. On initial recognition, an estimate is made for the inspection costs and is depreciated over the period to the first inspection. This is not a separate component cost. Remaining carrying amount of the cost of previous inspection is recognised.
What are some arguments for non-depreciation of PPE?
- Assets are maintained to a high standard. The maintenance cost is charged to P&L in lieu of depreciation.
- The residual value is at least equal to the carrying amount eg due to maintenance.
- Assets have a very long, useful life such that depreciation is not material.
- Asset is not currently in use.
What is residual value? How often should residual value, depreciation and useful life be reviewed under IAS 16 and how are their adjustments accounted for?
Residual value is the estimated amount currently obtainable on disposal of an asset, after deduction of any disposal costs, on the basis that the asset were already of the age and in the condition expected at the end of its useful life.
Residual value and the useful life of an asset must be reviewed at least at each financial year end and adjustments are accounted for as a change in accounting estimate.
What is the accounting treatment for depreciation under IAS 16?
Land that is consumed is not depreciated.
Depreciation must be charged in all other circumstances but may be zero (where the residual value exceeds the carrying amount of the asset).
When is an asset derecognised under IAS 16? What is the accounting treatment for revaluation surplus when a revalued asset is disposed of?
When disposal occurs or no future economic benefits are expected from the asset’s use or disposal.
The revaluation surplus may be transferred directly to retained earning ms or it may be left in the revaluation surplus within other components of equity.
What are the disclosure requirements under IAS 16?
- Measurement bases used.
- Useful lives and depreciation rates
- Reconciliation of the carrying amounts at the beginning and end of the period.
- If PPE are stated at revalued amounts, info about the revaluation should also be disclosed.
How does IAS 16 and the Framework deviate regarding measurement of PPE?
IAS 16 assets are measured at cost so if there are no costs, assets can’t be recognised.
However, framework states that in absence of costs, an item can still be considered an asset eg donated assets.
The FS would more faithfully represent the financial position of the business if assets were included at fair value.
What is an investment property as per IAS 40?
Investment property is property (land or buildings) held (by the owner or by the lessee as a ROU asset) to earn rentals or for capital appreciation or both.
Includes land held for undecided future use and buildings leased out under an operating lease.
What are the recognition criteria for investment property under IAS 40?
Investment property is recognised as an asset when:
- It is probable that the future economic benefits that are attributable to the investment property will flow to the entity.
And - the cost of the investment property can be measured reliably.
How is investment property initially measured? IAS 40
An owned investment property is measured initially at its cost, which is the fair value of the consideration given for it less any transaction costs.
An investment property that is held as a ROU asset is initially measured in accordance with IFRS 16 leases.
Outline the two models allowed for subsequent measurement of investment properties under IAS 40?
Selected model must be applied to all investment properties. (This is an accounting policy.)
- Cost model
- No revals permitted.
- If held for sale, follow IFRS 5.
- If ROU asset not HFS, follow IFRS 16.
- any other circumstance, follow IAS 16. - Fair value model
- Fair value remeasured each reporting date, no depreciation charged.
- reval gains/losses charged to P&L.
- if investment property is held as ROU asset, it is the FV of the ROU that must be measured rather than the FV of the underlying property.
Where investment property is measured using the cost model, how is a transfer between investment property, owner-occupied property and inventories accounted for (IAS 40)?
Transfers between these categories do not change the carrying amount of the transferred property.
Where investment property is measured using the fair value model, how is a transfer between investment property, owner-occupied property and inventories accounted for (IAS 40)?
- Transfer from investment property to inventories or owner-occupied property.
Use the fair value at the date of change for subsequent accounting under IAS 2, IAS 16 or IFRS 16.
- Transfer from owner-occupied property to investment property.
Normal accounting under IAS 16/IFRS 16 up to date of transfer. On adopting fair value model under IAS 40, if fair value is greater than carrying value recognise in OCI and credit to revaluation surplus in equity as per IAS 16. If fair value is less than carrying value, charge the loss to P&L.
- Transfer from inventories to investment property.
Any difference between the carrying amount and the fair value at the point of transfer should be recognised in P&L.
What are the disclosure requirements under IAS 40 Investment Property?
An entity must disclose:
- whether the cost or fair value model is used.
- amounts recognised in P&L for the period.
- a reconciliation between the carrying amounts of investment property at the beginning and end of the period.
- the fair value of investment property if the entity uses the cost model.
Under IFRS 5, when should a non-current asset be classified as held for sale?
A non-current asset or disposal group is classified as held for sale when its carrying amount will be recovered primarily through a sale of the asset rather than its continuing use.
What are the 7 conditions required to be met before an asset can be classified as held for sale?
- the item is available for immediate sale in its present condition.
- the sale is highly probable.
- management is committed to a plan to sell the item.
- an item is being actively marketed at a reasonable price in relation to its current fair value.
- the sale is expected to be completed within one year from the date of classification.
- it is unlikely that the plan will change significantly or be withdrawn.
If a non-current asset HFS is not sold within one year, what 2 criteria must be met for it to continue being classified as held for sale?
- The delay has been caused by events or circumstances beyond the entity’s control.
- There is sufficient evidence that the entity is still committed to the sale.
How are non-current assets HFS measured under IFRS 5?
Before classification, asset would be measured according to the relevant standard.
On classification as HFS, the asset is measured at the lower of its carrying value and the asset’s fair value less costs to sell.
Where fair value less costs to sell is lower than the carrying amount, the item is written down as an impairment loss unless the asset has a revaluation surplus, in which case, the write down should first pass through OCI.
Assets HFS are not depreciated.
How should HFS assets (and liabilities in a disposal group) be presented in the FS IFRS 5?
Should be presented separately from other assets in the SOFP.
Major classes of assets and liabilities HFS must be disclosed separately either on the face of the SOFP or in the notes.
Where an asset or disposal group is classified as HFS after the reporting date but before the issue of the FS, details should be disclosed in the notes (non-adjusting event after the reporting period).
If the criteria for HFS are no longer met, how should the asset or disposal group be measured under IFRS 5?
The assets or disposal group should be measured at the lower of:
- its carrying amount before it was classified as HFS adjusted for any depreciation, amortisation or revaluations that would have been recognised has it not been classified as HFS.
- its recoverable amount at the date of the subsequent decision not to sell.
Any adjustment required is recognised in profit or loss as a gain or loss from continuing operations.
What are the required disclosures under IFRS 5 Non-current assets held for sale and discontinued operations?
In the period, the asset is classified as HFS, the entity must disclose:
- a description of the non-current asset (or disposal group).
- a description of the facts and circumstances of the sale or expected sale
- any impairment losses or reversals recognised.
What is an intangible asset as per IAS 38 Intangible Assets?
An intangible asset is an identifiable non-monetary asset without physical substance.
As per IAS 38, when is an intangible asset identifiable?
- Asset is separable.
- Arises from contractual or other legal rights.
How are research and development costs treated under IAS 38?
Research costs are expensed in SOPL.
Development costs can only be recognised as assets if:
- the project is technically feasible.
- the entity intends to complete the intangible asset and then use it or sell it.
- the asset will generate probable economic benefits.
- the entity has adequate resources to complete the project.
- the entity can reliably measure the expenditure on the project.
How is an intangible asset measured initially (IAS 38)?
Intangibles are measured initially at cost.
If acquired separately then purchase price plus costs of preparing asset for use.
If acquired by govt grant then either fair value or plus costs to prepare for use.
If internally generated (development costs), then measure directly attributable costs incurred in the period after the recognition criteria are met.
If acquired through an exchange of assets, then measure at fair value unless transaction lacks commercial substance or it’s not possible to measure fair value of asset given up or asset received. Otherwise, use carrying value of the asset given up.
How is an intangible asset subsequently measured? IAS 38
Intangibles may be measured either:
- At cost less accumulated amortisation and impairment.
- Using revaluation model ie fair value less accumulated amortisation and impairment. This is only possible if an active market exists. Same treatment as PPE.
How are intangibles amortised under IAS 38?
If asset has an indefinite useful life, do not amortise. However, assess for impairment annually and when there is an indicator of impairment as per IAS 36.
If asset has a finite useful life then amortise it over that useful life.
What are the disclosure requirements under IAS 38?
Entity must disclose:
- The amount of research and development expenditure expensed in the period.
- The amortisation methods used.
- For intangible assets assessed as having an indefinite useful life, the reasons supporting that assessment.
- The date of any revaluations, if applicable, as well as the methods and assumptions used.
- A reconciliation of the carrying amount of intangibles at the beginning and end of the reporting period.
What are borrowing costs as per IAS 23 Borrowing Costs?
Interest and other costs that an entity incurs in connection with the borrowing of funds.
When is a borrowing cost capitalised (IAS 23)?
Borrowing costs are capitalised if they relate to the acquisition, construction or production of a qualifying asset.
A qualifying asset being one that takes a substantial period of time to get ready for its intended use.
Outline the capitalisation period for borrowing costs as per IAS 23.
Borrowing costs should only be capitalised while construction is in progress.
Capitalisation starts when expenditure is being incurred, borrowing costs are being incurred and activity to prepare the asset for use or sale has commenced.
Capitalisation should be suspended during extended periods in which active development is interrupted.
Capitalisation should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
What are the disclosure requirements under IAS 23 borrowing costs?
- The value of the borrowing costs capitalised during the period.
- The capitalisation rate.
