2. Tangible non-current assets Flashcards
What is IAS 46?
Property, plant and equipment
What is described below?
Tangible assets held by an entity for more than one accounting period for use in the production or supply of goods or services, for rental to others, or for administrative purposes
Property, plant and equipment
When should an item of property, plant and equipment be recognised as an asset?
There are two factors
- 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 should an item of Property, plant and equipment be initially measured at?
Cost
When we measure an item of PPE at cost, what does this include?
All costs involved in bringing the asset into working condition
What do all costs involved in bringing the asset into working condition include?
Give four examples
- Cost of site preparation
- Delivery cost
- Installation cost
- Borrowing cost
What items should be written off as incurred in the initial measurement of PPE?
Expense items, such as;
- Fuel
- Training and warranty costs
should be written off as incurred.
What costs in the initial measurement of PPE should be capitalised and then unwound over time?
Dismantling costs
What are the three cases where subsequent expenditure on PPE can be treated as part of the cost?
- It enhances the economic benefits provided by the asset
- it relates to an overhaul or required major inspection of the asset
- it is replacing a component of a complex asset.
What do we mean by it enhances the economic benefits provided by the asset?
- Extending the assets life
- An expansion
- Increasing the productivity
What should we do with the costs on an overhaul or required major inspection of the asset?
Should be capitalised and depreciated over the time until the next overhaul or safety inspection
What do we do with the old component of a complex asset when it is being replaced?
Derecognise the replaced component
What is a complex asset?
- Made up of a number of components, which each depreciate at different rates
e. g. an aircraft would comprise body, engines and interior.
What do we do with all subsequent expenditure that is not capitalised and included in the cost of an asset?
Recognised in the P+L
Why does all subsequent expenditure that is not capitalised and included in the cost of an asset get recognised in the P+L?
Because it merely maintains the economic benefits originally expected
What is described below?
‘The systematic allocation of the depreciable amount of an asset over its useful life’
Depreciation
What is described below?
‘The cost of an asset, or other amount substituted for cost, less its residual value’
Depreciable amount
From when should depreciation be charged?
From the date the asset is available for use
i.e. it is capable of operating in the manner intended by management.
If staff need to be trained to use an asset, how is depreciation charged?
Depreciation is continued even if the asset is idle
What are three possible depreciation methods used?
- Straight line
- Reducing balance
- Machine hours
When can you change from one method of depreciation to another?
It is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position
Does changing the depreciation method constitute a change in accounting policy?
No
It is a change in accounting estimate
How do you depreciate a complex asset?
Each component is depreciated individually over its useful life
What should you do with useful life and residual value at the end of each accounting period?
Review and revise if expectations are significantly different from previous estimates.
If inspection and overhaul costs satisfy the IAS 16 rules for separate components what can we do?
Capitalise as a non-current asset
depreciate over their useful economic life (until next inspection or overhaul is due)
What are the two IAS 16 accounting treatments for PPE??
The cost model
The revaluation model
What is the cost model?
Property, plant and equipment should be valued at cost less accumulated depreciation.
What is the revaluation model?
Property, plant and equipment may be carried at a revalued amount less any subsequent accumulated depreciation.
What two conditions must be complied with if using the revaluation model?
- Revaluations must subsequently be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at each reporting date.
- When an item of property, plant and equipment is revalued, the entire class of assets to which the item belongs must be revalued.
What are the three steps for revaluation?
1) Restate asset’s cost to the new valuation.
2) Eliminate any existing accumulated depreciation for the asset.
3) Show the total increase in Other Comprehensive Income, at the foot of the statement of profit or loss. This would then be taken to the revaluation surplus
What are the journals for revaluation?
Assuming a gain
Dr Non-current assets cost/valuation (revalued amount – cost)
Dr Accumulated depreciation (eliminate accumulated balance)
Cr Other Comprehensive Income (revaluation surplus)
How do we recognise revaluation gains?
In other comprehensive income either within the statement of profit or loss
Gain is then carried in a revaluation surplus within equity
Can revaluation surplus be distributed to investors?
No - because its a capital reserve
How do we recognise revaluation losses?
As an impairment expense in P+L
Can you offset gains and losses between different properties?
No
What is the treatments once an asset has been revalued.
- Depreciation charged over useful life of asset
- The whole charge must go to P+L for the year
- An annual reserves transfer may be made, from revaluation surplus to retained earnings, for the additional depreciation charged on the revalued amount compared to cost
How do we calculate the profit on disposal of a revalued asset?
The difference between the net sale proceeds and the carrying amount.
How do we calculate the profit on disposal of a revalued asset?
The difference between the net sale proceeds and the carrying amount.
What are the two steps to disposing of a revalued asset
(1) It should be accounted for in the statement of profit or loss of the period in which the disposal occurs.
(2) Any balance on the revaluation surplus relating to this asset should now be transferred to retained earnings.
What is IAS 20?
Accounting for Government Grants and Disclosure of Government Assistance
Give two examples of Government grants
- Revenue grants, e.g. contribution towards payroll costs
- Capital grants, e.g. contribution towards purchase of non-current assets.
What are the two general principles when determining the treatment of grants?
Prudence
Accruals
Explain prudence in respect to government grants
Grants should not be recognised until the conditions for receipt have been complied with and there is reasonable assurance the grant will be received.
Explain accruals in respect to government grants
Grants should be matched with the expenditure towards which they were intended to contribute.
What are the two circumstances which revenue grants depend on?
- If the grant is paid when evidence is produced that certain expenditure has been incurred, the grant should be matched with that expenditure.
- If the grant is paid on a different basis, e.g. achievement of a non- financial objective, such as the creation of a specified number of new jobs, the grant should be matched with the identifiable costs of achieving that objective.
How does IAS 20 allow for revenue grants to be presented?
- Presented as a credit in the statement of profit or loss, or
- Deducted from the related expense.
What are the two treatments of Capital grants that IAS 20 allows?
- Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
- Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher depreciation charge on the original cost.
What are the two treatments of Capital grants that IAS 20 allows?
- Write off the grant against the cost of the non-current asset and depreciate the reduced cost.
- Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher depreciation charge on the original cost.
What is IAS 23?
Borrowing costs
What are the three conditions to capitalise borrowing costs?
- Expenditure for the asset is being incurred
- Borrowing costs are being incurred
- Activities that are necessary to prepare the asset for its intended use or sale are in progress.
When should capitalisation of borrowing costs cease?
- ‘substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete’ (IAS 23, para 21), or
- Construction is suspended, e.g. due to industrial disputes.
What is IAS 40?
Investment Property
What is the IAS 40 definition of investment property?
Land or a building ‘held to earn rentals or for capital appreciation or both’
What should investment properties be initially measured at?
Cost
What are the two choices for subsequent measurement of investment properties?
- Cost model
- Fair value model
Once the model is chosen it must be used for all investment properties.
How does the fair value model work for investment properties?
- The asset is revalued to fair value at the end of each year
- The gain or loss is shown directly in the statement of profit or loss (not other comprehensive income)
- No depreciation is charged on the asset.
