3 Tangible Non - Current assets Flashcards
What IAS covers all aspects of accounting for property, plant and equipment. This represents the bulk of items which are ‘tangible’ non-current assets.
IAS 16
IAS 16 does not apply to the following.
(a) Biological assets related to agricultural activity, apart from bearer biological assets (see below) (b) Mineral rights and mineral reserves, such as oil, gas and other non-regenerative resources
Property, plant and equipment are tangible assets that:
– Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes – Are expected to be used during more than one period
Define Residual value
Residual value is the net amount which the entity expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal.
Define Entity specific value
Entity specific value is the present value of the cash flows an entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful life, or expects to incur when settling a liability.
Define impairment loss
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
The recognition of property, plant and equipment depends on two criteria:
(a) It is probable that future economic benefits associated with the asset will flow to the entity (b) The cost of the asset to the entity can be measured reliably
In this context, recognition simply means incorporation of the item in the business’s accounts, in this case as a non-current asset. The recognition of property, plant and equipment depends on two criteria:
(a) It is probable that future economic benefits associated with the asset will flow to the entity (b) The cost of the asset to the entity can be measured reliably
These recognition criteria apply to s___ e___ as well as costs incurred initially. There are no separate criteria for recognising s___ e_____. Property, plant and equipment can amount to substantial amounts in financial statements, affecting the presentation of the company’s financial position and the profitability of the entity, through depreciation and also if an asset is wrongly classified as an expense and taken to profit or loss
subsequent expenditure
subsequent expenditure
It is generally easy to measure the cost of an asset as the t____ a____ on p___, ie what was paid for it. S___-c____ a___ can also be measured easily by adding together the purchase price of all the constituent parts (labour, material etc) paid to external parties
transfer amount on purchase
Self-constructed assets
These items may be necessary for the entity to o___ f___ e____ benefits from its other assets. For this reason they are recognised as assets. However the original assets plus the safety equipment should be reviewed for impairment.
obtain future economic benefits
The standard lists the components of the cost of an item of property, plant and equipment:
Purchase price, less any trade discount or rebate Import duties and non-refundable purchase taxes Directly attributable costs of bringing the asset to working condition for its intended use, eg: – The cost of site preparation – Initial delivery and handling costs – Installation costs – Testing – Professional fees (architects, engineers) Initial estimate of the unavoidable cost of dismantling and removing the asset and restoring the site on which it is located
The revised IAS 16 provides additional guidance on directly attributable costs included in the cost of an item of property, plant and equipment:
(a) These costs bring the asset to the location and working conditions necessary for it to be capable of operating in the manner intended by management, including those costs to test whether the asset is functioning properly. (b) They are determined after deducting the net proceeds from selling any items produced when bringing the asset to its location and condition.
The following costs will not be part of the cost of property, plant or equipment unless they can be attributed directly to the asset’s acquisition, or bringing it into its working condition.
Administration and other general overhead costs Start-up and similar pre-production costs Initial operating losses before the asset reaches planned performance.
All of these will be recognised as an expense rather than an asset.
IAS 16 specifies that exchange of items of property, plant and equipment, regardless of whether the assets are similar, are measured at f___ v___, unless the e___ t___ lacks c___ s___ or the fair value of neither of the assets exchanged can be measured reliably
fair value, unless the exchange transaction lacks commercial substance or the fair value
The standard offers two possible treatments here, essentially a choice between keeping an asset recorded at cost or revaluing it to fair value.
(a) Cost model. Carry the asset at its cost less depreciation and any accumulated impairment loss. (b) Revaluation model. Carry the asset at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The revised IAS 16 makes clear that the revaluation model is available only if the fair value of the item can be measured reliably
when a revaluation takes place, the depreciation for the period up to the date of revaluation should be deducted from the carrying value before calculating the revaluation surplus. True/ false
True
The standard states that the depreciable amount
The depreciable amount of an item of property, plant and equipment should be allocated on a systematic basis over its useful life.
The standard states that the depreciation method
The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity.
The standard states that the depreciation charge
The depreciation charge for each period should be recognised as an expense unless it is included in the carrying amount of another asset.
Land and buildings are dealt with separately even when they are acquired together because land normally has an unlimited life and is therefore not depreciated. True / False
True
A review of the useful life of property, plant and equipment should be carried out at least at each financial year end and the depreciation charge for the current and future periods should be adjusted if expectations have changed significantly from previous estimates. True/ False
True
The depreciation method should also be reviewed at least at each financial year end and, if there has been a significant change in the expected pattern of economic benefits from those assets, the method should be changed to suit this changed pattern.the change should be accounted for as a change in accounting estimate and the depreciation charge for the current and future periods should be adjusted. T/F
True
An impairment loss should Not be treated in the same way as a revaluation decrease ie the decrease should be recognised as an expense. However, a revaluation decrease (or impairment loss) should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset.
An impairment loss should be treated in the same way as a revaluation decrease ie the decrease should be recognised as an expense. However, a revaluation decrease (or impairment loss) should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset. True
A reversal of an impairment loss should be treated in the same way as a revaluation increase, ie a revaluation increase should be recognised as income to the extent that it reverses a revaluation decrease or an impairment loss of the same asset previously recognised as an expense. T/F
T
What is a complex asset?
These are assets which are made up of separate components. Each component is separately depreciated over their useful life
When an asset is temporarily withdrawn from use, or sold or scrapped, and no future economic benefits are expected from its disposal, it should be withdrawn from the statement of financial position. Gains or losses are the difference between the estimated net disposal proceeds and the carrying amount of the asset. They should be recognised as income or expense in profit or loss. True/ False
When an asset is permanently withdrawn from use, or sold or scrapped, and no future economic benefits are expected from its disposal, it should be withdrawn from the statement of financial position. Gains or losses are the difference between the estimated net disposal proceeds and the carrying amount of the asset. They should be recognised as income or expense in profit or loss
An entity is required to recognise the carrying amount of an item of property, plant or equipment that it disposes of on the date the criteria for the sale in IFRS 15 Revenue from contracts with customers would be met. This also applies to parts of an asset. T/F
An entity is required to derecognise the carrying amount of an item of property, plant or equipment that it disposes of on the date the criteria for the sale in IFRS 15 Revenue from contracts with customers would be met. This also applies to parts of an asset. True
The following factors should be considered when estimating the useful life of a depreciable asset:
Expected physical wear and tear Obsolescence Legal or other limits on the use of the assets
Once decided, the useful life should be reviewed at least every financial year end and depreciation rates adjusted for the current and future periods if expectations vary significantly from the original estimates. The effect of the change should be disclosed in the accounting period in which the change takes place. T/F
T
In most cases the residual value of an asset is likely to be immaterial. If it is likely to be of any significant value, that value must be estimated at the date of purchase or any subsequent revaluation. T/F
T
Consistency is important. The depreciation method selected should be applied consistently from period to period unless altered circumstances justify a change. When the method is changed, the effect should be quantified and disclosed and the reason for the change should be stated. T/F
T
IAS 16 also requires the following to be disclosed for each major class of depreciable asset.
Depreciation methods used Useful lives or the depreciation rates used Total depreciation allocated for the period Gross amount of depreciable assets and the related accumulated depreciation
What is the first misconception about depreciation?
t is sometimes thought that the carrying amount of an asset is equal to its net realisable value and that the object of charging depreciation is to reflect the fall in value of an asset over its life. This misconception is the basis of a common, but incorrect, argument which says that freehold properties (say) need not be depreciated in times when property values are rising. It is true that historical cost statements of financial position often give a misleading impression when a property’s carrying amount is much below its market value, but in such a case it is open to a business to incorporate a revaluation into its books, or even to prepare its accounts based on current costs. This is a separate problem from that of allocating the property’s cost over successive accounting periods
What is the second misconception about depreciation?
Another misconception is that depreciation is provided so that an asset can be replaced at the end of its useful life. This is not the case: (i) If there is no intention of replacing the asset, it could then be argued that there is no need to provide for any depreciation at all (ii) If prices are rising, the replacement cost of the asset will exceed the amount of depreciation provided
Give examples of items that are not investment property.
Property intended for sale in the ordinary course of business (IAS 2 Inventories)
Property being constructed or developed on behalf of third parties (IFRS 15 Revenue from contracts with customers)
Owner-occupied property (IAS 16 Property, plant and equipment)
Investment property should be recognised as an asset when two conditions are met:
(a) It is probable that the future economic benefits that are associated with the investment property will flow to the entity. (b) The cost of the investment property can be measured reliably.
An investment property should be measured initially at its c__, including transaction costs. A property interest held under a lease and classified as an investment property shall be accounted for as if it _______e. The asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount is recognised as a liability.
cost; as if it were a finance lease.
IAS 40 requires an entity to choose between two
The fair value model The cost model
Where an entity chooses to classify a property held under an operating lease as an investment property, there is no choice. The fair value model must___
The fair value model must be used for all the entity’s investment property, regardless of whether it is owned or leased.
(a) After initial recognition, an entity that chooses the fair value model should measure all of its investment property at fair value, except in the extremely rare cases where this cannot be measured reliably. In such cases it should apply the IAS 16 cost model. (b) A gain or loss arising from a change in the fair value of an investment property should be recognised in net profit or loss for the period in which it arises. (c) The fair value of investment property should reflect market conditions at the end of the reporting period True/ False
True
The standard elaborates on issues relating to fair value:
(a) Fair value assumes that an orderly transaction has taken place between market participants, ie both buyer and seller are reasonably informed about the nature and characteristics of the investment property. (b) A buyer participating in an orderly transaction is motivated but not compelled to buy. A seller participating in an orderly transaction is neither an over-eager nor a forced seller, nor one prepared to sell at any price or to hold out for a price not considered reasonable in the current market. (c) Fair value is not the same as ‘value in use’ as defined in IAS 36 Impairment of assets. Value in use reflects factors and knowledge specific to the entity, while fair value reflects factors and knowledge relevant to the market. (d) In determining fair value an entity should not double count assets. For example, elevators or air conditioning are often an integral part of a building and should be included in the investment property, rather than recognised separately. (e) In those rare cases where the entity cannot determine the fair value of an investment property reliably, the cost model in IAS 16 must be applied until the investment property is disposed of. The residual value must be assumed to be zero.
The cost model is the cost model in IAS 16. Investment property should be measured at depreciated cost, less any accumulated impairment losses. An entity that chooses the cost model should disclose the fair value of its investment property. T/F
True
Once the entity has chosen the fair value or cost model, it should apply it to all its investment property. It should not change from one model to the other unless the change will result in a more appropriate presentation. IAS 40 states that it is highly unlikely that a change from the fair value model to the cost model will result in a more appropriate presentation. T/F
True
Transfers to or from investment property should only be made when there is a change in use. T/F
True
a change in use. For example,
owner occupation commences so the investment property will be treated under IAS 16 as an owner-occupied property
What does derecognising an asset mean?
Derecognise (eliminate from the statement of financial position) an investment property on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal
gain or loss on disposal is the difference between the net disposal proceeds and the carrying amount of the asset. It should generally be recognised as income or expense in profit or loss. T/F
True
Disclosure requirements These relate to:
Choice of fair value model or cost model Whether property interests held as operating leases are included in investment property Criteria for classification as investment property Assumptions in determining fair value Use of independent professional valuer (encouraged but not required) Rental income and expenses Any restrictions or obligations
Fair value model – additional disclosures An entity that adopts this must also disclose a reconciliation of the carrying amount of the investment property at the beginning and end of the period. T/F
True Fair value model – additional disclosures An entity that adopts this must also disclose a reconciliation of the carrying amount of the investment property at the beginning and end of the period
These relate mainly to the depreciation method. In addition, an entity which adopts the cost model must disclose the fair value of the investment property. T/F
These relate mainly to the depreciation method. In addition, an entity which adopts the cost model must disclose the fair value of the investment property
Define borrowing costs and Qualifying assets
Borrowing costs. Interest and other costs incurred by an entity in connection with the borrowing of funds. Qualifying asset. An asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
The standard lists what may be included in borrowing costs:
Interest on bank overdrafts and short-term and long-term borrowings Amortisation of discounts or premiums relating to borrowings Amortisation of ancillary costs incurred in connection with the arrangement of borrowings Finance charges in respect of finance leases recognised in accordance with IAS 17 Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs
Depending on the circumstances, any of the following may be qualifying assets.
Inventories Manufacturing plants Power generation facilities Intangible assets Investment properties
IAS 23 revised: capitalisation Under the revised treatment, all eligible borrowing costs must be capitalised. Only borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset can be capitalised as part of the cost of that asset. The standard lays out the criteria for determining which borrowing costs are eligible for capitalisation. True/ false
IAS 23 revised: capitalisation Under the revised treatment, all eligible borrowing costs must be capitalised. Only borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset can be capitalised as part of the cost of that asset. The standard lays out the criteria for determining which borrowing costs are eligible for capitalisation.
In a situation where borrowings are obtained generally, but are applied in part to obtaining a qualifying asset, then the amount of borrowing costs eligible for capitalisation is found by applying the ‘capitalisation rate’ to the expenditure on the asset. T/F
True
What is the capitalisation rate?
The capitalisation rate is the weighted average of the borrowing costs applicable to the entity’s borrowings that are outstanding during the period, excluding borrowings made specifically to obtain a qualifying asset. However, there is a cap on the amount of borrowing costs calculated in this way: it must not exceed actual borrowing costs incurred.
Three events or transactions must be taking place for capitalisation of borrowing costs to be started
(a) Expenditure on the asset is being incurred (b) Borrowing costs are being incurred (c) Activities are in progress that are necessary to prepare the asset for its intended use or sale
The following should be disclosed in the financial statements in relation to borrowing costs.
(a) Amount of borrowing costs capitalised during the period (b) Capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation
2 Which of the following elements can be included in the production cost of a non-current asset? (i) Purchase price of raw materials (ii) Architect’s fees (iii) Import duties (iv) Installation costs
all of them
