4. A) Accounting for Assets (PPE) Flashcards
Assets IASB Definition
A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce future economic benefits.
Steps to follow the treatment of Assets
- Is this an asset?
- Is it to be recognised on the statement of Financial Position?
- What method is to be used to measure it or to value it?
IAS 16 Property, plant and equipment
Sets out the accounting treatment for property, plant and equipment (PPE).
Recognition of the assets, determination of their carrying amounts, and depreciation charges and impairment losses to be recognised in relation to them.
Property, plant and equipment (definition)
Tangible items that are held for use by the business and that are expected to be used during more than one period
Depreciation (definition)
The systematic allocation of the depreciable amount of an asset over its useful life
Depreciable amount (definition)
The cost or valuation of an asset less its residual value
Useful life (definition)
The period over which an asset is expected to be available for use by the entity or the number of production of similar units expected to be obtained from the asset by an entity
An item of PPE can be recognised as an asset if:
- It is probable that future economic benefits associated with the item will flow to the entity.
- The cost of the item can be measured reliably.
Initially PPE measured at cost:
Cost is the purchase price, including any tax and duties, plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating. We can include the the initial estimate of the costs of dismantling and removing the item and restoring the site.
After acquisition, 2 models of measurement:
- Cost model:
the asset is carried at its cost less any accumulated depreciation and any accumulated impairment losses. - Revaluation model:
revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
(If an item is revalued, the entire class of assets to which that asset belongs should be revalued).
Revaluation (increase in value) of an asset treatment
- Asset increase value (Debit PPE)
- Increase recognised as a revaluation surplus in equity section of SFP.
- And as other comprehensive income in SPL.
If reverts previous decrease:
- Increase recognised as income in SPL (difference).
- Rest of increase revaluation surplus
Revaluation (reduction in value) of an asset
- Asset to reduce value (Credit PPE)
- Recognised as an expense in SPL
If reverts previous increase:
- Asset decrease value.
- Debited to revaluation surplus (the previously added amount ).
- Expenses the remaining loss in value.
Depreciation (IAS16 requirements)
- The depreciable amount (cost less residual value) should be systematically allocated over the asset’s useful life.
- The residual value and the useful life of the asset should be reviewed at least annually.
- It is recognised even if the fair value of the asset exceeds its carrying amount, as long as the asset’s residual value does not exceed its carrying amount.
Factors to consider in determining the useful life of an asset
- Expected usage of the asset
- Expected physical wear and tear
- Technical or commercial obsolescence
- Legal or similar limits on the use of the asset
Depreciation methods
- Straight-line: constant depreciation charge over the asset’s useful life.
- Diminishing balance: decreasing depreciation charge over the useful life
- Units of production: depreciation charge based on the expected use or output.
Choosing the depreciation method
The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
If a significant change in the expected pattern of consumption, the method shall be changed to reflect the changed pattern.
Derecognition
Occurs when an item of PPE is disposed of or when no future economic benefits are expected from its use or disposal.
Any gain or loss on disposal is recognised as income or expense (difference between net disposal proceeds and the carrying amount of the item).
Removal of the asset’s cost and accumulated depreciation, or carrying amount, from the accounts.
For each class of PPE financial statements need to show:
- The measurement bases used for determining the gross carrying amount (cost or revaluation method used).
- The depreciation method used.
- The useful lifes or the depreciation rates used.
- The gross carrying amount and the accumulated depreciation at the beginning and end of the period.
- A reconciliation of the carrying amount at the beginning and end of the period showing: Additions, Disposals, Increases or decreases resulting from revaluations, Impairment, Depreciation…
If items of PPE are stated at revalued amounts, financial statements need to show:
- The effective date of the revaluation
- Whether an independent valuer was involved
- For each revalued class of PPE, the carrying amount that would have been recognised had the assets been carried under the cost model
- The revaluation surplus
IAS 36 Impairment of Assets
Sets out the accounting procedures to ensure that assets are carried at no more than their value, or recoverable amount.
If the recoverable amount is less than its carrying amount, then the carrying value is to be reduced.
Applies to most non-current assets, not to current assets such inventories.
Recoverable amount
Higher of its fair value, less costs of disposal, and its value in use
Carrying amount
Amount at which an asset is recognised after deducting any accumulated depreciation and any accumulated impairment losses.
Impairment loss
Amount by which the carrying amount of an asset exceeds its recoverable amount.
Recognised as an expense in the SPL
Fair value
Price that would be received to sell an asset or paid to transfer a liability at the measurement date (date of valuation)
Value in use
The present value of the future cash flows expected to be derived from an asset.
The impairment review
- What is the asset’s carrying amount?
- What is the asset’s recoverable amount?
Higher of
- Fair value less cost of disposal
- Value in use - If carrying amount greater, asset impaired and down to recoverable amount in SFP. Amount of impairment loss expense in SPL.
Recognition of Impairment loss in Financial statements
Expense in SPL but if asset revalued, then it would be set against the revaluation surplus, up to the amount of the earlier increase in value.
In the SFP add the lower or:
-Carrying amount or
-Recoverable amount in “carrying amount”
