4. Property, plant and equipment and impairment of assets

Question 1

What assets are included in property, plant and equipment?”

Answer 1

Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.

Question 2

Does AASB 116 apply when property, plant and equipment assets are classified as held for sale?

Answer 2

No

Question 3

Recognition of property, plant and equipment depends on what two criteria being met?

Answer 3

(1) the existence of probable future economic benefits

(2) the ability to measure an asset’s cost reliably.

Question 4

How are specific assets recognised?

Answer 4

The specific assets recognised are affected by an analysis of the component parts of the assets acquired.

Question 5

What does cost mean?

Answer 5

The amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other accounting standards, e.g. AASB 2 Share-based Payment.

Question 6

What is fair value?

Answer 6

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 7

What is entity-specific value?

Answer 7

The present value of the cash flows an entity

(1) expects to arise from the continuing use of an asset and from its disposal at the end of its useful life or
(2) expects to incur when settling a liability

Question 8

When are property, plant and equipment measured?

Answer 8

They are initially measured at the cost of acquisition.

Question 9

How is the most worked out when multiple assets are acquired as a package?

Answer 9

The cost of each asset is measured by allocating the cost of the package to each asset in proportion to the fair value of each asset acquired.

Question 10

Does cost include any considerations?

Answer 10

The cost consists of the fair value of the consideration paid plus any directly attributable costs, including estimated costs of dismantling and removal.

Question 11

When is the cost of acquisition measured?

Answer 11

At the acquisition date.

Question 12

Do entities have a choice of measurement models?

Answer 12

Entities have a choice of measurement models subsequent to initial recognition — the choice is restricted to the cost model and the revaluation, or fair value, model.

Question 13

How are choices made for a model of measurement?

Answer 13

The choice of model is an accounting policy decision, subject to the application of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.

Question 14

What are impairment losses?

Answer 14

The amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount (which is the higher of the asset’s net selling price and its value in use)

Question 15

What is depreciation?

Answer 15

The systematic allocation of the depreciable amount of an asset over its useful life

Question 16

What is depreciable amount?

Answer 16

The cost of an asset, or other amount substituted for cost, less its residual value

Question 17

What is a useful life?

Answer 17

(a) the period over which an asset is expected to be available for use by an entity, or
(b) the number of production or similar units expected to be obtained from the asset by an entity

Question 18

What is residual value?

Answer 18

The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life

Question 19

What is a carrying amount?

Answer 19

The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon

Question 20

What affects the cost model measurement subsequent to initial recognition?

Answer 20

Depreci­ation charges and impairment losses.

Question 21

How is residual value determined?

Answer 21

By reference to current disposal prices and not future disposal prices.

Question 22

What should the depreciation method reflect?

Answer 22

The consumption of benefits.

Question 23

What should the allocation process reflect?

Answer 23

The consumption of benefits rather than changes in value.

Question 24

What model carries an asset at fair value?

Answer 24

The revaluation model

Question 25

How is the accounting for revaluation done?

Answer 25

The accounting for revaluation increments and decrements is done on an individual asset basis within each class of assets. and is affected by the existence of previous revaluation decrements and increments.

Question 26

Do revaluation decrements affect current profit or loss for the period?

Answer 26

Yes

Question 27

Where else is revaluation increments recognised?

Answer 27

In other comprehensive income and accumulated in equity, a revaluation surplus account, with the tax­effect being accounted for.

Question 28

Is the revaluation model is applied to classes of assets or to individual assets?

Answer 28

Classes of assets

Question 29

What is the choice of measurement model based on?

Answer 29

Relevance of information, reliability of measure­ ment and a consideration of the costs of applying a model.

Question 30

What does choice of model affect?

Answer 30

The presentation of accounting numbers in both the statement of com­prehensive income and the statement of financial position.

Question 31

T or F - Under the revaluation model, fair values must be kept up to date, which requires entities using the model to incur costs of valuation, extra audit costs and accounting costs

Answer 31

True

Question 32

Does fair value lack reliability?

Answer 32

Depending on the market for an asset, measurement of fair values may lack reliability.

Question 33

Are current prices more relevant?

Answer 33

Current prices are generally more relevant than past prices.

Question 34

When does derecognition occur?

Answer 34

Derecognition occurs when assets are disposed of, or when no future benefits remain.

Question 35

Where are gain or losses on sales included?

Answer 35

Gains or losses on sale are included in current period profit or loss and are normally disclosed on a net basis.

Question 36

Where is depreciation determined when an asset is derecognised?

Answer 36

When assets are derecognised during an accounting period, depreciation is determined up to the point of derecognition.

Question 37

T or F - The accounting policy choice relating to the asset measurement model does not have to be disclosed.

Answer 37

False

Question 38

Does information on the depreciation of assets, including depreciation methods and useful lives, have to be disclosed.

Answer 38

Yes

Question 39

T or F - Movements in revaluation surplus must be disclosed.

Answer 39

True

Question 40

Do movements on property, plant have equipment have to be disclosed?

Answer 40

The movements in property, plant and equipment from the beginning of the period to the end of the period must be disclosed, including additions, disposals, depreciation and impairment losses.

Question 41

What is impairment loss?

Answer 41

The amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount (which is the higher of the asset’s net selling price and its value in use)

Question 42

What are the carrying amounts of assets in an entity’s statement of financial position a result of?

Answer 42

Judgements and estimations made by the accountant.

Question 43

Are all assets written down?

Answer 43

Not all assets are written down as a result of an impairment test under AASB 136, but the standard that governs the accounting for those assets may have an inbuilt impairment test.

Question 44

What is the purpose of the impairment test?

Answer 44

To ensure that assets are not overstated in the statement of financial position.

Question 45

When is an impairment test conducted?

Answer 45

Only when there is evidence that assets have been impaired.

Question 46

What does external sources relate to?

Answer 46

Factors outside the entity such as changes in market prices, whereas internal sources relate to factors within the entity such as idle time of machinery held by the entity.

Question 47

T or F - Evidence of impairment may be obtained from internal and/or external sources.

Answer 47

True

Question 48

What is a recoverable amount?

Answer 48

The higher of an asset’s fair value less costs of disposal and its value in use

Question 49

What is costs of disposal?

Answer 49

Incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense

Question 50

What is value in use?

Answer 50

The present value of the future cash flows expected to be derived from an asset or cash-generating unit

Question 51

What is active markets?

Answer 51

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis

Question 52

What does the impairment test of a single asset require?

Answer 52

A comparison between the carrying amount of the asset and its recoverable amount, the latter being the higher of fair value less costs of disposal and value in use.

Question 53

What happens when an impairment loss occurs?

Answer 53

The asset is written down and an impairment loss is recog- nised, the accounting depending on whether the cost or revaluation model is being used for the asset.

Question 54

How is value in use calculated?

Answer 54

As the present value of future cash flows relating to the asset being tested, and its calculation requires the accountant to make assumptions and estimates about future events.

Question 55

What are the 2 categories of cash flow from assets?

Answer 55

Sale or use, and the impairment test is designed to look at the larger source of cash flows.

Question 56

What is a cash-generating unit?

Answer 56

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets

Question 57

What is corporate assets?

Answer 57

Assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units

Question 58

T or F - A cash-generating unit is not the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Answer 58

False

Question 59

How should corporate assets by allocated?

Answer 59

They should be allocated to cash-generating units if possible; otherwise they are tested within the smallest unit that contains the corporate asset.

Question 60

Are there restriction on how far particular asset can be written down in the allocation process?

Answer 60

Yes

Question 61

What happens when an impairment loss occurs in a cash-generating unit and no goodwill exists?

Answer 61

The impairment loss is allocated across the carrying amounts of the assets in the unit.

Question 62

What does AASB 136 provide?

Answer 62

Indicators or guidelines to help determine the cash-generating units in an entity.

Question 63

Where is goodwill allocated?

Answer 63

If possible, to the various cash-generating units of an entity, with consideration being given to how management monitors goodwill.

Question 64

T or F - In allocating an impairment loss in a cash-generating unit, the goodwill is written off first, with any balance of impairment loss being allocated pro rata to the other assets.

Answer 64

True

Question 65

What is the impairment of goodwill cushioned or protected by?

Answer 65

The non-recognition of internally generated goodwill, non-recognition of some intangible assets and the use of the cost method as all these procedures reduce the recognised carrying amounts of assets in a cash-generating unit.

Question 66

Can impairment losses be reversed?

Answer 66

Impairment losses may be reversed.

Question 67

What does AASB 136 put restrictions on?

Answer 67

The amount to which an asset can be increased, in particular requiring that it cannot exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in previous periods.

Question 68

Can goodwill be reversed?

Answer 68

Goodwill, once impaired, cannot be reversed.

Question 69

For an individual asset, a reversal of an impairment loss will result in what?

Answer 69

In an entity recognising income, depending on the measurement model being used.

Question 70

What is the assessment of possible reversal based on?

Answer 70

An analysis of external and internal indicators.

Question 71

Does AASB 136 require extensive disclosures about impairment of assets?

Answer 71

Yes

Question 72

Why does AASB 136 require disclosures about estimates and judgements made in the impairment testing process?

Answer 72

Because of the judgements required in measuring variables such as value in use.

Question 73

T or F - In the statement of profit or loss and other comprehensive income, both losses and reversals of losses must be separately disclosed, including a breakdown based on whether the cost model or the revaluation model is used.

Answer 73

True