4 Tangible Non-Current Assets Flashcards
According to IAS 16. PPE are tangible assets that are….
1.
2.
… held (purchased or constructed) by an entity, for use in PRODUCTION or supply of goods, for RENTAL to others, or for ADMINISTRATIVE purposes
AND
… expected to be used during more than one period
What is…
- the carrying amount?
- the initial carrying amount?
- the subsequent carrying amount?
- also known as the net book value
- its cost
- the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment loss
3 = 2 - accumulated depreciation - impariment losses
Whats the difference between capitalising costs and expensing them? Why does it matter? What do businesses prefer doing?
- Difference
- Impact Profit
- Asset Value
- Businesses Preference and why
- Capitalising Costs: Recording a cost as an asset. (put on BS) -> distributing costs acorss entire useful life//Expensing Costs: Recording a cost as an expense in the period incurred (in IS)
- Impact on Profits: Capitalising spreads costs over time, boosting short-term profits; expensing reduces profits immediately
- Asset Value: Capitalising increases total assets on the balance sheet.
- Business Preference and Why
Preference: Capitalising costs.
Reason: To increase short-term profits and enhance the balance sheet appearance
What do the following accounting standards entail:
- IAS 16
- IAS 23
- IAS 40
- property plant equipment
- borrowing costs
- investment property
Borrowing Costs | Definiton (IAS 23)
- Definition
- Relation to directly attributable
- Relevant costs
interest and other costs that an entity incurs in connection with the borrowing of funds
-> Directly attributable to the acquisition, construction or production of a “qualifying asset” are to be capitalised
Relevant costs are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not occurred
Qualifying asset | Definiton and examples
an asset which takes a
substantial time to prepare for its
intended use or for sale
Qualifying assets include:
Construction work-in-process
Manufacturing plants
Investment Properties
Intangible assets
They do not include:
Inventories produced over short time
scales
For how long can a business capitalise borrowing costs?
The capitalisation of borrowing costs should start when….
1.
2.
3.
And stop when….
- 2.
- Activities are taking place to prepare the asset for its intended use or sale AND
- Expenditure is being incurred on the asset AND
- ## Borrowing costs are being incurredwhen substantially all activities necessary to prepare the
asset are complete for its intended use
What is a significant by-product of revaluing assets?
1.
2.
3.
4.
- the effect on gearing (the proportion of debt in the capital structure of the firm)
- revaluations usually increase the carrying values of assets and equity; borrowings are unchanged
-> gearing decreases - when comparing a firms gearing levels, we need to look at revaluation policies and reserves
Investment Property | Definition and Examples
- a property held to earn rentals or capital appreciation or
both, as opposed to being used to produce goods /
services or for admin, or sale in the ordinary course of
business
Examples:
Land held for long-term capital appreciation
Land held for undecided future use
Building leased out under an operating lease
Vacant building held to be leased out under an operating
lease
What is NOT investment property? (IAS 40)
1.
2.
3.
4.
5.
The standard provides a list of items that are not
investment properties:
Property held for use in the production of goods or services
Property held for sale
Property under construction
Owner occupied property
Property occupied by employees
When is investment property masured and where?
1.
2.
3.
- measured at fair value
- changes are then directly recognzied in income statement
- OR, it can be measured AT COST as defined by IAS 16; here, the fair value must also be disclosed
EXCEPTION: Investment properties when measured under the fair value model are….
…. not depreciated!
(normally, under IAS 16 most tangible non current assets except for land are depreciated)
Revision: Whats an asset?
1.
2.
3.
4.
- resource that is controlled by entity
- … result of past events
- … future economic benefit expected
- is recognized if it is probable that future economic benefits will flow and the cost can be measured reliably
Whats the formula for the cost of an item of PPE acc to IAS 16?
- here our initial recognition is measured AT COST
- cost of an item of PPE = purchase price including import duties + non refundable purchase taxes - trade discounts + any directly attributable costs of bringing the asset to working condition for its intended use
What happens when the business uses some of its general-purpose borrowings to obtain a qualifying asset?
1.
2.
3.
- general purpose borrowings = not specifically taken for the asset
- the borrowing costs attributable to the qualifying asset need to be estimated
- typically done by applying a weighted average borrowing rate of the company to the expenditures incurred on the qualifying asset during the period it qualifies for capitalization
On initial recognition, IAS 16 requires that items of PPE should be measure…
…at cost
Cost of an item of PPE = purchase price incl. import duties + non-refundable purchase taxes - trade discounts + any directly attributable costs of bringing the asset to working condition for its intended use
Directly attributabkle costs include…
1.
2.
3.
4.
5.
- costs of site preparation
- delivery and handling costs
- installation costs
- professional fees (for architects and engineers)
- dismantling and restoring site
How do we handle self constructed items of PPE?
1.
2.
3.
- recignized at their cost
- handled as if the constructed PPE item is made available by the business for sale
- cost of constructed PPE = cost of producing the asset for sale (i.e. without any profit element)
Whats a qualifying asset?
1.
2.
3.
- asset which takes a substantial time to prepare for its intended use or for sale
- e.g. construction work in progress, investment properties, manufacturing plants, intangible assets
- NOT: inventories produced over short time scales
The capitalisation of borrowing costs should start when…
1.
2.
3.
should stop when….
4.
- … activities are taking place to prepare the asset for its intended use or sale AND
- … expenditure is being incurred on the asset AND
- borrowing costs are being incurred
- when substantially all activities necessary to prepare the asset for its intented use are complete. (its DONE)
What happens when the business uses some of its general purpose borrowings to obtain a qualifying asset?
1.
2.
- then the borrowing cost (i.e. interest charge) must be ESTIMATED for the qualifying asset
- take a weighted average of the company´s borrowing costs for the time that the asset counts as a qualifying asset
Subsequent expenditure (e.g. maintenance) is normally…
Exceptions to this are:
1.
2.
3.
4.
expensed.
- they will be capitalised if excess future economic benefits will flow
- extend useful life & increase quality (e.g. 15% revenue increase: IAS 16 qualifies this cost to be capitalized)
- upgrade to improve quality of output
- adopting new production processes to significantly reduce costs
Depreciation is…
…. an attempt to measure the proportion of the non-current asset used up to generate the current periods revenue
Why is this wrong: Depreciation is a way of showing how non current assets lose value over time
not reflecting real value, just rough value
IAS 16: Which measurements do we use in the following?
- initial recognition?
- subsequent measurement?
- at cost
- A. cost model or 2. revaluation model
What is…
- the cost model?
- the revaluation model?
- most common approach for measuring PPE; after recignition items are carried at cost less accummulated depreciation and any accumulated impariment losses
- after initial recognition items are carried at revalued amount; revalued amount = fair value (i.e. market value) at the date of revaluation minus any subsequent accummulated depreciation and any subsequent accumulated impairment losses
What are preconditions for measuring PPE according to the revaluation model?
1.
2.
3.
4.
- reliable measurement of the fair value of the PPE item
- application to entire class of PPE items not just one!!
- regular revaluations for the entire class of PPE items simultaneuosly
- revaluations usually every 3-5 years
How do we account for revaluation gains for PPEs?
- debit PPE item
- credit a revaluation surplus reserve under equity (classified as other comprehensive income in SoCI)
- why not treated as income? -> bc its an unrealized gain; by excluding it from profit its not available for payment dividends or tax
(But: if previously we had revaluation decrease (aka expense); then the increase now is stated as inome on the I/S (+10 OCI up; -10 OCI and -10 I/S)
What are downsides from too high profit?
- too high dividends
- market value going up is not directly realized
How do we account for revaluation losses?
- credit PPE item
- debit an expense -> directly shown on the I/S!
BUT: if asset already has surplus, then any following revaluation decrease is charged
How do we calculate the revised depreciation amount after revaluation a PPE?
- new value of the asset
- minus its residual value
-> subsequent annual depreciation charges will be based upon this revised amount
-> they will continue for the remainder of the assets useful life
When a revalued asset is sold, then…
1.
2.
3.
4.
5.
- the revaluation surplus becomes realized
- this is transfered to retained earnings
- transfer recorded in statement of changes in equity
- no effect on comprehensive income
-> transfer implies that a previously unrealized gain has now become realized
Whats thei impact of revaluation on F/S comparisons between firms?
- effect on gearing (leveraging), i.e. the proportion of debt in the capital structure of the firm (the higher the gearing is, the higher the proportion of debt in your company is)
- revaluations ususally increase carrying values of assets and equity, and borrowing stay unchanged -> gearing DECREASES
Define Investment Property
- property held to earn rentals or capital appreciation or both (as opposed to being used to produce goods/ services or for admin, or sale in the ordinary course of business)
e.g.: land held for LT capital appreciation; land held for undecided future use; building leased out under an operating lease
Whats NOT investment property?
1.
2.
3.
4.
5.
Property…
- held for sale in production for goods or services
- held for sale
- under construction
- owner occupied
- occupied by employees
When can a non current asset be classified as held for sale?
1.
2.
- asset must be available for immediate sale in its present condition AND
- its sale must be highly probable (requires management commitment; activeky seeking buyer; expected to complete the sale in one year)
What can be said regarding assets held for sale and depreciation?
1.
2.
3.
- they are NOT depreciated
- they are measured at the lower value between: carrying amount vs fair value less selling costs
- presented seperately on the face of the financial statements
