4 Tangible Non-Current Assets

Question 1

According to IAS 16. PPE are tangible assets that are….

1.
2.

Answer 1

… 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

Question 2

What is…

1. the carrying amount?
2. the initial carrying amount?
3. the subsequent carrying amount?

Answer 2

1. also known as the book value
2. its cost
3. the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment loss

3 = 2 - accumulated depreciation - impariment losses

Question 3

Whats the difference between capitalising costs and expensing them? Why does it matter? What do businesses prefer doing?

1.
2.
3.
4.

Answer 3

• Capitalising Costs: Recording a cost as an asset. //Expensing Costs: Recording a cost as an expense in the period incurred
• 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

Question 4

What do the following accounting standards entail:

1. IAS 16
2. IAS 23
3. IAS 40

Answer 4

1. property plant equipment
2. borrowing costs
3. investment property

Question 5

Borrowing Costs | Definiton

1.
2.
3.

Answer 5

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

Question 6

Qualifying asset | Definiton

Answer 6

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

Question 7

The capitalisation of borrowing costs should start when….

1.
2.
3.

And stop when….

1. 2.

Answer 7

 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
 are complete for its intended use

Question 8

What is a significant by-product of revaluing assets?

1.
2.
3.
4.

Answer 8

• 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

Question 9

Investment Property | Definition and Examples

Answer 9

• 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

Question 10

What is NOT investment property? (IAS 40)

1.
2.
3.
4.
5.

Answer 10

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

Question 11

When is investment property masured and where?

1.
2.
3.

Answer 11

• 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

Question 12

EXCEPTION: Investment properties when measured under the fair value model are….

Answer 12

…. not depreciated!

(normally, under IAS 16 most tangible non current assets except for land are depreciated)