5. Long-lived Assets Flashcards
What are PPE items held for?
Production, supply of goods, rental, or administrative purposes.
For how many periods are PPE expected to be used?
More than one period.
What standard applies to property, plant, and equipment?
IAS 16.
Does IAS 16 apply to PPE classified as held for sale?
No.
Does IAS 16 apply to investment property?
No, IAS 40 applies.
Does IAS 16 apply to biological assets related to agricultural activity?
No, IAS 41 applies.
What standard applies to the recognition and measurement of exploration assets?
IFRS 6.
How is an item of PPE measured at recognition?
At its cost.
What is included in the cost of an item of PPE?
Purchase price, import duties, non-refundable taxes.
What costs are not included in the carrying amount of PPE?
Costs incurred in using or redeploying the item.
What is the cost model formula for PPE?
Acquisition cost - depreciation - impairment losses.
What is the revaluation model for PPE based on?
Fair value - depreciation - impairment losses.
When must an entity assess if an asset is impaired?
At the end of each reporting period.
What should be considered when assessing impairment?
External and internal sources.
What is the result when the recoverable amount of an asset is less than its carrying amount?
Impairment loss.
How should impairment loss be recognized?
In profit or loss.
What happens after recognizing an impairment loss?
Depreciation charge is adjusted.
What does IAS 16 allow for depreciation methods?
Straight-line, diminishing balance, and units of production methods.
What is the cost model for PPE after recognition?
Cost less accumulated depreciation and impairment losses.
How should the depreciable amount of an asset be allocated?
Systematically over its useful life.
How often should the depreciation method be reviewed?
At least at each financial year-end.
When should the depreciation method be changed?
When there is a significant change in the expected pattern of consumption.
What happens if an item of PPE is revalued?
The entire class of PPE must be revalued.
What leads to an increase in the carrying amount in revaluation?
Revaluation surplus.
Where is the revaluation increase recognized?
In other comprehensive income (OCI).
Where is the revaluation increase recognized if it reverses a previous revaluation decrease?
In profit and loss.
Can revaluation surplus be transferred?
Yes, as the asset is used by the entity.
What is the difference when transferring revaluation surplus?
Difference between depreciation based on revalued amount and original cost.
What happens when the carrying amount of an asset is decreased?
Recognized in profit and loss.
Where is the decrease in carrying amount recognized if there is a revaluation surplus?
In other comprehensive income (OCI).
What happens to accumulated depreciation when an item is revalued?
It is eliminated against the gross carrying amount.
What is the definition of tangible assets?
Physical items held for use in production or administration.
What is excluded from PPE in IAS 16?
PPE classified as held for sale, investment property, biological assets.
What must be included in the initial estimate of PPE cost?
Costs of dismantling, removing, and restoring the site.
What is the treatment for intangible assets not yet available for use?
Tested for impairment.
What happens if impairment loss is recognized under the revaluation model?
Treated as a revaluation decrease.
What does IAS 16.3 specify?
PPE used to maintain assets related to non-applicable categories are covered by the standard.
What does IFRS 5 cover?
PPE classified as held for sale.
What standard covers mineral rights and natural resources?
Not covered by IAS 16, related to nonregenerative resources.
What should happen if there is no indication of impairment?
Regular depreciation continues.
What is the consequence of using an incorrect depreciation method?
The method must be changed if the consumption pattern changes.
How are regular revaluations handled?
Adjusted by accumulated depreciation and impairment losses.
What happens to a revalued asset’s surplus in subsequent periods?
Some surplus may be transferred as the asset is used.
How are costs incurred during asset use treated?
They are not added to the carrying amount of the asset.
When should impairment be reassessed?
When external or internal sources suggest potential decline in value.
What must entities consider for physical damage to assets?
Internal reporting evidence for impairment.
What is the result of a decrease in asset’s carrying amount?
It is recognized in profit and loss.
What happens to revaluation surplus upon derecognition of PPE?
Recognized in equity.
How should costs related to the removal of PPE be treated?
Included in the initial cost of PPE.
What should be considered when aggregating items for PPE?
Apply recognition criteria to the aggregated value.
What is an intangible asset?
A non-monetary asset without physical substance.
What are the three conditions for an asset to be considered intangible?
Identifiability, control, and future economic benefits.
What does identifiability mean for an intangible asset?
The asset is separable or arises from contractual or legal rights.
What is meant by control in the context of intangible assets?
The entity has the power to obtain future economic benefits and restrict others’ access.
What are future economic benefits of an intangible asset?
Additional revenue, cost savings, or other benefits from using the asset.
Can employee training be capitalized as an intangible asset?
No, because the entity does not have full control over the employee.
Can a self-made patented production process be recognized as an intangible asset?
Yes, if all three criteria (identifiable, control, and future benefits) are met.
Why are internally generated brands not recognized as intangible assets?
They cannot be distinguished from the overall cost of developing the business.
Is internally generated goodwill recognized as an intangible asset?
No, because it is not identifiable or separable.
Can an intangible asset arise from research?
Only in the late development stage, when future economic benefits can be demonstrated.
For US GAAP never, except software.
When can development costs be capitalized as an intangible asset?
After technical and commercial feasibility is established.
How should an intangible asset be measured initially?
At cost.
What are the three methods to determine the cost of an intangible asset?
Separate acquisition, acquisition as part of a business combination, internally generated.
What is included in the cost of separately acquired intangible assets?
Purchase price, import duties, and directly attributable costs.
How is the cost of an intangible asset in a business combination measured?
Fair value.
What model options exist for measuring intangible assets after recognition?
Cost model or revaluation model.
What is required if an entity uses the revaluation model for intangible assets?
All assets in the same class must use the same model.
What are the three conditions for an active market?
Homogeneous items, willing buyers and sellers, and public prices.
Are brands and trademarks usually traded in an active market?
No, it is uncommon for such assets to have an active market.
What are examples of assets that might have an active market?
Taxi licenses, fishing licenses, and production quotas.
How is an intangible asset with a finite useful life amortized?
On a systematic basis over its useful life.
What happens if the pattern of consumption of future benefits cannot be reliably determined?
The straight-line method is used for amortization.
What is the residual value of an intangible asset with a finite useful life?
Zero unless there is a commitment to purchase or a probable market exists.
Are intangible assets with an indefinite useful life amortized?
No, they are tested for impairment annually.
What term is used for the systematic reduction of the value of intangible assets?
Amortization.
How would you determine if a patented production process qualifies as an intangible asset?
Check if it is identifiable, controlled by the entity, and generates probable future economic benefits.
How would you account for development costs if a software product’s feasibility has been established?
Capitalize the costs as an intangible asset since future economic benefits are expected after technical and commercial feasibility.
If a company internally develops a brand, what treatment would you apply under IAS 38?
The internally developed brand cannot be recognized as an intangible asset and would not be capitalized.
What accounting approach would you apply to a fishing license if an active market exists?
Use the revaluation model to adjust the carrying amount based on the active market prices.
How would you apply amortization to an intangible asset with a finite useful life?
Amortize the asset systematically over its useful life, reflecting the pattern of benefit consumption, or use the straight-line method if the pattern is indeterminable.
How should you handle the costs of developing a new production process if it hasn’t reached commercial feasibility yet?
Expense the costs during the research phase as the asset cannot be recognized until feasibility is demonstrated.
How would you measure the cost of an intangible asset acquired as part of a business combination?
Measure the asset at its fair value, using active market prices, similar transactions, or a valuation model like discounted cash flow.
How would you assess the useful life of an intangible asset with an indefinite life?
Test the asset annually for impairment and review each period to determine if an indefinite useful life is still appropriate.
How would you decide whether to capitalize or expense software development costs for internal use?
Capitalize the costs incurred during the application development stage and expense those incurred during the research or preliminary stage.
How would you adjust the accounting treatment if a company commits to buying back an intangible asset at the end of its useful life?
Assign a residual value other than zero, reflecting the commitment to purchase the asset at the end of its useful life.
How would you calculate the carrying amount of an asset under the cost model if the asset has accumulated depreciation and impairment losses?
Subtract the accumulated depreciation and impairment losses from the acquisition cost.
Given an asset with a revaluation surplus, how would you treat the increase in carrying amount if it exceeds the previous decrease recognized in profit and loss?
The excess amount would be recognized in other comprehensive income (OCI) and accumulated in equity as revaluation surplus.
If a company has significant external evidence indicating an asset’s value has declined, what steps must they take according to IAS 36?
They must assess if the asset is impaired, estimate its recoverable amount, and recognize any impairment loss if the recoverable amount is less than the carrying amount.
How would you apply the revaluation model to a class of assets that has not been revalued in the past?
The entire class of PPE must be revalued, adjusting each asset for its fair value, and subsequent revaluations must consider any accumulated depreciation and impairment losses.
In what scenario would you change the depreciation method applied to an asset, and how should this be reflected in financial reporting?
The depreciation method should be changed when there is a significant change in the asset’s future economic benefits consumption pattern. This change must be reflected in the financial statements and applied prospectively.
How would you handle a situation where revaluation results in a decrease in an asset’s carrying amount, and there is an existing revaluation surplus?
Recognize the decrease in OCI to the extent of the credit balance in the revaluation surplus, and any excess beyond that in profit and loss.
How would you aggregate the costs of minor PPE items like moulds and tools for financial reporting purposes?
Aggregate the value of these insignificant items and apply the recognition criteria to the total aggregated value to determine whether it qualifies as PPE.
How would you calculate the amount to be transferred from the revaluation surplus as the asset is used?
The amount transferred would be the difference between depreciation based on the revalued amount and depreciation based on the asset’s original cost.
If an impairment loss is recognized under the revaluation model, how would it affect the asset’s revaluation surplus?
The impairment loss would be treated as a revaluation decrease, reducing the revaluation surplus or being recognized in profit and loss if no surplus exists.
How would you adjust the future depreciation charge after recognizing an impairment loss on an asset?
The depreciation charge should be recalculated based on the asset’s revised carrying amount, less its residual value, and allocated systematically over the remaining useful life of the asset.
