9.1 IAS 16 Property, plant and equipment

Question 1

Property, plant and equipment are tangible assets that

Answer 1

• are held by an entity for use in the production or supply of goods or services, for rental to others or for administrative purposes
• are expected to be used during more than one period

Question 2

Carrying amount

Answer 2

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

Question 3

Cost

Answer 3

The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction

Question 4

Depreciable amount

Answer 4

The cost of an asset, or other amount substituted for cost, less it’s residual value

Question 5

Depreciation

Answer 5

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

Question 6

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

Impairment loss

Answer 7

The amount by which the carrying amount of an asset exceeds its recoverable amount

Question 8

Recoverable amount

Answer 8

The higher of an assets fair value less costs of disposal and its value in use

Question 9

Residual value

Answer 9

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 10

Useful life

Answer 10

The period over which the asset is expected to be available for use by the entity or the number of production or similar units expected to be obtained from the asset by the entity

Question 11

Initial recognition - IAS 16 an item should be recognised as an asset when

Answer 11

• it is probably that future economic benefits will flow to the entity
• the cost of the asset can be measured reliably

Question 12

IAS 16 - The asset should initially be measured at its cost which should include
(same for self constructed assets)

Answer 12

• its purchase price including import duties and net of discounts and rebates (inc interest on loan)
• directly attributable costs to bring the asset to the location and condition necessary for it to be capable of operating for its intended use (eg: site preparation, initial delivery costs, installation costs, labour costs, testing costs, professional fees)
• the initial estimate of the cost of dismantling and removing the item and restoring the site, where there is an obligation to incur such costs

Question 13

Subsequent expenditure should be capitalised when (IAS 16)

Answer 13

• the expenditure improves the future economic benefits that the asset will generate
• it replaces a component of an asset and the carrying amount of the component replaced is derecognised
• it is the cost of a major inspection for faults and the carrying amount of the previous inspection is derecognised

(Cost of day to day servicing should be recognised in SPL as incurred)

Question 14

The depreciation charge for assets

Answer 14

• Should be recognised in the SPL, starting from the date the asset becomes available for use, not necessarily when it is purchased
• Land has an unlimited life and therefore will not be depreciated
• Buildings have a finite life and therefore should be depreciated
• Repair and maintenance does not remove the need to depreciate
• If the residual value is greater than the carrying amount the depreciation charge is zero
• An asset may be made up of separate parts which are depreciated separately

Question 14

Measurement after initial recognition
IAS 16 requires entities to apply either

Answer 14

• Cost model: Carrying amount = Cost - Accumulated depreciation - Accumulated impairment losses
• Revaluation model: Carrying amount = Fair value - Accumulated depreciation - Accumulated impairment losses

(A combination can be used but each class of assets must use the same model)

Question 15

Changes in depreciation method

Answer 15

• Depreciation methods should be reviewed periodically and if there has been a change in the pattern of consumption of benefits the method should be changed to reflect this
• Any change should be treated as a change in accounting estimate and the new method applied to current and future accounting periods
• Changes do not represent changes in accounting policy and therefore earlier periods don’t need to be altered

Question 16

Changes in useful life and residual value

Answer 16

• When acquiring an asset its useful life and residual value will be estimated
• Subsequently it may be appropriate to revise these estimates
• Any changes will results in adjustments to current and future periods but no change to past periods (ie. change in accounting estimate)