Accounting for property plant and equipment Flashcards
IAS16 — Property, Plant and Equipment :
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
Classes of property, plant and equipment:
Land and buildings
Plant and equipment
Motor vehicles
Fixtures and fittings
Freehold property
when does IAS16 state that property plant and equipment should be recognised as an asset?
“An item of P, P&E should be recognised as an asset if and only if:
it is probable that future economic benefits associated with the item will flow to the entity concerned, and
the cost of the item can be measured reliably.”
other words for initial cost
also referred to as acquisition cost, initial value, or original cost
what are Purchased assets?
assets that have been bought are recorded at historic purchase cost.
what are built assets?
Assets that the firm has built are recorded at ‘construction cost’. These costs may include capitalised interest from any project-specific financing.
what are business combination assets?
Assets that the firm has acquired as a result of a business combination are recorded at their appraised value at the time of the transaction.
E.g.: when a larger corporation acquires a smaller company that owns an office building
for P,P & E what does IAS16 state the initial cost of an asset comprises of?
its purchase price or construction cost,
any costs directly attributable to bringing the asset into the location and condition necessary for it to be operated as intended,
- e.g.: labour costs arising directly from the construction or acquisition of the item, site preparation costs,
initial delivery and handling costs, installation, assembly and testing costs, professional fees.
the initial estimate of any decommissioning obligation, if any, and, for assets that necessarily take a substantial period of time to get ready for their intended use. (e.g. dismantling, removing the item, restoring the site, etc.)
- eg A firm builds an offshore oil rig and, per environmental regulations, must dismantle and remove it at the end of its useful life, restoring the site. These dismantling costs are included in the initial cost.
what is subsequent cost?
costs incurred after the initial recognition of an item of P,P&E:
what happens if the subsequent cost maintains life of asset?
if maintains life or expected benefit (e.g. repair, routine servicing, maintenance costs – to expense (accounted for as an expense in the period to which they relate), not a capital expenditure;
Dr expenses, at cost
Cr cash/ wages / inventories/ payables
what happens if the subsequent cost adds to life of asset?
if adds to life or expected benefit – improvement, replacement of major parts – to capitalise (recognise as capital expenditure);
Dr P,P&E, at cost
Cr trade payables/cash
what is the accruals principle
Expenses should be recognised when incurred regardless of when paid for.
what is depreciation?
Depreciation is a reduction in the value of a non-current asset over time, due to:
wear and tear: due to physical exhaustion, the gradual wear and tear of P,P&E over time due to their use in operations and becoming less efficient
market changes: due to shifts in demand, industry trends
technology changes: due to technological obsolescence (issuing more efficient technologies)
Depreciation is the process of allocating the cost of each PPE to expense over its useful life.
All PPE (except for freehold land) has finite useful lives, and the passage of time reduces their usefulness, and this decline is an expense.
To record depreciation on PPE in the books of accounts
Dr Depreciation expenses £X
Cr Accumulated depreciation £X
