ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT

Question 1

PPE is defined in?

Answer 1

AASB116

Question 2

PPE is defined as in AASB116?

Answer 2

tangible items;
with a specific use within the entity;
that are expected to be used during more than one period (ie. they are non-current in nature).

Question 3

AASB116 specifically excludes?

Answer 3

assets held for sale
biological assets
mineral rights/reserve
also special rules for investment property

Question 4

For some purposes, PPE is divided into classes, e.g.

Answer 4

land, buildings, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office equipment.

Question 5

Initial recognition of PPE:

cost recognised as asset if?

Answer 5

it is probable that economic benefits will flow to the entity, and
the cost can be reliably measured.

Question 6

Initial recognition of PPE: when should costs incurred be expensed?

Answer 6

Where future economic benefits are not expected to flow to the entity

Question 7

Initial recognition of PPE: what are required to be separately accounted for?

Answer 7

component parts (with dif useful lives) e.g. for aircraft the engine, frame and fittins

Question 8

Initial measurement of PPE: initially measured at?

Answer 8

cost

Question 9

Initial measurement of PPE: cost include?

Answer 9

• purchase price (at fair value)
• directly attributable costs required to bring asset to location and condition necessary for it operate
• borrowing costs
• initial estimate of costs of dismantling, removing item or restoring site

Question 10

Directly attributable costs include?

Answer 10

costs of employee benefits arising from the construction or acquisition of the item of property, plant and equipment;
costs of site preparation;
initial delivery and handling costs;
installation and assembly costs;
costs of testing whether asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (e.g. samples);
professional fees.

Question 11

Measurement subsequent to initial recognition: two possible measurement models?

Answer 11

cost and revaluation model

Question 12

Measurement subsequent to initial recognition: policy choice based on and must be applied to?

Answer 12

Accounting policy choice of this decision based primarily on relevance of information. 
The policy that is chosen must be applied to a whole class of assets.

Question 13

Measurement subsequent to initial recognition: when can you change policy?

Answer 13

only if it results in reliable and more relevant information

Question 14

Measurement subsequent to initial recognition: under both models PPE with?

Answer 14

PPE with a limited useful life need to be depreciated

Question 15

Depreciation – fundamentals : what is depreciation?

Answer 15

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

Question 16

Depreciation – fundamentals : what is depreciable amount?

Answer 16

the cost of an asset less its residual value (or other appropriate amounts substituted for cost – eg. fair value

Question 17

Depreciation – fundamentals : what is residual value?

Answer 17

the estimated value of the asset at the end of its useful life to the entity

Question 18

Depreciation – fundamentals: what is useful life?

Answer 18

the period over which an asset is expected to be used by an entity/the number of production (or similar) units expected to be obtained by the entity

Question 19

Depreciation – fundamentals: depreciation is what kind of process?

Answer 19

allocation process designed to reflect the decline in the value of the asset in a pattern consistent with the consumption of economic benefits by the entity
doesn’t specify how process should be undertaken

Question 20

Depreciation – common methods: Straight line method?

Answer 20

assumption: asset used evenly throughout its life;
this method is appropriate when benefits to be derived from the asset are expected to be evenly received throughout the asset’s useful life

Question 21

Depreciation – common methods: Straight line method formula

Answer 21

annual depreciation amount:

(cost (or revalued amount) - residual (salvage) value)) / useful life

Question 22

Depreciation – common methods: Diminishing balance method

Answer 22

assumption: more benefits received in earlier years of the life of asset;
depreciation expense is calculated on the asset’s opening written-down value x depreciation rate

Question 23

Depreciation – common methods: Diminishing balance method written down value?

Answer 23

cost (or revalued amount) - accumulated depreciation

Question 24

Depreciation – common methods: Diminishing balance method depreciation rate formula?

Answer 24

1 - useful life (square root = residual value / cost or revalued amount)

Question 25

Depreciation – common methods: unit of production method?

Answer 25

based on expected use or output of asset

Question 26

Depreciation – common methods: unit of production method formula?

Answer 26

depreciation expense for the period is calculated as

unit produced in current period/total expected production x (cost - residual value)

Question 27

Depreciation – common methods: Sum of digits method?

Answer 27

this method is appropriate where useful life might be related more to production output than time and when economic benefits expected to be derived are greater in the early years than later years

Question 28

Depreciation – common methods: Sum of digits method depreciation expense?

Answer 28

(cost - residual value) is multiplied by successively smaller fractions to calculate depreciation expense;
numerator in fraction - changes each year, and is the years remaining of the asset’s useful life at the beginning of the period;
example for the 2nd year if useful life = 5 years

Question 29

Depreciation – useful life: management consider following factors for useful life?

Answer 29

expected use;
physical wear and tear;
technical or commercial obsolescence;
legal or similar limits.

Question 30

Depreciation – useful life subject to

Answer 30

periodoc review

Question 31

Depreciation – useful life land?

Answer 31

not subject to depreciation as it does not have a limited useful life.

Question 32

The cost model: requires assets are carried at cost less any accumulated:

Answer 32

depreciation

impairment losses

Question 33

The cost model: repair and maintenance costs are:

Answer 33

expensed as incurred, not capitalised

Question 34

The cost model: requirement of capitalisation?

Answer 34

at time of expenditure, increased probable future economic benefit for example, replacement of car engine

Question 35

The revaluation model - fundamentals: alternative of?

Answer 35

As an alternative to the cost model AASB 116 allows the revaluation model to be used for classes of assets.

Question 36

The revaluation model - fundamentals: what is revaluation?

Answer 36

adjustment of PPE’s carrying amount so that it reflects its current fair value

Question 37

The revaluation model - fundamentals: measurement based on

Answer 37

fair value

Question 38

The revaluation model - fundamentals: how often does it need to be performed?

Answer 38

frequency of revaluations not specified, but need to be performed with sufficient regularity such that carrying amount of assets is not materially different from their FV (fair value)

Question 39

The revaluation model - fundamentals: performed on what basis?

Answer 39

class basis

Question 40

The revaluation model - fundamentals: accounting performed on what basis

Answer 40

asset-by-asset

Question 41

The revaluation model:reversing previous decrements is recognised through and excess recorded as?

Answer 41

profit/loss

excess recorded as other comprehensive income and increases ARS (net of related tax effects)

Question 42

The revaluation model:what happens when asset revalued?

Answer 42

depre charge to be recorded over the remaining useful life of the asset is recalculated by reference to the fair value of the asset

Question 43

Transfers may be made from the ARS in the following circumstances:

Answer 43

When a revalued asset is derecognised (ie scrapped or sold) → the balance in the ARS may be transferred to retained earnings.

When a revalued asset is being depreciated → the ARS may be progressively transferred to retained earnings over the useful life of the asset.
Bonus share issues may be made from the ARS

Question 44

Choosing between the models

Answer 44

There is a cost disincentive to adopt the revaluation model (Australian experience).
Cost model harmonises with U.S. GAAP.
Revaluation model provides increased relevance & reliability.

Question 45

When an revalued asset is sold, any resulting balance in the revaluation surplus may be transferred….

Answer 45

directly to retained earnings

Question 46

When an revalued asset is sold, any resulting balance in the revaluation surplus cannot be transfered to?

Answer 46

p/r

Question 47

When an revalued asset is sold, any resulting balance in the revaluation surplus , for non-current assets under revaluation model…

Answer 47

any gain on sale shown in p/l will be less than for assets under the cost model

Question 48

For each class of property, plant and equipment the following must be disclosed (AASB 116):

Answer 48

measurement basis used for gross carrying amount;
depreciation methods used;
useful lives or depreciation rates used;
gross carrying amount and accumulated depreciation at beginning and end of period;
reconciliation of carrying amount at beginning and end of period.

Question 49

The required disclosures regarding asset revaluations (AASB 116) are:

Answer 49

effective date of revaluation;
whether an independent valuer was involved;
methods and assumptions applied;
extent to which fair values were determined, with reference to observable prices in active markets or recent market transactions;
for each revalued class, the carrying amount if the cost model was used;
the revaluation surplus, indicating the change for the period and any restrictions on distribution of the balance to shareholders.