C4 - Accouting For Assets Flashcards by Jade L

What in an asset?

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

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IAS 16 - property, plant and equipment

Definition of PPE

Tangible assets held for use in the production or supply of goods and services which are expected to be used for more than one period.

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IAS 16 - property, plant and equipment

Definition of depreciation

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

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IAS 16 - property, plant and equipment

Definition of depreciable amount

The cost or valuation of the asset, less any residual value (scrap value)

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IAS 16 - property, plant and equipment

Definition of useful life

The length of time, or the number of units of production, for which an asset is expected to be used.

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IAS 16 - property, plant and equipment

Definition of fair value

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 date of revaluation.

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IAS 16 - property, plant and equipment

Definition of impairment loss

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

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IAS 16 - property, plant and equipment

Definition of recoverable amount

The higher of the assets fair value less costs to sell and its value in use.

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IAS 16 - property, plant and equipment

Definition of carrying amount

The amount at which an asset is recognised on the balance sheet after deducting an accumulated depreciation and impairment loss

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An item of plant property and equipment is to be recognised as an asset when…??

It is probable that future economic benefits will flow to the entity

The cost of the asset can be measured reliably.

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What other costs are included in the purchase of assets?

Import duties 
Taxes 
Testing costs 
Professional fees
Dismantling asset
Removing costs of asset

Any other costs that are required to bring the asset to the location and condition for its intended use.

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IAS 16 - property, plant and equipment

What is a cost model as an accounting policy

The asset is carried at cost less acc depreciation and impairment losses

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IAS 16 - property, plant and equipment

What is a revaluation model as an accounting policy

Carried on balance sheet as fair value at date of revaluation minus depreciation and impairment (provided that fair value can be measured reliably)

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Dealing with revaluations of PPE

Double entry for increase in value??

DR asset account

CR comprehensive income account

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Dealing with revaluations..

Decrease in revaluation if PPE

DR comprehensive income account

CR asset account

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Can freehold land be depreciated?

No because it has an unlimited useful life.

However leasehold land can be depreciated.

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Can land be depreciated??

No as they also have unlimited useful life

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3 Methods of depreciation??

Straight line

Reducing (diminishing) balance

Units of production

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What is straight line depreciation?

A constant depreciation charge over the assets useful life

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What is reducing (diminishing) balance depreciation?

A decrease in depreciation charge over the assets useful life for example the depreciation will be higher the early years of owning the asset.

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What is units of production or service depreciation?

A depreciation charge based on the expected use or output

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What is derecognition?

When an item of PPE is disposed of when no future economic benefits are expected from its use or disposal.

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How is a loss on disposal recorded in bookkeeping?

DR P and l account as loss

CR disposals account

How is a gain recorded in bookkeeping?

DR disposals with gain

CR P&L account as gain

IAS 38 - Intangible assets Definition

An identifiable non monetary asset without physical substance

IAS 38 - Intangible assets Examples

Computer software Patents Customer list Marketing rights

IAS 38 - Intangible assets 3 key elements and meaning

Identifiability - capable of being sold or transferred Control - power to obtain future economic benefits from the asset Future economic benefits - revenue from sales of product

What are the two main sources of intangible assets?

Purchased or internally generated

What two items can commonly be mistaken for intangible assets?

Goodwill and brands

IAS 38 - Intangible assets Research definition

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

IAS 38 - Intangible assets Development definition

The application of research findings or other knowledge to a plan or design for production of new or improved products.

IAS 38 - Intangible assets How is revenue expenditure on research treated in FS

An expense in the profit or loss and other comp. income of the year it is incurred

IAS 38 - Intangible assets Finite meaning

An asset having a limited useful life

IAS 38 - Intangible assets Indefinite meaning

An asset having no foreseeable limit to the period over which the asset is expected to generate net cash inflows.

IAS 36 - impairment of assets Definition

This standard sets out accounting procedures to ensure that assets are carried on the FS at no more than their fair value or recoverable amount.

IAS 36 - impairment of assets Carrying amount definition

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

IAS 36 - impairment of assets Definition of amortisation

This has the same meaning as depreciation however amortisation is commonly used for intangible non-current assets

IAS 36 - impairment of assets Impairment loss

The amount by which the carrying amount of assets exceeds its recoverable amount

IAS 36 - impairment of assets Recoverable amount definition

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

IAS 36 - impairment of assets Fair value definition

The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the date of the valuation

IAS 36 - impairment of assets Value in use definition

The present value of the future cash flows expected to be derived from an asset

IAS 36 - impairment of assets External sources of information about impairment

A significant fall in assets value Increase in interest rates Market value less than carrying amount of net assets

IAS 36 - impairment of assets Internal sources of information on impairment

Physical damage to the asset Economic performance is worse than expected

IAS 36 - impairment of assets Impairment review 3 steps

1. What’s the carrying amount? (Cost - acc depn) 2. What’s the recoverable amount? (Higher of fair value less costs of disposal and value in use) 3. If carrying amount is higher.. asset is impaired and should be written down to its recoverable amount of SOFP

IAS 36 - impairment of assets What if the carrying amount is higher than assets recoverable amount?

The asset is impaired. Difference is recorded as an expense to PL

IAS 17 Leases Definition.

When a company obtains the right to use non current assets

IAS 17 Leases Two types of leasing

1. Finance lease - usually long term and all risks and rewards of ownership are transferred to the lessee 2. Operating lease - usually short term and there is no transfer of risks and rewards of ownership.

IAS 17 Leases Which type of lease has the following characteristics.. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than fair value (what is can be exchanged for)

Finance lease

IAS 17 Leases How is a finance lease recorded on FS

DR - asset BS CR - bank loan/lesser *amount shown is the lower of its fair value and present value of the minimum payments.

IAS 17 Leases How is an operating lease recorded on FS

DR - expense PL | CR - bank BS

IAS 2 - inventories Definition

Inventories should be valued at the lower of cost and net realisable value *cost = cost price incl additional charges do bring the product to its present location and condition ** net realisable value = est. selling price less estimated costs of completion and other costs to make the sale

IAS 2 - inventories What does AVCO mean?

Average cost (usually based on average weight using numbers of units bought as the weighting)

IAS 2 - inventories 3 types of inventories held at year end

1. Raw materials 2. Work in progress 3. Finished goods

IAS 17 - Leases How are finance leases displayed on BS

Liabilities at the lower of fair value (asset being leased) and present value of minimum lease payments.

IAS 2 - inventories 4 Different forms of inventories

1. Raw materials 2. Work in progress 3. Finished goods 4. Finished goods (bought in for resale)