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FAR UK GAAP > Ch 3 - Tangible Fixed Assets > Flashcards

Ch 3 - Tangible Fixed Assets Flashcards

1
Q

Define tangible fixed assets

A

Tangible items that
Are held for use in the production or supply of g/s for, for rental to others, or for admin purposes AND
Are expected to be used during more than one period

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2
Q

What are 2 other ways to term a TFA?

A

Non-current

Fixed

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3
Q

For the purposes of FS, how are TFAs categorised?

A

Categorise similar items together

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4
Q

Give examples of TFA categories

A 
Land and buildings
Motor vehicles
Fixtures and fittings
P&M 
Assets under construction
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5
Q

When are TFA’s recognised on the balance sheet?

A

It is probable that future econ benefits will flow to the entity
The cost of the item can be reliably measured

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6
Q

How should TFAs be initially measured?

A

Cost

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7
Q

What can the cost price of TFAs include?

A

Purchase price

Costs directly attributable to bringing the asset to the required location and condition to operate as intended

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8
Q

What does ‘purchase price’ include when calculating measurement at cost

A

Amount paid for actual item
Including duties and non-refundable taxi
After deducting trade discounts/rebates

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9
Q

What is included in Costs directly attributable to bringing the asset to the required location and condition to operate as intended?

A 
Directly attributable costs include
Employee costs arising directly from the construction or purchase of the asset
E.g. builders fees/salaries 
Costs of site preparation
Delivery and handling costs 
Installation and assembly costs 
Costs of testing 
Less proceeds of by-products 
Professional fees 
All direct costs of construction
i.e. materials, labour, borrowing costs 
The PV of the initial estimate of costs to dismantle and remove the asset and restore the site at the end of its useful like, IF THERE IS AN OBLIGATION TO DO SO
Either legal and constructive 
Commonly in quarrying etc.
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10
Q

What costs should be excluded when calculating cost for initial measurement of an asset?

A

Admin costs
General overheads
Abnormal costs
E.g. as a result of labour strikes or planning errors that result in downtime
Costs incurred after the asset is capable of normal operation
Unless they enhance performance

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11
Q

How should incidental income from assets be treated when calculating cost for measurement?

A

Incidental income
Is allowed to be deducted from the cost of the asset
It is treated as other income on the P&L
E.g. using a building site as a car park before construction commences
i.e. unrelated activity

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12
Q

How should subsequent costs from assets be treated when calculating cost for measurement?

A

Subsequent expenditure on an item of TFA may be capitalised ONLY if it enhances the economic benefit provided to them
i.e. can’t capitalise repairs

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13
Q

What are borrowing costs?

A

Interest costs incurred by an entity in connection with the borrowing of funds in order to construct an asset

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14
Q

What is the accounting treatment for borrowing costs per FRS 102 Section 25 BC?

A

FRS 102 Section 25 allows directly attributable borrowing costs to be capitalised as part of the cost of the qualifying asset
A qualifying asset is an asset that takes a substantial period of time to get ready for its use or intended sale
This is a choice of accounting policy, and if adopted, should be applied consistently to an asse class

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15
Q

Can borrowing costs be capitalised?

A

An entity may only capitalise those borrowing costs which would’ve been avoided if the expenditure had not been made

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16
Q

When you do capitalise borrowing costs, what should be capitalised?

A

Borrowing costs X

Less income from temporary inv of surplus borrowings (X)

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17
Q

What must be done when funds are taken from general borrowings when capitalising borrowing costs?

A

Capitalise
Weighted average cost of borrowing * expenditure on asset
This should be pro-rated for the period of capitalisation

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18
Q

For an asset under construcition, when should you commence capitalisation?

A

When

  1. Expenditure is being incurred AND
  2. Borrowing costs are being incurred AND
  3. Activities to repave asset for use/sale are in progress
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19
Q

When should you suspend capitalisation for an asset under construction?

A

During extended periods where active development of the asset has paused

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20
Q

When should you cease capitalisation?

A

When substantially all activities necessary to prepare the asset for use/sale are complete

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21
Q

Define depreciation

A

Depr is the systematic allocation of the depr amount of an asset over its useful life

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22
Q

What is the depr amount for depr calms?

A

Cost/valuation of asset - residual value

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23
Q

What is the useful life period?

A

The period of which an asset is expected to be available for use by an entity.

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24
Q

What should be considered when determining UEL period?

A

Capacity/output of the asset
Physical wear and tear
Possible obsolescence
Legal limits on the use of the asset

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25
Q

What is the residual value?

A

is the estimated amount that an entity would CURRENTLY obtain from disposal of an asset if it were already at the end of its useful life
i.e. ignore expected inflation

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26
Q

What are the different depr methods?

A

Straight line
Reducing balance
Units output

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27
Q

How do you choose a depr method?

A

Depreciation should reflect the pattern in which the benefits are produced by the asset arise

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28
Q

How should depr be accounted for?

A

Depreciation is charged to P&L unless acc standards allow it to be included within the cost of another asset
E.g. P&M depr may be included in cost of inv it produces

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29
Q

When should depr commence?

A

When the assets available for normal use

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30
Q

When does depr cease?

A

the EARLIEST of the follow dates
Full depr of asset
Sale of asset

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31
Q

What must be done if land and buildings are acquired together re depr?

A

They are separated for acc purposes
Land = infinite life so not depr
Buildings = finite life, so dear

32
Q

Give an example of when TFA are made up of components with diff UEL

A

Aircrafts

33
Q

What happens when a component needs to be replaced in an asset?

A

Must first dereog the old component

34
Q

What is the treatment of major overhauls and inspections?

A

The cost of such overhaul/inspection can be capitalised as a separate component of the asset
Prior to any subsequent overhaul or inspection, the earlier costs should be de-recognised or depr down to 0
i.e. not reflected in bal sheet

35
Q

What must you do if an overhaul/inspection is carried out at pre-determined intervals

A

Make the useful life of the asset = the inspection interval to achieve derecognition

36
Q

What does FRS 102 Section 17 allow an entity to choose?

A

which valuation model it uses

  1. Cost
  2. Revaluation
37
Q

How should the chosen valuation model be applied?

A

Consistently to an entire class of assets

38
Q

How should a carrying value be calculated using the cost model?

A

Cost
Less acc depr
Less acc impairment losses

39
Q

How should NBV of a TA be calc’ed using revaluation model?

A

FV at revaluation (i.e. market value)
Less subsequent acc depr
Less subsequent accumulated impairment losses

40
Q

Why should revaluations be regularly updated with the revaluation model?

A

To ensure the BS value doesn’t differ materially from FV

41
Q

What is the double entry for a basic upwards revaluation?

A

DR Cost (to increase cost of the asset to FV)
DR Accumulated depr (to eliminate depr to date)
CR Reval reserve (Balancing figure (FV-NBV)
NOT to P&L as the gain hasn’t been realised yet

42
Q

When something has been revalued, what should it be depreciated over?

A

The remaining useful life

43
Q

What impact does a revaluation have?

A

This makes th asset look stronger
So depr also will increase
Therefore nothing has changed to earning ability, but P&L has suffered 
This causes equity to suffer, so less money available for dividends
So a revaluation transfer is done

44
Q

Where are revaluation gains reported?

A

As part of comprehensive income

45
Q

What is the calc for depreciation after a revaluation?

A

Revalued amount - estimated residual value / remaining useful life

46
Q 
E.g. Will Smith Ltd buys an expensive classic carpet on 1 Jan 2019 for £200k. The UEL is 10 yrs 
Carrying amount @ 1 Jan 2020 is £180k
Revalued on 1 Jan 2020 at £300k
What is the double entry?
What is the new depr?
A

DR Cost £100k
DR Acc depr £80k
CR Reval reserve £120k

Reval amount - residual / remaining UEL = £300k - £0 / 9 = £33,333

47
Q

What is the impact on profits after a upwards revaluation?

How is the impact dealt with?

A

subsequent periods’ profits will decrease
Reduces stained earnings out of which dividends can be paid
To ensure this reval doesn’t adversely affect SH, FRS 102 Section 17 allows that the amount in excess of depr ‘charged each year due to reval’ is transferred into RE from the reval surplus

48
Q

How does acc standards ensure upwards reval doesn’t -vely impact dividends paid?

A

FRS 102 Section 17 allows that the amount in excess of depr ‘charged each year due to reval’ is transferred into RE from the reval surplus

49
Q

What is the Double Entry for removing the impact of a revaluation reserve on dividends?

A

DR Reval Reserve

CR P&L Reserve

50
Q

What are the 2 scenarios for a downars revaluation?

A

When the asset hasn’t;t been previously revalued upwards

When the asset has been previously revalued upwards

51
Q

How is a downwards revaluation dealt with in there hasn’t previously been a revaluation upwards?

A

Decrease in value of asset is recog in the P&L
DR P&L Balancing figure (NBV-FV)
CR NBV of asset To reduce the asset’s NBV to fair amount
Similar to the idea of impairment
Acts like a depr charge

52
Q

How is a downwards revaluation dealt with in there has previously been a revaluation upwards?

A

DR entry must first be changed to the reval surplus to the extent that relates to the asset in question
Any balance is charged to P&L account
DR Revaluation reserve To the extent the surplus relates to the asset
DR P&L Balancing figure
CR NBV of asset To reduce the assets NBV to FV
i.e. if the reval reserve is big enough, won’t need the P&L journal
But if reval is bigger than the reserve, it creates a new journal to P&L

53
Q

What does FRS 102 Section 27 Impairment of Assets explain?

A

When it may be appropriate to reduce (impair) the bal sheet value of assets
How much they should be impaired by
How the impairment should be accounted for

54
Q

Why must impairment reviews be done regularly?

A

Due to prudence, if there is any concerns- need to write it down

55
Q

When should an impairment review certainly take place?

A

When there is indications of impairment

56
Q

Give some examples of external impairment indications

A

Decline in the market value of an asset
Adverse changes to the environment in which the entity operates
Which may reduce the future economic benefits expected of the assets
Increases in interest rates
Which affects the discount rate used to calc PV of future cash flows generated by an asset
The value of the entity as a whole is less than its Net Asset Value

57
Q

Give some examples of internal impairment indicators

A

Asset is obsolete / damaged
Changes have occurred within the entity which mean that the asset won’t generate the benefits previously expected
i.e. it is left idle
Evidence suggests an asset won’t perform as well as expected
i.e. budgeted incorrectly

58
Q

When does an impairment occur?

A

If NBV > Recoverable amount

59
Q

What is the recoverable amount (when dealing w impairment)?

A

The greater of

  • FV less costs to sell
  • Value in use = the PV of future cash flows expected to be generated by the asset
60
Q

how is value in use calculated?

A

the PV of future cash flows expected to be generated by the asset

61
Q

If impairment is found, what is the impairment loss

A

NBV - recoverable amount

62
Q

How is an impairment loss accounted for when assets are valued using the cost model?

A

Impairment loss is recog in P&L as an expense immediately
DR P&L X
CR NBV of asset X

63
Q

How is an impairment loss accounted for when using the reval model

A

he impairment loss is charged to the reval surplus to the extent that it reverses any previous upward revaluation of the asset
Any excess is charged to the P&L
DR Reval surplus X
DR P&L (Bal figure) X
CR NBV of asset X

64
Q

When are TFAs de-recognised from the balance sheet?

A

When they are disposed of/sold

When they are abandoned/scrapped

65
Q

What does it indicate when an asset is disposed of before expected?

A

That there has been an impairment

66
Q

What should happen to any gain/losses on disposal

A

Should be recognised from date of disposal

67
Q

What is depr up to the date of disposal based on?

A

NBV after impairment

68
Q

When an asset is disposed what must you do with any bal on the reval reserve relating to an asset that has been disposed of?

A

This balance should be transferred to the P&L acc reserve as reserve transfer on disposal
Shown on Statement of changes in equity

69
Q

What treatment should be given to an asset that is to be scrapped

A

Continue to classify it as a fixed asset
Continue to depr it until it is scrapped
When scrapped, recog any P&L on disposal as the diff between the proceeds (if any) and NBV
Don’t classify as held for sale as unlikely to get anything for it

70
Q

What are the disclose requirements for PPE?

A 
FRS 102 Section 17 PPE 
Disclosure should be made of 
Measurement bases used (cost/reval) for each class of asset
Depr methods used
Useful lives/depr rates used
Changes in acc estimates
TFA reconciliation
Reval details including NBV under cost model of reval asset and mvmt on reval surplus
71
Q

Describe the TFA reconciliation

A 
Along the top: asset classifications 
e.g. L&B, P&M , total 
Down the side 
Cost (valuation at start of yr)
Additions
Revaluations
Disposals 
Cost at y/e 
Depr at start
Revaluation
disposals
Charge for year 
Impairment 
Depr at y/e

NBV ar start
NBV at end

72
Q

What does FRS 102 Section 27 Impairment of Assets require?

A

Disclosure should be made for each class of assets of
The amount of impairment loss charged to P&L acc for period and the line in the P&L acc in which this is included
The amount of impairment loss on revalued assets recognised as a reduction in reval surplus
For each material impairment loss, there should also be a disclosure of the nature and amount of the loss

73
Q

What are the IFRS differences relating to borrowing costs?

A

IAS 23 Borrowing costs requires directly attributable borrowing costs to be capitalised as part of the cost of the asset
FRS 102 Section 25 allows a choice between capitalisation and expensing the borrowing costs as incurred

74
Q

What are the IFRS differences relating to assets held for sale?

A

Assets valued using the cost model
1. When an asset is classified as held for sale, measure at LOWER of
Carrying amount
FV - cost to sell
2. This will result in the immediate recog of an impairment loss if FV-cost to sell < carrying amount
3. Cease depr
4. Present the asset separately on the bal sheet
Normally under sub-total of current assets
5. When the asset is sold, calc and recog any gain/loss as normal in P&L

Assets valued using the revaluation model
The treatment of reval asset is as above, but with 1 extra step before step 1
Prior to classification as held for sale, asset should be revalued (using usual IAS 16 rules)
This makes carrying amount = FV
Remaining steps are the same

75
Q

How should assets be valued using the revaluation model?

A

Prior to classification as held for sale, asset should be revalued (using usual IAS 16 rules)
This makes carrying amount = FV
1. When an asset is classified as held for sale, measure at LOWER of
Carrying amount
FV - cost to sell
2. This will result in the immediate recog of an impairment loss if FV-cost to sell < carrying amount
3. Cease depr
4. Present the asset separately on the bal sheet
Normally under sub-total of current assets
5. When the asset is sold, calc and recog any gain/loss as normal in P&L

76
Q

How are assets valued using the cost model?

A
  1. When an asset is classified as held for sale, measure at LOWER of
    Carrying amount
    FV - cost to sell
  2. This will result in the immediate recog of an impairment loss if FV-cost to sell < carrying amount
  3. Cease depr
  4. Present the asset separately on the bal sheet
    Normally under sub-total of current assets
  5. When the asset is sold, calc and recog any gain/loss as normal in P&L
77
Q

What are the differences between IFRS 102 and 105?

A

With FRS 105
There is no option to revalue PPE
There is no option to capitalise borrowing costs
MUST be expensed to P&L

FAR UK GAAP (18 decks)

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