Ch 9 - NCA - IAS 16 and IAS 36 Flashcards
What is IAS 16?
Property, plant and equipment - these are tangible assets that:-
- are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and
What is Carrying Amount?
The amount in the SOFP is correspondingly reduced with the depreciating expense, the remaining balance after accumulated depreciation is deducted is referred to as the CARRYING AMOUNT.
What is Cost?
The amount given to acquire the asset.
Depreciable amount?
The cost of an asset, less its residual value.
Depreciation?
The systematic allocation of the depreciable amount of an asset over its useful life.
Fair Value
The price that would be received to sell an asset or paid to transfer a liability.
What is IAS 36?
Impairment of Assets - defined as a loss if the recoverable amount is less than the carrying amount.
What if the residual value is greater than the carrying amount what happens to the depreciation
?
If the residual value is GREATER than the carrying amount the depreciation charge is Zero.
What is residual value?
The estimated disposal value of the asset at the end of its useful life - after deducting the estimated costs of disposal.
Explain IMPAIRMENT?
An asset may be impaired if its RECOVERABLE AMOUNT is less than its CARRYING AMOUNT in the financial statements.
Indications that an asset may be impaired include:-
* obvious damage
* obsolescence
* lack of use, so that the asset is not creating value for the entity.
Explain the RECOVERABLE AMOUNT ?
Represents the best use of the assets and is the higher of :-
- NET SELLING VALUE - fair value less costs of disposal
or - VALUE IN USE - generated income by continuing to use the asset in the business AND disposal of asset.
When should subsequent expenditure be CAPITALISED for P, P&Equip?
- 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 e.g. overhaul of a furnace or a roof (where both are separately identified as assets)
- it is the cost of a major inspection for faults and the carrying amount of the previous insepection is derecognised.
The costs of day-to-day servicing should be recognised in the SOPL (expense)
Explain derecognition?
Derecognition is the process of removing an asset or liability, or part of one from an entities financial statement.
What is recognised in the financial statements of an initial cost of assets PPE?
Only DIRECTLY attributable costs to be included in SOFP for PPE - NOT admin costs, general costs or annual maintenance contract.
What can be capitalised regarding additional expenditure?
- Costs to upgrade and enhance the machine above its original performance.
- Annual maintenance is and expense in the P&L
- Repairs to previous performance is maintenance expenditure in the P&L
Changes in useful life and residual value?
Any change in the useful life or residual value will result in adjustments to the depreciation charge for current or future periods - it is a change in accounting estimates. Formula:-
Cost - residual value / useful life
If the % for depreciation is not given how do you calculate it?
Cost - Residual value / useful life
What does IAS 16 require entities to apply?
COST MODEL - Carrying amount = cost
REVALUATION MODEL - Carrying amount = fair value
Both Less:- Accumulated depreciation
Less:- Accumulated impairment loss
An entity may decide to use the two models for measuring assets however?
must make sure that each class of assets uses the same model i.e.
- use the cost model for P&M
and - revaluation model for L&B
On acquiring an asset what estimates are made?
Estimates are made on its USEFUL LIFE and RESIDUAL VALUE.
Subsequently it may be appropriate to REVISE these estimates.
The revalued amount of an asset is?
The assets FAIR VALUE at the date of revaluation.
What does revaluing to fair value mean?
It means that the item of PPE will reflect the current value of the asset at the point the REVALUATION occurs.
Where does the REVALUATION SURPLUS sit in the financial statements?
REVALUATION SURPLUS - sits in the SOPL in
Other comprehensive income - which includes income (gains) and expenses (losses) that are not recognised in profit or loss (they are recorded in reserves rather than an element of the profit)
What are the key revaluation issues to remember?
- If an asset is revalued, any accumulated depreciation up to the date of the revaluation should be reversed. This will increase the revaluation surplus. The revaluation surplus is also described as the REVALUATION RESERVE
- Depreciation will then be calculated based on the revalued amount.
- Revaluations must be made for the whole of the class of assets
- The frequency of revaluations will depend upon the volatility of the fair values of the asset class. The more volatile, the more frequent the revaluation.
What are the steps to account for a revaluation? THIS IS IMPORTANT
- Restate asset cost to the revalued amount.
- Remove any existing accumulated depreciation.
- Transfer the increase in the cost account and the existing accumulated depreciation to the revaluation surplus account within equity.
- Recalculate current year’s depreciation on the revalued amount if applicable. If the revaluation takes place at the end of the year, the depreciation charge will be affected in future years. If the revaluation occurs at the start of the year then depreciation will be affected in the current year. Depreciation will be calculated as the revalued amount, over the remaining useful life. The remaining life is taken from the date of the revaluation.
What should you do if an asset is classed as HELD FOR SALE based on IFRS 5?
- Depreciation should cease
- The asset should be moved to current assets (below the sub total of the other current assets)
- hold at the lower of carrying value and fair value less costs to sell.
- Record the loss in SOPL
If the method of depreciation changes after a couple of years and you need to calculate the dep charge, what formula would you use?
N
With regard to Revaluations, what is the revalued amount of an asset is the assets?
Fair Value
Which IFRS relates to Fair Value Measurement for revaluations?
IFRS 13 Fair Value Measurement
What does IFRS 13, Fair Value Measurement set out?
a single framework for measuring fair value.
IFRS 13 defines fair value as……
“the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date”
What is Net Selling Price?
Fair Value LESS costs to sell
If an asset has been identified as IMPAIRED, its Carrying Amount must be ????
REDUCED to its recoverable amount and the fall in value is transferred to the SOPL as an expense (think of it as an extra depreciation charge for the year.
Where will a revaluation SURPLUS appear in the financial statements? (upwards revaluation)
Appear in the Equity Section of the SOFP
What are the entries when there is an INCREASE in Carrying Amount?
DR - Asset
CR - Revaluation surplus
When there is an INCREASE in revaluation surplus when the asset is used what happens?
The revaluation surplus may be transferred to RETAINED EARNINGS as the asset is used
DR - Revaluation Surplus
CR - Retained Earnings
Any remaining balance in the revaluation surplus will be transferred to retained earnings when the asset is DISPOSED.
