CH4 Fixed Assets

Question 1

Recognition criteria for PPE?

Answer 1

1. Probably that future economic benefit will flow
2. Cost can be measured reliably

Question 2

Initial measurement of PPE. What costs are included?

Answer 2

The cost directly attributable to bringing the asset to its present location and condition.

Question 3

What is the double entry for decommissioning an asset?

Answer 3

DR PPE
CR Provision (with the PV)

Question 4

What are the two choices in the Standards for subsequent measurement of fixed assets?

Answer 4

Cost model
Revaluation model

Question 5

If you follow the revaluation model, can you cherry pick which assets to revalue?

Answer 5

No - you must revalue that whole class of assets.

Question 6

How often do you have to revalue assets if you choose to follow this method?

Answer 6

Sufficient regularity that the CV is not materially different to the FV

Question 7

Where are revaluation gains recognised?

Answer 7

Other comprehensive income (OCI) - a revaluation surplus in equity

Question 8

What amount do we credit to Revaluation Surplus (OCI) when we revalue an asset?

Answer 8

The UPLIFT from CV to FV

Question 9

What are the journal entries for revaluation of an asset?

Answer 9

3. DR Cost (revaluation - original cost)
4. DR Acc Dep (clear out acc dep to date)
5. CR Reval. Surp (OCI) (revaluation - NBV (original cost - acc dep)

Question 10

What is the double entry to transfer the excess depreciation resulting from a revaluation?

Answer 10

DR Reval Surp
Cr RE

***difference only!!!!

Question 11

What are the conditions for held for sale?

Answer 11

1. Available for immediate sale in its current condition
2. Sale should be highly probable
3. Sale should be expected to take place within one year of reclassification

Question 12

On reclassification, assets held for sale will be…?

Answer 12

1. Shown separately under current assets in the SPL as non-current assets held for sale
2. Valued at lower of CV and FVLCTS
3. No longer depreciated (as not a NCA)

Question 13

What are the conditions for government grants to be recognised?

Answer 13

Govt grants will be recognised when there is REASONBABLE ASSURANCE that:
1. The entity will comply with the conditions
2. The entity will receive the grant

Question 14

Does an entity have the choice between capitalising qualifying finance costs related to buying assets or expensing the full amount to the SPL?

Answer 14

No. They must capitalise it.

Question 15

What does ‘fair presentation’ involve?

Applying what will result in fair presentation?

What uses the description of fair presentation in its discussion of qualitative characteristics?

Answer 15

1. Representing faithfully the effect of transactions, other events and conditions
2. In accordance with the definitions and recognition criteria in the Conceptual Framework

Application of IFRS Accounting Standards, Interpretations and additional disclosures results in fair presentation.

The Conceptual Framework uses the description of fair presentation in its discussion of qualitative characteristics

Question 16

What is the format of the PPE note?

Answer 16

Cost/Valuation
At start of year
Additions
Disposals
Revaluations
At end of year

Accumulated Depreciation
At start of year
Disposals
Revaluations
Charge for the Year
Impairment Loss
At end of year

CV
At end of year
At start of year

Question 17

When does depreciation commence?

Answer 17

When the asset becomes AVAILABLE for use.

Question 18

Where can the additional depreciation from a revaluation go?

Answer 18

From the Reval Surp to RE

Question 19

Can or must revalue/impair?

Answer 19

Can revalue
Must impair to recoverable amount

Question 20

Double entry for impairment

Answer 20

2. DR Reval Surp (OCI) - to reverse previous gain related to that asset which is in there already
3. DR Imp exp (remaining impairment expensed)
4. CR CV of asset to Cost a/c

Question 21

If not amortising an intangible asset, what MUST you do?

Answer 21

Annually review for impairment

Question 22

When else MUST you review for impairment?

Answer 22

If indicators that asset is impaired - broken, obsolete, change in policy

Question 23

An impairment has occurred if …?

Answer 23

CV > RA

Question 24

RA is ….?

Answer 24

The HIGHER of ViU (keep) and FVLCTS (sell)

Question 25

ViU is...?

Answer 25

PV of future cash flows that you think the item will generate

Question 26

What are the steps for NCA Held for Sale?

Answer 26

1. Move (reclassify) it to CURRENT assets (NCAHFS) 2. At LOWER of CV and FVLCTS 3. Stop depreciating it

Question 27

What criteria must be met in order to reclassify an NCA as Held for Sale?

Answer 27

ALL OF: 1. Available for IMMEDIATE SALE in its CURRENT CONDITION 2. Sale should be HIGHLY PROBABLE (reasonable price) 3. Sale should be WITHIN 1 YEAR of RECLASSIFICATION

Question 28

What is the basic double entry for Held for Sale reclassification?

Answer 28

IN - DR Current Assets (NCAHFS) with LOWER OF CV AND FVLCTS OUT - CR PPE Cost with CV (to remove) Alternatively, you might remove from PPE Cost and Acc. Dep. as opposed to removing CV from PPE

Question 29

The basic double entry for NCAHFS is IN - DR Current Assets (NCAHFS) with LOWER OF CV AND FVLCTS OUT - CR PPE with CV (to remove) How do we correct if it needs to go in as FVLCTS (i.e. because FVLCTS is lower than CV)?

Answer 29

IN - DR Current Assets (NCAHFS) with LOWER OF CV AND FVLCTS DR PorL with the difference (recognising loss on disposal at point of reclassification or an impairment of that asset on the day we decided to sell it) OUT - CR PPE with CV (to remove)

Question 30

The basic double entry for NCAHFS is IN - DR Current Assets (NCAHFS) with LOWER OF CV AND FVLCTS OUT - CR PPE with CV (to remove) What is the double entry if FVLCTS is lower than CV and we remove cost and acc. dep. separately?

Answer 30

DR PPE acc dep DR NCA HFS (LOWER of CV and FVLCTS) DR PorL (the bal. fig.) CR PPE cost (original cost)

Question 31

NCA HFS: what is the double entry if you then sell the item at a loss?

Answer 31

DR Cash (the money you get for it) DR Loss on Disposal (bal fig) CR NCAHFS (what it was in there for - i.e. the LOWER of CV and FVLCTS)

Question 32

If you have an asset held for sale under the revaluation model, what step do you need to add to the three step approach?

Answer 32

1. Final revaluation before you reclassify (revalued to FAIR VALUE FULL STOP.) 2. Move to NCAHFS 3. At LOWER of CV (since we have just revalued, CV = FV) and FVLCTS (meaning we will always have to write it down by any costs of selling - charge to PorL) 4. Stop depreciation

Question 33

How to deal with abandonment of NCA?

Answer 33

NOT held for sale!! Remains in NCA category So we still depreciate Impairment indicator!! Profit or loss recognised at time of abandonment

Question 34

When are govt grants recognised?

Answer 34

When there is REASONABLE assurance that BOTH: 1. Entity will comply with conditions 2. Entity will receiver grant

Question 35

What are the two types of govt grant and how released?

Answer 35

1. Relating to assets: released to PorL over useful life of asset in same proportion as dep charge 2. Relating to income (actually relates to day to day operating expenses of the business): released to PorL over periods in which costs of meeting conditions occurred.

Question 36

Does an entity have a choice in how to recognise govt grants?

Answer 36

Yes

Question 37

Grants related to assets can be presented as either:

Answer 37

Buy asset for 10mil, UL 10 years, grant 2mil. 1. Deferred income (gross method) DR PPE 10mil CR Cash 10mil Yearly depn 1mil DR Cash 2mil CR Deferred Income Liab 2mil - released to PorL over 10 years by DR DI Liab 0.2mil; CR Grant Income 0.2mil each year. 2. A deduction in the CV of the asset (netting off) DR PPE 8mil CR Cash 8mil Depn 0.8mil

Question 38

Grants related to income can be presented as either:

Answer 38

Employ Mohammed for 2000/month; grant of 1200/month 1. A CR in the PorL (Other Income) (gross method) - preferred. DR Wages Exp 2000 CR Cash 2000 DR Cash 1200 CR Grant Income 1200 2. A deduction from the related expense (netting off) DR Wages Exp 800 CR Cash 800

Question 39

Is govt advice recognised in the accounts as a grant?

Answer 39

No

Question 40

What is a qualifying asset in terms of capitalising borrowing costs?

Answer 40

An asset that takes a substantial time (>3 months) to get ready for its intended use or sale

Question 41

When can you start capitalising borrowing costs?

Answer 41

When you start to build. Not when you take out the loan. Must then be expensed to PorL

Question 42

When must you stop capitalising borrowing costs?

Answer 42

When you finish building. Must then be expensed to PorL

Question 43

If you have to pause production for a period of time, do you have to expense the borrowing costs to the PorL instead of capitalising them?

Answer 43

Yes. You can only capitalise borrowing costs WHILST YOU ARE ACTUALLY BUILDING

Question 44

Do you HAVE to capitalise borrowing costs on qualifying assets?

Answer 44

Yes

Question 45

If you borrow money to build a qualifying asset, what happens if you don't spend it all at once at the beginning?

Answer 45

Interest on loan whilst constrcuting x LESS inc frm reinvesting surp funds (x) Equals NET amount + PPE x The NET amount MUST be capitalised

Question 46

If you have GENERAL borrowings that you are using to build a qualifying asset (rather than borrowings specifically for that purpose), how do you account for it?

Answer 46

Weighted average % of interest on general borrowings (total yearly interest/total loan(s) figure) x n/12 x build cost = amount you MUST capitalise

Question 47

Format of PPE note

Answer 47

Along the top: headings for each class of asset plus a total column Down: Cost/Valuation At start of year Revaluations Additions Classified as held for sale Disposals At end of year Acc. Dep At start of year Charge for year Classified as held for sale Impairment loss Disposals At end of year Carrying Amount At start of year At end of year

Question 48

PPE - what are the differences between IFRS and UK GAAP treatment?

Answer 48

IFRS: proceeds arising from sale of items produced in the process of bringing PPE to location & condition necessary to operate are recognised in PorL. UK GAAP: these proceeds are deducted from the CV of the item. UK GAAP: if eligible (FRS 101), you do not have to present comparatives for the reconciliation of PPE at the beginning and end of the period.

Question 49

Impairment - what are the differences between IFRS and UK GAAP treatment?

Answer 49

UK GAAP: FRS 101 allows exemptions from disclosures regarding estimates used to measure recoverable amounts of certain groups of assets.

Question 50

Assets held for sale - what are the differences between IFRS and UK GAAP treatment?

Answer 50

UK GAAP: no equivalent concept in the UK. Assets are depreciated up to the point of disposal at which point the relevant gain or loss on disposal is recognised

Question 51

Govt grants - what are the differences between IFRS and UK GAAP treatment?

Answer 51

IFRS: recognises grants as either income or capital related and permits presentation on a net or gross basis (choice). UK GAAP: grants need to be treated on a class by class basis using either the: 1. Performance model: you can only recognise the grant when the performance related conditions have been met. Or the: 2. Accrual model (similar to IFRS treatment): classified either as revenue or asset related (same as IFRS) and recognised on a systematic basis in line with the related expenses or life of the asset (spreading the grant over its life). UK GAAP DOES NOT PERMIT A GRANT RELATING TO AN ASSET TO BE DEDUCTED FROM THE CV OF THE ASSET (IE YOU HAVE TO USE THE DEFERRED INCOME APPROACH).

Question 52

Borrowing costs - what are the differences between IFRS and UK GAAP treatment?

Answer 52

IFRS: capitalisation is REQUIRED. UK GAAP gives a choice (capitalise or expense it) IFRS: capitalised amount is limited to the borrowing costs on the related funds less any investment income. UK GAAP: The amount capitalised is based on the average CV of the expenditure.