Ch6: PPE Flashcards
Under both FWs, PPE is only recognized as an asset only if two criteria are met. What are they?
- it’s probable that future economic benefits associated with the item will flow to the entity.
-cost can be measured reliably.
The cost of a PPE comprises 3 components. What are they?
1) Purchase price (plus import duties & non-refundable purchase taxes) - (deduct trade discounts and rebates).
2) DCs attributable to bringing the asset to the location and condition necessary for it to be operable by the businesses.
3) Initial estimated costs of dismantling and removing the item and restoring the site.
What is capitalized when a business purchases equipment?
Purchase price (any non-refundable costs such as import duties and sales taxes) and any costs incurred to bring the asset into use such as delivery and/or installation of the asset, and tests conducted to ensure that the asset is operational. Any training expenses or maintenance expenses post-purchase of the asset are excluded. An exception to this rule would be the regular inspection of the equipment.
What can and cannot be capitalized when a business purchases land/building?
Purchase price, commissions, legal fees, title search, property transfer fees and in general any costs that are required to make the land and building usable for the company’s purposes are also capitalized.
Bear in mind that although land and building are often acquired together, they must be accounted for separately since buildings are depreciable, meanwhile land is not.
Explain what componetization means.
When PPE has significant parts with different usage rates (depreciation rates), the overall asset cost has to be broken apart and componentized so that each major part will be depreciated at the appropriate rate.
Side note: IFRS recommends that parts with similar useful lives be grouped together for purposes of depreciation.
Construction of an asset, what can be capitalized?
1) Direct construction costs = direct management salaries, direct labor, and materials.
2) site survey expenses
3) construction permits
4) professional fees.
5) Direct borrowing costs incurred to finance the construction until the occupation is obtained (IFRS only, ASPE allows the option between capitalizing or expensing).
Are spare parts, standby equipment, or servicing equipment considered inventory or PPE?
Spare parts that are “immaterial in nature” or have a short lifespan would be considered inventory. However, major spare parts, given that they meet the PPE 2 criteria, and have a lifespan greater than a year would be considered PPE/capital assets.
In the context of depreciation, useful lives can be based on three categories. What are they?
a. the period over which an asset is expected to be available for use.
b. the number of production
c. units expected to be obtained from the asset such as machine hours.
Identify and explain the three methods of deprecation available for entities to choose from.
a. straight line method = (cost of the asset - RV)/estimated useful life.
b. declining balance method = cost of the asset x depreciation rate.
- Assumption that the benefit derived is higher in its initial years and less as the asset ages.
- Rate is applied to the CV or NBV (cost less accumulated depreciation).
-Depreciation continues until the CV equals the SV. Once it reaches the salvage value depreciation stops.
-SV is not included in the calculation of depreciation.
c. units of production method: (cost - RV)/total units = per-unit depreciation rate.
Identify and explain the two measurement methods.
1) Cost model - assets are recorded at historical cost and depreciation is taken each year.
2) revaluation methods - assets are recorded at FV and depreciated each year (dep. method does not change every year).
Also;
- there must be a sufficient degree of reliability in measuring fair market value estimates. -revaluation will be required when there is material difference in fair market value from the last reporting period.
- an entity should perform valuations regularly.
Employing the revaluation method will result in gains and losses as the assets are written up or down to fair market value. Explain how that works.
When an asset is increased to fair market value, a gain occurs, which is recognized as follows:
The gain is first recorded to net income, up to the amount of losses that was previously recorded to net income as a result of revaluations on the asset.
Then the remaining gain is recorded to other comprehensive income (OCI).
DR. PPE (100% of gain)
CR. Gain on revaluation of PPE (I/s) (Gain up to previous losses)
CR. OCI revaluation surplus (remaining)
When an asset is written down to fair market value, a loss occurs, which is recognized as follows:
* The loss is first recorded to OCI, up to the amount of gains that was previously recorded to OCI as a result of revaluations on the asset.
* Then the remaining loss is recorded to net income.
DR. OCI - revaluation surplus (up to previous gains)
DR. Loss on revaluation of PPE I(/S) (remaining loss)
CR. PPE (100% of loss)
Under the revaluation method, depreciation (asset cost) is adjusted in two ways. What are they?
a) elimination method - accumulated depreciation is first reset back to zero and asset cost is adjusted accordingly (to reflect FV).
b) proportional method - cost and accumulated depreciation are adjusted proportionally to achieve an overall CV equal to FV.
Explain the difference between RV & SV.
RV = the proceeds of sale less any disposition costs.
SV = value of scrap at the end of its useful life.
Differentiate between useful life and asset life.
useful life = period of time that the asset produces economic benefit for the entity.
asset life = is the estimated length of time that the asset will last.
Interest capitalization for self-constructed assets, measurement basis, derecognition, and straight-line depreciation period are all treated differently under IFRS and ASPE. Explain.
A) Interest capitalization for self-constructed assets:
IFRS = have to capitalize
ASPE = gives option between expensing and capitalizing
B) Measurement basis:
IFRS = Cost or revaluation model
ASPE = Cost only
C) Derecognition:
IFRS: Required when replaced
ASPE: Not required when replaced (as long as net amount new+old is recoverable from future cash flows.
D) Straightline depreciation:
IFRS = (Cost - RV)/useful life
ASPE = Greater of;
I. (cost - RV)/useful life
ii. (cost - SV)/asset life
