Chapter 2 - Property Plant & Equipment

Question 1

What standard covers Property, Plant & Equipment?

Answer 1

IAS 16

Question 2

What is the prupose of IAS 16?

Answer 2

Recognition of PPE, determination of carry amounts and charging of depreciation

Question 3

Does IAS 16 include biological assets and mineral rights in its scope?

Answer 3

No. Specific standards exist.

Question 5

Under IFRS, is legal ownership of an asset required to recognise PPE?

Answer 5

No. Only control.

Question 6

Spare parts - are they an asset?

Answer 6

Yes. Should be included with property, plant & equipment unless it is used as trading stock

Question 7

What is a “bearer plant”?

Answer 7

Living plant that produces multiple harvests

Question 8

What 3 conditions exist to be classified as a bearer plant?

Answer 8

Plant that:

(A) used in agricultural produce
(B) expected to bear produce over more than one period
(C) remote likelihood of being sold as agricultural produce.

Question 9

What are examples of bearer plants?

Answer 9

Apple trees
Grapes vines
Teams bushes

Question 10

How are bearer plants treated - under IAS 16 or IAS 41?

Answer 10

Now under IAS 16 (Property Plant + Equipment).

Now recognised as a separate category of PPE.

Question 11

How are bearer plants valued / reported under IAS 16?

Answer 11

For the plants themselves:

• In the periods before cultivating (i.e. not yet in the form that management intends), recognise at accumulated cost, including any direct cultivation costs.
• once ready to cultivate, measure at either cost or fair value.

For the produce (e.g. apples or grapes), IAS 41 applies. Measured at fair value, less costs to sell.

Question 12

Under IAS 16, how should PPE be initially recognised?

Answer 12

At cost.

Includes:
- purchase price
- costs attributable to bring to current condition and location
- initial estimate for removing / dismantling the item, or restoring the site, if thr entity is required to do so.

Question 13

What is meant by “costs” under IAS 16?

Answer 13

Cash & cash equivalents paid

+

Fair value of any other consideration given

Question 14

Can costs that are not directly attributable to an item be recognised as PPE?

Answer 14

No. Must be directly attributable.

Question 15

If an entity incurs any abnormal costs in construction of an asset (e.g. design errors, wastage or industrial disputes), should these be classified as part of the asset / PPE costs under IAS 16?

Answer 15

No.

Should expense immediately when incurred, not part of the capitalised cost.

Question 16

What is covered by IAS 23?

Answer 16

Borrowing costs

Question 17

When should recognition of costs as part of PPE stop?

Answer 17

When the asset is capable of being operated in the manner intended by management

Question 18

What is fair value according to IAS 16?

Answer 18

Amount for which asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Keywords:
- amount
- exchanged
- knowledgeable + willing parties
- arm’s length.

Question 19

If revenue is earned before asset reaches final location or condition, are these treated as offsetting the cost of PPE, or recognised as revenue?

Answer 19

Treat as revenue, rather than deduct from cost.

Question 20

When recognising the initial cost of the asset under IAS 16 what happens when payment is deferred beyond normal payment terms?

Answer 20

Cost recognised is discounted to present value.

Difference is recognised as interest.

Question 21

An entity acquires an asset not by paying cash, but by exchanging assets.

How is this tested under IAS 16?

Answer 21

New asset should be recognised at fair value

Question 22

Start ups losses prior to an asset becoming fully operational - capitalised or expensed?

Answer 22

Expense as losses incurred - cannot be included in capitalised costs

Question 23

What subsequent costs should be capitalised versus expensed as R&M?

Answer 23

Routine repairs and maintenance costs = R&M expenses.

Enhances asset to the extent that additional economic benefits will flow = capitalise.

Question 24

Where an asset is made up of distinct parts that are routinely replaced (e.g. an airplane), how should costs be treated?

Answer 24

Parts should be separately identified where possible. The additional cost will replace the cost of the original part of the asset.

Question 25

Where an asset has major inspections or overhauls, how should the costs be treated?

Answer 25

As part of the carrying value of the PPE, provided it meets the recognition criteria.

Question 26

After initial recognition, what are the 2 options for measuring PPE?

Answer 26

1. Cost model (cost, less depreciation, less impairment) 2. Revaluation model (revalued amount less subsequent depreciation and impairment costs)

Question 27

What is residual value under IAS 16?

Answer 27

Estimated amount a entity would obtain after deducting the costs of disposal at the end of the useful life.

Question 28

When should an impairment loss be recorded for PPE?

Answer 28

When the carrying value exceeds its recoverable amount

Question 30

What is the definition of depreciable amount under IAS 16?

Answer 30

Cost of an asset less its residual value

Question 31

What is the definition of useful life in IAS 16?

Answer 31

The period for which the asset is expected to bear available for use by an entity

Question 32

What are 3 common methods of depreciation?

Answer 32

1. Straight-line method 2. Diminishing balance method 3. Units of production method

Question 33

Under IAS 16.60, how should an entity select a method to depreciate each asset?

Answer 33

Based on the depreciation method that best reflects the expected economic benefits embodied in the asset

Question 34

Is a depreciation method based on revenue generated considered appropriate?

Answer 34

No. Revenue typically is influenced by factors such as marketing, sales or economic trends and should not be used in determining depreciation.

Question 35

True or false: The depreciation method used should be reviewed every year and changed if appropriate?

Answer 35

True

Question 36

How should each different part of a an item of PPE be depreciated?

Answer 36

Separately, if they have different useful lives. For example, an aircraft engine may have a different useful life to the aircraft fuselage.

Question 37

Land and buildings are acquired at the same time by an entity. Under the cost model, how should these be recorded?

Answer 37

Upon purchase, record separate amounts for the land and buildings. Buildings are depreciated. Land is not.

Question 38

What is the revaluation model?

Answer 38

An entity can choose to revalue assets to their fair value. Land and buildings, for instance, are recorded based at their market values by an appraiser.

Question 39

If the revaluation model is chosen, does the entity need to do regular valuations?

Answer 39

Yes

Question 40

True or false: If an entity chooses the revaluation model on one model, other assets in that class can be valued using the cost model instead.

Answer 40

False. If the revaluation model is chosen for an asset, all other assets in that class must also use the revaluation model.

Question 42

Under the revaluation model, how are increases to the valuation recorded?

Answer 42

Increases in asset value - Gain in value is recognised in the statement of comprehensive income, and statement of equity as "revaluation surplus". If it reverses a decrease that was previously recorded in the P&L, then can be recorded in P&L to the same extent as the original decrease.

Question 43

Under the revaluation model, how are decreases to the valuation of an asset recorded?

Answer 43

Loss is recognised in profit & loss. However, if revaluation surplus already recognised in the gain,

Question 44

Under the revaluation model, how are any decreases in asset values recorded?

Answer 44

Recognised in the P&L. However, if a previous revaluation surplus for that asset exists and was previously recognised, revaluation loss should be recognised to that extent in comprehensive income, and the remainder to the P&L.

Question 45

True or false: When the revaluation model for PPE is used, you don't need to bother with depreciation

Answer 45

False. Assets still need to be depreciated when using the revaluation model - depreciation is based on the revalued amount.

Question 46

When using the revaluation model for PPE, is future depreciation based on the original cost or the revalued carrying amount?

Answer 46

Revalued carrying amount

Question 47

An asset has previously had a revaluation surplus. How is the new depreciation amount recorded?

Answer 47

New depreciation amount = new value divided by remaining useful life. The amount that is transferred out of the previous revaluation surplus is the new depreciation amount minus the existing depreciation amount if the asset hadn't been revalued.

Question 48

Under what 2 circumstances should derecognition of PPE occur?

Answer 48

Asset should be removed from statement of financial position either: 1. On disposal 2. When no future economic benefits are expected from its use or disposal.

Question 49

When an asset is recognised, how is the gain or loss recognised?

Answer 49

Under both the cost model and revaluation model, gain / loss is recorded in the profit & loss.

Question 50

True or false: Gains or losses from the disposal of assets should be included in comprehensive income.

Answer 50

False. Gains or losses should be recorded in the profit & loss.

Question 51

When an asset is derecognised (disposed), how is any previous revaluation surplus treated?

Answer 51

Revaluation surplus is moved to retained earnings. Does not affect P&L, shown as a movement between reserves.

Question 52

What 3 disclosures are required under IAS 16 for Property plant & equipment?

Answer 52

1. Reconciliation of carrying amounts 2. Depreciation policy and rates 3. Ancillary items

Question 53

What is IAS 36?

Answer 53

Impairment of assets

Question 54

What Australian Standard covers Property, Plant & Equipment?

Answer 54

AASB 116

Question 55

What acquisition date should be used for PPE?

Answer 55

The date that the acquire obtains control of the asset