Chapter 4 Flashcards
what are the three steps in regards to assets in financial statements?
- is this an asset?
- is it to be recognised on the SoFP?
- what method is to be used to measure or value it?
is a leased piece of equipment an asset to a business?
yes, it is controlled by the business and offers economic gain
PPE meaning
Property, Plant and Equipment
Examples of PPE
- Buildings
- Land
- Equipment
- shop fittings
- Vehicles
Impairment loss definition
The difference between the carrying amount and the recoverable amount to correct the value in the SoFP
Recoverable amount definition
higher of:
- Asset’s fair value less costs to sell
- It’s value in use
Carrying amount equation
deprecation
-
impairment loss
what is the criteria of when to recognise an asset?
- future economic benefits
- measured reliably
what makes up the initial cost of an asset
- purchase price
- import duties
- other taxes
- any costs to bring item to correct condition and location
- estimated cost of dismantling
- professional fees
- site preparation
how is an asset’s value calculated under the cost model?
original cost less depreciation less impairment loss
how is an asset’s value calculated under the revaluation model?
fair value less depreciation less impairment loss
how often are revaluations made?
either every year or every three to five years
How often should the depreciation method be reviewed?
Once a year
Another name for derecognition
Asset disposal
What happens if an asset revaluation during derecognition results in a surplus?
The ‘profit’ is added directly to retained earnings and not via P&L
Define intangible asset
An identifiable non-monetary non-physical asset
What are the two ways intangible assets come about?
- Purchased
- Created internally (staff work, innovation, etc)
What is Research?
- The pursuit of knowledge
- The pursuit of new alternative processes, systems, knowledge
- Theory
What is Development?
- The application of researched knowledge
- The application of research findings to plan and establish new alternative processes, systems, knowledge
- practical
When is a development cost to be capitalised?
- if the development is technically feasibly able to be sold or used upon completion
- intention to complete it for usage or sale
- the ability to use or sell the development
- demonstrate the way the development cost will produce economic benefit
- demonstrate the availability of resources to bring the asset to completion
- the ability to measure the costs reliably
When would a development cost (intangible asset) have a residual value?
When there is an agreement for a third party to purchase the asset at the end of the useful life, or a market reference is able to prove its value
How should a change in the useful life of an indefinite intangible asset that has become a definite useful life be accounted?
As a change in accounting estimate
Is goodwill an intangible asset?
No, it is regarded as a separate category and treated as such
examples of intangible assets
- scientific/technical knowledge
- design/implementation of new processes
- licenses
- intellectual property
- market knowledge
- trademarks (brands)
What happens to revenue expenditure on research?
It is expensed through P&L
What happens to development cost expenditure?
It is capitalised if it can demonstrate that it is an intangible asset
What happens if a business cannot distinguish research from development costs?
Both costs are then debited in the P&L
What happens to an infinite intangible asset?
- It is checked every year for impairment
- It is checked every year to see if it has become finite
Value in use definition
the expected future cash flows from an asset due to its use
External sources that indicate whether a business entity/net assets require impairment
- significant change in asset’s value
- changes in technology, markets, economy and laws
- increase in interest rates
- market of business is less than net assets
Internal sources of info of impairment
- physical damage
- reorganisation causing adverse effect on economy of asset
- a fall in budgeted profit
what happens to amortisation/depreciation after impairment loss?
It needs to be adjusted for the future for the new carrying amount
what is ROU assets?
Right Of Use Assets (lessee)
First double entry for a lease
debit ROU assets
credit lease liability
which valuation model can be applied to leases?
both cost model and revaluation model
What is the expense account called for impairment loss?
Impairment loss account
how should inventories be valued?
At the lower of cost or net realisable value
How is net realisable value calculated?
est. selling price - estimated costs to complete sale and finish product
