Chapter 4 Flashcards
IAS 16 - Property plant and equipment
are tangible assets held for use in the production or supply of goods and services, which are expected to be used for more than one period.
IAS 16 - Property plant and equipment
Depreciation
is the systematic allocation of the depreciable amount of an asset over its useful life.
IAS 16 - Property plant and equipment
Depreciable amount
is the cost or valuation of the asset, less any residual value.
IAS 16 - Property plant and equipment
Useful life
is the length of time, or the number of units of production, for which an asset is expected to be used.
IAS 16 - Property plant and equipment
Carrying amount
is the amount at which an asset is recognised on the statement of financial position, after deducting any accumulated depreciation and impairment losses.
Questions to be asked when dealing with assets:
1) Is this an asset?
2) Is it to be recognised on the statement of financial position?
3) What method is to be used to measure it or to value it?
An item of property plant and equipment (PPE) is to be recognised as an asset when:
1) it is probable that future economic benefits will flow to the entity; and
2) the cost of the asset can be measured reliably
Further costs spend on PPE:
1) The costs of day-to-day servicing of the asset
2) Where parts of the asset require replacement at regular intervals
3) Where regular inspections have to be carried out to continue operating an asset
Measurement of property plant and equipment:
How is it measured initially and what includes?
Initially PPE are measured at cost on the statement of financial position.
Cost is a purchase price including:
1) any import duties and taxes, plus
2) any costs directly attributable to bring the asset to the location and condition for its intended use, plus
3) the estimated costs of dismantling and removing the asset at the end of its useful life.
Measurement of property plant and equipment
after adquisition - Cost model
The asset is carried at cost less accumulated depreciation and impairment losses.
Measurement of property plant and equipment
After adquisition - Revaluation model
The asset is carried on the statement of financial position at a revalued amount, being its fair value less any subsequent depreciation and impairment losses.
Revaluations are dealt with as follows: increase in value
Any increase in value is recognised in other comprehensive income and is credited within equity to a revaluation surplus (if it reverses a previous decrease it is income).
Revaluations are dealt with as follows: reduction in value
Any reduction in value is recognised as an expense in the statement of profit or loss and other comprehensive income (if it reverses a previous increase it is debited to the revaluation surplus).
Revaluations are dealt with as follows: Derecognition
Derecognition occurs when an item of PPE is disposed of, or when no future economic benefits are expected from its use or disposal.
What is an intangible asset? Give examples
Is an identifiable non-monetary asset without physical substance.
Examples include computer software, patents, copyrights, customer lists, licences and marketing rights.
INTANGIBLE ASSETS - The three key elements are:
1) Identifiability
2) Control
3) Future economic benefits
INTANGIBLE ASSETS - Recognition:
How they come about?
How are they recognised in the financial statements?
Intangible assets come about from two main sources: either they are purchased, or they are internally generated.
In both cases the intangible asset is recognised initially in the financial statements at cost price when:
1) It is probable that the expected future economic
benefits that are attributable to the asset will flow to
the entity; and
2) The cost of the asset can be measured reliably.
Research
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
Development
Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.
Development costs: when are they capitalised as an intangible asset? 1 to 3
The entity has to demonstrate all of the following:
1) The technical feasibility of completing the intangible
asset so that it will be available for use or sale.
2) Its intention to complete the intangible asset and to
use or sell it.
3) Its ability to use or sell the intangible asset.
IMPAIRMENT OF ASSETS
If the recoverable amount of an asset is less than its carrying amount, then the carrying value is to be reduced.
This is an impairment loss which is recognised as an expense in the statement of profit or loss and other comprehensive income.
IMPAIRMENT OF ASSETS
Impairment loss
Impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
Fair value (of assets and liabilities)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the date of the valuation).
IMPAIRMENT OF ASSETS
Scope of the Standard
It applies to most non-current assets, such as land and buildings, plant and machinery, vehicles, goodwill and other intangible assets. It does not apply to current assets such as inventories.
The impairment review: mention the three steps
Step 1: what is the asset’s carrying amount?
Step 2: what is the asset’s recoverable amount?
The higher of:
• Fair value less costs of disposal
• Value in use
Step 3: if carrying amount is greater than recoverable amount, then the asset is impaired and should be written down to its recoverable amount on the statement of financial position.
IAS 17 - LEASES
Leasing is the means by which companies obtain the right to use non-current assets, such as machinery or vehicles. The lessee makes agreed payments for a period of time to a lessor (often a finance company). I may be provision in the lease contract for legal title of the leased asset to pass to the lessee.
Finance lease:
usually a longer term lease, under which substantially all the risks and rewards of ownership are transferred to the lessee.
Operating lease:
usually a shorter term lease, where there is not substantial transfer of the risks and rewards of ownership to the lessee.
A finance lease is usually characterised by one or more of the following:
Deciding whether a lease is a finance lease or an operating lease depends on the commercial substance of the transaction rather than the legal form of the contract. However, a finance lease is usually characterised by one or more of the following:
1) Transfer of ownership by end of lease term.
2) Lessee’s option to purchase at lower than fair value.
3) Lease term is for major part of asset’s economic life.
4) Present value of minimum lease payments at least equal to fair value of asset.
5) Specialist asset, major modifications needed for other users.
Accounting for finance leases by lessees
A finance lease is initially recognised on the statement of financial position as an asset, together with a corresponding liability to the lessor. The amount shown will be the lower of the fair value of the asset and the present value of the minimum lease payments. Any initial direct costs of the lessee are added to the amount recognised as an asset.
Accounting for operating leases by lessees
With an operating lease, lease payments are recognised as an expense in the statement of profit or loss and other comprehensive income on a straight-line basis over the lease term (unless another basis is more representative of the time pattern of the user’s benefit).
IAS 2 - INVENTORIES
1) definition
2) What forms of inventories are there?
3) How are they valued?
Inventories are assets held for sale in the ordinary course of business. Companies often have Inventories in various forms: raw materials, work-in-progress, finished goods. Inventories should be valued at the lower of cost and net realisable value.
The principle of inventory valuation:
Is cost price lower than selling price?: Yes: value inventory at cost price
No: value inventory at selling price (net realisable value).
The lower of these two values is taken, and different items or groups of inventory are compared separately.
Inventory valuation methods
1) FIFO (first in, first out)
2) AVCO (average cost), or weighted average cost method.
Were the cost of inventories is not recoverable they should be written down to their net realisable value.
Closing inventory valuation for a manufacturer, raw materials
For raw materials, the comparison is made between cost and net realizable value and the lower figure is taken as the inventory valuation.
Development costs - accounting
Development costs are either recognised as an expense in the statement of profit or loss and other comprehensive income when they are incurred, or they are to be capitalised as an intangible asset if the entity can demonstrate all of the following: (6 items)
INTANGIBLE ASSETS - The three key elements:
define Identifiability
Identifiability: the asset is either separable from the entity and is capable of being sold or transferred, or it arises from contractual or other legal rights.
INTANGIBLE ASSETS - The three key elements:
Define control
Control: the entity has the power to obtain future economic benefits from the asset.
INTANGIBLE ASSETS - The three key elements:
Define Future economic benefits
Future economic benefits: include revenue from the sale of products or services, cost savings, or other benefits
IMPAIRMENT OF ASSETS
What is the asset’s recoverable amount?
The higher of:
* Fair value less costs of disposal: * Value in use:
IMPAIRMENT OF ASSETS
Fair value
The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, i.e. net realisable value of the asset.
IMPAIRMENT OF ASSETS
Value in use:
The present value of the future cash flows expected to be derived from the asset, including cash from its ultimate disposal.
Inventory valuation: Cost
Cost, including additional costs to bring the product or service to its present location and condition.
Inventory valuation: Net realisable value
Net realisable value: the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale.
Closing inventory valuation for a manufacturer, for work-in-progress and finished goods: what is included?
For work-in-progress and finished goods the cost valuation includes expenditure:
1) on direct materials
2) on the costs of conversion, that is:
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Measurement of property plant and equipment: what models are used?
1) Cost model
2) Revaluation model
Development costs: when are they capitalised as an intangible asset? 4 to 6
The entity has to demonstrate all of the following:
4) The way in which the intangible asset will generate probable future economic benefits.
5) The availability of resources to complete the development and to use or sell the intangible asset.
6) Its ability to measure the development expenditure reliably.
Development costs: when are they capitalised as an intangible asset? Recall the key words
1) technical
2) intention
3) ability
4) way
5) availability
6) ability
A finance lease is usually characterised by one or more of the following: Recall the key words
1) Transfer
2) Option
3) Term
4) Present
5) Specialist
Closing inventory valuation for a manufacturer, for work-in-progress and finished goods: what cannot be included?,
Inventory valuation cannot include:
1) abnormal waste,
2) storage costs,
3) administrative overheads not related to production,
4) selling costs, and
5) the interest cost when inventories are purchased with deferred settlement terms.
Closing inventory valuation for a manufacturer, for work-in-progress and finished goods: what two values are compared?
The cost is then compared with net realisable value, and the lower figure is taken as the inventory valuation.
