Chapter 5 (Part 1) Flashcards
What criterias when recognizing capitalised PPE
- propable that asset’s future economic benefit will flow to entity (can use the asset to generate profit); AND
- cost of asset can be reliably measured
When PPE could meet these criteria, then it need to be capitalised
If the cost of PPE incurred, is it the cost need to be capitalised?
Yes if the cost of PPE is
* purchase price (including import duties, non-refundable purchase taxes, after deducting trade discounts and rebates)
* a capital expenditure (not revenue expenditure: repairing cost)
* directly attributable cost to bring the PPE to its present location and conditions (cost to get a PPE ready for use) i.e, renovation cost, import fees (import PPE to use), custom duties, transport fees, handling cost, professional fees…
* estimate cost such as dismantling cost, restoration cost, removing PPE cost (laws announce… thus these cost got provision)
* finance cost (borrowing money to constuct a PPE, then interest paid need to be capitalised also)
which means the cost incurred is to generate future economic benefit
SOFP under NCA: PPE (Purchase price + salary + dismantling cost…)
SOFP under CL: Provision (dismantling cost)
What cost cannot be capitalised
- administration cost and other general overhead costs
- cost incurred when PPE is already can be used
- cost incurred in initial operating period (introducing a new product, training cost, advertising, cost conducting business in new location…)
- cost of relocating / reorganizing opertaions
- abnormal costs (repairs, wastage)
When borrowing cost can be capitalised
borrowing cost can be capitalised only while construction in progress (because interest cost is neccessary in the construction process)
means capitalised if relate to the acquisition / construction of a qualifying asset (an asset that takes a substantial period of time “minimum 9 months” to get ready for intended use)
Capitalising borrowing cost when all 3 criteria apply
- Expenditure for asset being incurred - using the borrowing money for constructing asset
- Borrowing cost being incurred - interest incurred during construction asset
- Activities to get asset ready for use in construction progress
When should cease capitalised
- when substantially all the activities to get asset ready are completed (works are done, then stop capitalised)
- long period of interruption such as covid period, then cannot capitalised. (if short period such as technical issues, then can continue capitalised)
2 ways to borrow money
- specific borrowing (go to a bank to borrow specific amount for that specific asset), use interest payable
- general borrowing (go to several banks to borrow money and add up a total money for that asset), different interest rate so use average rate
Capitalised amount disclosure: value of borrowing and the interest rate during contructing asset
How to calculate weighted average cost of general borrowing?
Total interest expense / Total loan
i.e, [total interest expense (1m x 12.5%) + (1.5m x 10%) ] / total loan [(1m+1.5m)]
when can recognised government grant?
Gov grant can be recognised only if there is a reasonable assurance that:
* the entity will comply with the conditions; AND
* the grant will be received
2 types of grants
- Income-based grants (grant related to income, i.e, subsidiary
- Capital-based grants (grant related to asset)
2 methods to present asset grant in f/s: deduct the cost from asset & setting up the grant as deferred
income
2 methods to present income grant in f/s: deduct from expenses & setting up th grant as deferred income first then amortised to SOPL if conditions are met
How to recognise with income-based grants
It will reduce the cost, i.e, government give subsidy for operational expense, then expense minus subsidy to calulate actual expense
Initially, when the grant is received, it should be recognised as deferred income. Then, it should be armotised to the SOPL over the next X years (if grant received is for X years not 1 year)
What is revaluation
revaluation apply to all the assets in the same class and performed with sufficient regularity (not necessary yearly) so that carrying amount does not differ significantly with FV
2 models for revaluation of PPE
- Cost model (historical cost): cost - depreciation - impairment
- Revaluation model (current value): FV - depreciation - impairment
*The reserve transfer may be made under SOCIE, from revaluation surplus to RE [-rev surplus transfer to +RE) by using “new dprn - old dprn” method
FV > Carrying amount: Revaluation gain record in OCI & revaluation surplus (SOCIE)
FV < Carrying amount: Deficit amount will reduce revaluation reserve and remaining deficit amount will record in SOPL as impairment loss
IF no revaluation reserve before, full repreciation on revalued asset is recognised in SOPL as impairment.
Revaluation of PPE and FV adjustment of PPE
Revaluation is IFRS 16
FV adjustment just only when doing consol, calculate and impact on GW
