Chapter 5 (PPE - Property, plant and equipment) Flashcards
Definition of Property, plant and equipment
IAS16 defines PPE as tangible items that:
- Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
- Are expected to be used during more than one period.”
Carrying amount?
The amount at which an item is “carried” or shown in the financial statements.”
“The amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses”.
This amount could also be referred to as the asset’s written down value, although this term is not used by the international standards.
If it is probable that future economic benefits from an asset will flow to the company, what other requirement must be fulfilled to be able to recognize PPE?
Property, plant and equipment should be recognised as an asset if and only if:
- It is probable that future economic benefits associated with the item will flow to the entity concerned, and
- The cost of the item can be measured reliably
What can we treat as capital expenditure in PPE?
IAS16 requires that the cost of MAJOR REPLACEMENTS should be treated as capital expenditure and recognised as an addition to the carrying amount of the asset concerned.
How do you measure the initial recognition of PPE?
“To the purchase price, less discounts and rebates”
On initial recognition, IAS16 requires that items of property, plant and equipment should be measured at cost
- The purchase price of the item, including import duties and non-refundable purchase taxes, less trade discounts or rebates
- Costs that are directly attributable to bringing the item to the location and condition necessary for it to be operated as intended
- The estimated costs of dismantling and removing the item and restoring the site on which the item is located, as long as the obligation to meet these costs is incurred when the item is acquired or used
Describe the cost model for PPE
The initial recognized cost, less depreciations and impairments, plus dismantling costs at the end
After initial recognition, items of PPE are carried at cost less any accumulated depreciation and less any accumulated impairment losses
If a PPE is revalued and the value increases, how will the gain be recognized?
If the carrying amount of an item of PPE is increased as a result of a revaluation, the increase must normally be credited to a revaluation reserve and shown as “other comprehensive income” in the entity’s statement of comprehensive income.
A revaluation increase must be recognised as income when calculating the entity’s profit or loss to the extent that it reverses any revaluation decrease in respect of the same item that was previously recognised as an expense
If a PPE is revalued and sold a year later, how will the revaluation gain (the previous year) be recognized?
“Directly in retained earnings in equity”
When an item of PPE is disposed of, any revaluation gain which is included in the revaluation reserve in respect of that item may be transferred to retained earnings. This transfer takes account of the fact that a previously unrealised gain has now been realised. The transfer is recorded in the statement of changes in equity and does not affect the statement of comprehensive income.
“Depreciation”?
= Avskrivning
“the systematic allocation of the depreciable amount of an asset over its useful life”
“A systematic allocation aiming at allocating expenses”
If the depreciation method is changed, how will this be dealt with according to IAS?
(It is a change in ACCOUNTING ESTIMATE and will be changed PROSPECTIVELY)
A change should be accounted for as a change in an accounting estimate in accordance with the requirements of IAS8. This standard requires the new depreciation method to be applied prospectively over the remainder of the asset’s useful life.
If a company takes up a loan in a bank to use for construction of its own building, how will the interest cost on the loan be accounted for?
“It should be capitalized and included in the cost of the building”
The “core principle” of IAS23 is that borrowing costs that are directly attributable to the acquisition, construction or production of a “qualifying asset” should be capitalised as part of the cost of that asset.
How is a gain or loss on a fair value revaluation of investment property presented in the financial reports?
“On a separate line in the P/L”
A gain or loss arising from a change in the fair value of investment property must be recognised in the calculation of profit or loss for the period in which it arises. This is different from the IAS16 treatment of revaluation gains and losses, since IAS16 requires revaluation gains to be excluded from profit
What are the three levels of input for measuring fair value?
- The market approach
- The cost approach
- The income approach
“Level 1 inputs” are quoted prices in active markets for identical assets or liabilities.
“Level 2 inputs” are inputs (other than Level 1 inputs) that are observable for the asset or liability, either directly or indirectly. Examples of such inputs include quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates.
“Level 3 inputs” are unobservable inputs for the asset or liability (i.e. inputs for which market data is not available). Such inputs use the best information available about the assumptions that market participants would make when pricing the asset or liability. For example estimates of future cash flows.
