Chapter 7 - Property, Plant and Equipment

Question 0

WHAT COSTS CAN NOT BE CAPITALISED FOR A FIXED ASSET?

Answer 0

Administration costs

General overheads

Abnormal costs (e.g as a result of labour strikes)

Costs incurred after the asset is capable of normal operation

Question 1

WHAT COSTS CAN BE CAPITALISED FOR A FIXED ASSET?

Answer 1

INITIAL COSTS/ DIRECTLY ATTRIBUTABLE COSTS:
Purchase price (including duties and non refundable tax)
Employee costs arising from construction/ purchase
Costs of site preparation
Delivery and handling costs
Installation and assembly costs
Costs of testing (less proceeds of by products)
Professional fees
Some costs associated with borrowing to fund construction

SUBSEQUENT EXPENDITURE:
Subsequent expenditure on an item of PPE may be capitalised if it enhances the economic benefit provided by the item.

Question 2

WHEN CAN BORROWING COSTS BE CAPITALISED?

Answer 2

Only when funds are borrowed in order to CONSTRUCT an asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its use or intended sale.

An entity may only capitalise those borrowing costs which would have been avoided if the asset had not been made.

Question 3

WHAT IS THE PERIOD OF CAPITALISATION FOR BORROWING COSTS?

Answer 3

COMMENCE WHEN… (IAS 23, paragraph 17)
Expenditure on asset being incurred
Borrowing costs being incurred
Activities to prepare asset for use/ sale commences

CEASE WHEN… (IAS 23, paragraph 22)
When all activities necessary to prepare asset for use/ sale are complete

Question 4

DOUBLE ENTRY

UPWARDS REVALUATION

Answer 4

DR Cost
DR Accumulated depreciation
CR Revaluation reserve

Question 5

DOUBLE ENTRY

RESERVES TRANFERS

Answer 5

DR Revaluation reserve

CR Retained earnings

Question 6

DOUBLE ENTRY

DOWNWARDS REVALUATION (WHERE THE ASSET HAS NOT PREVIOUSLY BEEN REVALUED UPWARDS)

Answer 6

DR Income statement

CR Carrying amount of asset

Question 7

DOUBLE ENTRY

DOWNWARDS REVALUATION (WHERE THE ASSET HAS PREVIOUSLY BEEN REVALUED UPWARDS)

Answer 7

DR Revaluation reserve
DR Income statement (balance)
CR Carrying amount of asset

Question 8

WHAT ARE THE EXTERNAL INDICATIONS OF AN IMPAIRMENT OF AN ASSET?

Answer 8

• Decline in market value of an asset
• Adverse changes to entity environment
• Increase in interest rates
• Value of entity as a whole is less than its net asset value

Question 9

WHAT ARE THE INTERNAL INDICATIONS OF AN IMPAIRMENT OF AN ASSET?

Answer 9

• An asset is obsolete/ damaged
• Entity changes mean asset won’t generate the benefits previously expected
• Evidence suggests asset won’t perform as expected

If any of the above occur, an impairment review should be undertaken.

(IFRS 36, paragraph 13)

Question 10

WHAT IS THE COST MODEL?

Answer 10

It is one of the two valuation models that IAS 16 allows an entity to use for its PPE.

The carrying value of an item of PPE should be:

It’s cost x
(Minus any accumulated depreciation) (x)
(Minus any accumulated impairment losses) (x)

Question 11

WHAT IS THE REVALUATION MODEL?

Answer 11

It is one of the two valuation models that IAS 16 allows an entity to use for its PPE.

The carrying value of an item of PPE should be:

Its fair value at revaluation x
(Minus any subsequent accumulated depreciation) (x)
(Minus any subsequent accumulated impairment losses) (x)

Revaluation should be updated regularly.

Question 12

PPE DISCLOSURE NOTES

Answer 12

L&B | P&E | MV | F&F | Total

COST
  b/f
  Addition
  Revaluation
  c/f

DEPRECIATION
  b/f
  Charge
  Revaluation
  c/f

CARRY VALUE
End of year
Start of year

Question 14

DERECOGNITION

DISPOSAL: ASSETS VALUED USING THE REVALUATION MODEL

Answer 14

Same as with cost model but with one additional step:

STEP 1a
The asset should be revalued so the carrying amount is equal to the fair value.

STEP 1
When an asset is classified as held for sale:
  Measure at the lower of
     Carrying amount and
     Fair value less costs to sell

STEP 2
This will result in the immediate recognition of an impairment loss if fair value less costs to sell is less than the carrying amount.
CV > FV - CTS = Impairment

STEP 3
Cease depreciation

STEP 4
Present it separately on the Statement of Financial Position as ‘NCA Held for Sale’ normally under Current Assets.

STEP 5
When the asset is sold, calculate and record any gain/ loss as normal in the income statement.

Question 17

DERECOGNITION

DISPOSAL: WHAT IS REQUIRED FOR AN ASSET TO BE CLASSED AS ‘HELD FOR SALE’

Answer 17

• Available for immediate sale in present condition
• Sale must be highly probable
  + management committed
  + active program to locate buyer
  + asset being actively marketed
• Sale expected to be completed in next 12 months
• Unlikely that the plan will be significantly changed/ withdrawn

(IFRS 5, paragraph 7 & 8)

Question 19

DERECOGNITION

DISPOSAL: ASSETS VALUED USING THE COST MODEL

Answer 19

STEP 1
When an asset is classified as held for sale:
  Measure at the lower of
     Carrying amount and
     Fair value less costs to sell

STEP 2
This will result in the immediate recognition of an impairment loss if fair value less costs to sell is less than the carrying amount.
CV > FV - CTS = Impairment

STEP 3
Cease depreciation

STEP 4
Present it separately on the Statement of Financial Position as ‘NCA Held for Sale’ normally under Current Assets.

STEP 5
When the asset is sold, calculate and record any gain/ loss as normal in the income statement.