D2-IAS 16 PPE

Question 1

1. criteria for capitalisation

Answer 1

recognition
items of property, plant, and equipment should be recognised as assets when it is probable that :
1. it is probable that the future economic benefits associated with the aseet will flow to the entity;
2. the cost of the asset can be measured reliably.
IAS 16 further states that the asset must be held for the supply of goods and services and will be held for more than one accouting period.

Question 2

2. treatment of items

Answer 2

initial measurement
1. an item of property, plant and equipment should intially be recorded at cost.
components of cost:
-purchase price, less any trade discount or rebate;
-import duties and non-refundable purchase taxes;
-directly attributable costs of bringing the asset to working condition for its intended use, eg:
-the cost of site preparation
-initial delivery and handling costs
-installation costs
-testing

Question 3

3. additional expenditure

Answer 3

1. IAS 16: property, plant and equipment normally requires expenditure on an asset that had previously been recognised to be charged to profit or loss as incurred.
2. however, if that expenditure is expected to increase the future economic benefit of the asset in excess of the originally assessed level of performance, then it can be added to the carrying value of the asset.
   - asset value increase
   - depreciation charge be debited to profit or loss for the year and in the statement of financial position at 31 decemeber 2021
   - the asset will be included at a value less the depreciation for the year

Question 4

4. measurement subsequent to initial recognition

Answer 4

IAS 16 permits two accounting models:
1. cost model. the asset is carried cost less accumulated depreciation and impairment.
-cost-accumulated depreciation and impairment=carrying value
2. revaluation model. the asset is carried ar a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.
revalued amount-depreciation and impairment for subsequent measurement
3. the choice between straight line depreciation or reducing balance method is accounting estimate.

Question 5

5. revaluations

Answer 5

1. in the case of plant and equipment, fair value can be taken as market value. where a market value is not available, however, depreciated replacement cost should be used. subsequent depreciation must be based on the revalued amounts.
2. the frequency of valuation depends on the volatility of the fair values of individual items of property, plant and equipment. the more volatile the fair value, the more frequently revaluations should be carried out.
   revaluations must be regular, but IAS 16 doesn`t specify how often.
3. when an item of property , plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.
4. gains from revaluations are taken to revaluation reserve rather than retained earnings. if assets are disposed of, we should transfer the amount from the revaluation reserve to the retained earnings.

Question 6

6. depreciation

Answer 6

the need to depreciation non-current assets arises from the accruals assumption.

2. if money is expended in purchasing an asset then the amount expended must at some time be charged against profits. it the asset is one which contributes to an entity`s revenue over a number of accounting periods, it would be inappropriate to charge any single period (eg period in which the asset was acquired ) with the whole of the expenditure.
3. one way of defining depreciation is to describe it as a means of spreading the cost of a non-current asset over its useful life, and so matching the cost against the full period during which it earns profits for the business.
4. depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle.

Question 7

7. depreciation

Answer 7

for all depreciable assets:

1. the depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset`s useful life.
2. the depreciation method used should reflect the pattern in which the asset`s economic benefits are consumed by the entity.
3. a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate.
4. depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset.