Deck 3 FR

Question 1

If a lease has land and building, how will you value it?

Answer 1

If BPO exists, Capitalize the land and building separately
If BPO does not exist:
Land value< Building value >> economic life of the building is the life of the unit
Land value> Building value >> Lessor and lessee will allocate min lease payment between land and building in proration to their FV.
Land will be operating portion of the lease.

Question 2

Derecognition of Assets IFRS

Answer 2

IAS 16 provides guidance on derecognition of assets:

67 The carrying amount of an item of property, plant and equipment shall be derecognised:

(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.

68 The gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognised (unless IFRS 16 Leases requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.

Question 3

Depreciation Methods IFRS

Answer 3

IAS 16

60 The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

61 The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8.

Question 4

Variety of depreciation methods

Depreciation Basis

IAS 16.62

Answer 4

62 A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method.

• Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change.
• The diminishing balance method results in a decreasing charge over the useful life.
• The units of production method result in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.
• That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits.

Depreciation based on revenue is not allowed.

Question 5

Componentization

IAS 16

Answer 5

IAS 16 requires significant parts of an item to be depreciated separately:
43 Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately

Question 6

Amortization Periods

IAS 16

Answer 6

50 The depreciable amount of an asset shall be allocated on a systematic basis
over its useful life.

51 The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.