FINANCIAL REPORTING EXERCISE OF JUDGEMENT & ESTIMATION ASSETS Flashcards
What is an asset?
Asset
- Resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
- Control - power to obtain the future economic benefits, usually from legally enforceable rights
Examples of assets
- Property, plant & equipment
- Intangible assets – Patents, copyrights, R&D???
- Inventory
Classification
- Current
- Non current
What does IAS16 Property, Plant and Equipment standard prescribe?
- the criteria which must be satisfied in order that an item of property, plant and equipment should be recognised as an asset
- the way in which items of PPE should be measured in the financial statements, both at initial recognition and later
- the way in which depreciation charges should be calculated and accounted for
What is the cost of a PPE purchase comprised of?
- purchase price of the item, incl. 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, including:
- labour costs arising directly from the construction or acquisition of the item
- site preparation costs
- initial delivery and handling costs
- installation, assembly and testing costs
- professional fees
- 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 in incurred when the item is acquired or used.
Exclude admin costs and other general overhead expenses related to PPE.
What are the 2 subsequent measurements of PPE?
(a) The cost model (cost - depreciation - impairment)
(b) The revaluation model (fair value at date of revaluation - subsequent accumulated depreciation - subsequent accumulated impairment losses)
What do you do with an increased carrying amount on PPE?
- Credit to a revaluation reserve and show as “other comprehensive income”
- This ensures that unrealised revaluation gains (gains that have not been turned into cash) are excluded from profit and not available for dividends calculations.
- 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.
What do you do with an decreased carrying amount on PPE?
- Recognise an an expense when calculating profit or loss.
- This must be debited to the revaluation reserve and shown (as a negative figure) in other comprehensive income to the extent of any credit balance previously existing in the revaluation reserve in respect of that same item.
What to do when disposing of revalued PPE?
- revaluation gain in the revaluation reserve in respect of that item may be transferred to RE.
- this recognises previously unrealised gain as realised; record the transfer in the SoCE and does not affect the SoPLOCI.
- The fact that transfer described above does not occur in the SoPLOCI means that the gain from profit both initially and subsequently.
What is depreciation?
The systematic allocation of the depreciable amount of an asset over its useful life. It allocates expenses between accounting periods. It does not show assets at current values. Depreciation charges reduce profits but have no direct effect on an entity’s cash resources. Depreciation does not cease is an asset is revalued.
What is depreciable amount?
- the cost of an asset, or other amount substituted for cost, less its residual value.
- residual value: est. amt. that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
- useful life: the period over which an asset is expected to be available for use by an entity…or the number of production or similar units expected to be obtained from the asset by an entity.
What are the disclosure requirements of IAS16 (PPE)?
- For each class, list: the measurement bases, the depreciation methods, the useful lives or depreciation rates, the gross carrying amount and accumulated depreciation at the beginning and the end of the accounting period, a reconciliation of the carrying amount
- PPE pledged as security for liabilities
- Contractual commitments for the acquisition of PPE
- PPE stated at revalued amts, incl. date of revaluation, whether an independent valuer was involved, the carrying amt that wld have been recognised if the cost model had been used
What is included and included in the purchase price of PPE?
Cost + import duties + non-refundable purchase taxes - trade discounts - rebates =
If there is an obligation to remove, dismantle or restore PPE at the time of purchase, how do you account for this cost?
Exercise of judgement
If there are directly attributable costs of bringing PPE asset to location and condition necessary for intended operation, what costs should be included?
Include:
- *Self-construct own labour
- *Site preparation/ clearance
- *Initial delivery & handling
- *Installation, assembly & testing
- *Professional fees
- *Reduce by any offsetting income or refunds
Can additional expenditure on PPE asset be capitalised?
Yes, but only if PPE asset improves beyond originally assessed performance. Otherwise treat the additional expenditure as an expense in profit or loss as it is incurred.
How should an initial PPE expenditure be recorded?
- Debit PPE Account (Assets)
- Credit Bank / Payables (Assets)
