IAS 16

Question 1

Derecognition of PPE

Answer 1

if or when
- it is disposed of
- no future economic benefits are expected from its use or from its disposal

Question 2

Gains and losses in IAS 16

Answer 2

Gains or loss arising on the disposal of the old part is included in the calculation of the company’s P&L for the same accounting period.

G/L on Derecognition = Disposal Proceeds - Asset’s Carrying Amount

Question 3

New carrying amount of an asset formula

Answer 3

Original CA + New Cost - Derecognise Old Cost

Question 4

EX:
On 1 Dec 2017 a company paid £60,000 to replace a part of a machine that has been itemised in 2015 and with a current carrying amount of £250,000. of the carrying amount, £20,000 related to the original part of the asset replaced
On 1 Dec 2017, a company paid £300,000 for a major inspection of one of its aircraft. This is a routine and a mandatory inspection that needs to be carried out every three years. The previous inspection took place in September 2015 at a cost of £250,000. The carrying amount of the aircraft on 1 Dec 2017 (before accounting for new inspection) was £1,200,000. Of this amount, £100,000 was related to the previous inspection.
Required: Explain how each of these transactions should be accounted for in accordance with the requirement of IAS 16

Answer 4

a)
The cost of the asset replacement should be recognised as an asset given that it is a major part (part cost/CA)
The carrying amount of the original part should be derecognised
The new CA of the machine:
Original CA (£250,000) + New Replacement Cost (£60,000) – Derecognise Old Replacement Cost (£20,000)
=£290,000
The G/L arising on the disposal of the old part is included in the calculation of the company’s P&L for the same accounting period
G/L on Derecognition = Disposal Proceeds – Replacement Part’s Carrying Amount (£20,000)
b)
The cost of the new inspection should be recognised as an asset
The CA of the previous inspection should be derecognised
The new CA of the machine:
Original CA (£1,200,000) + New Inspection Cost (£300,000) – Derecognise Old Inspection Cost (£100,000)
=£1,400,000
The G/L arising on the disposal of the old part is included in the calculation of the company’s P&L for the same accounting period
G/L on Derecognition = Disposal Proceeds – Old Inspection’s Carrying Amount (£100,000)

Question 5

Initial Measurement of PP&E

Answer 5

Item purchase price: includes import duties and non-refundable purchase taxes, minus trade discounts or rebates.

Directly attributable costs for preparing the item for intended operation:
- Labor costs related to construction or acquisition.
- Site preparation expenses.
- Initial delivery and handling charges.
- Installation, assembly, and testing expenditures.
- Professional fees.

Exclude these costs if the obligation to cover them arises upon item acquisition.