IAS 16 and IAS 36

Question 1

What is IAS 16?

Answer 1

Property, plant and equipment - these are tangible assets that:-

• are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and

Question 2

What is Carrying Amount?

Answer 2

The amount in the SOFP is correspondingly reduced with the depreciating expense, the remaining balance after accumulated depreciation is deducted is referred to as the CARRYING AMOUNT.

Question 3

What is Cost?

Answer 3

The amount given to acquire the asset.

Question 4

Depreciable amount?

Answer 4

The cost of an asset, or other amount substituted for cost, less its residual value.

Question 5

Depreciation?

Answer 5

The systematic allocation of the depreciable amount of an asset over its useful life.

Question 6

Fair Value

Answer 6

The price that would be received to sell an asset or paid to transfer a liability.

Question 7

What is IAS 36?

Answer 7

Impairment of Assets - defined as a loss if the recoverable amount is less than the carrying amount.

Question 8

What if the residual value is greater than the carrying amount?

Answer 8

If the residual value is GREATER than the carrying amount the depreciation charge is Zero.

Question 9

What is residual value?

Answer 9

The estimated disposal value of the asset at the end of its useful life - after deducting the estimated costs of disposal.

Question 10

Explain IMPAIRMENT?

Answer 10

An asset may be impaired if its RECOVERABLE AMOUNT is less than its CARRYING AMOUNT in the financial statements.

Indications that an asset may be impaired include:-
* obvious damage
* obsolescence
* lack of use, so that the asset is not creating value for the entity.

Question 11

Explain the RECOVERABLE AMOUNT ?

Answer 11

Represents the best use of the assets and is the higher of :-

• NET SELLING VALUE - fair value less costs of disposal
  or
• VALUE IN USE - generated income by continuing to use the asset in the business AND disposal of asset.

Question 12

When should subsequent expenditure be CAPITALISED for PPE?

Answer 12

PPE - subsequent expenditure should be capitalised when:-

• the expenditure improves the future economic benefits that the asset will generate
• it replaces a component of an asset and the carrying amount of the component replaced is DERECOGNISED e.g. overhaul of a furnace or a roof (where both are separately identified as assets)
• it is the cost of a major inspection for faults and the carrying amount of the previous insepection is derecognised.

The costs of day-to-day servicing should be recognised in the SOPL (expense)

Question 13

Explain derecognition?

Answer 13

Derecognition is the process of removing an asset or liability, or part of one from an entities financial statement.

Question 14

What is recognised in the financial statements of an initial cost of assets PPE?

Answer 14

Only DIRECTLY attributable costs to be included in SOFP for PPE - NOT admin costs, general costs or annual maintenance contract.

Question 15

What can be capitalised regarding additional expenditure?

Answer 15

• Costs to upgrade and enhance the machine above its original performance.
• Annual maintenance is and expense in the P&L
• Repairs to previous performance is maintenance expenditure in the P&L

Question 16

Changes in useful life and residual value?

Answer 16

Any change in the useful life or residual value will result in adjustments to the depreciation charge for current or future periods - it is a change in accounting estimates. Formula:-

Cost - residual value / useful life

Question 17

If the % for depreciation is not given how do you calculate it?

Answer 17

Cost - Residual value / useful life

Question 18

What does IAS 16 require entities to apply?

Answer 18

COST MODEL - Carrying amount = cost

REVALUATION MODEL - Carrying amount = fair value

Both Less:- Accumulated depreciation
Less:- Accumulated impairment loss

Question 19

An entity may decide to use the two models for measuring assets however?

Answer 19

must make sure that each class of assets uses the same model i.e.

• use the cost model for P&M
  and
• revaluation model for L&B

Question 20

On acquiring an asset what estimates are made?

Answer 20

Estimates are made on its USEFUL LIFE and RESIDUAL VALUE.

Subsequently it may be appropriate to REVISE these estimates.

Question 21

The revalued amount of an asset is?

Answer 21

The assets FAIR VALUE at the date of revaluation.

Question 22

What does revaluing to fair value mean?

Answer 22

It means that the item of PPE will reflect the current value of the asset at the point the REVALUATION occurs.

Question 23

Where does the REVALUATION SURPLUS sit in the financial statements?

Answer 23

REVALUATION SURPLUS - sits in the SOPL in

Other comprehensive income - which includes income (gains) and expenses (losses) that are not recognised in profit or loss (they are recorded in reserves rather than an element of the profit)

Question 24

What are the key revaluation issues to remember?

Answer 24

• If an asset is revalued, any accumulated depreciation up to the date of the revaluation should be reversed. This will increase the revaluation surplus. The revaluation surplus is also described as the REVALUATION RESERVE
• Depreciation will then be calculated based on the revalued amount.
• Revaluations must be made for the whole of the class of assets
• The frequency of revaluations will depend upon the volatility of the fair values of the asset class. The more volatile, the more frequent the revaluation.

Question 25

What are the steps to account for a revaluation?

Answer 25

1. Restate asset cost to the revalued amount.
2. Remove any existing accumulated depreciation.
3. Transfer the increase in the cost account and the existing accumulated depreciation to the revaluation surplus account within equity.
4. Recalculate current year’s depreciation on the revalued amount if applicable. If the revaluation takes place at the end of the year, the depreciation charge will be affected in future years. If the revaluation occurs at the start of the year then depreciation will be affected in the current year. Depreciation will be calculated as the revalued amount, over the remaining useful life. The remaining life is taken from the date of the revaluation.

Question 26

What should you do if an asset is classed as HELD FOR SALE based on IFRS 5?

Answer 26

• Depreciation should cease
• The asset should be moved to current assets (below the sub total of the other current assets)
• hold at the lower of carrying value and fair value less costs to sell.
• Record the loss in SOPL