IAS 16 : Measurement After Recognition : Cost Model Flashcards
IAS 16 allows one of two alternatives to be chosen as the accounting policy for measurement of PP&E after initial recognition. The choice made must be applied to an entire class of PP&E, which means that not all classes are required to have the same policy. [IAS 16.29].
IAS 16 allows one of two alternatives to be chosen as the accounting policy for measurement of PP&E after initial recognition. The choice made must be applied to an entire class of PP&E, which means that not all classes are required to have the same policy. [IAS 16.29].
The first alternative is the cost model whereby the item, after recognition as an asset, is carried at cost less any accumulated depreciation and less any accumulated impairment losses. [IAS 16.30]. The alternative, the revaluation model
The first alternative is the cost model whereby the item, after recognition as an asset, is carried at cost less any accumulated depreciation and less any accumulated impairment losses. [IAS 16.30]. The alternative, the revaluation model
Significant parts of assets 1
IAS 16 links its recognition concept of a ‘part’ of an asset, discussed at 3.2 above, with the analysis of assets for the purpose of depreciation. Each part of an asset with a cost that is significant in relation to the total cost of the item must be depreciated separately,
which means that the initial cost must be allocated between the significant parts by the entity.
[IAS 16.43, 44].
IAS 16 links its recognition concept of a ‘part’ of an asset, discussed at 3.2 above, with the analysis of assets for the purpose of depreciation. Each part of an asset with a cost that is significant in relation to the total cost of the item must be depreciated separately,
which means that the initial cost must be allocated between the significant parts by the entity.
[IAS 16.43, 44].
Significant parts of assets 2
The standard once again refers to the airframe and engines of an aircraft but also sets out that if an entity acquires PP&E subject to an operating lease in
which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms.
[IAS 16.44].
The standard once again refers to the airframe and engines of an aircraft but also sets out that if an entity acquires PP&E subject to an operating lease in
which it is the lessor, it may be appropriate to depreciate separately amounts reflected in the cost of that item that are attributable to favourable or unfavourable lease terms relative to market terms.
[IAS 16.44].
Significant parts of assets 3
Because parts of an item of PP&E are identified by their significant cost rather than their effect on depreciation, they may have the same useful lives and depreciation method and the standard allows them to be grouped for depreciation purposes. [IAS 16.45].
Because parts of an item of PP&E are identified by their significant cost rather than their effect on depreciation, they may have the same useful lives and depreciation
method and the standard allows them to be grouped for depreciation purposes. [IAS 16.45].
Significant parts of assets4
The depreciation charge for each period is recognised in profit or loss unless it forms part of the cost of another asset and included in its carrying amount.
[IAS 16.48].
The depreciation charge for each period is recognised in profit or loss unless it forms part of the cost of another asset and included in its carrying amount. [IAS 16.48].
Significant parts of assets 5
Sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets, for example, the depreciation of manufacturing plant and
equipment is included as part of the cost of conversion of finished manufactured goods held in inventory in accordance with IAS 2, and similarly, depreciation of PP&E used for development activities may be included as part of the cost of an intangible asset recognised in accordance with IAS 38. [IAS 16.49].
Sometimes, the future economic benefits embodied in an asset are absorbed in producing other assets, for example, the depreciation of manufacturing plant and
equipment is included as part of the cost of conversion of finished manufactured goods held in inventory in accordance with IAS 2, and similarly, depreciation of PP&E used for development activities may be included as part of the cost of an intangible asset recognised in accordance with IAS 38. [IAS 16.49].
Depreciable amount and residual values 1
The depreciable amount of an item of PP&E is its cost, or other amount substituted for cost (e.g. valuation), less its estimated residual value. [IAS 16.6]. The standard states that an entity should review the residual value of an item of PP&E, and therefore all parts of it, at least at each financial year-end.
If the estimated residual value differs from the previous estimate, the change should be accounted for prospectively as a change in accounting estimate in accordance with IAS 8. [IAS 16.51].
The depreciable amount of an item of PP&E is its cost, or other amount substituted for cost (e.g. valuation), less its estimated residual value. [IAS 16.6]. The standard states that an entity should review the residual value of an item of PP&E, and therefore all parts of it, at least at each financial year-end.
If the estimated residual value differs from the previous estimate, the change should be accounted for prospectively as a change in accounting estimate in accordance with IAS 8. [IAS 16.51].
Depreciable amount and residual values 2
The residual value of an item of PP&E :
the estimated amount 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 assuming that it was already in the condition it will be in at the end of its useful life.
[IAS 16.6].
The residual value of an item of PP&E :
the estimated amount 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 assuming that it was already in the condition it will be in at the end of its useful life. [IAS 16.6].
Depreciable amount and residual values 3
Therefore, IAS 16 contains an element of continuous updating of one component of an asset’s carrying value because it is the current disposal amount (e.g. value at financial reporting date) of an asset’s future
state (i.e. asset’s condition in the future when the entity expects to dispose of it). This means that only the changes up to the financial reporting date are taken into account and that expected future changes in residual value other than the effects of expected
wear and tear are not taken into account.
[IAS 16.BC29]
Therefore, IAS 16 contains an element of continuous updating of one component of an asset’s carrying value because it is the current disposal amount (e.g. value at financial reporting date) of an asset’s future
state (i.e. asset’s condition in the future when the entity expects to dispose of it). This means that only the changes up to the financial reporting date are taken into account and that expected future changes in residual value other than the effects of expected
wear and tear are not taken into account. [IAS 16.BC29]
Depreciable amount and residual values 4
As any change in the residual value directly affects the depreciable amount, it may also affect the depreciation charge. This is because the depreciable amount (i.e. the amount actually charged to profit or loss over the life of the asset) is calculated by deducting the residual value from the cost (or other amount substituted for cost, such as valuation) of the asset. Sometimes, the residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the residual value is capped at the asset’s carrying amount. This means that in such a case, the asset’s depreciation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount. [IAS 16.53, 54].
As any change in the residual value directly affects the depreciable amount, it may also affect the depreciation charge. This is because the depreciable amount (i.e. the amount actually charged to profit or loss over the life of the asset) is calculated by deducting the residual value from the cost (or other amount substituted for cost, such as valuation) of the asset. Sometimes, the residual value of an asset may increase to an amount equal to or greater than the asset’s carrying amount. If it does, the residual value is capped at the asset’s carrying amount. This means that in such a case, the asset’s depreciation charge is zero unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount. [IAS 16.53, 54].
Depreciable amount and residual values 5
In practice, many items of PP&E have a negligible residual value. This is usually because they are kept for significantly all of their useful lives. Residual values are of no relevance if the entity intends to keep the asset for significantly all of its useful life. If an entity uses residual values based on prices fetched in the market for a type of asset that it holds, it must also demonstrate an intention to dispose of that asset before the end of its economic life.
In practice, many items of PP&E have a negligible residual value. This is usually because they are kept for significantly all of their useful lives. Residual values are of no relevance if the entity intends to keep the asset for significantly all of its useful life. If an entity uses residual values based on prices fetched in the market for a type of asset that it holds, it must also demonstrate an intention to dispose of that asset before the end of its economic life.
Depreciable amount and residual values 6
The requirement concerning the residual values of assets highlights how important it is that residual values are considered and reviewed in conjunction with the review of useful lives.
The useful life : the period over which the entity expects to use the asset, not the asset’s economic life.
The requirement concerning the residual values of assets highlights how important it is that residual values are considered and reviewed in conjunction with the review of useful lives.
The useful life : the period over which the entity expects to use the asset, not the asset’s economic life.
Depreciation charge 1
The standard requires the depreciable amount of an asset to be allocated on a systematic basis over its useful life. [IAS 16.50]. The standard makes it clear that depreciation must be charged on all items of PP&E,
including those carried under the revaluation model, even if the fair value of an asset is higher than its carrying amount, as long as the residual value of the asset is lower than its carrying amount. [IAS 16.52].
The standard requires the depreciable amount of an asset to be allocated on a systematic basis over its useful life. [IAS 16.50]. The standard makes it clear that depreciation must be charged on all items of PP&E,
including those carried under the revaluation model, even if the fair value of an asset is higher than its carrying amount, as long as the residual value of the asset is lower than its carrying amount. [IAS 16.52].
Depreciation charge 2
If the residual value exceeds the carrying amount, no depreciation is charged until the residual value once again decreases to less than the carrying amount.
[IAS 16.54].
There is no requirement in IAS 16 for an automatic impairment review if no depreciation is charged.
If the residual value exceeds the carrying amount, no depreciation is charged until the residual value once again decreases to less than the carrying amount.
[IAS 16.54].
There is no requirement in IAS 16 for an automatic impairment review if no depreciation is charged.
Useful lives 1
One of the critical assumptions on which the depreciation charge depends is the useful life of the asset. The standard requires the useful life of an asset to be estimated on a realistic basis and reviewed at least at the end of each financial year. The effects of changes in useful life are to be recognised prospectively as changes in accounting estimates in accordance with IAS 8, over the remaining useful life of the asset. [IAS 16.51].
One of the critical assumptions on which the depreciation charge depends is the useful life of the asset. The standard requires the useful life of an asset to be estimated on a realistic basis and reviewed at least at the end of each financial year. The effects of changes in useful life are to be recognised prospectively as changes in accounting estimates in accordance with IAS 8, over the remaining useful life of the asset. [IAS 16.51].