IAS 16 - PPE

Question 1

What is included in the initial cost recognition of an asset?

Answer 1

Purchase price, including irrecoverable taxes (not VAT) and after deducting trade discounts (not cash discounts)

Any costs directly associated in bringing the asset to the location and condition necessary for it to operate

Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located where a present obligation exists (IAS37)

Question 2

When can subsequent expenditure be capitalised?

Answer 2

1 Increases capacity (beyond original)
2 Improves quality (beyond original)
3 Increases useful economic life (beyond original)

Question 3

Separate components, inspection and overhaul costs:

Answer 3

Separate components should be capitalised and depreciated separately

Normally all inspection and overhaul costs are expensed, however if they satisfy IAS16 they can be capitalised separately (eg if cabins on a ship have to be overhauled every 5 years vs the ship itself of 20 years)

Overlap with IAS37 - Provision should only be made if costs are unavoidable. In this case, selling the asset would avoid overhaul or inspection so no provision.

Question 4

What is residual value?

Answer 4

The estimated amount that an entity would obtain from disposal of an asset, after deducting costs of disposal.

Question 5

How should a revision of useful life be treated?

Answer 5

Assets should be reviewed yearly for useful life, and if there is a change in estimate:

1 Calculate NBV
2 Apply change to NBV

Depreciation charge =
Carrying NBV - Residual Value
—————————————————
New estimate of remaining useful life

Question 6

Cost model vs Revaluation Model

Answer 6

An entity can choose which model to adopt to be applied consistently to each class of asset.

Cost model - After initial recognition, asset should be carried at cost less accumulated depreciation and accumulated impairment loss

Revaluation model - After initial recognition, asset is held at fair value less any subsequent accumulated depreciation and subsequent impairment.

All assets in same class to be revalued.

Question 7

Accounting for a revaluation

Answer 7

1 Dr NCA Cost (market value - original price)
Dr Accum Depn
Cr Reval Reserve

2 New depn. x
less old depn. (x)
= extra depn. x —–>

3 Dr Reval Reserve x
Cr Retained Earnings

Question 8

Accounting for a disposal

Answer 8

Dr Bank
Dr Accum Depn
(Dr Loss - if CV > Sale price)

Cr Cost
(Cr Income - if CV < Sale price)

Question 9

Accounting for disposal of a revalued asset

Answer 9

1 Calculate CV of asset after disposal

2 Disposal accounting

3 Remaining Reval Reserve (following accounting for revaluation and deducting profit/adding loss to reval reserve balance)
Dr Reval Reserve
Cr Retained Earnings

Question 10

Disclosure Note for PPE

Answer 10

Cost or Valuation:

At (b/f date)
Additions
Disposals
Revaluation
At (c/f date)

Accum Depreciation:

At (b/f date)
Charge for year
Disposal
Revaluation
At (c/f date)

CV (b/f date)
CV (c’f date)