IAS 16 - Property, Plant & Equipment Flashcards
How should Property, Plant & Equipment be measured AT recognition?
An item of Property, Plant & Equipment qualifying for recognition should be measured at COST (including import duties & non refundable purchase tax) plus DIRECTLY ATTRIBUTABLE COSTS.
Directly attributable costs include :
* Costs of employee benefits arising from construction or acquisition of the item
* Costs of site preparation
* Cost of initial delivery & handling costs
* Installation & assembly costs
* Cost of testing whether the asset is functioning properly
* Professional fees
When should an item be recognised as Property, Plant & Equipment under IAS 16?
An item should be recognised as Property, Plant & Equipment if it is probable that future economic benefits associated with the item will flow to the entity AND the items cost can be measured reliably.
How is Property, Plant & Equipment measured AFTER recognition?
1) COST MODEL
Initial cost plus subsequent qualifying expenditure less accumulated depreciation and impairment losses
2) REVALUATION MODEL
Revalued amount less accumulated depreciation and impairment losses.
NOTE : WHERE THE REVALUATION MODEL IS ADOPTED IT SHOULD BE APPLIED TO AN ENTIRE CLASS OF PPE.
How should an item in Property, Plant & Equipment be valued?
1) Revaluations should be carried with sufficient regularity that does not differ materially from fair value.
2) Land & Buildings should be revalued at the market value by professionally qualified valuers.
3) Plant & Equipment should be valued at market value by appraisal
4) If the item is so specialised that market value is not available use the replacement cost approach to get a value.
How should an increase in the value of Property, Plant & Equipment be recognised?
An increase in carrying amount on revaluation should be recognised as follows: -
DR - PP&E
CR - Revaluation Surplus (within equity)
Then recognise the amount in ‘other comprehensive income statement’ as a credit.
Unless the asset was previously revalued downwards in which case the CR should go to P&L expense to offset against the earlier DR to P&L expense.
How should the decrease in value of Property, Plant & Equipment be recognised?
A decrease in carrying amount on revaluation (impairement) should be recognised as follows :
CR - PP&E
DR - Expense in P&L
Unless the asset was previously revalued upwards. In which case the DR should go against the Revaluation Surplus amount in equity.
When does depreciation of an asset commence?
Depreciation should commence when the asset is in the location and condition necessary for its intended use.
How should the components within Property, Plant & Equipment be depreciated?
Each item of Property, Plant & Equipment should be depreciated seperately.
How often should the depreciation method be reviewed?
The depreciation method should be reviewed at each financial year end (together with the residual value & useful life) - Any changes in depreciation method are classed as a change in accounting estimate.
What is the depreciable amount of Property, Plant & Equipment?
The depreciable amount is cost less residual value or where an asset has been revalued, the revalued amount less residual value.
What happens to depreciation when an asset has been revalued?
1) clear out the SOFP depn
DR - Accumulated
Depn
CR - Revaluation Surplus
2) Calculate the depreciation amount on the new value of the asset
CR - Accumulated Depn
DR - Profit & Loss Depn
3) The difference between the old depn and the new depn amount should be journaled as follows :
DR - Revaluation Surplus
CR - Retained Earnings
When should an asset be removed from the Statement Of Financial Position?
An item of Property, Plant & Equipment should be de-recognised when it is disposed of or when no future economic benefits are expected from its use.
The gain or loss is recognised in Profit & Loss in the period in which the de-recognition occurs.
What are the judgements required in IAS 16?
The key judgements include : -
USEFUL LIFE : The longer the useful life, the lower the annual depreciation - this should be determined with reference to new technology
RESIDUAL VALUE : The higher the residual value, the lower the annual depreciation. In an era of changing technology can a residual value be estimated.
DISTINCTION BETWEEN CAPITAL & REVENUE : Does the current expense increase or merely maintain the economic benefits expected from the asset.
What are the comparison for IAS 16 & FRS 15 under UK GAAP?
UNDER IAS 16 : -
Revaluations should be to fair value taken at market value
UNDER FRS 15 : -
Revaluation based around the current value model, only takes into account current use of the asset
UNDER IAS 16 : -
Does not specify maximum period for timing of revaluations it depends on changes in the market
UNDER FRS 15 : -
Maximum period of 5 years between full valuations & a interim valuations every 3 years
UNDER FRS 15 : -
Annual impairment reviews required for all assets depreciated over period of more than 50 years
UNDER IAS 16 :-
There is no such requirement
