IAS 16 - Property, plant & equipment

Question 1

Accounting for IAS 16

Answer 1

• Initially, PPE are to be measured at cost in the SOFP
• After PPE acquisition, an entity must choose either the cost model or the revaluation model as its accounting policy – which is then applied to an entire class of PPE
• Using the cost model, assets are carried in the SOFP at cost less accumulated depreciation and impairment losses
• Using the revaluation model, assets are carried at a revalued amount, being fair value less any subsequent depreciation and impairment losses; revaluations are to be made regularly to ensure that the carrying amounts do not differ materially from fair values at the date of the SOFP
• The asset’s residual value and useful life are to be reviewed at least annually
• Depreciation continues to be recognised even if the fair value of an asset exceeds its carrying amount (but there is no need for depreciation when the “residual value” > the “carrying amount”)
• Spending money on an asset’s repair and maintenance does not remove the need for depreciation
• When calculating depreciable amount, the residual values of assets are often low/immaterial - e.g. machine’s scrap value is often negligible
• Depreciation can be applied to separate parts of an asset where each part is a significant cost - e.g. aircraft engines are often depreciated separately from aircraft bodies
• Depreciation for the period is recognised in the SOPL and other comprehensive income (unless it’s included in the carrying amount of another asset)
• The following factors need to be considered when determining the asset’s useful life (even if it’s not being used):
  1. expected usage of the asset, i.e. the expected capacity/output
  2. expected physical wear and tear, which depends on operational factors and the repair and maintenance program
  3. technical/commercial obsolescence, e.g. the introduction of new technology, changes in demand for the product/service
  4. legal or similar limits on the use of the asset, e.g. the period for which an asset is leased

Question 2

depreciation

Answer 2

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

• Additional notes*
• Check Page 104

Question 3

recognition

Answer 3

An asset is recognised as an asset when:

• it is probable that future economic benefits will flow to the entity; and
• the cost of the asset can be measured reliably

Additional notes

• SOPL
  1. day-to-day servicing of asset costs
  2. costs of small parts
• SOFP (carrying amount)
  1. part replacement at regular intervals
  2. regular inspections for continual operation of asset

Question 4

useful life

Answer 4

time length or the number of units of production for which an asset is expected to be used

Question 5

cost of PPE

Answer 5

• the purchase price
• any import duties and other taxes
• any costs directly attributable to bring the asset to the location and condition for its intended use
• the estimated costs of dismantling and removing the asset at the end of its useful life
• Additional notes*
• Included:
  1. costs of site preparation
  2. initial delivery and handling costs
  3. installation and assembly costs
  4. costs of testing the asset
  5. professional fees
• Not included:
  1. administration and other general overhead costs
  2. start-up costs of a new business/section of the business
  3. start-up costs for new product/service intro (advertising and promotional costs)

-Subsequent costs should only be capitalised if additional economic benefits are expected at the time of the assets’ original acquisition

Question 6

depreciable amount

Answer 6

the cost/valuation of the asset, less any residual value

Question 7

carrying amount

Answer 7

the amount at which an asset is recognised on the SOFP, after deducting any accumulated depreciation and accumulated impairment losses

Question 8

derecognition

Answer 8

occurs when an item of PPE is disposed of, or when no future economic benefits are expected from its use/disposal

Question 9

PPE

Answer 9

tangible assets held by an entity for use in the production/supply of goods and services, which are expected to be used for more than one accounting period

Question 10

depreciation methods

Answer 10

• the straight-line method
• the diminishing balance method (or sum-of-the-digits depreciation as a proxy for the diminishing balance method
• units of production method

Question 11

cost model

Answer 11

the asset is carried at cost less accumulated depreciation and impairment losses

Question 12

revaluation model

Answer 12

• the asset is carried at a revalued amount (fair value, less any subsequent depreciation and impairment losses, provided that fair value can be measured reliably)
• revaluations are to be made regularly to ensure that the carrying amount does not differ materially from its fair value at the date of the SOFP
• Additional notes*
• Increase in value = other comprehensive income (SOPL) and revaluation surplus (equity)…..or income in the SOPL and other comprehensive income (if it reverses part or all of a previous decrease for the same asset)
• Decrease in value = expense in the SOPL and other comprehensive income….or other comprehensive income and is debited to the revaluation surplus (if it reverses part or all of a previous increase for the same asset)
• Part of revaluation surplus can be transferred to retained earnings during the asset’s life: (depreciation on revalued carrying amount) - (depreciation on asset’s original cost)

Question 13

PPE disclosure requirements

Answer 13

For each class of PPE:

• the basis for determining the carrying amount
• the depreciation method(s) used
• the useful lives or depreciation rates
• the gross carrying amount (e.g. cost of the asset) and the accumulated depreciation and impairment losses at the beginning and end of the period
• a reconciliation of the carrying amount at the beginning and end of the period showing: (remember “ada rirdo”)
• additions
• disposals
• acquisitions through business combinations
• revaluation increases
• impairment losses
• reversal of impairment losses
• depreciation
• other changes

Additional notes

PPE requirements (stated at revalued amounts)

• the effective revaluation date
• whether an independent valuer was involved
• the carrying amount that would have been recognised under the cost model
• the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders

Question 14

accounting policy for PPE

Answer 14

• cost model

- revaluation model