IIAAÄS 16 -> PPE

Question 1

Mistä IAS 16:ssa on kyse?

Answer 1

IAS 16 Property, plant and equipment sets out key accounting principles to be applied when determining the cost of property, plant and equipment and subsequently measuring its carrying amounts.

Question 2

What are Property, plant and equipment?

Answer 2

Property, plant and equipment are tangible items that:

a) Are held by an entity for use in the production or supplu of goods or services, for rental to others, or for administrative purposes; and

b) Are expected to be used during more than one period.

Question 3

What is a bearer plant?

Answer 3

Bearer plant = is a living plant that is (refer to IAS 41 Agriculture):

a) Used In the production or supply of agricultural produce
b) Expected to bear produce for more than one period, AND
c) Not intended to be sold as a living plant or harvested as agricultural produce except for incidental scrap sales.

Question 4

Carrying amount?

Answer 4

Carrying amount = is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.

Question 5

Cost?

Answer 5

Cost = is the amount of cash or cash equivalents pad or the fair value of the other consideration given to acquire an asset at the time of acquisition or construction, or when applicable, the amount attributed to that asset when initially recognized in accordance with specific standard.

Question 6

Depreciable amount?

Answer 6

Depreciable amount = is the cost of an asset, or other amount substituted for cost, less its residual value.

Question 7

Depreciation?

Answer 7

Depreciation = is the systematic allocation of the depreciable amount of an asset over its useful life. The economic future benefits embodied in an item of PPE are consumed by the entity principally though the use of the asset. Depreciation is the recognition of the economic benefits of the asset consumed during each period.

Question 8

Fair value?

Answer 8

Fair value = is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 9

Impairment loss?

Answer 9

Impairment loss = is the amount by which the carrying amount of an asset exceeds its receivable amount.

Question 10

Recoverable amount?

Answer 10

Recoverable amount = is the higher of an asset’s fair value less the costs to sell and its value in use.

Question 11

Residual value?

Answer 11

Residual value = is 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 in the condition expected at the end of its useful life.

Question 12

Useful life?

Answer 12

Useful life = is either

A) The period over which an asset is expected to be available for use by an entity, or

B) the number of production or similar units expected to be obtained from the asset by an entity.

Question 13

What are the three principal issues IAS 16 tackles?

Answer 13

IAS 16 deals with three principal issues:
1. What constitues cost on initial recognition of an assets:
2. How the asset should be measured subsequent to recognition, and
3. How subsequent expenditure and disposal of an asset should be accounted for.

IAS 16 requires that an item of property, plant and equipment (PP&E) be recognized as an asset when it satisfies the definition and recognition criteria for an asset in the Conceptual framework for financial reporting.

Question 14

What is the scope of IAS 16?

Answer 14

IAS 16 applies when accounting for PPE with the following EXCEPTIONS:

1. PPE classified as held for sale in accordance with IFRS 5
2. Biological assets related to agricultural activity other than bearer plants (refer to IAS 41 Agriculture)
3. Mineral rights and reserves i.e., oil, natural gas and similar non-regenerative resources.
4. The recognition and measurement of exploration and evaluation assets (refer IFRS 6), and
5. Investment property accounted for under the cost model of IAS 40. Where an entity chooses to apply the cost model to its investment properties, it shall use the cost model in IAS 16.

However, this standard applies to PPE used to develop and maintain the asset described in 2.-4. sections above. For example, it applies to land related to agricultural activity.

Question 15

Name special circumstances related to IAS 16?

Answer 15

Sometimes IFRS allow PPE to be initially recognized using a different apporach to that prescribed in IAS 16. Examples are assets acquired in connection with a business combination (IFRS 3) or using funds from government grants (IAS 20). Subsequent accounting should follow IAS 16.

Infrastructure within scope of IFRIC 12 Service Consession Arrangements is not recognized as PPE of the operator as contractual service arrangements do not transfer the right to control use of the public service infrastructure, but only access to operate the infrastructure.

Question 16

Spare parts, stand-by equipment, and servicing equipment?

Answer 16

Spare parts, stand-by equipment, and servicing equipment should be classified as PPE qhen they meet the definition of PPE in IAS 16. Otherwise, it should be classified as inventory in accordance with IAS 2.

Some types of business may have a very large number of minor PPE items like tools and spare parts. These are difficult to control and are lost often. Also, it is difficult to calculate depreciation on these. Therefore, entities have to apply judgement for their individual circumstances. IAS suggests that some parts like tools, molds and dies should be aggregated and the Standard applied to the aggregate amount.

Question 17

PPE recognition criteria?

Answer 17

The cost of an item of PPE should be recognized as an asset if, and only if:

a) It is probable that future economic benefits associated with the item will flow to the entity, and
b) The cost of the item can be measured reliably.

Both of the above conditions should be met before the item of PPE is recognized as an asset.

Question 18

PPE and components of cost?

Answer 18

An item of PPE that qualifies for recognition as an asset shall be measured at its costs. These are separated to two:
1. Costs of an acquired asset
2. Cost of a self-constructed asset

Question 19

PPE and costs of an acquired asset?

Answer 19

IAS 16 prescribes the cost of an item of PPE as:

• Purchase price, including import duties and non-refundable purchase taxes after deducting any trade discounts and rebates,
• Any directly attributabe costs to bring the asset to the location and working condition necessary for it to be capable of operating as inteded by management, and
• Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during the period.

Question 20

PPE and costs of a self-constructed asset?

Answer 20

The cost of a self-constructed asset is determined using the same principles as for an acquired asset. IAS 16 states that if an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing the asset for sale, in accordance with the principles of IAS 2.

Question 21

Examples of directly attributable costs?

Answer 21

a) Costs of employee benefits arising directly from the CONSTRUCTION or ACQUISITION of the item of PPE.
b) Costs of SITE PREPARATION
c) Initial delivery and handling costs
d) Installation and assembly costs
e) Professional fees; and
f) Costs of testing whether the asset is functionin properly AFTER DEDUCTING THE NET PROCEEDS FROM SELLING ANY ITEMS PRODUCED WHILE BRINGING THE ASSE TO THAT LOCATION AND CONDITION.

Question 22

Lue: Costs NOT directly attributable?

Answer 22

Here are examples of costs which should not be capitalized because they are not directly attributable to bringing the asset to its use. Costs of:
a) Opening a new facility
b) Introducing a new product or service (including costs of advertising and promotional activities)
c) Conducting business in a new location or with a new class of customer (including costs of staff training)
d) Administration and general overhead costs (overhead costs = välilliset kustannukset)
e) Costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity
f) Initial operating losses, and
g) Costs of relocating or reorganizing operations

Question 23

Lue vain:

Answer 23

Under IFRIC 1 Changes in existing decommissioning, restoration and similar liabilities, the periodic unwinding of the discount for the measurement of decommissioning, restoration and similar liabilities shall be recognized in profit or loss as a finance cost as it occurs. As the unwinding of the discount is not a borrowing cost as defined in IAS 23 Borrowing costs, CAPITALIZATION UNDER IAS 16 IS NOT PERMITTED!

Question 24

Välilliset kustannukset?

Answer 24

Välillinen kustannus ovat välillisesti tuotteen valmistuksesta syntyvät kustannukset, kuten käyttötarvikkeet tai palkat, jotka eivät suoranaisesti synny tuotteen valmistamisesta. Välilliset kustannukset voivat olla muuttuvia kustannukset tai useimmin kiinteitä kustannuksia, kuten markkinointi tai hallintokulut.

Question 25

Revenue items which may impact the carrying amount of an item of PPE

Answer 25

Revenue items that may impact the carrying amount of an item of PPE include:

1) Internal profit eliminated from the costs of self-constructed assets
2) Applicable government grants (IAS 20), and
3) Net proceed from selling items produced in bringing the asset to that location or condition (such as the sale of samples produced when testing the equipment)

Question 26

What are 3 methods of acquiring an asset?

Answer 26

1) DEFERRED PAYMENT (maksun jaksotukset tai siirretty/viivästetty maksu): When payment for an item of PPE is deferred beyong normal credit terms, its cost is the cash price equivalent. The difference between this amoun and the total payment is recognized as interest expense over the period of credit unless capitalized in accordaance with IAS 23. Where settlement is deferred, the economic substance of the transaction is that payments in the future inlcude a cost relaed to financing the deferred settlement.

2) EXHANGCE OF ASSETS: The cost of such item of PPE is measured at fair value unless: the exchange transaction lacks commercial substance OR the fair value of neither the asset received nor asset given is reliably measurable.

3) EQUITY INSTRUMENTS: If an item of PPE is acquired in exchange for equity instruments of the entity, the cost of the item of PPE is the fair value of the PPE acquired. If that fair value cannot be reliably determined, the fair value of the equity instruments is used. Refer to IFRS 2 Share-based payment.

Question 27

Recognizing various components of the asset

Answer 27

An entity allocated the amount initially recognized in respect of an item of PPE to its significant parts and depreciates separately such part. For example, it may be appropriate to depreciate separately the airframe and engines of an airplane. If a significant part of an item of PPE has same useful life and depreciagtion method as other significant part, those can be grouped in determining the depreciation charge.

Esimerkki: Nostokurjen overall life is estimated at five years, but the some parts are replaced every two years for example -> those are recognized separatley over its own useful life.

Question 28

Costs of dismantling, removal and site restoration

Answer 28

Costs incurred by an entity in respect of obligations for dismantling, removing and restoring the site on which an item of PPE is located are recognized and measured in accordance with IAS 37. HOWEVER, the accounting for CHANGES in such obligations is dealt with in IFRIC 1.

Scope of IFRIC 1 = IFRIC 1 is applicable when:
- Entities have obligations to dismantle, remove items of PPE, and
- Subsequent changes to cash flos, interest rates and time periods have occurred affecting changes in the liaiblity

Cost model:
- INCREASE in liability: Debit -> Asset, Credit -> Liability (Since the asset value increased, test the asset for potential impairment)
- DECREASE in liability: Debit -> Liability, Credit -> Asset (The amount deducted from the cost is limited to carrying amount. Excesses are immediately recognized in profit or loss.)

Revaluation model:
- INCREASE in liability: Debit -> profit or loss OR, Debit -> Revaluation surplus (to the extent a credit balance exists in the revaluation surplus in respect of that asset), Credit -> Liability
- DECREASE in liability: Debit -> liability, Credit -> revaluation surplus OR, Profit or loss (to the extent it reverses a revaluation deficit on the asset that was previously recognized in profit or loss).
- If the decrease in liability exceeds the carrying amount (as per cost model), the excess is immediately recognized in profit or loss.

Question 29

How is depreciation calculated?

Answer 29

An asset is depreciated by allocating the depreciable amount of the asset on a systematic basis over its useful life. The depreciation method should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

The depreciation charge for each period should be recognized in profit or loss unless another IFRS allows to be capitalized in the carrying amount of an asset.

Question 30

Depreciable amount?

Answer 30

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. The residual value is determined at the acquisition date of the asset and it is reviewed at the end of each reporting period.

Any significant change in the residual value will have an impact on the depreciable amount and the depreciation change, and it is accounted for prospectively. An estimate of the residual value is based on the amount recoverable from disposal, at the date of estimate, of assets that have reach the end of their useful life and have operated under conditions similar to those in which the asset wil be used.

Question 31

Which factors need to be considered in determining the useful life of an asset?

Answer 31

When determining the useful life of an asset, we need to consider:

1) The expected USAGE of the asset by the entity. Usage is assessed by reference to the asset’s expected capacity or physical output,
2) The expected PHYSICAL WEAR AND TEAR, which depends on operational factors like number of shifts asset is used and the repair and maintenance program of the entity, and the care and maintenance of the asset while idle.
3) Technical or commercial OBSOLESCENCE arising from the changes or improvements in production, or from a change in the market demand for the product or service output of the asset. Expected future reductions in the selling price may indicate obsolescence of the asset, which might reflect reduction of the future economic benefits embodied in the assets, and
4) Legal or similar LIMIT ON THE USE of the asset, such as the expiry dates of related leases.

Since useful life on an asset is defined in terms of its expected utility to the entity, the asset management policy of the reporting entity should be taken into account when estimating the useful life of an asset.

Question 32

When are residual value and useful life of an asset reviewed?

Answer 32

The residual value and useful life of an asset shall be reviewed at least each financial year-end and, if expectations differ from previous estimates, and the changes shall be accounted for as a change in an accounting estimate in accordance with IAS 8.

Question 33

Give me three examples of different depreciation methods?

Answer 33

The method used should be the one that reflects most closely the pattern in which the asset’s economic benefits are expected to tbe consumed by the entity. The method should be applied consistently from period to period unless the pattern of consumption changes.

1) Straight-line method = results in a constant charge over the useful life IF the asset’s residual value does not change.

2) Reducing balance (diminishing balance) method = results in a decreasing charge over the useful life.

3) Unit of production method = results in a charge based on the expected use or output

Question 34

Esimerkkilasku: depreciation with different methods

Entity acquires a machine and estimates to use it for 5 years. The machine’s capacity is estimated at 100 000 hours. Entity used the machine 30 000 hours in year 1. Machine is estimated to produce 40 000 units. 5 000 units were produced in year 1. Cost of the machine is 500 000 euros and has no residual value.
What will the depreciation charge in year 1 be using:
a) Straight-line method
b) Number of hours
c) Number of units or production made?

Answer 34

Straight-line method = Cost of machine / useful life = 500 000 / 5 = 100 000 EUR

Number of hours = Cost of machine * (hours used/estimated total hours) = 500 000 * (30 000/100 000) = 150 000

Number of units = Cost of machine * (units produced/estimated total production) 500 000 * (5 000/40 000) = 62 500 EUR

Question 35

What depriciation method is not permitted by IAS 16?

Answer 35

A depreciation method based on REVENUE that is genrated by an activity that includes the use of an asset is not appropriate.

Why? Because the revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits of the asset. For example, revenue is affected by other inputs and processes, sellng activites and changes in sales volumes and prices.

Question 36

What happens to the depreciation of an asset if it comes temporarily idle or retired and held for disposal assets?

Answer 36

Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale in accordance with IFRS 5 and the date that the asset is derecognized (eli kumpi ensin). DEPRECIATION DOES NOT CEASE WHEN THE ASSET BECOMES IDLE OR IS RETIRED FROM ACTIVE USE UNLESS THE ASSET IS FULLY DEPRECIATED.

An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If so, recoverable amount of the asset shall be estimated and recognized an impairment loss if necessary (IAS 36).

Question 37

Why should assets be depreciated?

Answer 37

The future economic benefits embodied in an asset are consumed as an entity uses the asset. The depreciable amount, therefore, the carrying value should be reduced over its useful life to recognize this consumption.

Question 38

IAS 16 allows two treatment methods of measuring items of PPE subsequent to initial recognition. Which are these two?

Answer 38

Whichever accounting polciy is selected, it is required to be applied to entire CLASS of PPE. Eli samaan luokkaan kuuluville samanlainen kohtelu.
1) COST MODEL = after recognition as an asset, an item of PPE shall be carried at tits cost less any accumulated depreciation and any accumulated impairment lossess.

2) REVALUATION MODEL = after recognition as an asset, an item of PPE whose FAIR VALUE can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. IAS 16, does not require annual revaluations. When items of PPE have only insignificant changes in fair value, the Standard indicates that it may be necessary to revalue them only every three or five years.

Question 39

What are the factors to consider if they choose the revaluation model?

Answer 39

a) BASIS OF REVALUATION -> A fair value measurement of a non-financial asset (like land and buildings) is based on its “highers and best use”. This does no apply for financial assets, as IFRS 13 states. Measuring the fair value of a non-financial asset, an entity is required to take into account a market pariticipant’s ability to generate economic benefits by using the asset in its highes and best user or by selling it to another market pariticapnt that would use the asset in its highes and best use. See IFRS 13 for more.

b) REVALUATION SURPLUS -> If the carrying amount INCREASED as a result of revaluation, the increase is recognized in other comprehensice income and accumulated in equity under revaluation surplus. However, the increase is recognized in profit or loss to the extent it reverses a revaluation decrease of the same asset that was previously recognized in profit or loss. If the carrying amount is DECREASED, the decrease is recognized in profit or loss. However, the decrease is recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus. The decrease recognized in othre comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. Surplus included in equity may be transferred directly to retained earnings when the asset is derecognized. Some of it can be transferred to retained earnings while the asset is used. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

c) WHO SHOULD PERFORM THE APPRAISAL? -> Normally appraisals are done by professionally qualified valuers. FREQUENCY OF REVALUATIONS: depends of the movements in the fair value. Material movement requires revaluation. CLASSES OF PPE: When PPE is revaluated, it should revaluea ALL assets in its CLASS simultaneously, but they may be performed on a rolling basis.

Question 40

Revaluation: the accounting

Answer 40

When accounting for a revaluation, the carrying amount of htat asset is adjusted to the revalued amount. At the date of the revaluation, there are two possible methods of accounting the asset. Under both methods, the revaluation surplus or deficit and future depreciation will be the same, only the presentation that differs.

1. Method:
   a. Debit -> Asset, Credit -> Revaluation reserve,
   b. Debit -> revaluation reserve, Credit -> Accumulated depreciation
   c. At the revaluation date, the gross carrying amount is adjusted to be consistent with the revaluation of the carrying amount of the asset. The accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset, after taking into account accumulated impairment losses. Results: Ratio of gross carrying amount to accumulated depreciation will stray the same, and Net carrying amount will equal revalued amount.
2. Method:
   a. Debit -> Asset, Credit -> Revaluation reserve,
   b. Debit -> Accumulated depreciation -> revaluation reserve, Credit
   c. Any accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the asset. Results: asset stated at revalued amount and accumulated depreciation reset to zero.

Question 41

Impairment of PPE?

Answer 41

IAS 36 guides on PPE impairments. And explains how carrying amounts of its assets are reviewed, the recoverable amounts and when to recognize or reverse an impairment loss.

Compensation from third parties for PPE that were impaired/lost/give up is included in determining profit or loss for the period when it becomes receivable.

IAS 16 emphasizes that impairments or losses of PPE, related claims for or payments of compensation from third parties, and any subsequent purchase or construction of replacement assets are separate economic events and should be accounted for as such.