Lecture 3 - Property, Plant & Equipment

Question 1

principal issues relating to PP&E?

Answer 1

• recognition of assets
• determination of carrying amount
• depreciation & impairment

Question 2

scope of PP&E?

Answer 2

does not apply to:
- biological assets
- mineral rights & reserves

Question 3

what is PP&E?

Answer 3

• tangible items held for use in the production/supply of goods/services
• tangible items for rental to others
• tangible items for administrative purposes

Question 4

are PP&E expected to be used for more than one period?

Answer 4

yes

Question 5

examples of PP&E?

Answer 5

• property (land & buildings)
• plant (plant & machinery)
• equipment (vehicles)

Question 6

carrying amount?

Answer 6

the value of an asset on the balance sheet after deducting accumulated depreciation

cost - depreciation

Question 7

cost?

Answer 7

the amount paid to acquire an asset

Question 8

depreciable amount?

Answer 8

the portion of an asset’s cost that is subject to depreciation

cost of asset - residual value

Question 9

depreciation?

Answer 9

the allocation of the cost of a tangible asset over it’s useful life

can be due to wear & tear, usage or obsolescence

Question 10

fair value?

Answer 10

the price at which the asset can be sold in an orderly transaction today

Question 11

impairment loss?

Answer 11

amount by which an asset’s carrying amount exceeds its recoverable amount

carrying amount - recoverable amount = impairment loss

e.g., asset’s book value is £50,000, but recoverable amount is £30,000: impairment loss is £20,000

Question 12

property, plant & equipment definition?

Answer 12

tangible long term assets that are used by a business to generate revenue

Question 13

recoverable amount?

Answer 13

the maximum amount that can be recovered through selling the asset

Question 14

residual amount?

Answer 14

estimated amount an asset is expected to be worth at the end of its useful life (after depreciation)

the amount the owner is expected to recover once the asset’s no longer in use

Question 15

useful life?

Answer 15

the estimated period over which an asset is expected to be used by a business

Question 16

when can an item of PPE be recognised as an asset?

Answer 16

• if it is probable to derive future economic benefit
• the cost of the item can be measured reliably

Question 17

how are servicing, repair & maintenance costs treated?

Answer 17

expensed in the P&L

Question 18

how are major capital replacements/enhancements treated?

Answer 18

capitalised as a capital expenditure and recognised as an addition to the carrying amount of the asset in the balance sheet

Question 19

vehicle undergoes servicing for 200

is this expensed or capitalised?

Answer 19

expensed

dr repairs & maintenance exp, cr bank

Question 20

tyres of a delivery vehicle are replaced at a cost of 1,000

is this expensed or capitalised?

Answer 20

capitalised

dr tyres, cr bank

Question 21

after initial recognition, items of PPE can be measured using either…

Answer 21

the cost model or the revaluation model

Question 22

the cost model?

Answer 22

items are carried at cost - accumulated depreciation and less any accumulated impairment losses

Question 23

the revaluation model?

Answer 23

items are carried at fair value at the date of revaluation minus any accumulated depreciation and minus any subsequent accumulated impairment losses

Question 24

if revaluation model is used, must it be applied to entire classes of PPE?

Answer 24

yes, it must

Question 25

how are ‘items of PPE’ prescribed?

Answer 25

judgement is required

Question 26

how are groups of PPE designated?

Answer 26

initially through significant parts

e.g., same useful life & depreciation method

remainder of insignificant parts

e.g., cost of replacement

Question 27

measurement at recognition for PPE?

Answer 27

initially measured at cost

Question 28

elements of PPE cost?

Answer 28

• purchase price, import duties, purchase taxes less trade discounts
• costs directly attributable to bring asset to location & condition (e.g., installation, delivery & handling)
• estimates of cost dismantling/ removing the item from the site

Question 29

purpose of depreciation?

Answer 29

to allocate an expense between accounting periods

• depreciation makes no attempt to show assets at their current values
• charging depreciation doesn’t guarantee there will be funds available to replace assets when they end their useful life

Question 30

when should the residual value of PPE be reviewed?

Answer 30

at least the end of each FY

Question 31

if estimates change…

Answer 31

this should be accounted for as a change in accounting estimate

Question 32

the depreciation method should…

Answer 32

match the usage pattern of the item

Question 33

depreciation methods?

Answer 33

• straight line method
• diminishing balance method
• units of production method

Question 34

when does depreciation begin and end?

Answer 34

begin = when capable of operating in intended way

end = when classified as held for resale or when derecognised

Question 35

does depreciation cease when the asset is idle?

Answer 35

no

Question 36

objective of impairment?

Answer 36

to ensure that assets aren’t carried higher than recoverable amount

Question 37

if CA > RA…

if carrying amount > recoverable amount…

Answer 37

• the asset is impaired
• IAS 36 requires an impairment loss to be recognised

Question 38

IAS 36?

Answer 38

requires an impairment loss to be recognised

Question 39

how can the recoverable amount of an asset be obtained?

Answer 39

by either using or selling the asset

Question 40

external indications of impairment?

Answer 40

• decline in the market value
• adverse tech, market, economic or legal changes
• increase in discount rate used when computing value in use
• carrying amount of entity’s net assets exceeds market cap

Question 41

internal indications of impairment?

Answer 41

• evidence of obsolescence or physical damage to the asset
• the asset has become idle
• plans to discontinue the operation in which the asset is used
• useful life of of the asset reassessed as finite
• evidence that the asset’s economic performance will be worse than expected

Question 42

impairment loss =

Answer 42

carrying amount - recoverable amount

the amount currently on the balance sheet minus the amount you would get for it if sold today

Question 43

recoverable amount =

Answer 43

higher of:
- fair value - costs of disposal
- value in use

Question 44

fair value?

Answer 44

• market based measurement
• the price that would be received if the asset was sold in an orderly transaction at the measurement date

Question 45

value in use (VIU)?

Answer 45

• an entity-specific measurement
• VIU is the PV of future cash flows expected to be derived from an asset

Question 46

if the recoverable amount of an asset is less than its carrying amount…

Answer 46

the asset’s carrying amount should be reduced to its recoverable amount

the amount of this reduction is an impairment loss

Question 47

how is impairment loss recognised in FSs?

Answer 47

• generally recognised as an expense
• for revalued assets, it’s dr revaluation reserve, cr any balance previously existing in that reserve
• any excess is recognised as an expense

Question 48

IAS36 disclosure requirements?

Answer 48

for each class of assets, entities should disclose:
- the amount of impairment losses recognised as expenses during the period and the line items included
- the amount of impairment losses recognised in other comprehensive income during the period

Question 49

when should the CA of PP&E be derecognised?

Answer 49

on disposal

when no future economic benefits are expected to be derived

Question 50

when should gains or losses of PP&E be derecognised?

Answer 50

gain/loss included in the P&L when derecognised

• gain isn’t revenue
• gain/loss = proceeds - CA