Lesson 9: Property, Plant, and Equipment

Question 1

What is Property, Plant, and Equipment (PPE)?

Answer 1

-tangible assets for use in business operations to earn revenue
-not intended for resale
-kept and used by the business for MORE THAN 1 ACCOUNTING PERIOD
-non-current assets

Question 2

What are the common types of PPE?

Answer 2

-Property (land and/or buildings)

-Fixtures and fittings (chairs, cabinets, electrical wiring, etc.)

-Equipment (computers, fax machines, photocopiers, etc)

-Motor vehicles (motor van, cars, etc)

EXCEPT for freehold land, which is NON-DEPRECIABLE,

all PPE have LIMITED USEFUL LIVES and are DEPRECIABLE

Question 3

What are Capital Expenditures?

Answer 3

-costs to acquire assets that will benefit the business in the current and future years (Eg. Purchase of PPE)

-charged to an ASSET account, subsequently allocated as an expense to the years it benefits

-includes major improvements and additions to PPE when they:
-increase the capacity of the asset
-improves the quality of services or efficiency
-extends its useful life

Question 4

What are Revenue Expenditures?

Answer 4

-costs to acquire assets and services that will be used up in a particular year (Eg. rent, repairs, salaries, cost of inventories sold)

-charged to an EXPENSE account and MATCHED AGAINST THE REVENUE EARNED for the year it benefits

-Includes ordinary repairs - expenditures incurred to MAINTAIN PPE in good working condition or to return to its prior condition (Eg. repainting of buildings, repairs and maintenance of buildings/machines/vehicles)

Question 5

What is the Materiality Concept?

Answer 5

Transactions that have little effect on financial statements may be treated in the most expedient manner

Question 6

What does the cost of an item of PPE include?

Answer 6

-Purchase price (including any import duties and non-refundable taxes) LESS any trade discount and rebates
-Initial delivery and handling costs

It also includes any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
such as:
- Costs of site preparation
- Installation and assembly costs
- Costs of testing (eg. test runs, etc)
- Professional fees (engineer, architect, lawyer fees )

Question 7

What is Depreciation of PPE?

Answer 7

Depreciation is the systemic allocation of the cost of PPE over its useful life

Question 8

Note:
PPE are NON-CURRENT ASSETS when acquired as they will benefit the business in current and future years

Question 9

Note:
a portion of the cost of the PPE must be allocated as DEPRECIATION EXPENSE to every year it benefits to ensure accurate matching of expenses against revenue generated by the use of PPE

Question 10

What are the factors to consider in the measurement of depreciation?

Answer 10

-Cost of the asset
-Expected Residual Value (Scrap value or salvage value)
-Useful life of the asset

Question 11

What are the causes of Depreciation?

Answer 11

-Wear and Tear
-Physical Deterioration
-Obsolescence

Question 12

What is Overhaul?

Answer 12

examination of a machinery or system, with repairs or changes made if necessary

Question 13

Note:
for second hand non-current assets, expenditure incurred to repair or OVERHAUL the asset to put them in working condition should be TREATED AS PART OF COST OF THE ASSET

Answer 13

This will be considered a CAPITAL EXPENDITURE necessary to bring the motor vehicle to the condition necessary for it to be CAPABLE OF OPERATING AS INTENDED

Question 14

What is Residual value?

Answer 14

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 15

Note:
The total amount of depreciation to be charged over an asset’s useful life is the cost of the asset LESS its residual value

Question 16

What is the Useful Life of the asset?

Answer 16

This is the estimated period of time that the asset is expected to be used in carrying out the business activities

Question 17

What are the the 2 main Depreciation methods?

Answer 17

1. Straight line
2. Reducing (Diminishing) Balance

Question 18

What is the Straight line method?

Answer 18

With the straight line method, each accounting period is allocated a UNIFORM AMOUNT OF THE DEPRECIABLE VALUE (cost of PPE less any residual value).

This method assumes that depreciation is a uniformed function of time.

This method is suitable when the PPE provides equal benefits over its useful life

Question 19

How do you calculate Depreciation per period?

Answer 19

Depreciation per period = Depreciable value x Rate of Depreciation

OR
Depreciation per period = (Cost - Estimated residual value)/ Estimated useful life

Question 20

How do you find the uniform amount of the depreciable value?

Answer 20

Cost of PPE less any residual value

Question 21

What is Net Book Value (NBV)?

Answer 21

NBV or carrying amount of the asset is cost less accumulated depreciation

Question 22

What is the Reducing (diminishing) Balance Method?

Answer 22

Each accounting period is allocated a UNIFORMED RATE OF NBV.

As the rate remains constant while the book value declines, ANNUAL DEPRECIATION IS LESS EACH YEAR.

This method is suitable when the PPE provides GREATER BENEFITS IN THE EARLY YEARS OF ITS USEFUL LIFE THAN IN THE LATER YEARS.

Question 23

Note:
IAS 16 requires that the depreciation method chosen to reflect the PATTERN OF CONSUMPTION OF THE ECONOMIC BENEFITS embodied in the asset. (ie. match the usage pattern)

Question 24

How do you choose the method of depreciation?

Answer 24

For PPE with a reasonably constant pattern of consumption, the allocation basis should be done using the STRAIGHT-LINE method.

Assets that generate more revenue earlier in their useful lives and less in later years should use the REDUCING BALANCE method.

Question 25

Note:
methods once selected should be applied consistently throughout its useful life UNLESS CHANGES IN CIRCUMSTANCES MAKE IT NO LONGER APPLICABLE

Answer 25

This is to comply with the Consistency Concept

Question 26

What is the Consistency Concept?

Answer 26

The same accounting methods should be applied by a firm FROM PERIOD TO PERIOD. This is to ensure that the financial statements of different periods are COMPARABLE

Question 27

When would an asset be impaired?

Answer 27

An asset is impaired when its carrying amount is greater than its recoverable amount

Question 28

What is Recoverable amount?

Answer 28

Recoverable amount is the higher of FAIR VALUE less cost to sell and VALUE-IN-USE

Question 29

How is the fair value of PPE determined?

Answer 29

The fair value of PPE is determined from market based evidence by professional appraisal or valuation