M3 Assets & Impairment

Question 1

A property held for sale in the ordinary course of business, or in the process of construction or development for such sale will be classified as:

Answer 1

Inventory

A property held for sale in the ordinary course of business will be treated as inventory and valued as per IAS 2. Inventory is defined as an asset that will be used in the ordinary course of business to raise revenue.

Question 2

Which of the following will be classified as an investment property as per IAS 40?

Answer 2

A property bought in an area under establishment; currently with an undetermined use
An idle property leased out to raise some finance
Land bought as a result of idle surplus cash that was available with the company

A property bought with the intention to capitalise on the expected appreciation in value or used to earn rentals will be classified as investment property.

Question 3

A property being constructed or developed on behalf of third parties will come under the scope of:

Answer 3

Revenue from Contracts with Customers

A property being constructed on behalf of third parties comes under the scope of IFRS 15 — Revenue from Contracts with Customers. Inventory is an asset that is used in the normal operations of a business to raise revenue. Investment property is the property help to earn rentals or for capital appreciation. Property being used in production is classified as PPE and comes under the scope of IAS 16.

Question 4

Which of the following properties is not outside the scope of IAS 40:

Answer 4

Property leased to a third party under operating lease

Properties leased under finance lease agreements are not considered investment property, as the leased asset is no longer an asset of the company. Property held for use in a production capacity or other administrative purpose comes under the scope of IAS 16. Lastly, any property bought with the intentional to earn rentals to take advantage of capital appreciation comes under the scope IAS 40.

Question 5

An investment property can be:

Answer 5

Held to earn rentals or for capital appreciation

Investment property is defined as property, that is land or a building, or part of a building, or both, held to earn rentals, which means income from renting the property out to others, or from capital appreciation, or both.

Question 6

Which of the following statements is true regarding IAS 40:

Answer 6

If the investment property is subsequently measured using cost, the respective fair values still need to be disclosed in the financial statements

Investment property can be measured subsequently at either cost or fair value. The method selected by management needs to be applied consistently to all the properties in the same investment portfolio. The fair value method is considered more relevant in valuation of investment property as the valuation will be more realistic, keeping the intended use of the property in mind. This is the reason that even if they are subsequently measured at cost, the company still needs to disclose their fair values in financial statements.

Question 7

Which of the following statements is false:

Answer 7

The revaluation model to value investment property will result in no depreciation charge

The revaluation model to value property is allowed under IAS 16, not IAS 40. IAS 40 allows two methods to value property subsequently, these are the cost method and the fair value method. Under the fair value method, there is no depreciation charge to the assets.

Question 8

The characteristics of measuring investment property using fair value method do not include:

Answer 8

Depreciation charge

Measuring investment property at cost will result in depreciation charge. It must be noted that if the property is being measured at fair value no depreciation charge will arise, instead gain or loss will arise which is charged to the P/L account of the period.

Question 9

A piece of land was purchased for $100,000 by company A for investment purposes.

The transfer of registry will cost a further outflow of $400 and tax associated with the purchase will be a total of $10,000.

Company A also hired expert engineers to value the land and potential capital appreciation (expected from the investment before finalising the purchase) at a cost of $15,000.

The senior management expects a bonus of $40,000 as profit will increase when the property is sold after the price appreciation is realised.

The property should initially be measured at:

Answer 9

$125,400

The initial recognition will be at cost = purchase price + transaction cost + taxes + professional fee = $100,000 + $400 + $10,000 + $15,000 = $125,400 (bonus payable will not be a part of cost).

Question 10

Consider the following valuation techniques:

1. Cost
2. Amortised cost
3. Fair value
4. Net realisable value

Which of the above methods are allowed to subsequently measure investment property as per IAS 40?

Answer 10

1 - Cost
3 - Fair Value

IAS 40 allows investment property to be subsequently measured as either cost or fair value. The companies need to select one method and apply it consistently.

Question 11

Borrowing Costs

Answer 11

Companies are not required to capitalise borrowing costs in relation to those items of inventory which are manufactured routinely

A qualifying asset is an asset that takes a substantial period of time to get ready. Inventories are within the scope of IAS 23 as long as they fulfill the definition of a qualifying asset. If an asset is ready for its intended use or for sale at the time when it is acquired, it will not be treated as a qualifying asset.

Question 12

As per IAS 23, borrowing costs include:

Answer 12

Interest expense
Exchange differences arising on borrowings in foreign currencies
Finance charges in respect of finance leases

Borrowing costs include interest expenses, finance charges (in respect of finance leases) and exchange differences arising if the borrowing is in some other currency. Transaction costs will not form a part of borrowing costs, they should be expensed out.

Question 13

When general borrowings are used to obtain a qualifying asset, borrowing costs should be capitalised using:

Answer 13

A capitalisation rate

When general borrowings are used to obtain a qualifying asset, borrowing costs should be capitalised using a capitalisation rate. This is a rate that reflects the weighted average of the borrowing costs applicable to the borrowings of the company that are outstanding during the period, other than borrowings made for specific purposes.

Question 14

A company borrowed a compound loan of $400,000 at 3% to specifically finance manufacturing a new plant for production.

Calculate the amount of borrowing cost that will be capitalised if the duration of the loan is three years?

Answer 14

$37,091

The interest expense on compound loan = [$400,000 x (1.03)³] – $400,000 = $437,091 – $400,000 = $37,091.

Question 15

Borrowings costs will be capitalised when:

Answer 15

They are directly involved in the acquisition, production or construction of a qualifying asset

IAS 23 requires borrowing costs to be capitalised, that is included in the book value of an asset, as opposed to being expensed to profit or loss, if they are directly attributable to the acquisition, construction or production of a qualifying asset.

Question 16

The following are components of the cost of an asset?

Answer 16

Import duties
Non-refundable purchase taxes
Purchase price

Start-up costs related to opening a new facility are an example of costs that should not be considered directly attributable.

Question 17

Which of the following is correct treatment for all eligible borrowing costs?

Answer 17

Fully capitalised

All eligible borrowing costs must be capitalised under IAS 23 – Borrowing Costs

Question 18

Which of the following is covered by IAS 16 - Property, Plant and Equipment?Which of the following is covered by IAS 16 - Property, Plant and Equipment?

Answer 18

Office building

A list of PPE items which are outside the scope of IAS 16: - Investment properties, which are dealt with in IAS 40; - Property, plant and equipment classified as held for sale, which are regulated by IFRS 5; - Biological assets related to agricultural activity as covered by IAS 41 Agriculture; and - Mineral rights and mineral reserves such as oil and gas.

Question 19

Which of the following relate to expenses which require capitalisation?

Answer 19

Expenses that relate to the replacement of a major component of the asset
Expenses that relate to required major inspection of the asset
Expenses that enhance the economic benefits provided by the asset

The cost of routine servicing, which typically involves minor repairs and day-to-day maintenance, should be taken to profit or loss in the same period as the servicing activity occurs.

Question 20

How should an item of PPE be initially recognised in financial statements?

Answer 20

Measured at cost

According to IAS 16, The initial measurement of PPE should be carried out at cost.

Question 21

formula for calculating depreciation using reducing balance method?

Answer 21

Annual depreciation = Carrying value x Depreciation percentage

Reducing balance method charges higher depreciation in the earlier years and lower depreciation in the latter years. Depreciation under this method may be calculated as follows: Annual depreciation = Carrying value x Depreciation percentage

Question 22

Which of the following are necessary for calculating the straight-line depreciation expense? (select all that apply)

Answer 22

Useful life
Residual value
Cost of an asset

Straight-line depreciation method charges the cost evenly throughout the useful life of an asset. It is calculated as follows: Annual depreciation = (Cost – Residual value) / Useful life Therefore, a number of units produced are not necessary for calculating the depreciation using the Straight-line method

Question 23

Company A bought a building for $73,000, which has the expected useful life of eight years and a residual value of $4,000 at the end of that time.

If depreciation is to be provided using the Straight-line method, the net book value after two years will be:

Answer 23

$55,750

The depreciation charge amount for the two years period should be calculated as follows: Depreciation charge for two years = (Cost - Residual value) / 8 x 2 = ($73,000-$4,000) / 8 x 2 = $17,250. Therefore, the net book value equals to: NBV = Cost - Depreciation charge for two years = $73,000 - $17,250 = $55,750.

Question 24

The cost of an asset less its residual value is defined as:

Answer 24

Depreciable amount

The depreciable amount is the difference between the historical cost, or other amount substituted for the historical cost in the financial statements of the entity, and the estimated residual value of the asset.

Question 25

An asset was bought for $12,000.

Its accumulated depreciation is $7,700 and the rate of depreciation is 20%.

What is the amount of depreciation charge for the current accounting period using reducing balance method?

Answer 25

$860

The depreciation charge for the current period should be calculated as follows: Depreciation charge = (Cost - Accumulated depreciation) x Depreciation percentage = ($12,000 - $7,700) x 20% = 4300 x 20% = $860.

Question 26

When revaluing an asset, one of the ways of handling the accumulated depreciation is to:

Answer 26

Restate it proportionately with the change in carrying amount

Treatment of accumulated depreciation is an important aspect of the revaluation entries. As per IAS 16, the accumulated depreciation should be handled in one of the following ways: It should be eliminated against gross carrying value of the asset; or It should be restated proportionately with the change in carrying amount.

Question 27

Items of Property, Plant and Equipment after initial recognition must be measured using:

Answer 27

Either the revaluation model or the cost model

IAS 16 provides a choice of two measurement methods: The cost model and the revaluation model.

Question 28

When an item of property, plant and equipment is revalued, what should also be revalued?

Answer 28

The whole class of assets to which it belongs

According to IAS 16, the whole class of assets should be revalued. This prevents a mixture of cost and values appearing in the financial statements. It also prevents management from picking only the best assets to revalue.

Question 29

The decrease in the fair value of an item of PPE is recognised in (assume there were no prior revaluations):

Answer 29

Retained Earnings

Under IAS 16, decreases in the fair value of an item of PPE are recognised in profit or loss as an expense, unless they reverse an earlier upward revaluation.

Question 30

The increase in fair value of the asset is credited to (assume there were no prior revaluations):

Answer 30

Revaluation surplus within Other Comprehensive Income

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss.

Question 31

If the computer software is an integral part of the related hardware (hardware element is more significant), it should be accounted for under:

Answer 31

IAS 16 - Property, plant and equipment

Question 32

Two critical attributes of an intangible asset are:

i) They are controlled
ii) They are an integral part of the enterprise
iii) Future economic benefits must be expected
iv) They must be measured at fair value

Answer 32

i) They are controlled
iii) Future economic benefits must be expected

An asset is a resource that is controlled by the entity as a result of past events and from which future economic benefits are expected. Thus, the two critical attributes of an intangible asset are control and future economic benefits.

Question 33

What are intangible assets according to IAS 38?

Answer 33

Non-monetary assets without physical substance

IAS 38 defines intangible assets as identifiable non-monetary assets without physical substance.

Question 34

Which of the following is not considered to be an intangible asset?

Answer 34

Training provided to employees

In order to meet the definition of an asset, intangible assets must be controlled and future economic benefit must be expected from them. Here, training provided is not considered an intangible asset as the entity cannot control the actions of its employees. However, football club players are an exception to this rule.

Question 35

Which if the following costs can be included in the cost of an intangible asset?

Answer 35

Professional fees arising directly from bringing the asset to its working condition are an example of directly attributable costs of preparing the asset for its intended use. For all other options, costs should not be capitalised and must be expensed as incurred, as they are not directly attributable costs.

Question 36

Intangible assets received by way of a government grant may initially be recognised under:

Answer 36

Either the fair value model or the cost model

Question 37

Which of the following internally generated items may not be recognised as intangible assets?

Answer 37

Internally generated intangible assets are not recognised. Such assets would not qualify for recognition on the grounds that their cost cannot be measured reliably.

Question 38

the following are recognition criteria for an intangible asset?

Answer 38

It is an identifiable non-monetary asset without physical substance
The cost of the asset can be measured reliably
It is probable that expected future economic benefits will flow to the entity

According to IAS 38, internally generated intangible assets are not recognised. Such assets would not qualify for recognition on the grounds that their cost cannot be measured reliably.

Question 39

What is the initial recognition measurement of an intangible asset?

Answer 39

Cost

Intangible assets meeting the relevant recognition criteria are initially measured at cost, subsequently measured at cost or using the revaluation model, and amortised on a systematic basis over their useful lives.