PPE Flashcards
What is PPE
Tangible items that are both :
Held for use in the supply of goods or services, for rental to others or for administrative purposes, and ;
Expected to be used during more than one period
Recognition
Should be recognised where it is :
probable that future economic benefits will flow to the entity and
their cost can be measured reliably
Subsequent costs :
Repairs and maintenance - recognised in profit and loss as incurred
Replacement parts- capitalised - provided the original cost of the item they replace is de recognised
Separate components:
Parts of a bigger asset with separate useful lives depreciated separately
Component approach Also used where regular major inspections of an asset are a condition of continuing to use it , cost of each inspection treated as a separate item of PPE no
Measurement of PPE
Measured at cost at recognition
Cost includes -
1) purchase price (inc all non recoverable duties and taxes but NET of trade discount)
2) directly attributable costs (bringing asset to location and condition necessary to operate in the intended manner)
Not including cost to open new facility, introducing new products, doing business in new location or with new class of customers, admin and general overhead costs
3)estimate of dismantling and site restoration costs
Cost is measured as :
- purchase price + directly attributable cost , or
- fair value if PPE items are exchanged
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. All other borrowing costs are expenses
Qualifying asset- asset that necessarily takes a substantial period of time to get ready for its intended use or sale
(PPE, investment properties under construction, inventories e.g. aeroplane for sale, intangible asset) this excludes an asset that is ready for sale when acquired
Borrowing costs to be capitalised
If borrowed for construction
Borrowing costs can be readily identified, and ;
If the funds are not all required immediately and some are invested, the borrowing costs capitalised should be reduced by the investment income received on the excess income
Eg borrow 1 mil at 7.5% but earned 35k
(1m x 7.5%) - 35k
If construction financed out of general borrowing - use Weighted average cost of general borrowings- Excluding borrowings to a finance specific asset or building until substantially all activities to prepare the asset are complete
Eg an entity has the following finance in place
1 m at 6% pa loan finance
2m at 8% pa loan finance
It constructed a new factory which cost £600,000 and this was funded out of the existing loan finance, the factory took 8 months to complete
Weighted average cost of loans:
(1m x 6% ) + (2 m x 8%) / 3 m = 7.33%
Borrowing costs to be capitalised = £600k x 7.33% x 8/12 = £29320
Revaluation model
FV basis
L+B - FV determined from Market based evidence and by professional valuers
P+E - FV usually determined by appraisal
Specialised items of PPE (which are rarely sold)- FV determined by using a depreciated replacement cost (as no market evidence)
Accounting for revaluations
Cost x
Depreciation (X)
CA. X
Gain ( bal.) X
Revaluation X
If given gain then reval is balancing figure
For an increase in reval :
DR NCA by (original cost -reval cost)
DR accumulated depreciation
Cr reval surplus by gain
Revaluation entries (excluding a sole increase)
1) Decrease in value (no previous increase):
Expense charged to PL
Debit PL expense
Cr PPE Carrying amount
2) Decreases in value reversing an earlier revaluation :
Deficit should be :
A ) recognised in other comprehensive income to the extent of any remaining balance on Rev Surp on that asset
B) Any excess is recognised in the PL
3) increase in value reversing a previous decrease
Where the previous decrease was recognised in PL,
Surplus should be recognised in PL to extent of previous decrease
The credit to the reval surplus/OCI should be the amount as if the previous downward reval never took place
Depreciation of revalued assets
Where an asset is revalued the dep charge is on :
The revalued amount less residual value from the date of valuation
Residual value should be re estimated on reval
Revalued asset depreciated over remaining useful life, whole of the dep charge recognised in the PL
Best practice to make a transfer of reserves of excess depreciation arising from reval
Transfer recorded as :
Amount of transfer = annual dep charge now (based on reval) less annual depreciation charge prior to reval (historic cost)
Entry :
Dr reval surplus
Cr retained earnings
Impairment of Assets
IAS 36
CA> recoverable amount
Recoverable amount = higher of:
- Fair value less costs to sell - net realisable value
- Value in use - PV of future cash flows
Difference CA exceeds recoverable amount = impairment loss (DR PL, CR NCA)
If asset previously revalued upwards:
-Imp loss charged to OCI to extent of clearing reval surp to 0 for that asset
-Any further impairment charged to PL
De recognition of PPE
Disposed of or abandoned
Where asset held at depreciated cost, process to account for disposal is :
Dr cash (proceeds) Cr Asset cost (remove)
DR acc dep (remove)
DR/CR Loss/gain on disposal (PL)
Where asset previously revalued journal entry is same as above however any balance is RS must be transferred to RE
Debit RS (to zero) Cr RE
Asset held for sale
IFRS 5
Held for sale of :
1) Asset available for immediate sale in present condition
2) It’s sale must be highly probable
For the sale to be probable there should be :
- management commitment to sell
- active search for buyer
- marketing for sale at a reasonable price
- expectation to sell within one year from date of classification
- No likelihood of significant changes to plan
Asset held for sale accounting treatment
1) if asset held at valuation , reval to FV before held for sale
2) on classification, write down to FV less costs to sell ( if less than CA), charge any impairment loss to PL
3) NCA held for sale not depreciated/amortised
4) disclosed presented:
- As a single amount separate from other assets
- on face of SOFP
- Normally as current assets
PPE disclosures
IAS 16 paras 73-79
Disclosures wide ranging shown for each class of PPE by way of note
