PPE Flashcards
What is PPE, what is its initial cost and when must it be recognised
IAS16: PPE defined as tangible items that are held for use in production of supply or admin purposes AND expected to be used for more than one period
PPE must be recognised when future economic benefits probable and costs can be measured reliably
Initial cost of PPE: purchase price and directly attributed costs (delivery installation) to bringing asset to location on condition necessary (include import duty remove trade discount)
What 4 costs are excluded/included in measuring PPE
Excluded costs- doesn’t add to asset value and should be an expense in SPL for example admin cost or general overheads (electricity)
Incidental income (income before asset is ready)- not deducted from cost but recorded in other income in SPL (e.g. Construction site used for parking)
Subsequent cost- additional costs after initial purchase is capitalised (added to value) if meet recognition criteria i.e. Provide future economic benefits (improvements)
Do not capitalise on 3 Rs (renew, renovate, repaint)
List 5 directly attributable costs and explain what it is
cost of employee benefits from construction of PPE
o Site preparation, delivery, installation, testing, and professional fees
What are borrowing costs and can you capitalise
Cost incurred to borrow funds to construct asset. You can capitalise as part of qualifying asset (takes substantial time to prep) which is directly attributable. They are suspended in times of inactivity and cease when complete
What borrowing costs can be capitalised (list 3)
Costs which would have been avoided if expenditure on qualifying assets was not made
Borrowing specific to asset= Borrowing costs incurred - income from temporary investment of surplus borrowings
Funds taken from general borrowings=Weighted average cost of borrowing x expenditure on asset (time apportion)
Give the 2 depreciation models and their formulas
Cost model and revaluation model
Under cost model: Carrying Amount= cost- a. dep - a. impairment
Under reval model: FV at reval- subsequent a. dep- subsequent a. impairment
What is the double entry for upward revaluation
Increasing asset value
Dr Cost of asset (to FV)
Dr A. dep
Cr Revaluation Surplus (FV- carrying amount)
unless CA< FC < Historic Cost
Dr A. dep
Cr Cost
Cr Revaluation Surplus
Formula for depreciation charge for revalued asset? What does upward revaluation lead to?
(Revalued amount - estimated residual value) / remaining useful life
leads to fall in subsequent period profit and reducing retained earning
Downward revaluation double entry
- When not previously upward revalued- decrease in value of asset is recognised in SPL
Dr SPL (balancing figure: carrying amount- fair value)
Cr carrying amount of asset
- When it has been upward revaluation-
Dr revaluation surplus (by amount it has changed)
Dr SPL (balancing figure)
Cr carrying amount of asset
Give examples of internal and external indications of impairment
External Indications of impairment (IAS36)
o Decline in MV more than expected
o Significant change in tech, market, legal and economic environment (reduce future economic benefit), change in government policy, increase in interest rate (affects discount rate used in PV)
Internal Indications of impairment
o Damage
o Sustainability policy of entity (such as reducing emissions)
o Evidence suggests asset will not perform as expected
Give double entry for impairment loss (cost/revaluation model) and explain what impairment is
When CA falls below recoverable amount. Recoverable amount is greater of
FV - cost to sell
Value in use= present value of future cash flows expected to be generated
Cost model:
o Dr SPL (expense)
o Cr Carrying amount of asset
Reval. Model:
o Dr revaluation Surplus
o Dr SPL (balancing figure- expense)
o Cr carrying amount
if reval surplus is at 100 but impairment led to value of asset falling to 50, reduce reval surplus by 50
Formula for impaired asset depreciation
Depreciation charge for impaired asset=
(New carrying amount- estimated residual value)/(Remaining useful life)
When is a NCA classified as held for sale? (4)
If carrying amount recovered through sale than through use.
Asset must be available for immediate sale in present condition, sale must be highly probable (active sale within 12 months) and plan unlikely to be changed
How do you value assets with cost model when held for sale? (3 steps) What about reval model
Measure at lower of carrying amount and FV - cost to sell
If fair value option used then recognise of impairment loss
Cease depreciation
Present asset separately in SFP (under subtotal of current assets)
Record any gain in SPL like normal
For reval model, before step one you should revalue asset and charge the difference to impairment loss
Under IAS 16 (PPE) what should be disclosed (3) and under IAS36 (2)
IAS16
o Disclose measurement bases (cost or revaluation)
o Depreciation method and useful life
o Changes in accounting estimates and PPE reconciliation
IAS36:
o Amount of impairment loss charged to SFP and line in SFP which this is included
o Amount of impairment loss on revalued assets recognised as a reduction in revaluation surplus