PPE Flashcards
Define PPE:
A tangible asset held for business use for over a year.
Probable that future economic benefits associated with the item will flow to the entity, and costs reliably measured.
What is the Recognition of PPE in a Firm?
PPE recognised when asset is received. Doesn’t have to be legally owned, complete, or it could be an addition of an existing asset.
Health & Safety equipment = asset.
What are the Different Examples of Subsequent Costs?
Repairs & Maintenance (expense)
Replacement Parts (derecognise old (disposals), recognise new)
Major Inspections (derecognise old, recognise new)
Enhancements (recognise as additional assets)
What are Recognition Costs?
- Purchase price
- Costs directly attributable to bringing asset to location and conditions necessary for it to operate in manner intended by management.
- Estimated cost of dismantling/removing item and restoring site.
Cost to get land ready to build on is a directly attributable cost, but it is subjective.
Legal costs incurred to acquire property is an asset if it is directly attributable.
What are Examples of Directly Attributable Costs?
- Employee, Construction & Acquisition costs
- Site prep
- Initial delivery & handling cost
- Installation & assemble cost
- Testing cost
What are Examples of Costs that are Not Directly Attributable?
- Opening new facility
- Introducing new product/service
- Conducting business in new location
- Administration and other general OH
What are Borrowing Costs?
Interest costs directly attributable to acquisition, construction or production of a qualifying asset.
Specific borrowings
General borrowings
What are Specific Borrowings?
Loans taken out specifically for an asset.
Borrowing costs to capitalise = actual borrowing costs incurred on loan - interest income from investment of surplus
What are General Borrowing Costs?
General loans used to fund asset. Pro-rate for number of months.
Borrowing costs to capitalise = amount spent on asset x weighted average interest rate.
How Should Borrowing Costs be Capitalised?
Begin capitalising when expenditure is incurred for asset/activity of asset has started.
Stop capitalising when qualifying asset is substantially complete.
Suspend capitalisation when active development of asset is suspended.
What is the Formula to Measure Value of AssetAfter Initial Recognition?
Net book value = cost – accumulated depreciation – impairment losses
What is PPE’s Useful Life Based on?
- Expected usage (business model)
- Expected physical wear and tear
- Expected obsolescence
- Other limits on the use of the asset (e.g. lease term)
How is Depreciation of of PPE Calculated?
- Straight line
- Reducing balance
- Units of production
What is the Straight Line Depreciation Formula?
Depreciation Expense = Depreciable amount / Useful economic life
What is the Reducing Balance Depreciation Formula?
Depreciation Expense = % x Netbook value
What is the Units of Production Depreciation Formula?
Depreciation Expense = Cost x (Units produced in period / total expected units over life of asset)
