PPE Flashcards
Definition of PPE
Tangible items that :
(A)Held for use in production or supply of goods or services, for rental to others, or for administrative purposes; and
(B) are expected to be used during more than one period
Recognition of PPE
1) an item of property plant and equipment should only be considered an asset if:
A)It is probable that future economic benefits associated with the item will flow to the entity concerned, and
B) the cost of the item can be measured reliably
Initial measurement
PPE is initially measured AT COST. This includes:
Purchase price plus import duties less trade discounts
Costs in bringing an asset to its present location and condition necessary for it to be used as intended
Estimated costs of dismantling, removing the asset and restoring the site after use of this is an obligation on purchase
Subsequent costs
Repairs, servicing,maintenance-revenue not capital
Improvements, enhancing - capital
Replacement of major parts- capital
Subsequent measurement
After initial recognition PPE is measured using one of two methods
- The cost model: items are carried at cost less any accumulated depreciation and less any impairment losses
- The revaluation model: items are carried at a fair value at the date of revolution, less any subsequent accumulated depreciation and less any subsequent accumulated impairment losses
If the revaluation model is used it must be applied to the entire class of PPE
Revaluation gains and losses
Revaluation gains- credited to a revaluation reserve, they are unrealised and are not in profit so can’t be paid out as a dividend
Revaluation losses- are recognised as an expense in the calculation of profit or loss
A revaluation decrease- must be debited to the revaluation reserve if there is a balance there in respect of the same asset (previous increase in valuation)
IAS 23 Capitalisation of borrowing costs for self constructed assets
Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset
Qualifying asset- takes a substantial period of time to get ready for use or scale
Capitalisation stops when the asset is ready for use
Depreciation
(An expense between accounting periods)
Depreciable amount - the cost of an asset less it’s residual value
Residual value - net amount expected to be obtained for an asset at the end of its useful life
Useful life- an estimation, therefore implies judgment. Land has indefinite life and therefore is not depreciated
Review of residual values and useful life
The residual value and useful life of PPE should be reviewed at least at the end of each financial year
If expectations differ from previous estimates, these should be accounted for as a change in an accounting estimate in accordance with IAS8
The assets depreciable amount is revised to reflect any change in residual value
Depreciation methods
Straight line ( percentage at cost )
Residual balance method - NBV - (NBVx%)
Review of depreciation methods
The depreciation method applied to an item of PPE should be reviewed at least at the end of each financial year
If the usage pattern of the asset has changed, the depreciation method should be changed accordingly
A change in depreciation method is accounted for as a Change in an accounting estimate in accordance with IAS8
Review of valuation models
Cost model- (more common) the asset is carried at cost less accumulated depreciation and any accumulated impairment losses
Revaluation model- the asset is carried at revalued amount which is its fair value at the date of revaluation less any subsequent accumulated impairment losses
Fair value is basically market value
The revaluation method is not permitted under IFRA For SMEs
Disclosure under IAS16
- The measurement based used
- The depreciation methods used
- The carrying amount and accumulated depreciation at the beginning and end of the accounting period
- a reconciliation of the carrying amount at the beginning and end of the period, showing additions, disposals, revaluation increases and increases, depreciation, impairment losses and any other movements
