PPE

Question 1

If my Spooky factory was originally bought for £200k, estimated useful life 20 years, straight line depreciation. The it is revalued after 15 years to be worth £500k, with a useful life of 10 years from then on. How does this work with regards to depreciation and reval surplus?

Answer 1

original depreciation is £10k a year, goes through P&L

At reval, the factory will be worth £50k.

Has gained £450k in the reval, so there is £450k in the reval surplus.

New depreciation per year is £50k/year, old carrying value over another 10 years would be £5k/year

For the 10 years now, £50k/year will go through the P&L and £45k/year (50k-5k) will be transferred from the revaluation reserve to retained earnings.

Question 2

what is an asset’s recoverable amount?

Answer 2

the HIGHER of:

• fair value less costs to sell
  OR
• the value in use - the present value of the future cash flows expected to be derived from the asset.

Question 3

when should capitalisation of borrowing costs from general borrowing start if the borrowing is used to construct an asset?

Answer 3

when all 3 of the following occur:

• expenditure incurred for the asset
• borrowing costs incurred
• activities necessary to prepare the asset for its intended use or sale are undertaken

Question 4

how do you work out the amount of borrowing costs to capitalise when it is from general borrowings?

Answer 4

you use the weighted average cost of the general borrowings.

Question 5

what judgements does IAS23 require mamagement to make with regards to capitalisation of borrowing costs?

Answer 5

• is the period of time its taken to get ready for use/sale ‘substantial’ or not?
• what borrowing costs are directly attributable to the project- i.e. in a group borrowing costs may be neogotiated for many things, so calculating the weighted average may be difficult
• what activities are necessary for preparing a qualifying asset for use - i.e. is mowing a lawn outside a derelict spooky factory necessary for preparing it for wholesale renovation?
• at what point are all the necessary activities to get it ready for use complete - i.e. is painting the walls a nice colour necessary or not?

Question 6

what is a qualifying asset from a capitalising borrowing costs POV?

Answer 6

one that necessarily takes a substantial amount of time to get ready for its initial use or sale

Question 7

when is an item ‘held for sale’

Answer 7

when it:

• is immediately ready for sale and its sale is highly probably, not just probable

highly probable = found in the open book

Question 8

what would you put in the SPL for an impairment loss of something that was sold in the year?

Answer 8

“impairment loss on reclassification of non-current assets as held for sale”

Question 9

can you capitalise an internally generated brand?

Answer 9

no