Property, Plant and Equipment Flashcards
How are property, plant, and equipment defined?
Tangible property with an extended future benefit of longer than one year. It is held by an entity for the use in the production or supply of goods and services or as rental to others.
It is only recognized as an asset if:
(1) Probable that future economic benefits associated with the item will flow to the entity.
(2) The cost of the item can be measured reliably
What are the different components of asset capitalization for PP&E
Purchase price (including import duties, non-refundable taxes, less trade discounts, and rebates).
Costs of import/travel to bring the asset to the location to be capable of operating
The initial estimate of the cost of dismantling and removing the item and restoring the site after use.
For the acquisition of land and building, what other components are capitalized?
commissions, legal fees, title search, and property transfer taxes.
How are spare parts, standby equipment and servicing equipment be categorized on the balance sheet?
If they’re immaterial in nature or have a short lifespan, then they are considered inventory.
Major parts, on the other hand are considered assets in which they are componentized and have a different depreciation rate than the rest of the assets.
What are the three methods of depreciation?
Straight-line method, declining balance method, units of production method
What is the Revaluation model?
Under IFRS, companies may choose between the cost model (record at cost and depreciate) or revaluation model.
Revaluation method allows companies to reevaluate their assets to FMV - although they are still depreciated every year.
If there are gains in the FMV:
Gain is recorded to net income up to the amount of losses that was previously recorded, and excess goes through OCI
if there are losses in the FMV:
Asset is written down to the FMV, but is first recorded to OCI (until exhausted), then the remaining loss is recorded to net income.
Asset adjustment are used using two methods: Elimination and proportional
**Loss on revaluation
What is the elimination method
Accumulated depreciation is reset back to 0, and the asset cost adjusted accordingly - after the revaluation, the asset would be on the books with a cost equal to FMV and A/D of 0
What is the proportional model
Both the cost and A/D are adjusted proportionally to achieve an overall carrying amount equal to FMV
When should an entity apply IAS 2 Inventories to the costs of obligations for dismantling, removing of PPE?
It is incurred when that is the consequence of having used that item to produce inventory during that period. Examples that are not cost of PPE:
- cost of opening a new facility
- costs of introducing new product or service (cost of adv and promotional)
- costs of conducting business in a new location with a new class of customer (costs of staff training)
- admin and other general OH
What do we do with OCI if the asset is sold?
It is transferred to equity
What is the difference between ASPE and IFRS?
- ASPE - can choose to capitalize borrowing costs or expense them.
- only allowed cost method
- derecognition is not required if the net (old + new) cash flows is covered by future cash flows
- Straight line depreciable amount and depreciation period
How does ASPE record straight line depreciation?
Greater of:
- cost less residual value divided by useful life
- cost less salvage value divided by asset life
