Property, Plant and Equipment

Question 1

What is IAS16?

Answer 1

Property, Plant and Equipment

Question 2

What does IAS16 define PPE as?

Answer 2

Tangible assets that are:

-held by an enterprise for use in the production or supply of goods and services, for rental to others, or admin purposes

• expected to be used during more than one period
• assets that are not for investment

Question 3

The cost of an item of property, plant and equipment shall be recognised as an assets if…

Answer 3

• it is probable that future economic benefits associated with the item will flow to the entity

AND

• the cost of the item can be measured reliably

Question 4

If the cost of an item of PPE doesnt meet both requirements, what is it?

Answer 4

an expense

Question 5

Regarding initial measurement, when do you measure the value?

Answer 5

on the day of recognition (only once)

Question 6

Regarding subsequent measurement, when do you measure the value?

Answer 6

On the day of financial statement (annually)

Question 7

Regarding the cost model, how does it change the asset’s value?

Answer 7

it doesnt

Question 8

Regarding the revaluation model, how does it change the assets value?

Answer 8

it changes the value of the asset to reflect its fair value

Question 9

What do you do when using the cost model?

Answer 9

cost
less acc depreciation
less acc impariment losses
fair value not recognised

Question 10

What do you do when using the revaluation model?

Answer 10

revalued amount (fair value at the date of revaluation)
less acc depreciation
less subsequent impairment losses

Question 11

If the market value of an asset was 15 but the carrying amount was 15, what would you record in the income statement?

Answer 11

+5 asset
+5 income

Question 12

What is the +5 income recognised as and what does this mean?

Regarding the question: if the market value of an asset was 15 but the carrying amount was 15, what would you do in the income statement?

Answer 12

unrealised income
doesnt go to statement as a profit
goes into other comprehensive income due to prudence

Question 13

If the market value of an asset was 8 but the carrying amount was 10, what would you record in the income statement?

Answer 13

-2 asset
-2 expense

Question 14

What is the -2 expense recognised as?

Regarding the question: If the market value of an asset was 8 but the carrying amount was 10, what would you record in the income statement?

Answer 14

realised loss

Question 15

What does cost comprise of?

PPE

Answer 15

• cost + directly attributable expenses
• its purchase price, including import duties and non-refundable purchase taxes
• plus any directly attributable costs of brining the asset to working condition for its intended use
• the estimated cost of dismantling and removing the asset and restoring the site

Question 16

What are some examples of PPE costs?

Answer 16

• cost of site preparation
• initial delivery and handling costs
• installation costs and assembly costs
• costs of testing whether the asset is functioning properly
• professional fees such as architects and engineers
• interest on capital borrowing to finance the production

Question 17

What are some examples of non-PPE costs?

Answer 17

• costs of opening a new facility
• costs of introducing a new products or service (including costs of advertising and promotional activities)
• costs of conducting business in a new location or with a new class of customer (including costs of staff training)
• admin or other general overhead costs
• initial operating losses
• costs of relocating or reorganisation

Question 18

How is depreciation dealt with regarding PPE?

Answer 18

each part of an item of PPE with a cost that is significant in relation to the total cost of the item will be depreciated separately

Question 19

How is depreciation recognised in the income statement (PPE)?

Answer 19

the dep charge for each period is recognised in the statement unless its included in the carrying amount of another assest

e.g. development costs and costs of conversion of inventories

Question 20

What’s the formula for the straight line method?

Answer 20

(cost-residual value)/useful life

Question 21

Arguments for the straight-line method?

Answer 21

• easy to understand
• easy to calculate
• most popular method
• differences to other methods not material

Question 22

Whats the formula for the reducing balance method?

Answer 22

1- n^√(residual value/cost)
where n = useful life

Question 23

Arguments for reducing the balance method?

Answer 23

• tax authorities use it
• NBVs similar to second hand values (e.g. cars)
• matching depreciation with efficiency
  initially: high efficiency = high dep charge
  end of life: low efficiency = low dep charge

Question 24

Arguments for the sum of the units method?

Answer 24

• popular in USA
• simple to obtain the exact residual amount
• high initial charge like the diminishing balance method

Question 25

What’s the formula for the machine-hour depreciation method?

Answer 25

actual hours worked/potential total hours available

e.g. plane depreciated on basis of flying hours or oil drilling equipment on basis of machine hour

Question 26

Formula for units of production depreciation method?

Answer 26

actual units produced/estimated total units produced

Question 27

What are some criticisms of depreciation?

Answer 27

• variety of depreciation methods make it hard to compare btwn companies
• uncertainty over useful lives
• specific dep rates and basis of residual values not disclosed
• NBM is not the same as the market value
• effects of inflation is often ignored
• revaluation affects gearing