Property, Plant and Equipment Flashcards
What is IAS16?
Property, Plant and Equipment
What does IAS16 define PPE as?
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
The cost of an item of property, plant and equipment shall be recognised as an assets if…
- 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
If the cost of an item of PPE doesnt meet both requirements, what is it?
an expense
Regarding initial measurement, when do you measure the value?
on the day of recognition (only once)
Regarding subsequent measurement, when do you measure the value?
On the day of financial statement (annually)
Regarding the cost model, how does it change the asset’s value?
it doesnt
Regarding the revaluation model, how does it change the assets value?
it changes the value of the asset to reflect its fair value
What do you do when using the cost model?
cost
less acc depreciation
less acc impariment losses
fair value not recognised
What do you do when using the revaluation model?
revalued amount (fair value at the date of revaluation)
less acc depreciation
less subsequent impairment losses
If the market value of an asset was 15 but the carrying amount was 15, what would you record in the income statement?
+5 asset
+5 income
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?
unrealised income
doesnt go to statement as a profit
goes into other comprehensive income due to prudence
If the market value of an asset was 8 but the carrying amount was 10, what would you record in the income statement?
-2 asset
-2 expense
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?
realised loss
What does cost comprise of?
PPE
- 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
What are some examples of PPE costs?
- 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
What are some examples of non-PPE costs?
- 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
How is depreciation dealt with regarding PPE?
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
How is depreciation recognised in the income statement (PPE)?
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
What’s the formula for the straight line method?
(cost-residual value)/useful life
Arguments for the straight-line method?
- easy to understand
- easy to calculate
- most popular method
- differences to other methods not material
Whats the formula for the reducing balance method?
1- n^√(residual value/cost)
where n = useful life
Arguments for reducing the balance method?
- 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
Arguments for the sum of the units method?
- popular in USA
- simple to obtain the exact residual amount
- high initial charge like the diminishing balance method
What’s the formula for the machine-hour depreciation method?
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
Formula for units of production depreciation method?
actual units produced/estimated total units produced
What are some criticisms of depreciation?
- 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
