Property, Plant And Equipment Flashcards
Define carrying amount
Amount asset is recognized in the SOFP after deducting accumulated depreciation and accumulated impairment losses
Define: Cost
Cash / cash equivalent and fair value of other consideration given to acquire asset at date of acquisition
Define: Depreciation
Systematic allocation of depreciable amount over assets useful life
Define: Entity-Specific Value
Present value of cash flows the entity expects from an asset PLUS the value from disposal at end of useful life.
Define: Fair Value
Amount for which an asset could be exchanged between knowledgable, willing parties at an arms length transaction.
Define: Impairment Loss
Amount by which the carrying amount exceeds the removable amount
Define: Recoverable Amount
The greater of the net selling price (fair value - cost to sell) or value in use.
Define: Residual Value
The estimated amount the entity would currently obtain from disposal after deducting estimated selling costs if the asset were at the end of its useful life.
Define: Useful Life
Either;
- Period the asset is expected to be available for use
- Number of production or similar units expected to be obtained
Define: Depreciable Amount
Cost of an asset - residual value
When can an asset be recognized?
Only when;
- Probable that future economic benefits will flow to the entity from the asset
- Cost of the asset can be reliably measured
What are components of a PPE?
Major spare parts or servicing equipment
When can components of PPE be considered PPE?
If they are used for more than one accounting period
Is day to day servicing considered PPE?
No
When can parts of PPE be recognized as PPE?
When those parts need replacement at regular intervals
And
They meet the recognition criteria
Can inspections be recognized as PPE?
If they are major regular inspections.
The cost is capitalized to PPE
Recognition criteria must be met
Example of a regular major inspection?
For planes, every 5000 hours of flight, they need inspections
How would inspection costs be depreciated?
Over period till next inspection
What does the initial cost of a PPE item comprise of?
- Purchase price
- Costs to bring in the asset/installation
- Initial estimated cost of dismantling at the end of use
What do purchase prices include?
- Import duties
- Non refundable purchases taxes after deducting trade discounts
- Rebates
What is the cost of installation?
This includes import, transport, installation, site preparation, testing, professional fees.
What is the cost to dismantle PPE?
This is the present value of the future estimated cost to remove the asset and rehabilitate the site after use.
What is the journal entry for dismantling cost?
Dr. PPE
Cr. Provisions.
Then once it’s done at the end you can reverse this amount.
What happens with abnormal credit terms?
When is deferred from normal credit terms, the difference between cash price and total payment is seen as interest.
What is another term for exchange of PPE?
Bartering transaction
What values are taken as costs when it comes to exchange of PPE?
- Cost = FV of asset given up
- Cost = FV of asset acquired if cannot calculate 1
- Cost = CA of asset given up if;
- Cannot calculate 1 or 2
- There is no commercial substance in the transaction.
What are the aspects to consider with depreciation?
- Useful life
- Expected residual value
- Method of depreciation
What four factors are considered when dealing with useful life?
- Physical production capacity
- Physical wear and tear
- Technical / commercial obsolescence
- Legal and similar limitations.
Is estimated useful life a matter of judgement?
Yes, purely
When must useful life be reviewed?
According to IAS 16.51
It must be reviewed annually
If the original estimate was incorrect for useful life?
An adjustment must be made
this is NOT a correction of error
What do adjustment form part of?
Operating expense items
What is residual value?
The estimated amount the entity would currently obtain from the disposal of the asset at the end of its useful life AFTER deducting the estimated costs of selling
When must residual value be reviewed?
Annually
And any changes will be accounted for normally
When does depreciation start?
Only when the asset is made available for use
When does depreciation end?
Only when the asset has been derecognized
What are the methods of depreciation.
- Straight-line method
- Diminishing-balancing method
- Unit production method
Where is PPE derecognition recognized?
In the SOFP
When is an asset derecognized?
Either;
- Upon disposal
- No future expected benefits from use or disposal
What value is gain/loss from derecognition?
Difference between net disposal proceeds and carrying at date of disposal
Where is the gain/loss recognized from derecognition?
In the profit and loss section in SOCI
Is a gain seen as revenue?
No
What criteria must be applied to determine the date of disposal?
IAS 18
What is the criteria to determine date of disposal?
- Transfer risks and rewards of ownership
- Entity retains neither managerial involvement or control over asset
- Revenue of transaction can be measured reliably
- Probable that economic benefits from transaction will flow to entity
- Cost of transaction can be measured reliably
Which conditions must be met before disposal can be recognized?
ALL of them!!
How is the consideration receivable initially recognized from disposal?
At fair value
If payment is deferred, what is initial recognition from disposal?
At cash price on date of disposal (present value of cash to be received)
Why is there revaluation?
Because of the limitation of historical cost to represent a fair value
If a PPE item is revalued, what else MUST be revalued?
That ENTIRE class of PPE must be revalued too.
What value must PPE items be carried at when revaluation occurs?
At the regulated amount less subsequent accumulated depreciation and accumulated impairment losses.
Should revaluations be made regularly?
Yes
PPE items with insignificant changes in fair value, regarding revaluation?
Unnecessary to revalue them frequently, every 3-5 years.
When a PPE item is revalued for the first time?
It is considered a change in accounting policy
Which ways can an asset be revalued?
With at;
- Net replacement value
- Gross replacement value
What is gross replacement value?
Replacement cost of a similar, new asset.