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.
What is net replacement value?
Replacement cost of a similar asset with the same age and condition.
Where is it recognized if assets value increases due to revaluation?
- In other comprehensive income in equity under heading “revaluation surplus”
- First in profit and loss to reverse previous decrease on that asset.
Where is the decrease recognized from revaluation?
- Profit and loss
2. First reverse any increase in other comprehensive income for that asset
Is revaluation surplus actual money in the bank?
No, it is unrealised and is a non-distributable reserve.
What can the revaluation surplus reserve be used for?
Only subsequent write down of revaluations and capitalisation of share issues.
When and where are revaluation surplus transferred?
Once the asset is derecognized, it is transferred to retained earnings.
However, some of the surplus may be transferred while asset is in use.
What amount of the revaluation surplus is transferred?
Difference between depreciation based on the revalued carrying amount of the asset and the depreciation based on the original cost of the asset
Where are transfers made?
Directly on the face of the SOCE
Where is revaluation surplus disclosed?
SOCE
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.
What is net replacement value?
Replacement cost of a similar asset with the same age and condition.
What are the treatments of depreciation at the date of revaluation?
- Proportional restatement f accumulated deviation
2. Elimination of depreciation against gross carrying amount and net amount restated to revalued amount of asset
Where is it recognized if assets value increases due to revaluation?
- In other comprehensive income in equity under heading “revaluation surplus”
- First in profit and loss to reverse previous decrease on that asset.
Where is the decrease recognized from revaluation?
- Profit and loss
2. First reverse any increase in other comprehensive income for that asset
Is revaluation surplus actual money in the bank?
No, it is unrealised and is a non-distributable reserve.
What can the revaluation surplus reserve be used for?
Only subsequent write down of revaluations and capitalisation of share issues.
When and where are revaluation surplus transferred?
Once the asset is derecognized, it is transferred to retained earnings.
However, some of the surplus may be transferred while asset is in use.
What amount of the revaluation surplus is transferred?
Difference between depreciation based on the revalued carrying amount of the asset and the depreciation based on the original cost of the asset
Where are transfers made?
Directly on the face of the SOCE
Where is revaluation surplus disclosed?
SOCE
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.
What is net replacement value?
Replacement cost of a similar asset with the same age and condition.
What are the treatments of depreciation at the date of revaluation?
- Proportional restatement of accumulated depreciation
2. Elimination of depreciation against gross carrying amount and net amount restated to revalued amount of asset
Where is it recognized if assets value increases due to revaluation?
- In other comprehensive income in equity under heading “revaluation surplus”
- First in profit and loss to reverse previous decrease on that asset.
Where is the decrease recognized from revaluation?
- Profit and loss
2. First reverse any increase in other comprehensive income for that asset
Is revaluation surplus actual money in the bank?
No, it is unrealised and is a non-distributable reserve.
What can the revaluation surplus reserve be used for?
Only subsequent write down of revaluations and capitalisation of share issues.
When and where are revaluation surplus transferred?
Once the asset is derecognized, it is transferred to retained earnings.
However, some of the surplus may be transferred while asset is in use.
What amount of the revaluation surplus is transferred?
Difference between depreciation based on the revalued carrying amount of the asset and the depreciation based on the original cost of the asset
Where are transfers made?
Directly on the face of the SOCE
Where is revaluation surplus disclosed?
SOCE
Formula for interest with a deferred payment?
Total cash received - cash price
Formula for amount transferred for revaluation surplus?
Depreciation of revalued carrying amount - depreciation on cost
Formula for gain/loss from after disposal?
Net proceeds - carrying amount
at date of disposal
How is deferred tax calculated?
Difference between historical cost carrying amount of an asset and the tax base of an asset.
Do non-depreciable assets have deferred tax?
No
Example of a non-depreciable assets?
Land
Has no deferred tax
Does SARS recognize revaluations?
No
They use only the historical cost of an asset.
What is the result of SARS not recognizing revaluations?
The tax base will not change but the carrying will after revaluations.
What does revaluation surplus in excess of historical cost represent?
Capital gain
When is capital gains taxed?
Soon as the asset is disposed of.
How is the deferred tax on revaluation of land provided for?
Total surplus above base cost at 18.6%.
Irrespective whether there is an intention to sell or not.
How is deferred tax provided for on a depreciable asset where there is NO intention to sell?
28% on total revaluation surplus.
How is deferred tax provided for on a depreciable asset where there has been made intention to sell?
On revaluation surplus up to original cost is 28%
Then on excess above cost is at 18.6% (28% x 66.6%)
How is the deferred tax on revaluation of PPE transferred to or from revaluation surplus?
Via other comprehensive income.
What does IAS 16 suggest, but not require?
Difference between depreciation on revalued asset and depreciation on original cost be transferred from revaluation surplus to retained earnings as the asset is used.
In order to calculate deferred tax, what columns are used?
Carrying amount, tax base, temporary difference, deferred tax
How is tax base calculated?
Usually carrying amount less the tax allowance
What is done with components of PPE when calculating deferred tax?
The asset and component (e.g. Major inspection) is split into different columns and the deferred tax is calculated separately.
How is the revaluation treated when calculating deferred tax and the asset is going to be disposed of?
The revaluation amount is split into separate rows, namely;
- Capital gain
- Depreciation / wear and tear
What is the journal entry for the acquisition of an asset?
Dr. Asset
Cr. Bank
What is the journal entry for depreciation for the year?
Dr. Depreciation
Cr. Accumulated Depreciation
What is the journal entry for deferred tax?
Dr. Deferred tax
Cr. Deferred tax
What is the journal entry for the revaluation of an asset at NTV?
Dr. Accumulated Depreciation
Dr. Asset (revalued amount)
Cr. Asset (cost)
Cr. Revaluation Surplus (OCI)
What is the journal entry on deferred tax on revaluation?
Dr. Revaluation
Cr. Deferred Tax
How do you calculate deferred tax on an asset with intention to sell?
Proceeds over carrying amount up to base cost is at 28%
Then proceeds above base cost at 18.6%
What is the formula for all aspects of calculating depreciation?
- cost of asset less any components
- less any residual value
- divide by tots useful life
- multiply by amount of used useful life
What are the basic columns used to calculate deferred tax for PPE?
- Carrying amount
- Tax base
- Temporary difference
- Deferred tax
What are the basic rows when calculating deferred tax?
- Cost
- Depreciation
- Carrying amount
What is deferred tax calculated on?
The temporary difference between the carrying amount and the tax base.
What is the basic formula for depreciation?
(cost - residual amount) / total estimated useful life x used life
How is depreciation calculated on the tax base?
The information given will determine that.
What is done with components of PPE when calculating deferred tax?
They are separated from the PPE and out into their own columns
How are components treated when they are used up?
They are depreciated in full and then the next one is capitalized
Do components of PPE have a tax base?
No, meaning the amount they are capitalized as will be the temporary difference.
Do you account for residual amount when determination depreciation on tax basis?
NO
What changes to the columns are there when land and building are involved?
- Carrying amount becomes total
- Add historical cost column
- Add revaluation column
- Add permanent difference column
What is done with a component or PPE derecognized?
It is derecognized with the left over depreciation
Is deferred tax calculated on the permanent difference?
No
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