Property, Plant & Equipment Flashcards
What does FRS 102 & IAS 16 say about PPE?
Tangible assets (that have physical substance) that are held by an entity for us in the production or supply of goods and services, for rental to others, or for admin purposes, and are expected to be used during more than one period
Where are PPE include in a SOFP?
Non-current asset section
What does recognition mean in regards to PPE?
Reporting on an item within main financial statements
What does Recognition IAS 16 and FRS 102 say?
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if it is probable that future economic benefits associated with the item will flow to the entity, ant he cost of the item can be measured reliably
How should PPE be measured initially?
UK and International standards say initially at cost
What can be included in purchase price?
Purchase price, including import duties and non-refundable purchases taxes, after deducting any trade discounts and rebates
What are items that may be included in purchase costs?
Invoice price, import duties, any costs involved in testing equipment, staff training costs, transportation costs, costs of insuring equipment whilst in transit
What can be included in production costs?
Purchase price of raw materials and consumables, labour costs of own employees, and costs directly attributable to production
What cannot be included in production costs?
Admin and other general overheads, and costs of opening a new facility, introducing new product or service, conducting business in a new location
What are the options in regards to borrowing costs to finance production?
Treat the interest as an expense in the income statement as incurred
OR
Treat the interest as part of the cost of an asset on the balance sheet knows as Capitalisation of interest costs
What are the arguments in favour of capitalising interest costs?
Costs of borrowing to allow construction of a non-current asset is no different from other costs which are capitalised, interest costs directly attributable to assets, improved matching of income and expenses, interstate’s incurred with a view of future benefit, it is appropriate to treat interest as part of asset which generates future benefit, and capitalisation provides greater comparability between companies which develop their own assets and those which buy similar completed assets
What are the arguments against capitalising interest costs?
Illogical to treat borrowing costs during the period of construction of an asset differently from those incurred when asset is in use, borrowing costs usually incurred to support all of the activities of the business - it would be arbitrary for finance to be matched against specific assets, and capitalisation of borrowing costs will result in the carrying value of an asset on the balance sheet being dependent on method of financing
What do the accounting standards say?
Old UK standard (FRS 15) gave companies choice, FRS 102 gives choice of capitalisation in relation to a qualifying asset, IAS 23 did give a choice BUT not anymore, it now requires capitalisation of borrowing costs directly attributable to acquisition, construction or production of a qualifying asset as part of the cost of that asset (Revised in 2006)
What is a qualifying asset?
It is an asset that takes a substantial time to get ready for use or sale (e.g. ships, aircraft)
What are indirect costs treated as for non-qualifying assets?
An expense
A toffee manufacturer buys a new toffee shaping machine. Purchase price of machine is listed on suppliers invoice. Should the costs of delivery and installation be added to the amount recorded as asset cost?
Yes
A company buys a new head office. The purchase price is on the contract. Should the legal costs be included in asset cost?
Yes
A new head office building is under development. Should interest being charged on the funds borrowed to finance development be included in asset cost?
If it takes a substantial time to build, i.e. qualifying asset - YES under IAS; Choice under UK Accounting Standards (FRS 102)
What happens when PPE is in use and subsequent expenditure is incurred?
It depends, if it enhances future economic benefit in excess of originally assed standard of performance and can be measured reliably then it is capitalised (added to carrying value of asset in balance sheet)
What are examples of subsequent expenditure which is capitalised?
Modification of an item of plant to extend its useful economic life or increase capacity, upgrading machine parts to achieve a subsequent improvement in quality of output, and adoption of new production processes enabling substantial reduction in previously assessed operating costs
What is depreciation?
The measure of the cost (or revalued amount) of the economic benefits of the non-current asset that have been consumed during the period
What is depreciation NOT?
A measure of fall in value of asset or a source of finance for asset replacement
What do we need to know when determining depreciation charge?
Cost/valuation of the asset, useful economic life of the asset, residual value of the asset, and method of depreciation
What does useful economic life mean?
The period of time over which the entity expects to derive economic benefits from the asset (e.g. the period over which an asset is expected to be available for use)
