Tangible non-current assets

Question 1

Property, plant and equipment should initially be measured at cost. Cost should include all directly attributable costs necessary to bring the asset into use, and could include

Answer 1

purchase price
deliveryandinstallation(includingownlabourcostifused)
professional fees (e.g. solicitor, architect etc)
end-of-life costs (costs incurred at the end of asset life, initially recognised at present value then unwound) e.g. dismantling, landscaping.

Question 2

Property plant and equipment should be recognised as an asset when there is

Answer 2

a probable flow of future economic benefit and are liable measure of cost.

Question 3

What is the formula for discounted present value

Answer 3

x 1/(1+r)

R = Rate
N = Number of periods

Question 4

Subsequent expenditure should only be capitalised if it

Answer 4

enhances the asset’s economic benefits

relates to an overhaul or major safety inspection

replaces a component of an asset that has two or more significant parts

Question 5

Depreciation is the

Answer 5

systematic allocation of the depreciable amount of an asset over its useful life.

Question 6

IAS 23 Treatment - Borrowing costs must be capitalised

Answer 6

as part of the cost of an asset if that asset is a qualifying asset (one which necessarily takes a substantial time to get ready for its intended use or sale).

Question 7

Capitalisation commences when:

Answer 7

expenditure for the asset is being incurred, and

borrowing costs are being incurred

activities that are necessary to prepare the asset for its intended use or sale are in progress.

Question 8

Capitalisation ceases when:

Answer 8

substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete, or

there is an unplanned suspension of construction ,e.g.duetoindustrial disputes.

Question 9

The rate of interest to be used is:

Answer 9

actual interest rate where specific funds borrowed,or

weighted average of general borrowings where general borrowings used.

Question 10

Where surplus borrowings are invested to earn interest, the interest earned is:

Answer 10

offset against the cost of the asset if earned during the period of construction

recognised within profit or loss if earned prior to commencement of construction.

Question 11

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

Answer 11

Revenue
Net – deduct from expense
Gross – present as credit

Capital
Net – deduct from asset cost
Deferred credit – show separately

Question 12

IAS 16 Choices
Cost model
Revaluation model

Answer 12

Cost - Initial cost less accumulated depreciation
Revaluation - Revalued amount less accumulated depreciation

Question 13

Accounting for revaluation

Answer 13

Restate asset cost to new value(increase=debit asset cost)

Remove accumulated depreciation (debit asset accumulated depreciation)

Revaluation gains are recognised with in other comprehensive income and credited to revaluation surplus (credit other comprehensive income)

Revaluation losses are charged as an expense (debit statement of profit or loss)
Revalued amount less accumulated depreciation

Note that if a revaluation reverses a previous gain or loss then the previous gain or loss is reversed before following the above rules.

Question 14

Revaluation surplus

Answer 14

The revaluation surplus is a capital reserve, and therefore non-distributable

The revaluation surplus cannot have a debit balance.

There is no offset permitted between assets, i.e. a loss on one asset cannot be offset against a gain on another.

Question 15

Annual reserves transfer

Answer 15

IAS 16 permits an annual transfer to be made from the revaluation surplus to retained earnings to offset the additional depreciation charged as a result of the revaluation. This transfer would be shown on the statement of changes in equity (see chapter 1).
Where the asset life remains unchanged the calculation of this transfer is simply the difference between the new and previous depreciation charge. If the asset life changes the transfer is the revaluation surplus relating to depreciating assets divided by the remaining asset life.

Question 16

Disposal of revalued asset

Answer 16

Calculate gain on disposal by comparing sale proceeds to carrying amount

Transfer balance on revaluation surplus to retained earnings (debit revaluation surplus, credit retained earnings), again shown on the face of the statement of changes in equity.

Question 17

IAS 40 Investment Property

Answer 17

Investment property is property held for rental income and/or capital appreciation, rather than for use by the entity or for sale in the ordinary course of business.

Question 18

Cost model

Answer 18

Initial cost less accumulated depreciation as per IAS 16

Question 19

Fair value model

Answer 19

Investment property under the fair value model is accounted for differently to property under the IAS 16 revaluation model:
investment property is revalued to fair value at the end of each year

any gain or loss is taken to the statement of profit or loss, rather than other
comprehensive income
no depreciation is charged.

Question 20

Transfers to and from investment property

Answer 20

If the fair value model for investment property is used, then the property should be revalued before being transferred between investment property and property, plant and equipment.

Question 21

From investment property to property, plant and equipment

Answer 21

revalue using IAS 40 rules, taking gain or loss to profit or loss

Question 22

From property, plant and equipment to investment property

Answer 22

revalue using IAS 16 rules taking gain or loss to revaluation surplus or
profit or loss as appropriate.

Question 23

Property, plant and equipment are tangible assets held

Answer 23

by an entity for more than one accounting period for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

Question 24

An item of property, plant and equipment should be recognised as an asset when:

Answer 24

‘it is probable that future economic benefits associated with the asset will flow to the entity; and
the cost of the asset can be measured reliably’

Question 25

Subsequent expenditure on property, plant and equipment should only be treated as part of the cost of the asset if:

Answer 25

it enhances the economic benefits provided by the asset (this could be extending the asset’s life, an expansion or increasing the productivity of the asset)

it relates to an overhaul or required major inspection of the asset – the costs associated with this should be capitalised and depreciated over the time until the next overhaul or safety inspection

it is replacing a component of an asset made up of a number of components, e.g. an aircraft comprising body, engines and interior, all with different expected lives. The replaced component will be derecognised.

Question 26

‘Depreciation is the

Answer 26

systematic allocation of the depreciable amount of an
asset over its useful life

Question 27

Depreciable amount is the

Answer 27

cost of an asset, or other amount substituted
for cost, less its residual value

Question 28

Depreciation must be charged from the date the asset is X.

Answer 28

available for use, i.e. it
is capable of operating in the manner intended by management.

This may be earlier than the date it is actually brought into use, for example if staff need to be trained to use it. Depreciation is continued even if the asset is idle.

Question 29

A change from one method of providing depreciation to another:

Answer 29

• is permissible only on the grounds that the new method will give a fairer presentation of the results and of the financial position
• does not constitute a change of accounting policy
• is a change in accounting estimate.

Question 30

IAS 16 allows a choice of accounting treatment for property, plant and equipment:

Answer 30

the cost model
the revaluation model.

Question 31

The cost model

Answer 31

Property, plant and equipment should be valued at cost less accumulated depreciation.

Question 32

The revaluation model

Answer 32

Property, plant and equipment may be carried at a revalued amount less any subsequent accumulated depreciation.

Question 33

If the revaluation alternative is adopted, two conditions must be complied with:

Answer 33

• Revaluations must subsequently be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at each reporting date.
• When an item of property, plant and equipment is revalued, the entire class of assets to which the item belongs must be revalued.

Question 34

Revaluation gains are recorded as a component of

Answer 34

other comprehensive income either within the statement of profit or loss and other comprehensive income or in a separate statement. This gain is then carried in a revaluation surplus within equity. This revaluation surplus is a capital reserve and is therefore not permitted to be distributed to the shareholders.

Question 35

An annual reserves transfer may be made from the revaluation surplus to ..

Answer 35

retained earnings, for the additional depreciation charged on the revalued amount compared to cost. This permitted treatment under IAS 16 is to address the imbalance between a non-distributable gain held in revaluation surplus and the reduction in retained earnings due to the increased depreciation charge.

This transfer would be shown on the SOCIE.

Question 36

The profit or loss on disposal of a revalued non-current asset should be calculated as the

Answer 36

difference between the net sale proceeds and the carrying amount.

Question 37

There are two steps to disposing of a revalued asset:

Answer 37

(1) It should be accounted for in the statement of profit or loss of the period in which the disposal occurs.
(2) Any balance on the revaluation surplus relating to this asset should now be transferred to retained earnings.

Question 38

Prudence: grants should not be recognised until the conditions for receipt have been

Answer 38

complied with and there is reasonable assurance the grant will be received.

Question 39

Accruals: grants should be matched with the

Answer 39

expenditure towards which they were intended to contribute.

Question 40

For Capital grants you can either

Answer 40

Write off the grant against the cost of the non-current asset and depreciate the reduced cost.

Treat the grant as a deferred credit and transfer a portion to revenue each year, so offsetting the higher depreciation charge on the original cost.

Question 41

IAS 23 Borrowing Costs - Borrowing costs must be

Answer 41

capitalised as part of the cost of an asset if that asset is a qualifying asset (one which ‘necessarily takes a substantial period of time to get ready for its intended use or sale

Question 42

IAS 23 states that capitalisation of borrowing costs should commence when all
of the following conditions are met:

Answer 42

expenditure for the asset is being incurred

borrowing costs are being incurred

activities that are necessary to prepare the asset for its intended use or sale are in progress.

Question 43

Capitalisation of borrowing costs should cease when either:

Answer 43

‘substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete’ (IAS 23, para 21), or

construction is suspended, e.g. due to industrial disputes.

Question 44

Investment properties should initially be measured at?

Answer 44

Cost

Question 45

IAS 40 then gives a choice for subsequent measurement between the following:

Answer 45

 cost model
 fair value model.
Once the model is chosen it must be used for all investment properties.

Question 46

Fair value model

Answer 46

 the asset is revalued to fair value at the end of each year
 the gain or loss is shown directly in the statement of profit or loss (not other comprehensive income)
 no depreciation is charged on the asset.

Fair value is normally established by reference to current prices on an active market for properties in the same location and condition.