Topic 6 non current assets

Question 1

Under IAS 16 Property, Plant and Equipment (PPE) should be recognised if it meets the following criteria:

Answer 1

• It is probable that economic benefits associated with the asset with flow into the entity; and
• The cost can be reliably measured.

Question 2

what is the initial measurement of PPE and double entry

Answer 2

at cost

Dr NCA
Cr Bank

Question 3

what costs are included in initial recognition of PPE

Answer 3

All costs involved in bringing the asset to it’s present condition and location

• This includes delivery costs, site preparation, installation costs etc, TESTING

• If the dismantling costs are known (when the asset will be removed) then the PRESENT VALUE of these
dismantling costs should also be recognised.

Question 4

what are the options available under IAS 16 for subsequent measurement of non current asset?

Answer 4

• Historic cost model

* Revaluation model/ Fair value

Question 5

what is subsequent measurement under historic cost model

Answer 5

the original cost wouldn’t change subsequently under there are subsequent expenditure relating to the asset

Question 6

what are some examples of situation where further capitalization costs can be incurred and recognised which could change the historic cost of NCA?

3 reasons

Answer 6

• The expenditure enhances the asset.
• A complex asset component is replaced.
• Works pre or post a major work inspection on the asset.

Question 7

at what point is depreciation charged

Answer 7

as soon as the asset becomes available for use

Question 8

what are the methods of depreciation

Answer 8

straight line

reducing balance

Question 9

under which situation is a depreciation policy change allowed

Answer 9

The new depreciation policy would give the users of the financial statements a more accurate and fairer presentation of the assets at each reporting date

Question 10

is a change in depreciation policy a change in

Accounting policy or an Accounting estimate?

Answer 10

Accounting estimate

Question 11

under the revaluation model, what happens?

Answer 11

Under the revaluation model, the non-current assets are revalued each year and the revaluation gain or loss would usually go through the revaluation reserve.

Question 12

what are the double entry for an increase to an asset value i.e. revaluation gain

Answer 12

DR Non-current Asset X

CR Revaluation reserve X (Also shown in OCI)

Question 13

what are the double entry for an decrease to an asset value i.e. revaluation loss

Answer 13

DR Revaluation reserve X (Also shown in OCI)

CR Non-current Asset X

Question 14

what step do you take if the revaluation reserve balance is low and if the journal posted will make the balance DEBIT

i.e. show the Dr Cr

(the balance should be a credit)

Answer 14

you DR the remaining balance to Impairment Expense

Question 15

when an asset is revalued, what happens to depreciation?

Answer 15

When an asset is revalued, at that date any accumulated depreciation brought forward would effectively be wiped and depreciation should subsequently be calculated on the new revalued amount.

Question 16

what is an “Annual Transfer to Retained Earnings”

and why and when is used

Answer 16

This occurs primarily when you’ve got assets under the revaluation model when there is an upward revaluation

when there is a higher revaluation, the depreciation charge to the P/L increases therefore reducing the profit and hence lower dividends

therefore, companies have a policy to do an annual transfer of this additional depreciation on revalued assets from the revaluation reserve to retained earnings

Question 17

what is the double entry for doing the annual transferr to retained earnings

Answer 17

Dr Reval reserve

Cr retained earnings

Question 18

IAS 23 says borrowing cost can be capitalized but only if they are a qualifying asset.

what is a qualifying asset? and give example

Answer 18

a qualifying asset is one that takes substantial amount of time to get ready to use or sell..

e.g. house, building a machine

Question 19

borrowing cost can be capitalised once three qualities are met, what are they

Answer 19

• Expenditure for the asset has started to be incurred.
• Borrowing costs/ finance costs has started to be incurred
• Activity on the asset has commenced (to construct)

Question 20

if the company has taken out a variety of loans for various projects, what borrowing rate do you capitalise?

give formula

Answer 20

a weighted average of the borrowing costs on the general loans taken out may need to be calculated.

(200.05)+(150.4)
___
total loan e.g. 20m+15m

Question 21

at what point do you stop caitalising borrowing cost?

Answer 21

• Construction of the asset has suspended temporarily for some reason (legal reasons etc)
• Construction of the asset is complete and ready for it’s use or sale

Question 22

IAS 20 Accounting for government grants and disclosures of government assistance

when is a grant recognised

Answer 22

when there is reasonable assurance that

a) The entity will comply with the conditions attaching to them; and
b) The grants will be received

Question 23

what is capital gratns

Answer 23

it’s capital- it’s to purchase or replace a capital Item

Question 24

what are the two methods of presenting in the financial statements of capital grants

Answer 24

a) Set up the grant as deferred income and recognise income on a systematic basis over the useful life of the
asset

b) Deduct the grant from the cost of the asset and recognise as part of the depreciation charge

Question 25

what is revenue grants

Answer 25

wages, employing new staff, revenue generating expenditure

Question 26

what are the two methods of presenting in the financial statements of revenue grants

Answer 26

Two presentation approaches are acceptable:

▪ Present as a credit in the statement of profit or loss
▪ Present as a deduction from the related expense

Question 27

ISA 40 Investment properties, what is the initial recognition?

Answer 27

at cost

Question 28

ISA 40 Investment properties, what is the subsequent recognition?

Answer 28

either be under the cost model or under the fair value model.

Question 29

the historic model for ISA 40 Investment properties is similar to PPE but the revaluation model is slightly different

what two things make it different?

Answer 29

Any gains or losses on the re-measurement of an investment property are taken directly to the profit or
loss (not OCI/ revaluation reserve like IAS 16).

• There is no depreciation.

Question 30

During the life of an asset, the use of the asset to the business may change over time.

This means that it may be transferred between PPE and Investment property on the statement of financial position.

if the cost model is used, what is the treatment?

Answer 30

• Then transfer the asset at the carrying amount. Continue to depreciate.

Question 31

During the life of an asset, the use of the asset to the business may change over time.

This means that it may be transferred between PPE and Investment property on the statement of financial position.

if the fair value/revalue model is used, what is the treatment?

Answer 31

Wherever the asset is coming FROM, it must be revalued under that standard first.

• For example, a property which is to be transferred from PPE to Investment Property should first be revalued under IAS 16 prior to the transfer.

• If a property is being transferred FROM investment property to property, plant and equipment, then it
should first be revalued to fair value under IAS 40 prior to the transfer.

Question 32

loans are regarded as financial liabilities so should be held at what cost?

Answer 32

amortized cost

Question 33

A takes out loan for construction
construction has begun
but temporarily investing the loan and earned interest

how is the loan accounted for?

Answer 33

because the interest was earned during the construction period, it should be netted off the amount capitalized

however, if the interest was earned prior to the period of construction, it should be taken to PL as investment income