W3 - PPE pt1 Flashcards
Criteria for recognition of PPE (2):
It is probable that any of the future economic benefits associated with the item will flow to the entity;
The cost of the item can be measured reliably
What is the treatment of a PPE that does not provide future economic benefits?
It must be expensed
Treatment for repairment of PPE?
It must be expensed, as this maintains economic benefit but does not create additional benefit
Costs of day‑to‑day servicing of the item are recognised in profit or loss as incurred as ‘repairs and maintenance’
What is componentization? How should it be depreciated?
When an asset is broken down into separate significant components
e.g. : An aircraft separated into body and engines || Warehouse separated into buildings, heavy-duty equipment, packaging lines, racks…
How do you measure initially a PPE, and what does it includes?
At COST, and it comprises all costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
Liste quasi-exhaustive:
- Purchase price net of trade discount
- Import duties and taxes
- Cost of site preparation
- Delivery and handling costs
- Installation and assembly costs
- Cost of testing whether the asset is working properly
- Professional fees
- Wages and salaries and other employee benefits relating to the acquisition, construction and installation
- Decommissioning costs
- May include borrowing cost
- May be reduced by government grant
What is a decommissioning cost? How do you account it (DR, CR)?
When a business has an obligation to dismantle and remove the item and restore the site on which it is located at the end of its use
Estimates of these costs, discounted to PV, are included in the cost of an asset
Corresponding liability set up under IAS 37: DR PPE, CR Provisions (liability)
e.g. Oil exploration and drilling companies
How do you treat borrowing costs directly related to the acquisition of PPE?
Any borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of the asset
Principle:
The cost of an asset should include all costs incurred that are necessary to get it ready for its intended use
Capitalisation stops when asset is ready for use or construction is substantially complete
What is a ‘qualifying asset’?
‘Qualifying assets’ are those that take a substantial time to get ready for use or sale.
Any of the following may be qualifying assets:
inventories;
manufacturing plants;
power generation facilities;
intangible assets;
investment properties
