Accounting 5-8 Flashcards
AASB 115 / IAS 16 defines property, plant and equipment as:
- Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
- They are expected to be used during more than one period
- Assets with a specific use within the entity
- Assets are non-current.
PPE is considered in terms of
- recogn of the asset
- initial measurement of the asset
- measurement subsequent to initial recog
- derecognition of the asset
- disclosure requirements
Initial recognition of PPE
- Cost of an item is recogn as an asset if:
it is probable that econ benefits will flow to the entity & the cost can be measured reliably - The outlay must give rise to the expectation of future econ benefits
- The term ‘measured reliably’ refers to recogn of PPE only where the measurement purports to faithfully represent the economic substance of the item and is free from material error or bias
Initial recognition of PPE: significant parts approach
- the total PPE of an entity may be broken down into seperate assets
- to recogn both the value of the asset and the exp benefits consumed by the entity during the period in which the benefits are received
e. g. an aircraft - the engines
- the cockpit equipment inc computers, navigation equipment …
Initial measurement of PPE: initially measured at cost which includes
- purchase price
- directly attributable costs
- initial estimate of the costs of dismantling and removing the item or restoring the location site
initial measurement of PPE : purchase price
- is the base cost of the asset
- the entity should re-measure the transferred assets to their fair values as at the acquisition date
- acquisition date; the advantage of these dates is that they relate to a specific point of time and can be determined objectively
Initial measurement PPE; directly attributable costs
Directly attributable costs
-The costs are capitalised into the cost of the asset.
-Costs to be included
Costs of employee benefits arising directly from the construction or acquisition of the item of PPE
Costs of site preparation
Initial delivery and handling costs
Installation and assembly costs.
Initial measurement PPE : costs not to be included
- costs of opening new facility
- costs of intro new prod/service
- costs of conducting business in new locn
- costs incurred while an item capable of operating
- initial operating losses
- costs of relocating or reorganising part/all of these opps
Initial measurement of PPE; cost of dismantling, removal or restoration
e.g. construction of offshore oil platform
- The platform gives rise to a liability for restoration under AASB 137/IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
It is an essential condition of having the asset available for use.
Included in the value of the asset and depreciated over its useful life.
Measurement subsequent to initial recognition
AASB 116/ IAS 16 allows a choice of two possible measurement models:
- cost model
- revaluation model
the choice of model is not an acct policy decision it is not applied to ind assets but to an entire class of PPE
The cost model
AASB 116/ IAS 16 req that assets are carried at cost less any accumulated:
- depreciation
- impairment losses
the costs incurred at the time the capacity is changed must be able to be measured reliably
The cost model ;
Depreciation
Under the cost model, after initial recognition.
Depreciation: the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciable amount: the cost of an asset less its residual value.
Residual value: the estimated value that an entity would currently obtain from disposal if the asset were at the end of its useful life.
Useful life: the period over which an asset is expected to be available for use by an entity.
A systematic allocation
Depreciation is a process of allocation.
Depreciation is not a measure of change in value.
AASB 116/IAS 16 does not specify how this allocation process should be undertaken.
Methods of depreciation
Straight line method.
Diminishing-balance method.
Units-of-production method.
Useful life
Determination of useful life requires estimation of the asset’s useful life to the entity.
The expected usage of the asset by the entity.
Residual value
Residual value is an estimate based on what the entity would currently obtain on the asset’s disposal.
Residual value is not adjusted for expected changes in prices.
As an alternative to the cost model AASB 116/IAS 16 allows the revaluation model to be used for classes of assets:
Measurement basis is fair value (FV).
The principle for revaluation of the asset is that revaluations must be made with sufficient regularity.
It limits the ability of management to ‘cherry‐pick’ or selectively choose which assets to revalue.
The revaluation model;
As an alternative to the cost model AASB 116/IAS 16 allows the revaluation model to be used for classes of assets:
Measurement basis is fair value (FV).
The principle for revaluation of the asset is that revaluations must be made with sufficient regularity.
It limits the ability of management to ‘cherry‐pick’ or selectively choose which assets to revalue.
Revaluation inc and dec
AASB 116 / IAS 16 para 39:
- revaluation in that class are done on an asset by asset basis
- to inc is not recog in profit or loss but in other comprehensive income (OCI)
Revaluation increases and decreases involving reversals
- There is a revaluation decrease, (due to a change in the fair value of an asset) and there has previously been a revaluation increase to that asset.
- There is a revaluation increase to an asset that had previously recorded a revaluation decrease in the profit or loss.
Depreciation of revalued assets
Applies for both the cost model and the revaluation model.
Depreciation is not determined simply as the change in fair value of the asset over a period.
It is calculated as the pattern of economic benefits relating to the asset and the residual value of the asset.
AASB 116/IAS 16 para 67 identifies two occasions where derecognition should occur:
on disposal
where no future economic benefits are expected.
On sale of an item of PPE, the entity must:
Account for depreciation from the beginning of the period to the date of sale.
Account for the sale and recognise a gain or loss on sale.
According to paragraph 73 of AASB 116/IAS 16, entities are required to disclose
the measurement bases used
the depreciation methods used
the useful lives or the depreciation rates used.
Accounting standards do not allow the recognition of some items that the market considers to be valuable such as:
Human resources
Brand names
Customer satisfaction.
AASB 138 / IAS 38 identifies intangibles as and characterised as:
“an identifiable non-monetary asset without physical substance”
three key characteristics of intangibles
- identifiable
- non-monetary in nature
- without physical substance
Identifiable
an asset is identifiable if it either is separable or arises from contractual or other legal rights
the asset is separable:
- an asset must be capable of being separated from the entity
- if the entity sold, licensed, rented, exchanged or transferred the asset
the asset arises from contractual or other legal rights:
- entity has right to use 2m litres of water / year in its prod process
- these rights cannot be transferred between entities
Non-monetary in nature
- monetary assets are ‘money held and assets to be received in fixed or determinable amounts of money’
- included as a req characteristic of an intangible asset in order to exc such financial assets as loans receivable from being classified as intangible assets
Lack of physical substance
- physical substance relates to the ability to see and touch an asset
- it is inc in the definition to exc items of PPE from being classified as intangible assets
The following recognition criteria must be met before it can be recognised as an asset
- it is probable that future economic benefits attributable to the asset will flow to the entity
- the cost of the asset can be measured reliably
Intangibles that can never be recognised
- specific internally generated intangibles assets
- research costs
Intangibles may be acquired in the following ways:
- by seperate acquisition
- acquisition as part of a business combo
- internally generated intangible assets
separate acquisition
- means that an entity acquires an ind intangible asset not a group of assets
- assets obtained by separate acquisition are measured at cost
- the cost is determined as the sum of the purchase price and the directly attributable costs
acquisition as part of a business combo
Intangibles acquired as part of a business combination, no recognition criteria need be applied.
The acquirer will recognise the assets at fair value and the fair value is always considered measurable.
For example, the acquirer can recognize brands, mastheads or publishing titles as intangibles because these are acquired not internally generated assets.
Internally generated intangible assets
Internally generated asset may be created over a period of time.
In contrast to separate acquisition and business combinations where there is a single acquisition date.
An entity has to classify the generation of the asset into
a research phase
a development phase.
Research
‘original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding’.
Research would be undertaken in the early stages of the project.
Development
The research phase of a project has been completed, the outlays are classified as development.
An intangible asset can arise from development outlays.
Recognition criteria are:
The technical feasibility
Its intention to complete the intangible asset
Ability to use or sell
How the intangible asset will generate future economic benefits
Availability of resources
Ability to measure costs reliably.
Internally generated goodwill
Goodwill is not an intangible asset as it is not a separable asset, an entity does not have legal or contractual rights to the asset.
Internally generated goodwill shall not be recognised as an asset.
The reason for non‐recognition of internally generated goodwill is that the cost of the asset cannot be reliably measured.