Lecture 5 - Property, Plant And Equipment (PPE) Flashcards
What does IAS 16 say are the three factors that define PPE?
1) The asset is tangible.
2) The item has a specific use within the business.
3) Be used for more than 1 period (NON-Current asset).
What four categories can PPE be divided into? Do assets have to fit into these categories?
- Land and Buildings
- Machinery
- Motor Vehicles
- Office equipment
Within IAS 16 there is no requirements for assets to fit in these groups, they need to be assigned to the asset classes they are most suitable for.
What are the two initial factors for items to be recognised as PPE?
A) Probability that future economic benefits will follow for the entity
B) The cost can be measured reliably
What three things are included in the cost of PPE?
1) Purchase price (inclusive of all import duties and taxes)
2) Directly attributed costs (The costs involved in bringing the asset into working condition such as delivery, instillation costs, professional fees, architects etc).
3) Initial estimates of dismantling - This is uncommon for most assets brought into most businesses but is relevant in businesses such as power plants and oil rigs.
What is not included in the ‘Initial measurement’ of PPE?
- Administration expenses.
- General overheads.
- Maintenance is never included in the purchase price.
- Unexpected or accidental costs associated with the acquirement of PPE (Damage to a door frame as a result of trying to move a new machine in).
What are the two possible methods of accounting for PPE over a period of time?
- The Cost Model
- The Revaluation model
What does IAS 16 stipulate the ‘Cost model’ carrying amount must be?
PPE must be carried out at cost LESS any accumulated depreciation and impairment losses (irregular write offs of value).
Under the ‘Cost Model’, how are ‘Repairs and Maintenance’ treated?
Costs associated with maintaining the original capacity are expensed immediately in the income statement.
Under the ‘Cost Model’, how are ‘Improvement’ treated?
Costs associated with improving the capacity of PPE are CAPITALISED.
Improvements include:
- Extend useful life
- Increase in productivity
- Improve the quality of the product
- Reduce operating costs
The depreciation process requires an entity to estimate three factors:
- The useful life of a product
- The most suitable depreciation pattern
- The residual value of the asset
What asset doesn’t have a finite useful life? What is the consequence of this in relation to the cost model?
Land, therefore it is not depreciated
What are the three methods of depreciation?
- Straight-line depreciation
- Reducing balance/diminishing balance
- Units of production method
When does depreciation begin? And when does depreciation end?
Depreciation begins when the asset becomes available for use and ends when the asset is ‘derecognised’, even if the asset is idle
IAS 16 allows the ‘Revaluation Model’ to be used if:
1) The fair value can be measured reliably (by a professional)
2) Revaluations are made with regularity
3) The entire class of PPE in which an asset belongs is revalued
(Motor Vehicles, Buildings, Machinery)
What happens in the accounts for a ‘Revaluation increase’?
The increase (difference between carrying amount and revaluation) is included as a ‘revaluation reserve’ in ‘OTHER COMPREHENSIVE INCOME’.
