Property, Plant, and Equipment Developments in 2006

12. Property, Plant, and Equipment Developments in 2006

Advance

Land, land

Machinery

Miscellaneous

payments and

rights and

and technical

equipment

construction

In euro millions

buildings

equipment

and fixtures

in progress Total

Acquisition costs

Balance as of January 1, 2006

Changes in scope of consolidation

Additions 630.6 1,672.7 216.2 1,548.9 4,068.4 Disposals 242.3 413.9 145.7 45.0 846.9 Transfers 149.1 927.5 73.1 (1,152.9) (3.2) Exchange differences

Balance as of December 31, 2006

Balance as of January 1, 2006 4,242.5 24,103.2 2,264.2 25.4 30,635.3 Changes in scope of consolidation

0.2 10.9 2.4 --

Additions 234.2 2,074.4 173.1 0.4 2,482.1 Disposals 175.8 384.2 136.6 23.1 719.7 Transfers 6.1 2.2 (5.6) (0.2) 2.5 Exchange differences

Balance as of December 31, 2006 4,221.9 25,268.0 2,236.6 2.5 31,729.0

Net book value as of December 31, 2006

Additions in 2006 are explained in detail in the Management’s Analysis under Liquidity and Capital Resources on pages 30 to 31. Impairment losses of €344.0 million in 2006 related in particular to the Intermediates division of the Chemicals segment. Of this amount €184.2 million was attributable to the mothballing of the THF plant at the site in Caojing, China.

Further impairment losses resulted from the measures to restructure the Fine Chemicals division, especially the lysine and vitamin B2 business at the site in Gunsan, Korea.

Wiley IFRS: Practical Implementation Guide and Workbook

MULTIPLE-CHOICE QUESTIONS

those expenses are initial operating losses. These 1. Healthy Inc. bought a private jet for the use of its

should be

top-ranking officials. The cost of the private jet is $15 (a) Deferred and amortized over a reasonable million and can be depreciated either using a com-

period of time.

posite useful life or useful lives of its major (b) Expensed and charged to the income state- components. It is expected to be used over a period of

ment.

7 years. The engine of the jet has a useful life of 5 (c) Capitalized as part of the cost of the plant as years. The private jet’s tires are replaced every 2

a directly attributable cost. years. The private jet will be depreciated using the

(d) Taken to retained earnings since it is unrea- straight-line method over

sonable to present it as part of the current (a) 7 years composite useful life.

year’s income statement. (b) 5 years useful life of the engine, 2 years use-

Answer: (b)

5. IAS 16 requires that revaluation surplus resulting (c) 2 years useful life based on conservatism

ful life of the tires, and 7 years useful life applied to the balance cost of the jet.

from initial revaluation of property, plant, and equip- (the lowest useful life of all the parts of the

ment should be treated in one of the following ways. jet).

Which of the four options mirrors the requirements of (d) 5 years useful life based on a simple average

IAS 16?

of the useful lives of all major components (a) Credited to retained earnings as this is an of the jet.

unrealized gain. (b) Released to the income statement an amount

Answer: (b)

equal to the difference between the depre- 2. An entity imported machinery to install in its

ciation calculated on historical cost vis-à-vis revalued amount.

new factory premises before year-end. However, due to circumstances beyond its control, the machinery

(c) Deducted from current assets and added to was delayed by a few months but reached the factory

the property, plant, and equipment. premises before year-end. While this was happening,

(d) Debited to the class of property, plant, and the entity learned from the bank that it was being

equipment that is being revalued and cred- ited to a reserve captioned “revaluation

surplus,” which is presented under “equity.” freight and interest expense under IAS 16?

charged interest on the loan it had taken to fund the cost of the plant. What is the proper treatment of

Answer: (d)

(a) Both expenses should be capitalized. (b) Interest may be capitalized but freight

should be expensed. (c) Freight charges should be capitalized but in- terest cannot be capitalized under these circumstances.

(d) Both expenses should be expensed.

Answer: (c)

3. XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry and thus has significant other property, plant, and equip- ment that it carries in its books. It decided to revalue its property, plant, and equipment. The company’s accountant has suggested the alternatives that follow. Which one of the options should XYZ Inc. select in order to be in line with the provisions of IAS 16?

(a) Revalue only one-half of each class of prop- erty, plant, and equipment, as that method is less cumbersome and easy compared to re- valuing all assets together.