Subsequent expenditure PROPERTY, PLANT AND EQUIPMENT

Chapter 7 – Property, Plant and Equipment Page 96 Year 3 – CU4,694 - CU4,000 = CU694. Year 4 – CU5,532 - CU4,000 = CU1,532. Year 5 – CU5,532 - CU4,000 = CU1,532. Year 6 – CU6,667 - CU4,000 = CU2,667. 8 Impairment of PPE IAS 36 Impairment of assets requires that an item of PPE is reviewed to ensure that there has not been an impairment of the asset. Impairment arises when the carrying amount of the asset is higher than its recoverable amount. For example, a car has a carrying amount of say CU10,000, but due to a new model being released by the manufacturer, the amount that could be recovered through, say, the sale of the car is only CU7,000. IAS 36 sets out when an entity should review items of PPE for impairment, how impairments are calculated and the accounting treatment required for them. Compensation may be received from a third party for an item of PPE when it is impaired, lost, or given up, for example an insurance payment where an asset has been damaged by fire. IAS 16 states that the impairment or loss of an asset, any compensation received in relation to the asset and any subsequent purchase to replace the asset are all separate events and hence should be accounted for individually. Any compensation received for an impaired, or lost, asset should therefore be recognised in profit or loss when the amount becomes receivable. [IAS 16.65] 9 Derecognition of an Item of PPE An item of PPE should be removed from the statement of financial position i.e. derecognised when it is disposed of or when no future economic benefits are expected from its use. On removal from the statement of financial position, a gain or loss should be recognised in profit or loss. The gain or loss is calculated by comparing the carrying amount of the asset with the net disposal proceeds received after deducting selling costs. The gain or loss is calculated in the same way, regardless of whether the asset is revalued or not. Any gain should not be classified as part of the entity’s revenue. [IAS 16.67, 16.68, 16.71] The date of disposal and presentation of an asset held for resale should be determined by considering the criteria set out in IAS 18 Revenue and IFRS 5 Non-current assets held for sale and discontinued operations. If on disposal of a revalued asset there remains a balance on the revaluation surplus relating to the asset, this balance should be transferred to retained earnings. This transfer is shown as a movement between reserves and does not form part of any profit or loss on disposal of the item. Chapter 7 – Property, Plant and Equipment Page 97 10 Disclosure Requirements IAS 16 requires that a reconciliation of the carrying amount at the beginning and end of each period is disclosed in relation to the movement in PPE. The reconciliation should show all movements during the period, including additions, assets classified as held for sale and other disposals, impairment losses, revaluations, depreciation and acquisitions made as part of a business combination. The most practical way to meet these disclosure requirements is to present the information in the form of a table. The reconciliation should be set out for each class of assets. [IAS 16.73] In addition to a full reconciliation, the entity should disclose its depreciation policy and rates or length of the useful lives. Where the entity adopts a policy of revaluation, this should be explained along with information on when the last valuation exercise was carried out, whether the valuation was carried out by an independent valuer, the major assumptions used in the valuation and on what basis the fair value was determined, for example by reference to an active market. In addition, the carrying amount of the revalued asset based on cost should be set out, along with the amount of the revaluation surplus, with any movements during the period highlighted. [IAS 16.77] Information is also required to be disclosed on a number of ancillary items which involve PPE. These disclosures include the existence and amount of any restrictions on the title of PPE where PPE has been pledged as security over some of the entity’s liabilities, the amount of any expenditure recognised in respect of assets in the course of construction, the amount of any contractual commitments for the future acquisition of items of PPE and the amount of any compensation received in respect of impaired or lost assets. [IAS 16.74] 11 Chapter Review This chapter has been concerned with the key issues relating to how PPE is recognised, valued and depreciated. The chapter has covered:  the objectives, scope, definitions and disclosure requirements of IAS 16;  cost model versus revaluation model;  different methods of depreciation;  an overview of impairment;  derecognition;  when to start and cease recognition; and  what cost can be recognised as part of the asset and what should be expensed. Chapter 7 – Property, Plant and Equipment Page 98 12 Self Test Questions Chapter 7 1. Which ONE of the following statements best describes residual value? A The estimated net amount currently obtainable if the asset were at the end of its useful life B The present value of estimated future cash flows expected to arise from the continuing use of the asset and from its ultimate disposal C The amount at which the asset could be exchanged between knowledgeable, willing parties in an arms length transaction D The amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal 2. Which ONE of the following terms best describes the cost or an amount substituted for cost of an asset less its residual value? A Revalued amount B Carrying amount C Recoverable amount D Depreciable amount 3. Which ONE of the following statements best describes the carrying amount of an asset? A The cost or an amount substituted for cost of the asset less its residual value B The amount at which the asset is recognised in the statement of financial position after deducting any accumulated depreciation and accumulated impairment losses C The higher of the assets net selling price and its value in use D The fair value of the asset at the date of a revaluation less any subsequent accumulated impairment losses 4. Which ONE of the following terms best describes the removal of an asset from an entitys statement of financial position? A Derecognition B Impairment C Write-off D Depreciation Chapter 7 – Property, Plant and Equipment Page 99 5. Which ONE of the following statements best describes the term depreciation? A The systematic allocation of an assets cost less residual value over its useful life B The removal of an asset from an entitys statement of financial position C The amount by which the recoverable amount of an asset exceeds its carrying amount D The amount by which the carrying amount of an asset exceeds its recoverable amount 6. Are the following statements regarding the cost of an asset true or false, according to IAS16 Property, plant and equipment? 1 The cost includes cash equivalents paid to acquire an asset. 2 The cost includes the fair value of any non-monetary consideration given to acquire an asset. Statement 1 Statement 2 A False False B False True C True False D True True 7. Which of the following terms best describes the systematic allocation over its useful life of the cost of an asset, or other amount substituted for cost, less its residual value? A Depreciation B Derecognition C Impairment D Value in use 8. Which ONE of the following terms best describes the amount at which an asset could be exchanged between knowledgeable, willing parties in an arms length transaction? A Fair value B Value in use C Residual value D Realisable value Chapter 7 – Property, Plant and Equipment Page 100 9. Which TWO of the following statements are correct per IAS16 Property, plant and equipment? A Assets are depreciated even if their fair value exceeds their carrying amount B Land and buildings are accounted for separately, even when acquired together C A non-current asset acquired as the result of an exchange of assets is not recognised D A gain on disposal of a non-current asset is classified as revenue 10. According to IAS16 Property, plant and equipment, which TWO of the following items should be capitalised into the cost of property, plant and equipment? A Cost of excess materials resulting from a purchasing error B Cost of testing whether the asset works correctly C Initial operating losses whilst demand builds up D Cost of preparing the site for installation 11. Under the principles of IAS16 Property, plant and equipment, which TWO of the following should be included in the cost of an item of property, plant and equipment? A Initial delivery and handling costs B Apportioned general overhead costs C Costs of training staff on the new asset D Installation and assembly costs 12. Which TWO of the following disclosures must be made under IAS16 Property, plant and equipment? A The existence and amounts of restrictions on title B A narrative discussion of future capital expenditure plans C The disposal proceeds of each major asset sold in the period D The measurement bases used for determining the gross carrying amount 13. Which ONE of the following statements regarding depreciation is true, according to IAS16 Property, plant and equipment? A An asset must be depreciated from the date of its purchase to the date of sale B The annual depreciation charge should be constant over the life of the asset C The total cost of an asset must eventually be depreciated D If the carrying amount of an asset is less than the residual value, depreciation is not charged Chapter 7 – Property, Plant and Equipment Page 101 14. Under IAS16 Property, plant and equipment, which TWO of the following costs relating to non-current assets should be capitalised? A Replacement of a buildings roof every 15 years B Maintenance of an asset on a three-monthly basis C Installation and assembly costs D Replacement of small spare parts annually 15. The Charcoal Company is purchasing a second-hand polishing machine from a competitor who has gone bankrupt. It will incur the following costs: CU Agreed price to be paid to vendor 8,000 Dismantling the machine at its current location 400 Transportation to Charcoals factory 350 Machine refurbishment costs prior to re-installation 175 Re-installation 125 Under IAS16 Property, plant and equipment, the total included in non-current assets in respect of the machine should be A CU8,875 B CU9,050 C CU8,125 D CU8,000 16. The Plaice Company acquired a new filing machine, the list price of which was CU49,000. The supplier allowed a trade discount of CU1,700 off the list price. On delivery, the cost of installing the machine in its desired location was CU450. According to IAS16 Property, plant and equipment, at what cost should the filing machine be measured in the financial statements of Plaice? A CU47,750 B CU49,000 C CU49,450 D CU47,300