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Chapter 11: Property, plant and equipment, If carrying amount increases:
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Chapter 11: Property, plant and equipment
Definition of PPE
- tangible assets held by entity for use in the production/supply of goods or services, for rental to others, or for administration purposes
- and are expected to be used during more than one period
- an item of PPE should be recognised as an asset if it is probable that future economic benefits associated with the item will flow to the entity & the cost of the item can be measured reliably
:warning: day to day costs of PPE (e.g servicing) are recognised as an expense when incurred (called "Repairs and maintenance") BUT other costs such as long-term scheduled maintenance (called subsequent expenditure) could be recognised as an asset as it meets the IAS 16 criteria
e.g if the maintenance occurs yearly, it is an expense but if it is a once off upgrade, it is an asset
The cost of PPE =
Purchase price + Import duties + non-refundable purchase taxes (∴VAT if entity is not a tax vendor) + other directly attributable costs (e.g delivery pg329) - Trade discount:warning: 'other attributable costs' are only stop being recognised once the item is on site and ready to be used to gain economic benefits; costs incurred while the item is ready for use but not used as well as initial operating losses are expensed on SOPL
- if item is bought on credit and accrues interest, the cost of PPE (i.e asset price) is the cash price before interest accrued on the item. The interest accrued is recognised as an expense on SOPL. see pg 332 for journal treatment
Depreciation of PPE
Definitions:
- Depreciable amount = Cost - Residual value
- Carrying amount = Cost - Accumulated depreciation
- Residual value is estimated amount an entity would obtain for the disposal of the asset if it were at end of useful life. Residual value = Cost - Depreciable value
- the choice depreciation method used must reflect the expected pattern of consumption of the PPE
Methods of depreciation
Straight-line method
- Depreciation expense = (Cost -Residual value) ÷ Useful life
- results in a constant charge over the useful life of the asset
Diminishing balance method
- Depreciation expense = Carrying amount * %depreciation rate
- carrying amount in first period is the cost of the PPE, thereafter it is the carrying amount
- %rate = (1 - n^√r÷c) (pg 337)
n = useful life of asset (years)
r = residual value of the asset
c = cost of the asset
Units of production method
- Depreciation expense = Depreciable amount * (Output in period÷ Total estimated output)
- depreciation measured as maximum potential output
- in an idle month, no depreciation is recognised using this method
Recording depreciation expense:DR Depreciation expense
CR Accumulated depreciation
- accumulated depreciation is a contra-asset account (it is increased with a credit entry) see pg 340 for how it is closed off
On statement of financial position, the current carrying value of the asset at the time the statements are being created is placed there
Useful life, depreciation method and residual value are reviewed annually
- if any of these estimates change, the depreciation expense needs to be revised
Revised depreciation = Carrying amount - residual value ÷ remaining useful life
Disposals
- Occurs when asset is stolen, sold or scrapped
- Profit or loss on disposal = Proceeds - Carrying Amount
Steps to follow when accounting for disposal
- cost eliminated as an asset
- accumulated depreciation eliminated as a contra asset
- proceeds on dispoal recorded
- profit or loss recorded in statements
see pg 344 for entries!
Impairment of assets
- IAS 36's objective is to ensure assets are not overstated
- if carrying amount exceeds recoverable amount; its unlikely that the carrying amount will be recovered through use or sale.
- ∴ asset is impaired and impairment loss should be recognised on SOPF
Impairment loss = Carrying amount - Recoverable amount
- Recoverable amount is the max benefit obtained from an asset from either selling it (fair value - costs of disposal) or using it (value in use)
- Recoverable amount is the greater of the fair value - costs of disposal or value in use
- if value in use is higher than fair value - costs of disposal, recoverable amt. = value in use
if fair value - costs of disposal is higher than value in use, recoverable amt. = fair value - costs of disposal
Fair value - costs of disposal
- amount obtainable from sale of asset - costs of disposal
Value in use
- present value of estimated cash flows from continuous use of asset and from disposal
-
If carrying amount increases:
- Recognised in other comprehensive income as increase in revaluation surplus, or
- Recognised in profit or loss as revaluation income (if reversing a previous revaluation decrease)
If carrying amount decreases:
- Recognised in OCI as decrease in revaluation surplus, then
- Recognised in P/L as revaluation expense (after any revaluation surplus from previous revaluations is reduced to nil)