By Janice Edwards,2014-05-16 03:41
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    Week 1 Property, Plant & Equipment (PPE) – Chapter 2


    1.1Define the term PPE according to IAS 16 Property, Plant and Equipment1.2Explain under what conditions PPEs are recognized

    1.3Explain and apply the principles of IAS 16

    1.4Consider other international standards which may be relevant when accounting

    for PPE – IAS 23 Borrowing Costs

    2Assets – Definition and recognition

    .1Definition of assets:

    “a resource controlled by the entity as a result of past event and from which

    future economic benefits are expected to flow to the entity. (Framework, para.


    .1.1Controlled by the entity: not refer to ownership

    2.1.2A result of past events: objective evidence

    2.1.3Future economic benefits: provide direct & indirect future cash

    (stock vs. warehouse)

    2.1Recognition of assets

    2.1.1Recognition means reporting an item within the main financial

    statements (not including notes)

    2.1.2Criterion 1 - it is probable that future economic benefit will flow to the

    entity (e.g. proof of ownership)

    2.1.3Criterion 2 – the cost can be measured reliably (purchase price will not

    always be equal to the assets cost)

    Take your notes:

    3Cost of an asset

    3.1Cost of an asset – include all the costs incurred in bringing the asset to its present

    location and in a condition ready for use. In general, cost can include purchase

    price, delivery costs, installation costs and professional fees.3.2Borrowing costs (e.g. interest/finance cost)

    3.2.1IAS 23 – borrowing costs that directly attributable to the acquisition,

    construction and production of a qualifying asset should be treated as

    part of the cost of that asset.

    3.2.2A qualifying asset – an asset that takes substantial period of time to get

    ready for use

    3.2.3Arguments for capitalization of borrowing cost

    ?Borrowing costs are no different from other costs that are commonly

    capitalized, e.g. delivery or installation costs

    ?Better adheres to the matching principle

    ?Better comparison between companies constructing assets and buying

    similar completed assets

    3.2.4Arguments against capitalization

    ?Treatment of the interest expense should be consistent

    ?It can be difficult to identify specific borrowing with specific projects

    ?It is inappropriate that the same type of asset would have a different

    carrying amount depending on whether its construction was financed by

    borrowings or by equity.

    Take your notes:

    4IAS 16 Property, Plant and Equipment

    4.1Definition of PPE

    “IAS 16 defines PPE as tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period.”

    4.2Recognition of PPE

    4.2.1Recognition criteria - the same criteria as stated in 2.1

    4.2.2The normal point of recognition - delivery to the company

    4.2.3What constitutes an item of PPE? No prescription. Judgment is required.4.2.4Allow for aggregation of insignificant items and recognize a separate

    component of an significant item

    4.3Cost of PPE

    4.3.1 Initial cost – see 4.4.1

    4.3.2 Subsequent costs – include the cost of replacing the part of an item in the carrying amount of the item (repairs and maintenance are only expenses)

    4.4 Measurement of PPE

    4.4.1 Initial measurement ( Activity 1 & Activity 2) Purchase price (including import duties and stamp duty) Directly attributable costs in bringing the asset to the location and

    condition necessary for its intended use.

    - Cost of site preparation

    - Delivery and handling

    - Installation

    - Professional fees

    - Cost of testing

    - Dismantling and removing the asset and restoring the site4.4.2 Subsequent measurement – IAS 16 allows for 2 models Cost model – after initial recognition, the asset is carried at cost less

    accumulated depreciation and less any accumulated impairment losses Revaluation Model – after initial recognition, the asset is carried at a

    revalued amount i.e. the fair value of the asset at the date or revaluation

    less any subsequent accumulated depreciation and less any subsequent

    accumulated impairment losses.

    4.4.3 Revaluations If the revaluation model is applied to an item of property, plant and

    equipment, then it must be applied to the entire class to which the item

    belongs. Revaluation gain after initial recognition - if the carrying amount of

    an asset is increased as a result of a revaluation, the increase (unrealized

    gain) must be credited to a revaluation reserve and shown as ‘other

    comprehensive income’ in the entity’s statement of comprehensive income.

    This ensures that the unrealized gain is excluded from profit and so is not

    available for payment as a dividend. (Activity 3) Revaluation loss after initial recognition - if the carrying amount of

    an asset is decreased as a result of a revaluation, the decrease must be

    recognized as an expense in the same period. (Activity 4) Revaluation loss followed by revaluation gain - a revaluation

    increase must be recognized as income to the extent that it reverses any

    revaluation decrease in respect of the same asset that was previously

    recognized as an expense. (Activity 6) Revaluation gain followed by revaluation loss - a revaluation

    decrease must be debited to the revaluation reserve and shown in other

    comprehensive income to the extent of any credit balance previously

    existing in the revaluation reserve in respect of the same asset. (Activity 5) Disposal of revalued asset – when a revalued asset is disposed of,

    any revaluation surplus may be transferred directly to retained earnings, or

    it may be left in equity under the heading revaluation surplus. Note that the

    transfer to retained earnings should not be made through the income


    4.5Disclosure in practice

    4.5.1 The required disclosures are given in distinct section. The accounting policies note is normally used to disclose the entity’s policy on measurement

    bases and depreciation rates while, the balance sheet discloses the total figure

    for PPE and the note provides the detail.

    4.5.2 The note discloses the movements in cost and accumulated depreciation

    over the year for the classes of PPE identified within the accounting policies


    Take your notes:

    Seminar exercise for week 2: Exercise 3 in P150 and Exercise 8 in P152 (1% of total marks)

    Week 1 Activities for PPE

    Activity 1

    P Ltd completed construction of a chemical plant at a cost of 25m in early 2008. As part of the planning permission, P Ltd agreed to dismantle the plant at the end of its useful life. The present value of dismantling is 2m. Prepare double entries for the transaction.Dr




    Activity 2

    P buys a second-hand fixed asset and makes the following payments in relation to it:Cost 15,000

    Less: discount received2,000

    Delivery charge200

    Erection charge100

    Maintenance charge300

    Replacement parts150

    Additional components to 400

    increase capacity

    Prepare double entries for the transaction.

    Initial cost = _______________________________________________



    Activity 3 – revaluation gain after initial recognition

    An entity has a PPE that cost 15,000 at the start of Year 1; it has a useful economic life of 10 years, a residual value of 3,000 and is being depreciated on a straight line basis. At the end of Year 1, the asset was revalued upwards to 17,500.

    Depreciation in Year 1



    Gain on revaluation = _________________________________________________

    Gain on revaluation should be credited to reserves.





Depreciation in Year 2



    Activity 4 – revaluation decrease after initial recognition

    An asset has a cost of 1,000,000 and a life of 10 years. At the end of Year 3, the asset is revalued downwards to 350, 000.

    Accumulated Depreciation in the first 2 years = _______________________________Depreciation in Year 3



    Accumulate depreciation in the first 3 years =__________________________________Loss on revaluation = ________________________________________________

    Loss on revaluation is charged to the income statement.





    Activity 5 – revaluation gain followed by revaluation loss

    A company buys freehold land for 100,000 in Year 1. The land is revalued to 150,000 in Year 3 and 90,000 in Year 5. The land is not depreciated.

    In Year 3, the amount of revaluation gain credited to revaluation reserve was _______________

    In Year 5, revaluation loss = ____________ , among them, __________of revaluation gain should be reversed and the excess _____________is recognized as an expense.Dr



    Activity 6 – revaluation loss followed by revaluation gain

    An asset costs 15,000 at the start of Year 1; it has a useful economic life of 10 years, a residual value of 3,000 and is being depreciated on a straight line basis. At the end of Year 1 the asset was revalued downwards to 10,500. At the end of Year 2 the asset is revalued upwards to 17,500.

    Annual depreciation = _______________________________________

    At the end of Year 1, loss on revaluation = _____________________________________Dr






    At the end of year 2

    Annual depreciation = ____________________________



    Revaluation gain = ______________________________________

    Recognition loss on revaluation in Year 1 leads to reduction of depreciation expense by_________. Had loss on revaluation not been recognized, the net amount of PPE should be increased by_______________.






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