When does IAS 16 state PPE should be recognised? - answer✔When it is probable that future economic
benefits will flow to the entity and the cost can be reliably measured.
PPE should be measured at cost. What does IAS 16 state cost can include? - answer✔- purchase price
including import duties and non-refundable purchase taxes after deducting trade discount/rebates.
- directly attributable costs needed to bring asset to location and condition necessary for it to be capable
of operating as management intended.
Give 8 examples of what 'directly attributable costs' to PPE include. - answer✔- costs of wages needed
for construction.
- site prep costs.
- initial delivery and handling costs.
- installation and assembly costs.
- costs of testing must deduct net proceeds from cost of any sellable items from testing.
- PV of future dismantling and site restoration costs @ end of useful life.
Outline four costs that should be excluded from PPE cost and expenses to PL. - answer✔- admin costs.
- general OVHs.
- abnormal costs INCLUDING labour strikes or planning errors (remove cost).
- costs incurred after asset is capable of normal operation.
How should incidental income relating to PPE be treated? - answer✔It is not allowed to be deducted
from the cost of the asset in the SFP, it should be treated as other income in the PL (so as not to reduce
depreciation expense).
How should subsequent costs of acquiring PPE be treated? - answer✔Subsequent costs are expenses
incurred after completion of the asset and can only be capitalised if it ENHANCES the economic benefit
provided by the asset.
Improvements = capitalise.
Repairs = expense (PL).
Define borrowing costs (PPE). - answer✔Interest and other costs incurred in connection with the
borrowing of funds in order to construct an asset.
How should borrowing costs be treated in the financial statements? - answer✔Directly attributable
borrowing costs MUST be capitalised as part of qualifying asset cost.
A qualifying asset takes a substantial period of time to get ready for use or intended sale.
Borrowing specifically for asset funding = capitalise cost incurred MINUS income from temp investment
of surplus borrowings (i.e. only need half the borrowings for first 6 months so invest other half).
How would you calculate the amount of borrowing cost to capitalise in relation to an asset from general
borrowings for asset funding? - answer✔weighted average cost of borrowing x expenditure on the
asset.
- pro rate the amount for the period of capitalisation.
- where you have 2 loans with 2 different interest rates find the average rate by doing:
(loan1 x loan1%) + (loan2 x loan2%) / total of loans
According to IAS 23, when should the capitalisation of borrowing costs commence, be suspended and
cease. - answer✔Commence = when expenditure on asset is being incurred, borrowing costs are being
incurred, activities to prepare asset for use/sale is in progress.
Suspended = during extended periods in which it suspends active development of a qualifying asset.
Cease = when substantially all activities necessary to prep the asset for use/sale are complete.
In terms of depreciation, what should be done for items of PPE that are split up into different
components with different useful lives? - answer✔- the cost of replacing certain components may be
capitalised ONCE the existing part is fully depreciated/derecognised.
- the items should then be separated out and depreciated individually.
What- are the two models that IAS 16 prescribe after initial recognition of PPE? - answer✔The cost
model - can be applied to all classes of PPE.
The revaluation model - can be applied to land/buildings.
* both methods apply depreciation in the same way, and revals should be updated regularly to avoid
material difference in SFP asset values from fair value.
How should an upwards revaluation of PPE be accounted for? - answer✔CR revaluation surplus
(reflected in other comprehensive income on SPL to reflect that this is an unrealised gain). = sum of
below amounts (fair value - carrying amount).
DR cost (to increase the cost of the asset to fair value).
DR accumulated depreciation (to eliminate an accumulated depreciation to date).
What is the equation for depreciation charge of a revalued asset? - answer✔= revalued amount -
estimated residual value/REMAINING useful life.
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