Chapter 2 - Tangible Non Current Assets

Question 1

Property, plant and equipment

Answer 1

An item of property, plant and equipment should initially be measured at its cost:

1. Include all costs involved in bringing the asset into working condition.
2. Include in this initial cost capital capital costs, borrowing costs (IAS 23).
3. Revenue costs should be written off as incurred.
4. Dismantling costs: the PV of these costs should be capitalised. The discount on this liability would then be unwound over the period until the costs are paid.

1/ (1+r)^n

Question 2

Subsequent expenditure

Answer 2

Should only be capitalised if:

1. It enhances the economic benefits provided by the asset.
2. Relates to an overhaul or required major inspection of the asset - the costs associated with this should be capitalised and depreciated over time until the next overhaul or safety inspection.
3. Replacing a component of a complex asset. This can only be capitalised if the original component has been written off.

Question 3

Depreciation

Answer 3

The systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less residual value.

Question 4

The revaluation model

Answer 4

Accounting for a revaluation:

1. Restate asset from cost to valuation.
2. Remove any existing accumulated depreciation provision.
3. Include increase in Other Comprehensive Income, at the bottom of the statement of profit or loss.

Question 5

Disposal of revalued non current assets

Answer 5

The profit or loss on disposal of a revalued non current asset should be calculated between the net sale proceeds and he carrying amount.

There are 2 steps to disposing of a revalued asset:

1. It should be accounted for in the statement of profit or loss of the period in which the disposal occurs.
2. The remainder of the revaluation surplus relating to this asset should now be transferred to retained earnings.

Question 6

IAS 20 accounting for government grants and disclosure of government assistance

Answer 6

Government grants could be:

Revenue grants: money towards wages.

Capital grants: money towards purchase of non current assets.

Question 7

Revenue grants

Answer 7

1. If the grant is paid when evidence is produced, certain expenditure has been incurred, the grant should be matched with that expenditure.
2. If the grant is paid on a different basis, e.g. Achievement of a non financial objective, such as the creation of a specified number of new jobs, the grant should be matched with the identifiable costs of achieving that objective.

IAS 20 allows grants to either:

1. Be presented as a credit in the statement of profit or loss.
2. Be deducted from the related expense.

Question 8

Capital grants

Answer 8

IAS 20 permits two treatments.

1. Write off the grant against the cost of th on current asset and depreciate the reduced cost.
2. Treat the grant as a deferred credit and transfer a portion to revenue each year so offsetting the higher depreciation charge on the original cost.

Question 9

Borrowing costs

Answer 9

IAS 23 Borrowing Costs regulates the extent to which entities are allowed to capitalise borrowing costs incurred on money borrowed to finance the acquisition of certain assets.

Borrowing costs must be capitalised as part of the cost of an asset if that asset is a qualifying asset.

Question 10

Commencement of capitalisation

Answer 10

1. Expenditure for the asset is being incurred.
2. Borrowing costs are being incurred.
3. Activities that are necessary to prepare the asset for its intended use or sale are in progress.

Question 11

Cessation of capitalisation

Answer 11

1. When all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.
2. Construction is suspended.

Question 12

Investment property

Answer 12

Land or a building held to earn rentals or for capital appreciation or both rather than for use in the entity or for sale in the ordinary course of business.

Owner occupied property is excluded.

These could be spare properties rented out to third parties, or specifically bought in to profit a gain in value.

If a company rents out certain floors to other companies, then the part occupied will be classed as property, plant and equipment per IAS 16 with the floors rented out classed as investment property per IAS 40.

Question 13

Accounting treatment

Answer 13

Investment properties should initially be measured at cost.

1. IAS 40 gives a measurement between a cost model and a fair value model.

Under the cost model, the asset should be accounted for in line with the cost model laid out in IAS 16.

Under the fair value model,

• the asset is revalued to fair value at the end of each year.
• the gain or loss is shown directly in the statement of profit or loss.
• no depreciation is charged on the asset.

If an asset is transferred from being used as property, plant and equipment into being rented out as investment property and the fair value model for investment property is being used,

• the asset must first be revalued under IAS 16 and then transferred into investment property at fair value.

If the cost model is used,

• the asset is transferred from being rented out as investment property into being used as property, plant and equipment and the fair value model for investment property is used.

If an asset is transferred from being rented out as investment property into being used as property, plant and equipment and the fair value model for investment property is used,

• revalue the property first per IAS 40 and then transfer to property, plant and equipment at fair value.

If the cost model is used,

• the asset is transferred into property, plant and equipment at the current carrying amount and continues to be depreciated.