Chapter 3 Tangible Non Current Assets

Question 1

Property, plant and equipment (IAS 16)

Answer 1

PPE are tangible items that:

1. Are held by an entity for use in the production or supply of goods or services for rental to others or for administrative purposes.
2. Are expected to be used during more than one period.

Question 2

Measurement at recognition

Answer 2

All items of PPE are recognised at cost.

1. Purchase price
   Import duties and non refundable purchase taxes, after deducting trade discounts and rebates.
2. Directly attributable costs
   - Employee benefit costs
   - Costs of site preparation
   - Initial delivery and handling costs
   - Installation and assembly costs
   - Costs of testing whether the asset is functioning properly
   - Professional fees
3. Estimated cost of dismantling and removing the item.
4. Finance costs
   The capitalisation of finance costs is required for qualifying assets.

Question 3

Measurement after recognition

Answer 3

1. Cost model
   PPE is carried at cost less accumulated depreciation and impairment losses
   Cost - Accumulated depreciation = NBV
2. Revaluation model
   PPE is carried at a revalued amount.

Revalued amount = Fair Value at date of revaluation less subsequent accumulated depreciation and impairment losses.

3. Fair Value
   The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

4. Scope
Where an item of PPE is revalued, all other assets in the same class must also be revalued.

5. Revaluation gains
   Reported in other comprehensive income (revaluation surplus in the statement of final position) except where reversing a previous revaluation loss charged to profit or loss.
6. Revaluation surplus
   Charged first to other comprehensive income and any remainder as an expense in profit or loss.

Question 4

Investment property (IAS 40)

Answer 4

Investment property is property (land or building or part or both) held to earn rentals or for capital appreciation or both rather than for:

1. Use in the production or supply of goods or services or for administrative purposes.
2. Sale in the ordinary course of business.

Question 5

Measurement at recognition

Answer 5

Investment property is initially measured at cost.

Cost includes purchase price and any directly attributable expenditure (professional fees, for legal services, property transfer taxes and other transaction costs).

Question 6

Measurement after recognition

Answer 6

An entity can choose whether to use the fair value model or the cost model (IAS 16 applied Cost less accumulated depreciation and impairment losses).

Question 7

Borrowing costs (IAS 23)

Answer 7

Borrowing costs that directly relate to acquisition, construction or production of a qualifying asset must be capitalised as a part of the cost of that asset.

Funds borrowed specifically for a qualifying asset - capitalise actual borrowing costs incurred less investment income on temporary investment of the funds.

Funds borrowed generally - weighted average of borrowing costs outstanding during the period (excluding borrowings specifically for a qualifying asset) multiplied by expenditure on qualifying asset. The amount capitalised should not exceed total borrowing costs incurred in that period.

Commencement of capitalisation begins when

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