1
Q
What is property, plant, and equipment?
A
Tangible items that:
- are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
- are expected to be used during more than one period
2
Q
When should cost of PPE be recognized?
A
- It’s probable that future economic benefits will flow to the company; and
- cost can be measured reliably
3
Q
What is included in the initial cost of PPE?
A
- Purchase price (net of GST/HST, trade discounts, etc…)
- Directly attributable costs:
- Costs of bringing to current location and condition
- Initial delivery and handling costs
- Installation costs
- Professional fees (e.g., architect’s and legal fees)
- Testing costs (less net proceeds of sale of any products produced)
- Dismantling, removal and restoration for which there is an obligation when incurred.
Note: general overhead allocation is excluded from the cost base, as it not directly attributable to the PPE.
4
Q
What are considerations for costing self-made assets?
A
- Profit element on internal labour should not be included
- Costs of abnormal amounts of wasted labour should not be included. Cost should be no more than fair value of the asset.
- Qualifying interest costs should be capitalized.
5
Q
What are borrowing costs?
A
Interest and any other costs (such as arrangement fees) than an entity incurs in connection with the borrowing of funds.
- Borrowing costs need to be capitalized
6
Q
When does capitalization end?
A
When it is ready for use, whether or not it is actually being used.
- Depreciation starts when it is ready for use.
7
Q
What should not be capitalized?
A
- Administrative and general overheads
- For self-constructed assets: profit element on internal labour and costs of abnormal wasted material and labour
- Initial operating losses
- Relocation or reorganizing costs
8
Q
Where is the cost of decommissioning recorded?
A
As a liability
- It is for the best estimate of the future obligation discounted by an appropriate interest rate the reflects the risk of the obligation.
9
Q
With respect to decommissioning, what is different for ASPE?
A
- Obligation is refered to as an asset retirement obligation (ARO)
- Interest expense on the ARO is charged to accretion expense (rather tha interest expense)
- It is the best estimate of the expenditure required to settle the present obligation
10
Q
What to do about bundled purchases?
A
Must allocate the purchase price to each asset based on its relative fair values.
11
Q
How is PPE initially measured in a non-monetary exchange?
A
PPE acquired is normally measured at fair value unless the exchange lacks commercial substance.
- The cost is the FV of the asset given up (adjusted for cash paid or received)
- If no FV is available for the asset given up, then the cost of the new asset is the FV of the asset received.
- Any difference between the FV of assets exchanged results in a gain/loss being recognized.
12
Q
When is there commercial substance?
A
The cash flows from the new asset differ from those of the old asset (in risk, timing, and amount)
13
Q
If there is no commerical substance, how is PPE measured in an exchange?
A
The carrying value of what is given up is used.
- This also applies when there is no FV for either asset given up or the asset received (and there is commercial substance)
14
Q
Are replacements and repairs capitalized or expensed?
A
- Replacements (day-to-day costs of maintaining) are expensed
- Repairs are capitalized (as long as recognition criteria is met)
15
Q
What are the models for subsequent measurement of PPE?
A
- Cost model (more common): asset carried at its original cost less accumulated depreciation and any accumulated impairment losses.
- Revaluation model (not applicable for ASPE): asset carried at fair value at the revaluation date less subsequent accumulated depreciation less subsequent accumulated impairment losses.
16
Q
What is the most commonly revaluated asset?
A
Land
17
Q
How frequently are assets revaluated?
A
Depends on volatility of asset’s fair values.
18
Q
How are revaluation gaines and losses handled?
A
Revaluation gains:
- First credit to profit or loss to the amount of cumulative losses previously charged; and
- Any remaining amount is credited to OCI
Revaluation losses:
- First debited to OCI to the extent of cumulative gains previously recognized; and
- Any remaining amount to profit or loss
Revaluation surplus in OCI may be transferred to retained earnings either systematically over live of asset or on derecognition.
19
Q
What are the 2 methods of revaluation?
A
- Elimination method
- Removes the pre-valuation amounts for accumulated depreciation and replaces the pre-valuation gross cost with the new revaluated amount.
- Accumulated depreciation becomes nil at each time a revaluation is made.
- Proportional method
- Adjusts the cost and accumulated depreciation proportionally by the change in the revaluation amount so that the adjusted net book value is equal to the new revaluated amount.
Both methods will result in the same net book value being reported on the statement of financial position for the revaluted asset. The gain or loss will also be the same.
20
Q
What is the impact of the timing in the year with respect to depreciation and revaluation?
A
- Start of year: revaluate and depreciate on revaluated amount
- End of year: depreciate for year on opening balance, then revaluate
- During the year: depreciate on opening amount to date of revaluation, then revalue and depreciate on revalued amount for remainder of year.
21
Q
When can the transfer of revaluation surplus to retained earnings be done?
A
- The entire surplus can be transferred when the asset is derecognized; or
- Transfer a portion on an ongoing basis (amount is difference between the depreciation expense based on the revaluated carrying amount and the depreciation expense based on the original cost)
Notes p. 21
22
Q
Does a transfer of revaluation surplus to retained earnings show up as a gain on the statement of comprehensive income?
A
No
The transfer is made directly and does not flow through profit or loss or in other comprehensive income.
23
Q
What is the difference between deprecation, depletion, and amortization?
A
- Depreciation: for tangible assets other than natural resources
- Depletion: for tangible natural resources
- Amortization: for intangible assets
24
Q
What is net book value?
A
Net book value is the original cost of an asset, less any accumulated depreciation, accumulated depletion, or accumulated amortization, and less any accumulated impairment.
25
What is fair value?
The price that two parties are willing to pay for an asset or liability, preferably in an active market.
26
What is depreciation?
The systematic allocation of the depreciable amount of an asset over its useful life.
* It is not an attempt to ensure that the asset is reported at its fair market value on the statement of financial position
27
What is residual value?
The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, at the end of its useful life.
28
What is depreciable amount?
The cost (or revalued amount if using the revaluation model) less residual value.
29
What is useful life?
The period over which an asset is expected to be available for use or number of production units expected to be obtained from the asset.
30
When does deprectiation begin and end?
* Begins when asset is first available for its intended use.
* Ends at the earlier of when:
* Asset is fully depleted (e.g., when net book value equals residual value)
* Asset is classified as held for sale
* Asset is derecognized
* If a usage-based method of depreciation is used, depreciation can be suspended if there is no production.
31
What are 3 common depreciation methods?
* Straight line: (cost – residual value) / useful life (in years)
* Units of production: (cost – residual value) x units used / total life units
* Diminishing balance (declining balance): depreciation expense is highest in the first full year and then diminishes
* net book value x depreciation rate
* depreciate down to residual value although you ignore the residual value at the beginning... just don't depreciate below it
* original cost x (1-d)n, where d = depreciation rate, n = number of periods of depreciation
32
How is depletion calculated?
Based on the total projected quantity of natural resources to be extracted and the actual quantity extracted for the period in question, using a similar method to the units-of-production method.
* Depletion is recognized as a cost of inventory with an offsetting entry to accumulated depletion.
33
What are the steps for derecognition of PPE?
1. Depreciate up to date of derecognition.
2. Calculate the gain/(loss) on sale based on the consideration received.
3. Remove the asset and related accumulated depreciation from the books, and the record the gain or loss on derecognition.
34
How is derecognition different with ASPE?
1. Depreciation is called amortization.
2. Annual amortization charge is the greater of:
* cost less salvage value over _the **life** of the asset_, and
* cost less residual value over _the **useful** life of the asset_
3. Salvage value is the estimated net realizable value at end of asset’s life.
4. Any depreciation method can be used as long as it is rational and systematic.
35
What must be disclosed for each class of PPE?
* Measurement bases used (for example, the cost or revaluation model) to determine the gross carrying amount
* Depreciation methods used
* Useful lives of property, plant and equipment
* Gross amount and accumulated depreciation at the beginning and end of each period
* Reconciliation of the change in carrying amounts during the year
* Description of impairment losses and reversals realized in profit or loss
36
What are examples of intangible assets?
* Computer software
* Copyrights
* Customer lists
* Franchises
* Licences
* Patents
* Quotas
* Trademarks
37
Is goodwill an intangible asset?
No
It is the residual between the price paid to acquire a business and the fair value of the identifiable net assets, representing the future economic benefits arising from other assets acquired in a business combination.
38
What is the criteria for an intangible asset?
* Separately identifiable
* Separable - capable of being sold, transferred, rented, licensed or exchanged, individually or together with a related contract, asset, or liability; or
* Arises from contractual or other legal rights, regardless of whether these are transferable or separable
* Controlled by the entity
* Probably that future economic benefits will flow; and
* Cost can be reliably measured.
39
How are intangible assets initially measured?
At cost.
40
Where does research belong?
As an expense on the statement of comprehensive income.
* It cannot demonstrate that it will generate probable future economic benefits
41
When can you capitalize (versus expense) development?
When the following 6 conditions are met:
1. Technical feasibility
2. Intention to complete the asset and use or sell it
3. Ability to use or sell the asset
4. Probable future economic benefits
5. Availability of resources
6. Reliable measurement of expenditure
42
Which internally generated assets cannot be recognized as intangible assets?
* Brands (note that it's internally generated)
* Mastheads
* Publishing titles
* Customer lists
* Similar items
These cannot be distinguished from the cost of developing the business as a whole (in other words, the separability criterion is not met).
43
What is the main difference between IFRS and ASPE in terms of intangible assets?
Under ASPE, an entity may elect to expense expenditures made during the development phase.
(Notes p. 36)
44
Which models can be used for subsequent measurement of intangibles?
1. Cost model: where asset may have finite or infinite life.
2. Revaluation model: however intangible asset has to have been traded in an active market. Therefore very rare. E.g., taxi licenses, milk quotas
45
With the cost model for intangible assets, what is the difference between an asset with a finite and infinite life?
* Finite life:
* Amortize over useful life.
* Typically straight-line.
* Must review amoritization method and useful life yearly.
* Indefinite life:
* Not amortized
* Must be tested for impairment
46
What is the definition of indefinite?
For intangible assets it means that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
* Indefinite = we do not know how long it will last
* Infinite = it will last forever
47
When are intangible assets derecognized?
When they are disposed of or when no future economic benefits are expected from its use or disposal.
* Recognized in profit or loss
48
What is goodwill?
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
49
What is impairment?
When the recoverable amount of an asset falls below its carrying amount.
* Recoverable amount is defined as the higher of:
* Fair value less costs of disposal, and
* Value in use (VIU): present value (PV) of future cash flows expected to arise from using the asset over its remaining life and from its disposal.
50
Which assets have exceptions to the requirements of IAS 36 (Impairment of Assets)?
* Inventories
* Financial assets within the scope of IFRS 9
* Non-current assets classified as held for sale
51
What is a cash generating unit (CGU)?
The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Examples:
* Individual store in a supermarket chain
* Oilfield
* An assembly line for cars (as it would be difficult to identify the cash flows for the door panels as an example).
52
What is recoverable amount?
Is the higher of an asset or CGU's fair value less costs of disposal and its value in use.
53
What is 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 measureable date.
54
What is cost of disposal?
The incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.
55
What is value in use?
The present value of the future cash flows expected to be derived from an asset or cash-generating unit.
This is the value to the company if it chooses to sell the asset in the near term.
56
What are the steps in testing the impairment process?
1. Determine what is to be tested for impairment.
2. Decide when the identified assets and cash generating units (CGU) have to be tested.
3. Test for impairment.
4. Recognize any impairment loss in the financial statements.
57
When do you test for impairment?
* For most assets, only when there is an indication of impairment
* Annually for the following assets:
* Intangible assets with indefinite useful lives
* Intangible assets not ready for use (e.g., development projects)
* Goodwill acquired in a business combination
58
What does fair value less costs of disposal represent?
The value to the company if it chooses to sell the asset in the near term.
59
What do costs of disposal include?
The costs directly attributable to the disposal of the asset, such as sales commission and legal fees.
60
How do you account for an impairment loss for CGU?
* First go to goodwill
* Then to other assets, pro rata based on each asset's carrying amount
* No individual asset is written down below the highest of:
* its individual fair value less costs of disposal,
* value-in-use, or
* 0
61
Can impairment losses for goodwill be reversed?
No
62
When reversing an impairment what is the maximum the asset can be increased to?
Maximum of its carrying amount (net of depreciation) had the impairment not occurred.
So it is the carrying amount that it would be had the original impairment not been recorded.
63
When reversing an impairment what is the maximum that CGU can be increased to?
Should not be increased above the _lower of_:
* Recoverable amount; and
* Carrying amount (net of depreciation) had the original impairment not occured.
64
What is required for non-current assets to be classified as held for sale?
Asset is available for immediate sale in its present condition and that the sale is highly probable.
65
What is a disposal group?
A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction.
66
What is required to be highly probable with respect to making an asset held for sale?
* Approved by appropriate level of management
* Active plan to find buyer initiated
* Actively marketed at a reasonable price
* Sale expected within 12 months (exceptions)
67
What is the initial measurement for held for sale assets?
* Depreciation stops when classified as held for sale.
* Reclassified as a current asset.
* Value at lower of carrying amount and fair value less costs to sell
* If fair value less costs to sell \< carrying amount (CA), charge impairment loss to profit or loss.
68
What is the subsequent measurement for held for sale assets?
* Lower of carrying amount (CA) and fair value less costs to sell at each reporting date.
* If fair value less costs to sell \< CA, charge additional impairment to statement of comprehensive income
* If fair value less costs to sell \> current CA recognize gain, only to extent it reverses previous impairment(s).
69
How is derecognition handled for held for sale assets?
A gain or loss is recognized through the statement of comprehensive income.
70
When are government grants initially recognized?
When there is reasonable assurance that:
* Company will comply with conditions, and
* Grant will be received.
71
What is the subsequent measurement for grants?
Using the historical cost (original grant amount less the cumulative amount recognized as income in the statement of comprehensive income).
72
When are government grants derecognized?
* Grant amount has been entirely recognized in income on the statement of comprehensive income; or
* Grant became repayable or is repaid, as the entity did not meet the terms of the grant.
73
How are asset and income government grants presented?
_Asset government grants_ on statement of financial position as:
* Deferred income (liability); or
* Reduction in the carrying amount of a related asset.
_Income government grants_ on statement of comprehensive income as:
* Revenue, either separately or as "other income"; or
* Reduction of the related expense.
74
How do you record the new asset when there is _no commercial substance_?
* The asset acquired is recorded at the **carrying value of the asset(s) given up**.
* Add: carrying value of cash given up; or
* Subtract: amount of cash received
* If the fair value of the asset received is known, or is subsequently determined, and if that value is less than the amount used to recognize the new asset, then an impairment adjustment is made.
*Exchange of Assets Practice Problem 1*
75
When there is an impairment where is it credited?
* Accumulated impairment loss; or
* Accumulated depreciation
* Notes p. 43.*
* Impairment practice problem 3*
76
With ASPE, for tangible and intangible assets, what is the two-step process to determine whether impairment should be recorded?
1. Determination of impairment — If the carrying amount exceeds the sum of the undiscounted cash flows expected from the asset, there is impairment.
2. Measurement of impairment — The impairment loss is the amount by which the carrying amount exceeds the fair value. If an impairment loss is recognized, the adjusted carrying amount becomes the new cost basis.
