PPE

PPE (IAS 16)

Tangible items: held for use in production of goods, for admin purposes, or for rent to others, and are expected to last >1 period

PPE criteria (2)

1. Probable future economic benefits associated with item will flow to company

2. Cost of item can be measured reliably

Consider the direct and indirect benefit to the entity (Computer in acctg department)

Initial measurement of Equipment

Capitalized costs - Purchase price (including delivery and installation, discounts, and non-refundable fees), costs to bring asset to location, decommissioning costs

Any costs past initial point are expensed (training), with the exception of those needed to continue operation (inspection - recognize and derecognize previous inspection)

Dr. Equipment / Cr. Cash or AP

Initial measurement of Land and Building

Directly attributable costs become part of purchase price (commission, legal, title search, property transfer taxes)

Additional costs include land prep and removal of old building

Consider construction costs are only attributable to the building

Price is allocated between land and building, unless building is demolished- treated as separate assets going forward

Componentization of PPE

Parts of PPE have different usage rates, lives, or residual value

Overall cost must be broken down so they can be depreciated appropriately; allocate costs

Borrowing costs (IAS 23)

Amount capitalized is the actual borrowing costs less investment income

ASPE: can choose to capitalize or expense

Spare parts, standby, and servicing equipement

If it meets the criteria of PPE then it can be capitalized; IFRS version of ASPE’s betterment

Subsequent measurement methods for PPE under IFRS (2)

Cost Model

Revaluation model

Requirements to consider: policy choice per asset class, reliability needed for FMV, Frequency of revaluations

Subsequent measurement for PPE under ASPE

Only cost model can be used

PPE: Cost model

Record at historical cost and depreciated yearly

Reported at net cost

PPE: Revaluation model

Assets recorded at FMV and depreciated yearly

Depreciation is based on revalued amount

Reported at depreciated cost less accumulated impairment costs

When assets written up: recognized to PL/net income up to previous losses, remaining is put in OCI to RE

When assets written down: Record in OCI up to previous years gains, remaining loss recorded in net income

2 approaches to adjusting asset costs: elimination or proportional

Adjustment to asset cost under revaluation

Elimination: Acc. Dep is reset to 0; asset cost adjusted accordingly. Results in asset with cost equal to FMV and 0 depreciation

Proportional: Both cost and acc. dep are adjusted proportionally to achieve overall carrying value equal to FMV

Methods of calculating depreciation

1. Straight line (SL) - evenly over use

2. Declining balance (DB) - declines as asset ages

3. Units of production - benefits compared to outputs generated

Choice of how to treat depreciation on assets acquire partway through the year (3)

1. Pro-rated based on days owned

2. Half depreciation in year 1 and disposal year

3. Full depreciation in year 1 and none in disposal year

Straight line depreciation

=(cost - residual value) / estimated useful life

ASPE: Greater of above formula or (cost - salvage) / asset life

Declining balance depreciation

Carrying value of asset * depreciation rate (set by mgmt.)

Next year the shrunken carrying value is applied vs the same rate

Units of production depreciation

Calc per unit depreciation = (cost - residual) / total units

Multiply vs output

Derecognition of PPE

Depreciation is brought to date, asset and acc dep are removed from books and the difference with consideration is recorded as a gain or loss on disposal

Residual vs salvage

Residual is the selling costs while salvage is the scrap costs