Audit of Plant, Property and Equipment – Lecture
Property, plant and equipment are tangible items that:
a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than one period.
An item of PP&E should be recognised only if its cost can be measured reliably and it is probable that future economic benefits associated with the item will flow to the entity. The cost of an item of property, plant and equipment comprises: a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Exchanges of assets
PAS 16 requires all acquisitions of PP&E in exchange for non-monetary assets, or a combination of monetary and non-monetary assets, to be measured at fair value, subject to the following conditions: 1. 'The cost of such an item of property, plant and equipment is measured at fair value unless a) the exchange transaction lacks commercial substance or b) the fair value of neither the asset received nor the asset given up is reliably measurable.
2. If the fair value of neither the asset given up nor the asset received can be measured reliably, the cost of the asset is measured at the carrying amount of the asset given up and there is no gain on the transaction.
Costs Incurred After Acquisition
Bigger – the cost makes the asset bigger, such as an addition to a building Better – the cost makes the asset better, such as an improvement that makes an asset perform more efficiently
Longer – the cost makes the asset last longer, it extends the useful life Do not capitalize:
Repairs and maintenance
Borrowing costs are interest and other costs incurred by an entity in connection with the borrowing of funds. Capitalisation of borrowing costs
Interest costs are capitalized as part of asset if they are directly attributable such that it would have been avoided if the expenditure on the qualifying asset had not been made. Classification:
1. Specific borrowings
The borrowing costs eligible for capitalisation are the actual borrowing costs incurred during the period. Investment income on the temporary investment of those borrowings should be deducted and only the net amount capitalized.
2. General borrowings
The amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditures on that asset.
The capitalisation rate should be the weighted average of the borrowing costs applicable to the borrowings of the entity that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Note: The amount of borrowing costs capitalised during a period should not exceed the amount of borrowing costs incurred during that period.
Measurement after recognition
PAS 16 allows one of two alternatives to be chosen as the accounting policy for measurement of PP&E after initial recognition. 1. Cost model
The item of PP&E is carried at cost less accumulated depreciation and any impairment losses.
2. Revaluation model
The item of PP&E is initially recognised at cost and subsequently measured at fair value less subsequent accumulated depreciation or impairment losses.