RELEVANT TO ACCA QUALIFICATION PAPER F7
The accounting for IAS 16, Property, Plant and Equipment is a particularly important area of the Paper F7 syllabus. You can almost guarantee that in every exam you will be required to
account for property, plant and equipment at least once.
This article is designed to outline the key areas of IAS 16, Property, Plant and Equipment that you may be required to attempt in the F7 exam.
IAS 16, Property, Plant and Equipment overview
There are essentially four key areas when accounting for
property, plant and equipment that you must ensure that you are familiar with:
The basic principle of IAS 16 is that items of property, plant and equipment that qualify for recognition should initially be measured at cost.
One of the easiest ways to remember this is that you should
capitalise all costs to bring an asset to its present location and condition for its intended use.
Commonly used examples of cost include:
purchase price of an asset (less any trade discount)
directly attributable costs such as:
cost of site preparation
initial delivery and handling costs
installation and testing costs
the initial estimate of dismantling and removing the asset and restoring the site on which it is located, to its original condition (ie to the extent that it is recognised as a provision per IAS 37, Provisions, Contingent Assets and Liabilities)
borrowing costs in accordance with IAS 23, Borrowing Costs. Example 1
On 1 March 2008 Yucca acquired a machine from Plant under the following terms:
List price of machine
Electrical installation costs
Purchase of a five-year maintenance contract with Plant
In addition to the above information Yucca was granted a trade discount of 10% on the initial list price of the asset and a settlement discount of 5% if payment for the machine was
received within one month of purchase. Yucca paid for the plant on 25 March 2008.
How should the above information be accounted for in the
financial statements? (See page 5 for the solution to Example 1.) Example 2
Construction of Deb and Ham’s new store began on 1 April 2009. The following costs were incurred on the construction:
Direct labour costs
The store was completed on 1 January 2010 and brought into use following its grand opening on the 1 April 2010. Deb and Ham issued a $25m unsecured loan on 1 April 2009 to aid construction of the new store (which meets the definition of a qualifying asset per IAS 23). The loan carried an interest rate of 8% per annum and is repayable on 1 April 2012.
Calculate the amount to be included as property, plant and
equipment in respect of the new store and state what impact the above information would have on the income statement (if any) for the year ended 31 March 2010.
(See page 5 for the solution to Example 2.)
Once an item of PPE has been recognised and capitalised in the financial statements, a company may incur further costs on that asset in the future. IAS 16 requires that subsequent costs should be capitalised if:
it is probable that future economic benefits associated with the extra costs will flow to the entity
the cost of the item can be reliably measured.
All other subsequent costs should be recognised as an expense in the income statement in the period that they are incurred.
On 1 March 2010 Yucca purchased an upgrade package from Plant at a cost of $18,000 for the machine it originally purchased in 2008 (Example 1). The upgrade...
Please join StudyMode to read the full document