Initial measurement & depreciation

• PPE are tangible assets that :

  • are held for use in the production or supply of goods or services, for rental to others or for administrative purposes and
  • are expected to be used during more than one period IAS 16
• PPE initial measurement :

  the cost of an item of PPE includes:

  • the purchase price

  and

  • costs directly attributable to the asset that is needed to bring it to working condition
  • cost of
  • site preparation
  • installation
  • delivery
  • related professional fees for architects and engineers
• Subsequent measurement:

  routine repairs and maiantenance costs

  • expenses in the income statement

  expendinure extending the useful life of PPE:

  • added to the cost of the asset of the SOFP
• the two models to measure subsequent measurement:

  cost model

  revaluation model
• cost model:

  (historic cost) less accumulated impairment losses - carrying amount (net book value of the asset)
• revaluation model:

  revalued amount less accumulated depreciation and accumulated impairment losses
• to calculate depreciation 4 factors need to be considered:

  the cost or fair value of the asset

  the useful life of the asset

  the residual value of the asset

  the depreciation method
• factor 2 of depreciation:

  useful economic life

  • the period over which an asset generates benefits

  distinction between the physical life of the assets - time expected to remain in existence

  the economic life of the asset: time expected to be used
• residual value : disposal value, terminal value , scrap value or salvage

  • selling value of the asset at the end of its useful life

  depreciable amount = initial cost - residual value
• The 2 depreciation methods:

  straight line : constant change over the life of the asset

  reducing balance : decreasing change over the life of the asset
• straight line method

  deprecinaction charge = initial cost - residual value / useful economic life
• reducing balance = formula, you then apply it to the NBV

  
• PPE depreciation methods:

  • the method chosen should be applied consistently to enhance comparability
  • entities usually select the method used by industry peers to enhance comparability
  • entities may not use the same depreciation methods for all types of depreciable assets