PPE, INTANGIBLE ASSETS & BORROWING COST

• Property, plant and equipment (PPE)


  Tangible items 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
• Examples of PPE


  • Land
  • Land improvements
  • Buildings
  • Machinery
  • Furniture and fixtures
  • Office equipment
• Recognition criteria for PPE


  • It is probable that future economic benefits associated with the item will flow to the entity
  • The cost of the item can be measured reliably
• Spare parts, stand-by equipment and servicing equipment


  Can be recognised as PPE if they meet the definition of PPE
• Unit of measure for PPE


  Judgment is required in applying the recognition criteria to an entity's specific circumstances
• Initial measurement of PPE


  1. Purchase price including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates

  2. 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

  3. Initial estimate of the cost of dismantling and removing the item and restoring the site
• Costs not included in the cost of PPE
• Modes of PPE acquisition


  • Purchased
  • Self-constructed
  • Purchased under deferred payment contracts
  • Exchanged for a non-monetary asset
• PPE is subject to depreciation
• Depreciation is the process of allocating the cost of PPE as an expense in a systematic manner over the periods expected to benefit from the use of the asset
• Depreciation methods


  • Straight-line method
  • Units of production method
  • Declining balance method
  • Group and composite depreciation
• Supplies used for PPE are not capitalised, they are prepaid expenses
• Modes of acquisition


  The different ways an entity can acquire property, plant and equipment (PPE)
• Modes of PPE acquisition


  • Purchase
  • Self-construction
  • Deferred payment contracts
  • Exchange
• Acquisition by purchase


  1. Debit asset account

  2. Credit cash and any payables
• Acquisition by self-construction


  1. Materials used

  2. Labor costs incurred

  3. Overhead
• Overhead is normally allocated based on direct labor costs
• Overhead is normally applied to buildings for clients, with any incremental amount applied to buildings for own use
• Acquisition by deferred payment


  Record asset at present value of future payments
• Commercial substance of an exchange


  The exchange transaction results in changes to the timing and amount of the entity's future cash flows
• Accounting for exchange with commercial substance


  Recognize any gains or losses directly in the exchange transaction
• Accounting for exchange with no commercial substance


  Recognize any gains partially, but losses in full
• Calculating cost of new asset in an exchange


  New asset cost = List price - Trade-in allowance + Fair value of old asset
• Calculating gain/loss on disposal in an exchange


  Gain/loss = Fair value of old asset - Carrying value of old asset
• Borrowing costs


  Costs that are directly attributable to the acquisition, construction or production of a qualifying asset
• Qualifying asset


  An asset that necessarily takes a substantial period of time to get ready for its intended use or sale
• Capitalizing borrowing costs for specific borrowings


  Actual borrowing costs incurred less any investment income on temporary investment of those borrowings
• Capitalizing borrowing costs for general borrowings


  Weighted average of interest rates applied to average accumulated expenditures on the asset
• Capitalizable borrowing costs should not exceed actual borrowing costs
• Intangible asset


  An identifiable non-monetary asset without physical substance
• Intangible asset


  • It should be identifiable
  • The company has control over it
  • Future economic benefits are expected from it
• Identifiability


  An intangible asset is identifiable when it is separable or arises from contractual/legal rights
• Recognition criteria for intangible assets


  • It is probable that future economic benefits will flow to the entity
  • The cost can be measured reliably
• Measurement of intangible assets


  • Initial measurement: Cost model or Revaluation model
  • Subsequent measurement: Amortization and Impairment
• Amortization of intangible assets


  • Intangible assets with finite useful life are amortized systematically over their useful life
  • Intangible assets with indefinite useful life are not amortized but tested for impairment
• Goodwill


  An intangible asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized
• Subsequent expenditure on intangible assets like brands, mastheads, customer lists etc. must be recognized in profit or loss as incurred
• Patent


  An exclusive right granted by a government to an inventor to control the manufacture, use, or sale of an invention for a specified period
• Trademark


  A symbol, sign, slogan, or name used to distinguish a product from others
• Copyright


  An exclusive right granted to authors, composers, or artists to publish, sell, or benefit from their literary, musical, or artistic work