FAC3702 - Unit 1-7 Summary with Examples Distinctive Financial Reporting (University of South Africa)

FAC3702 - Unit 1-7 Summary with Examples Distinctive Financial Reporting (University of South Africa) lOMoARcPSD| LEARNING UNIT 1 IAS 16 PROPERTY, PLANT AND EQUIPMENT Disclaimer The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam. RECOGNITION INITIAL COST SUBSEQUENT COST Elements of cost: Purchase price, import duties and nonrefundable purchase taxes etc Costs directly attributable to bringing the asset to location and condition to be capable to operate in manner intended by management Initial estimated costs of dismantling and removing item and restoring the site on which it is located. Servicing costs: Normal day-to-day servicing (maintenance) costs are not recognised in the CA of the item. Replacement at regular intervals Recognise in CA of PPE item the cost of the replacing part when the cost is incurred if the recognition criteria are met. The remaining CA of the replaced part is derecognised. MEASUREMENT AT RECOGNITION ABNORMAL CREDIT TERMS EXCHANGE OF PPE ITEMS Cost of PPE is cash price equivalent at recognition date. If payment is deferred beyond normal credit terms. Difference between cash price and total payment is recognised as interest over the period of credit. PPE items may be acquired in exchange for monetary or non-monetary assets or both: The cost of acquired item is measured at FV unless: Exchange transaction lacks commercial substance, OR FV of neither asset received or given up is reliably measured Else asset acquired is measured at carrying value of asset given up. Determine commercial substance by considering the extent to which its future cash flows (CF) (after tax) are expected to change as a result of the transaction. Exchange transaction has commercial substance if: lOMoARcPSD| Configuration of the CF of asset received differs from the configuration of CF of asset transferred, OR Entity-specific value of the portion of entity’s operations affected by the transaction changes as result of exchange, AND Difference in the 2 above is significant relative to the FV of the assets exchanged. When FV of both acquired asset and asset given up can be measured reliably, then FV of asset given up is used to measure cost of the asset received, UNLESS FV of asset received is more evident. MEASUREMENT AFTER RECOGNITION COST MODEL REVALUATION MODEL Calculation of CA: Cost price Less accumulated depreciation Less accumulated impairment losses Calculation of CA: FV on date of revaluation Less accumulated depreciation Less accumulated impairment losses Gross replacement value: The replacement cost (market value/cost price) of a similar new asset You have to determine the CA at the beginning of the current year in order to compare it to your existing CA on the same date and calculate the revaluation surplus/deficit Net replacement value Regarded as the cost to replace the asset currently with a similar asset of the same age and condition The value given (normally at the end of the financial year) is the CA of that a