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International Financial Financial Reporting Standards

5728 words - 23 pages

1. IAS 16 PROPERTY PLANT AND EQUIPMENT
This standard regulates the measurement, recognition, derecognition and disclosure requirements of non-current assets and its related expenditure or income in the financial statements. It also defines the scope of it by stating clearly all assets falling within it.

1.1. Definition
Property, plant and equipment refer to all tangible non-current assets used in the production or supply of goods and services, for administrative purpose or for rental to others.

This definition emphasizes 4 important features of assets qualifying as PPE.

a) They are tangible non-current assets. This creates the delineation well excluding clearly any asset that ...view middle of the document...

* Revaluation model-This measurement looks at using a current market value or a valuation price of the asset taking into consideration the number of years the asset has been in use. This can only be used in subsequent recognition.i.e after the asset has first been recorded at historical cost meaning for initial recognition PPE cannot be at revalued amount. The revalued amount is also depreciated.

1.3 Recognition
This refers to incorporating the effects of a transaction into the financial statements.i.e recording the substance of a transaction in the financial statements.
PPE is recorded only when;
* It satisfies the definition of PPE
* It is probable that there will be an inflow of economic benefits from the asset to the entity
* The cost can be measured reliably

1.4 Finding the cost of the asset
The cost of the asset refers to the consideration given in exchange of the asset and all other cost incurred in bringing the asset into condition intended by management for use.
In finding the cost of the asset we look at it from two perspectives.
* Bought-in asset
* Self-constructed asset

1.4.1 Bought-in asset
In finding the value to be placed on asset bought before it is recorded, these are considered;
* Purchase cost
* Freight charges
* Professional fees incurred in connection with acquisition
* Installation cost

1.4.1.1 Once the asset is installed it means that the asset has become ready for use or has been put in a condition intended by management for it to be used.

1.4.1.2 Once an asset becomes ready for use, capitalization ceases and subsequent cost from there will be expensed unless it will improve the useful life of the asset.

1.4.1.3 Depreciation starts from where capitalization ends meaning an asset cannot be depreciated when is not ready for use.

1.4.1.4 Cost as listed below are usually subsequent cost and should not be added to the cost of the asset but should be expensed.
* Staff training cost to enable staff to operate the asset
* Operating losses resulting from use of asset until it reaches planned production level
* Maintenance and repairs,etc

Cost like interest paid or payable on a loan acquired to purchase PPE cannot be added to the cost of the asset as it is bought rather than built. Guidance in respect of this is given by IAS 23, borrowing costs.

1.4.1.1Subsequent cost
It has been said that capitalization ceases when the asset becomes ready for use. However if the cost incurred after the asset has become ready for use or is being used is expected to increase the useful life of the asset, this expenditure must be added to the cost of the asset.

1.4.2 Self-Constructed asset
This refers to PPEs not purchased or ready-made but the entity develops it from scratch through construction or any other mode of development.
The relevant cost to ascertain is the production cost and absorption costing is used to get the product cost. The elements of the cost of the asset are;

* Cost of...

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