F7 Financial Reporting (INT) IAS 16 Property, plant and equipment
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected flow to the entity. Property, plant and equipment 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. Initial recognition: PPE should initially be recognised in an entity's statement of financial position at cost. Cost is the amount of cash and cash equivalents paid to acquire the asset at the time of its acquisition or construction PLUS the fair value of any other consideration given. In an exchange transaction if the entity is able to determine reliably the fair value of o either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. [IAS 16: 26] Elements of Cost: Cost can include: Purchase price less any trade discount (not prompt payment discount) or rebate Import duties and non-refundable purchase taxes Directly attributable costs of bringing the asset to working condition for its intended use. Examples: Costs of site preparation Where these costs are Initial delivery and handling costs incurred over a period of time, Installation and assembly costs the period for which the costs Professional fees such as legal fees, architects fees can be included in the cost of Initial costs of testing that asset is functioning correctly PPE ends when the asset is (after deducting the net proceeds from selling any items ready for use, even if not produced) brought into use. -
The initial estimate of dismantling and removing the item and restoring the site where it is located if the entity is obliged to do so (to the extent it is recognised as a provision per IAS 37). Gains from the expected disposal of assets should not be taken into account in measuring a provision.
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In case of a land, if initial estimation of restoration cost is capitalised then this capitalised restoration cost shall be depreciated.
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Borrowing costs incurred in the construction of qualifying assets if in accordance with IA S 2 3 B o r r o w i n g c o s t s .
Any abnormal costs incurred by the entity, for example those arising from design errors, wastage or industrial disputes, should be expensed as they are incurred and do not form part of the capitalised cost of the PPE asset.
Estimated economic life and residual value of asset should be reviewed at the end of each reporting period. If either changes significantly, the change should be accounted for over the useful economic life remaining.
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