ICAEW - FAR EXAM QUESTIONS AND 100%
CORRECT ANSWERS
IAS 16: At what stage should PPE be recognised? - Answer When it is probable that
future economic benefits will flow to the entity and the cost can be reliably measured.
PPE should be measured at cost. According to IAS 16, what can cost include? - Answer -
purchase price including import duties and nonrefundable purchase taxes after
deducting trade discount/rebates.
- directly attributable costs needed to bring asset to location and condition necessary
for it to be capable of operating as management intended.
Give 8 examples of what 'directly attributable costs' to PPE include. - Answer - costs of
wages needed for construction.
- site prep costs.
- initial delivery and handling costs.
- installation and assembly costs.
- costs of testing must deduct net proceeds from cost of any sellable items from testing.
- professional fee.
- direct construction costs.
- PV of future dismantling and site restoration costs @ end of useful life.
State four costs to be excluded from PPE cost and write-off to PL. - Solution - admin
costs.
- general OVHs.
- abnormal costs INCLUDING labour strikes or planning errors (write off cost).
- costs incurred after asset is capable of operating normally.
How should PPE incidental income be treated? - Answer It is not allowed to be deducted
,from the cost of the asset in the SFP, it should be treated as other income in the PL (so
as not to reduce depreciation expense).
How would you account for subsequent costs of acquiring PPE? - Answer Subsequent
costs are those costs that have been incurred subsequent to the asset being completed
and can only be capitalised if it ENHANCES the economic benefit provided by the asset.
Improvements = capitalise
Repairs = expense (PL)
Explain borrowings costs for PPE - Answer Interest along with other costs associated
with borrowing funds to construct an asset.
How should borrowing costs be treated in the financial statements? - Answer Directly
attributable borrowing costs MUST be capitalised as part of qualifying asset cost.
A qualifying asset takes a substantial period of time to get ready for use or intended
sale.
Borrowings specifically for asset funding = Capitalise cost incurred LESS income from
temporary investment of surplus borrowings
i.e. only need half the borrowings for first 6 months so invest other half.
How would you calculate the amount of borrowing cost to capitalise in respect of an
asset from general borrowings for asset funding? - Answer weighted average cost of
borrowing x expenditure on the asset.
- apportion the amount for the period of capitalisation.
- where you have 2 loans with 2 different interest rates find the average rate by doing:
(loan1 x loan1%) + (loan2 x loan2%) / total of loans
IAS 23 Where should the capitalisation of borrowing costs commence, be suspended
, and cease. - Answer Commence = when expenditure on asset is being incurred,
borrowing costs are being incurred, activities to prepare asset for use/sale is in
progress.
Suspended = during extended periods in which it suspends active development of a
qualifying asset.
Cease = when substantially all activities necessary to prep the asset for use/sale are
complete.
In relation to depreciation what happens when items of PPE are split up into different
components with different useful life? - Answer - the cost of replacing certain
components may be capitalised ONCE existing part is fully depreciated/derecognised.
- the items must be then separated out and depreciated individually.
What- are the two models that IAS 16 prescribe after initial recognition of PPE? - Answer
The cost model - can be applied to all classes of PPE.
The revaluation model - can be applied to land/buildings.
* both methods apply depreciation in the same way, and revals should be updated
regularly to avoid material difference in SFP asset values from fair value.
How does the upward revaluation of PEE go into the books? - Solution CR revaluation
surplus (recorded in other comprehensive income in SPL, because this is an unrealised
gain). = total of below amounts (fair value - carrying amount).
DR cost (to increase the cost of the asset to fair value).
DR accumulated depreciation (to eliminate an accumulated depreciation to date).
What is the formula for depreciation charge of a revalued asset? - Answer = revalued
amount - estimated residual value/REMAINING useful life.
CORRECT ANSWERS
IAS 16: At what stage should PPE be recognised? - Answer When it is probable that
future economic benefits will flow to the entity and the cost can be reliably measured.
PPE should be measured at cost. According to IAS 16, what can cost include? - Answer -
purchase price including import duties and nonrefundable purchase taxes after
deducting trade discount/rebates.
- directly attributable costs needed to bring asset to location and condition necessary
for it to be capable of operating as management intended.
Give 8 examples of what 'directly attributable costs' to PPE include. - Answer - costs of
wages needed for construction.
- site prep costs.
- initial delivery and handling costs.
- installation and assembly costs.
- costs of testing must deduct net proceeds from cost of any sellable items from testing.
- professional fee.
- direct construction costs.
- PV of future dismantling and site restoration costs @ end of useful life.
State four costs to be excluded from PPE cost and write-off to PL. - Solution - admin
costs.
- general OVHs.
- abnormal costs INCLUDING labour strikes or planning errors (write off cost).
- costs incurred after asset is capable of operating normally.
How should PPE incidental income be treated? - Answer It is not allowed to be deducted
,from the cost of the asset in the SFP, it should be treated as other income in the PL (so
as not to reduce depreciation expense).
How would you account for subsequent costs of acquiring PPE? - Answer Subsequent
costs are those costs that have been incurred subsequent to the asset being completed
and can only be capitalised if it ENHANCES the economic benefit provided by the asset.
Improvements = capitalise
Repairs = expense (PL)
Explain borrowings costs for PPE - Answer Interest along with other costs associated
with borrowing funds to construct an asset.
How should borrowing costs be treated in the financial statements? - Answer Directly
attributable borrowing costs MUST be capitalised as part of qualifying asset cost.
A qualifying asset takes a substantial period of time to get ready for use or intended
sale.
Borrowings specifically for asset funding = Capitalise cost incurred LESS income from
temporary investment of surplus borrowings
i.e. only need half the borrowings for first 6 months so invest other half.
How would you calculate the amount of borrowing cost to capitalise in respect of an
asset from general borrowings for asset funding? - Answer weighted average cost of
borrowing x expenditure on the asset.
- apportion the amount for the period of capitalisation.
- where you have 2 loans with 2 different interest rates find the average rate by doing:
(loan1 x loan1%) + (loan2 x loan2%) / total of loans
IAS 23 Where should the capitalisation of borrowing costs commence, be suspended
, and cease. - Answer Commence = when expenditure on asset is being incurred,
borrowing costs are being incurred, activities to prepare asset for use/sale is in
progress.
Suspended = during extended periods in which it suspends active development of a
qualifying asset.
Cease = when substantially all activities necessary to prep the asset for use/sale are
complete.
In relation to depreciation what happens when items of PPE are split up into different
components with different useful life? - Answer - the cost of replacing certain
components may be capitalised ONCE existing part is fully depreciated/derecognised.
- the items must be then separated out and depreciated individually.
What- are the two models that IAS 16 prescribe after initial recognition of PPE? - Answer
The cost model - can be applied to all classes of PPE.
The revaluation model - can be applied to land/buildings.
* both methods apply depreciation in the same way, and revals should be updated
regularly to avoid material difference in SFP asset values from fair value.
How does the upward revaluation of PEE go into the books? - Solution CR revaluation
surplus (recorded in other comprehensive income in SPL, because this is an unrealised
gain). = total of below amounts (fair value - carrying amount).
DR cost (to increase the cost of the asset to fair value).
DR accumulated depreciation (to eliminate an accumulated depreciation to date).
What is the formula for depreciation charge of a revalued asset? - Answer = revalued
amount - estimated residual value/REMAINING useful life.
