Week 4:Tangible Non-Current Assets
Part I: Property, Plant & Equipment (IAS 16):
What is an ASSET?
A resource that has the following characteristics:
✓ Controlled by the entity
✓ A result of past events
✓ Potential for future economic benefits
✓ Has a reliable monetary value (objective valuation)
Definition of PPE:
According to IAS 16:
PPE are tangible assets that are held (purchased or constructed) by an
entity:
•For use in the production or supply of goods and services,
•for rental to others, or
•for administrative purposes AND expected to be used during more than
one period(>12 months)
What do we mean by the carrying amount of an asset?
■Carrying Amount is also known as the Net Book Value
■Initial carrying amount = its cost
■Subsequent carrying amount = the amount at which an asset is
recognised after deducting any accumulated depreciation and
accumulated impairment losses.
Activity in class:
Eleonor PLC purchased a machinery on the 1st July 2019 for £20,000. As of
1st July 2023, the accumulated depreciation of this machinery was
£5,000. What is the initial carrying amount and the NBV of the machinery
at 1st July 2023?
• initial carrying amount=cost of machinery =£20,000
• NBV at 1/7/23: £15,000
The initial cost of an item of PPE:
• On initial recognition, IAS 16 requires that items of PPE should be
measured AT COST.
• Cost of an item of PPE = Purchase Price (plus import duties minus
trade discounts) + any directly attributable costs
• Directly attributable costs include:
o Costs of site preparation
o Delivery and handling costs
o Installation costs
o Professional fees (for architects & engineers)
o Dismantling and restoring site
Example: On 31st July 2020, Kappa Plc, a company with a 31st March
year end,
bought a machinery (see full breakdown of expenses related to that
purchase). Its CEO believes that the full amount of the £540,000 should
, be recognised as initial cost. Do you agree?
Initial cost of PPE: £498,800 (= £470,000 + £4,300 + £24,500)
Example 2:
On October 2016, StructX PLC began the construction of its new
factory. The following costs have been provisionally capitalized by
StructX PLC and it is expected to report an initial recognition of PPE
£15,400. Do you agree?
i. Purchase of the land £10,000
ii. Costs of dismantling existing structures on the site £1,000
iii. Purchase of materials to construct the factory £3,000
iv. Costs of relocating additional staff who will work at the new factory
once open £500
v. Architects’ fees related to the construction of the parking outside of the
factory £700
vi. Costs relating to the formal opening of the factory £200
Actual cost should be: £10,000+£1,000+£3,000= £14,000
Part II: Borrowing costs (IAS 23):
IAS 23 (Borrowing Costs):
What if the business needs to take out a loan in order to fund the
purchase or construction of PPE?
■IAS 23 (Borrowing Costs) deals with it…
Specifically:
➢Are the interest charges for this loan part of the cost of the PPE (should
they be capitalised or expensed)?
-Borrowing costs are “interest and other costs that an entity incurs in
connection with the borrowing of funds”.
-Borrowing costs that are directly attributable to the acquisition,
construction or production of a “qualifying asset” are to be capitalised.
▪ In other words, such costs are those that would have been avoided if the
expenditure on the qualifying asset had not occurred.
For how long can a business capitalise borrowing costs?
The capitalisation of borrowing costs should start when:
Part I: Property, Plant & Equipment (IAS 16):
What is an ASSET?
A resource that has the following characteristics:
✓ Controlled by the entity
✓ A result of past events
✓ Potential for future economic benefits
✓ Has a reliable monetary value (objective valuation)
Definition of PPE:
According to IAS 16:
PPE are tangible assets that are held (purchased or constructed) by an
entity:
•For use in the production or supply of goods and services,
•for rental to others, or
•for administrative purposes AND expected to be used during more than
one period(>12 months)
What do we mean by the carrying amount of an asset?
■Carrying Amount is also known as the Net Book Value
■Initial carrying amount = its cost
■Subsequent carrying amount = the amount at which an asset is
recognised after deducting any accumulated depreciation and
accumulated impairment losses.
Activity in class:
Eleonor PLC purchased a machinery on the 1st July 2019 for £20,000. As of
1st July 2023, the accumulated depreciation of this machinery was
£5,000. What is the initial carrying amount and the NBV of the machinery
at 1st July 2023?
• initial carrying amount=cost of machinery =£20,000
• NBV at 1/7/23: £15,000
The initial cost of an item of PPE:
• On initial recognition, IAS 16 requires that items of PPE should be
measured AT COST.
• Cost of an item of PPE = Purchase Price (plus import duties minus
trade discounts) + any directly attributable costs
• Directly attributable costs include:
o Costs of site preparation
o Delivery and handling costs
o Installation costs
o Professional fees (for architects & engineers)
o Dismantling and restoring site
Example: On 31st July 2020, Kappa Plc, a company with a 31st March
year end,
bought a machinery (see full breakdown of expenses related to that
purchase). Its CEO believes that the full amount of the £540,000 should
, be recognised as initial cost. Do you agree?
Initial cost of PPE: £498,800 (= £470,000 + £4,300 + £24,500)
Example 2:
On October 2016, StructX PLC began the construction of its new
factory. The following costs have been provisionally capitalized by
StructX PLC and it is expected to report an initial recognition of PPE
£15,400. Do you agree?
i. Purchase of the land £10,000
ii. Costs of dismantling existing structures on the site £1,000
iii. Purchase of materials to construct the factory £3,000
iv. Costs of relocating additional staff who will work at the new factory
once open £500
v. Architects’ fees related to the construction of the parking outside of the
factory £700
vi. Costs relating to the formal opening of the factory £200
Actual cost should be: £10,000+£1,000+£3,000= £14,000
Part II: Borrowing costs (IAS 23):
IAS 23 (Borrowing Costs):
What if the business needs to take out a loan in order to fund the
purchase or construction of PPE?
■IAS 23 (Borrowing Costs) deals with it…
Specifically:
➢Are the interest charges for this loan part of the cost of the PPE (should
they be capitalised or expensed)?
-Borrowing costs are “interest and other costs that an entity incurs in
connection with the borrowing of funds”.
-Borrowing costs that are directly attributable to the acquisition,
construction or production of a “qualifying asset” are to be capitalised.
▪ In other words, such costs are those that would have been avoided if the
expenditure on the qualifying asset had not occurred.
For how long can a business capitalise borrowing costs?
The capitalisation of borrowing costs should start when:
