Study unit 2 Chapter 7, 8 & 18
Property, plant and
equipment (PPE)
IMPORTANT TO REMEMBER: Imports (shipping terms):
− FOB (free on board): use exchange rate on date when stock is loaded on ship
− CIF (customs, insurance, freight): use exchange rate on date of arrival of the ship in SA port
− DAT (delivered at terminal): use exchange rate on date stock unloaded at port
2.1. IAS 16
− Definitions:
o PPE = Tangible asset used in production or supply of goods or services; Rental to others; Admin purposes AND is
expected to be used for more than one period
o Cost model: asset is carried at CP less accumulated depr and impairment losses
o Revaluation model: Asset is carried at revalued amount; therefore FV on date of revaluation, minus subsequent
depr, provided that the FV can be measured reliably
− Disclosure (accounting policy): depreciation methods; service life; model (e.g. cost model)
Cost
− PPE cost price = purchase price + directly attributable costs + initial estimates of future costs
− Purchase price:
o Includes: Import tax and non-refundable tax
o Excludes: Discounts and rebates received
− Directly attributable costs:
o To get the asset to its current location and condition so that it can be used as intended by management
o Examples: costs for site preparation; initial delivery and handling costs; installation and assembly costs; professional
fees; employee benefits directly related to construction or acquisition; cost to test whether asset is functioning
properly (net of proceeds earned from sale of items produced during testing)
− Dismantling, removal and restoration costs:
o Future costs arising from acquisition: Capitalised as initial cost measured by its PV
o Future costs that arise due to use: Capitalised as a subsequent cost, unless the asset has reached the end of its
useful life, in case future costs are recognized in P/L; is measured against PV
− Subsequent costs:
o Day to day maintenance → always expense
o Replacement of parts: Remove CA of old/damaged part (damage = first test for impairment); Recognise new
component separately; Component not previously recognised separately → estimate CA; Component not
significant → expense
o Major inspections: Recognised as an asset and depreciated over useful life (period until next inspection)
SUMMARY:
− CAPITALISE: Purchase price (paid in cash immediately); Non-refundable import taxes; VAT which is not recoverable from
SARS; Delivery cost on purchase; Installation costs; Maintenance cost which is not day-to-day maintenance costs; [Initial
testing costs – Proceeds on sale from products on initial testing]; Major inspection costs; Compulsory costs of dismantling and
removing at PV; Professional costs for registration of property
− DON’T CAPITALISE: VAT which is recoverable from SARS; Introductory costs; Day-to-day maintenance costs; Initial operating
losses; Costs of relocating; Administrative costs; Advertisements costs; Personnel training for new machine
IMPORTANT TO REMEMBER:
− Repairs/restoration to be capitalised to asset = capitalise on date work finished/completed
− Deferred payment finance costs (AMRT period interest) when journal entries are asked
ACCC 371 @ NWU 2021 Ruané la Grange © 083 292 2662 1
Property, plant and
equipment (PPE)
IMPORTANT TO REMEMBER: Imports (shipping terms):
− FOB (free on board): use exchange rate on date when stock is loaded on ship
− CIF (customs, insurance, freight): use exchange rate on date of arrival of the ship in SA port
− DAT (delivered at terminal): use exchange rate on date stock unloaded at port
2.1. IAS 16
− Definitions:
o PPE = Tangible asset used in production or supply of goods or services; Rental to others; Admin purposes AND is
expected to be used for more than one period
o Cost model: asset is carried at CP less accumulated depr and impairment losses
o Revaluation model: Asset is carried at revalued amount; therefore FV on date of revaluation, minus subsequent
depr, provided that the FV can be measured reliably
− Disclosure (accounting policy): depreciation methods; service life; model (e.g. cost model)
Cost
− PPE cost price = purchase price + directly attributable costs + initial estimates of future costs
− Purchase price:
o Includes: Import tax and non-refundable tax
o Excludes: Discounts and rebates received
− Directly attributable costs:
o To get the asset to its current location and condition so that it can be used as intended by management
o Examples: costs for site preparation; initial delivery and handling costs; installation and assembly costs; professional
fees; employee benefits directly related to construction or acquisition; cost to test whether asset is functioning
properly (net of proceeds earned from sale of items produced during testing)
− Dismantling, removal and restoration costs:
o Future costs arising from acquisition: Capitalised as initial cost measured by its PV
o Future costs that arise due to use: Capitalised as a subsequent cost, unless the asset has reached the end of its
useful life, in case future costs are recognized in P/L; is measured against PV
− Subsequent costs:
o Day to day maintenance → always expense
o Replacement of parts: Remove CA of old/damaged part (damage = first test for impairment); Recognise new
component separately; Component not previously recognised separately → estimate CA; Component not
significant → expense
o Major inspections: Recognised as an asset and depreciated over useful life (period until next inspection)
SUMMARY:
− CAPITALISE: Purchase price (paid in cash immediately); Non-refundable import taxes; VAT which is not recoverable from
SARS; Delivery cost on purchase; Installation costs; Maintenance cost which is not day-to-day maintenance costs; [Initial
testing costs – Proceeds on sale from products on initial testing]; Major inspection costs; Compulsory costs of dismantling and
removing at PV; Professional costs for registration of property
− DON’T CAPITALISE: VAT which is recoverable from SARS; Introductory costs; Day-to-day maintenance costs; Initial operating
losses; Costs of relocating; Administrative costs; Advertisements costs; Personnel training for new machine
IMPORTANT TO REMEMBER:
− Repairs/restoration to be capitalised to asset = capitalise on date work finished/completed
− Deferred payment finance costs (AMRT period interest) when journal entries are asked
ACCC 371 @ NWU 2021 Ruané la Grange © 083 292 2662 1
