ICAEW – FAR EXAM QUESTIONS WITH VERIFIED ANSWERS
When does IAS 16 state PPE should be recognised? - AnswersWhen 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. What does IAS 16 state cost can include? ...
ICAEW – FAR EXAM QUESTIONS WITH
VERIFIED ANSWERS
When does IAS 16 state PPE should be recognised? - Answers✓✓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. What does IAS 16 state cost can include? - Answers✓✓-
purchase price including import duties and non-refundable 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. - Answers✓✓- 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.
Outline four costs that should be excluded from PPE cost and expenses to PL. - Answers✓✓-
admin costs.
- general OVHs.
- abnormal costs INCLUDING labour strikes or planning errors (remove cost).
- costs incurred after asset is capable of normal operation.
How should incidental income relating to PPE be treated? - Answers✓✓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 should subsequent costs of acquiring PPE be treated? - Answers✓✓Subsequent costs are
expenses incurred after completion of the asset and can only be capitalised if it ENHANCES the
economic benefit provided by the asset.
Define borrowing costs (PPE). - Answers✓✓Interest and other costs incurred in connection with
the borrowing of funds in order to construct an asset.
How should borrowing costs be treated in the financial statements? - Answers✓✓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.
Borrowing specifically for asset funding = capitalise cost incurred MINUS income from temp
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 relation to an asset from
general borrowings for asset funding? - Answers✓✓weighted average cost of borrowing x
expenditure on the asset.
- pro rate 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
According to IAS 23, when should the capitalisation of borrowing costs commence, be
suspended and cease. - Answers✓✓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 terms of depreciation, what should be done for items of PPE that are split up into different
components with different useful lives? - Answers✓✓- the cost of replacing certain components
may be capitalised ONCE the existing part is fully depreciated/derecognised.
- the items should then be separated out and depreciated individually.
What- are the two models that IAS 16 prescribe after initial recognition of PPE? -
Answers✓✓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 should an upwards revaluation of PPE be accounted for? - Answers✓✓CR revaluation
surplus (reflected in other comprehensive income on SPL to reflect that this is an unrealised
gain). = sum 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 equation for depreciation charge of a revalued asset? - Answers✓✓= revalued
amount - estimated residual value/REMAINING useful life.
--> pay close attention to date of reval, and when the useful life amount began!!!
What happens in a reserves transfer (PPE)? - Answers✓✓- due to an upward reval, depreciation
is likely to be higher, thus will decrease profits.
IAS 16 allows EXCESS depreciation (the extra depr charge resulting from reval) to be
transferred into retained earnings from the reval surplus (so need to know what depr WOULD
have been):
DR reval surplus
CR retained earnings
What is the accounting treatment for a downwards reval that has NOT previously been revalued
upwards? - Answers✓✓CR carrying amount of asset to reduce asset to FV.
DR PL expense (opex).
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