1 Introduction to published accounts Chapter learning objectives

Tangible non-current assets









PER

This chapter provides a recap from Financial Accounting, then builds on that knowledge.

The principles of the knowledge gained will
also be seen in Strategic Business Reporting. The chapter also provides information on
evidence useful in Audit and Assurance.

One of the PER performance objectives (PO6) is to record and process transactions and

events. You use the right accounting
treatments for transactions and events. These should be both historical and prospective – and include non-routine transactions. Working
through this chapter should help you
understand how to demonstrate that objective.

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Chapter 2





1 IAS 16 Property, Plant and Equipment
^{Property, plant and equipment}
Property, plant and equipment are tangible assets held by an entity for
more than one accounting period for use in the production or supply of
goods or services, for rental to others, or for administrative purposes.
Recognition
An item of property, plant and equipment should be recognised as an
asset when:
 'it is probable that future economic benefits associated with the
asset will flow to the entity; and
 the cost of the asset can be measured reliably' (IAS 16, para 7).

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Tangible non-current assets

Initial measurement
An item of property, plant and equipment should initially be measured at its cost:
 include all costs involved in bringing the asset into working
condition
 include in this initial cost capital costs such as the cost of site
preparation, delivery costs, installation costs, borrowing costs (in
accordance with IAS 23 – see later in this chapter).
 expense items, such as fuel, training and warranty costs, should
be written off as incurred.
 dismantling costs – the present value of these costs should be
capitalised, with an equivalent liability set up. The discount on
this liability would then be unwound over the period until the
dismantling costs are paid. This means that the liability increases
by the interest rate each year, with the increase taken to finance
costs in the statement of profit or loss.
– You may need to use the interest rate given and apply the
discount fraction where r is the interest rate and n the
number of years to settlement.
1
(1 + r)ⁿ

^Illustration 1

If an oil rig was built in the sea, the cost to be capitalised is likely to include the cost of constructing the asset and the present value of the cost of dismantling it. If the asset cost $10 million to construct, and would cost $4 million to remove in 20 years, then the present value of this dismantling cost must be calculated. If interest rates were 5%, the present value of the dismantling costs are calculated as follows: $4 million × 1/1.05^20 = $1,507,558 The total to be capitalised would be $10 million + $1,507,558 = $11,507,558. This would be depreciated over 20 years, so 11,507,558 × 1/20 = $575,378 per year. Each year, the liability would be increased by the interest rate of 5%. In year 1 this would mean the liability increases by $75,378 (making the year end liability $1,582,936). This increase is taken to the finance costs in the statement of profit or loss.

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