13/08/2012
Topic 3 Property, Plant & Equipment
The nature of PP&E
• AASB 116 defines property, plant & equipment (PP&E) as: • tangible items • with a specific use within the entity • that are expected to be used during more than one period AASB 116 specifically excludes assets held for re-sale PP&E is normally divided into classes. Common classes include land, buildings, machinery, motor vehicles.
• •
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Initial recognition of PP&E
• Cost of an item is recognised as an asset if: • it is probable that economic benefits will flow to the entity, and • the cost can be reliably measured Where future economic benefits are not expected to flow to the entity, costs incurred should be expensed. Component parts (with
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The revaluation model: Revaluation increments
• Revaluation increments and their related tax effects are initially recorded in other comprehensive income and then transferred to equity. • The revaluation increment for Plant A would be recorded as follows: Dr Cr
Removal of existing accumulated depreciation prior to revaluation
Dr Cr
Revaluation of plant to fair value
These entries can be combined into a single entry
The revaluation model: Revaluation increments
Dr Cr
Tax effect of revaluation gain
• The entry to transfer the gain to equity is as follows: Dr Cr Cr
Accumulation of net revaluation gain in equity
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The revaluation model: Revaluation decrements
• The accounting treatment of a revaluation decrement is as follows: • Immediate recognition of an expense • No extra tax-effect entries beyond the tax-effect worksheet • The revaluation of Plant B would be recorded as follows: Dr Dr Cr
Devaluation of plant to fair value
The revaluation model: Reversing previous increments
• A decrement reversing a previous increment eliminates
any surplus before recognising an expense.
• In relation to Plant B, assume that a gross revaluation
increment of $15,000 had been made in 2010.
• The journal entries required are as follows:
Dr Accum. depreciation Cr Plant Dr Dr Cr
Devaluation of plant to fair value
40,000 40,000
Removal of existing accumulated
8. Paying any Liability does not count as an Equity Transaction. This does not affect Capital Accounts. Tax Basis is reduced by Partner's share. In this case, 25% of $10,000 payment is a reduction of $2,500 in the Partner's Tax Basis.
The company should report the change in the contingency accrual as a 2009 event due change in estimate. ASC 250-10-45-17 specifies that “a change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts reported in financial statements of prior periods.” Additionally, ASC 450-20-25-7 indicates that “all estimated losses for loss contingencies shall be charged to income rather than charging some to income and others to retained earnings as prior period adjustments”.
When a corporation distributes appreciated property, it must recognize gain as if it sold the property for its FMV immediately before the distribution. For gain recognition purposes, a property’s FMV is deemed to be at least equal to any liability to which the property is subject or that the shareholder assumes in connection with the distribution. A corporation recognizes no loss when it distributes to its shareholders property that has depreciated in value. A corporation’s E&P is increased by any E&P gain resulting from a distribution of appreciated property. A corporation’s E&P is reduced by (a) the amount distributed plus (b) the greater of the FMV or E&P adjusted basis of any non money property distributed, minus © any liabilities to which the property is subject or that the shareholder assumes in connection with the distribution. E&P also is reduced by taxes paid or incurred on the corporation’s recognized gain, if any.
ASC 320-10-35-34: “The fair value of the investment would then become the new amortized cost basis of the investment and shall not be adjusted for subsequent recoveries in fair value.”
* Conclusion: Changes in an acquirer’s valuation allowances that stem from a business combination should be recognized as an element of the acquirer’s deferred income tax expense (benefit) in the reporting period that includes the business combination.
Moreover, ASC 250-10-45-17 presents that “A change in accounting estimate shall be accounted for in the period of change if the change affects that period only or in the period of change and future periods if the change affects both. A change in accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts
According to IAS 16, The cost of an item of property, plant and equipment comprises, its purchase price, including
There is no need to make a journal entry for the 2,500 spent on disposing of capital assets because it was correctly recorded as a Repairs and Maintenance expense.
Assets are to be recorded and valued based of the type of asset there are.
Classify each of the items as an asset, liability; revenue; or expense from the company's viewpoint. Also indicate the normal account balance of each item.
Depreciation method was changed to straight line method from accelerated method. This policy change increased the income of year 1984 by $ 11 Million.
For our pro forma, we first began with the income statement. To determine Sales, we assumed an increase at a consistent rate each year. COGS and operating expenses were estimated as a percentage of Sales. Exceptional Costs and Restructuring Costs were not considered since pro forma statements exclude unusual and nonrecurring transactions. With these figures, we were able to determine our Profit Before Tax (PBT). For our tax expense, we assumed a constant tax rate. By subtracting the Tax Expense from our PBT we determined the Profit/(loss) After Tax. Lastly, we subtracted dividends, which remained unchanged each year, from the Profit/(loss) After Tax to find the company’s Retained Earnings. Below is a diagram illustrating these steps:
c) In relation to the plant, explain the adjustment required to the deferred tax account.
One of these is with regards to goodwill and intangible assets with identifiable useful lives.
For purposes of the asset provider financial discussion relative to investment, there is a cost and benefit analysis that always takes place. These elements are generally described as, for cost elements, facility capital costs (dictated by site location and design, as well as the partners involved in the planning process), facility maintenance costs (ongoing costs of maintaining a facility to ensure safe operations and upkeep), and operating costs (such as labor costs, fuel costs, equipment costs, and the time lost to congestion or to the breakdown of efficient supply chains).