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Questions and Answers
What condition must be met for an asset to be recognized under IAS 16?
What condition must be met for an asset to be recognized under IAS 16?
- The future economic benefits associated with the asset must be probable. (correct)
- The asset must be depreciated before being recognized.
- The asset must be available for use immediately.
- The asset must have a minimal cost.
Which of the following is included in the cost of an asset under IAS 16?
Which of the following is included in the cost of an asset under IAS 16?
- Purchase price plus import duties and taxes. (correct)
- Future costs related to disposal after its useful life.
- Cost of maintenance during its useful life.
- General administrative costs of the business.
How is the depreciable amount determined under IAS 16?
How is the depreciable amount determined under IAS 16?
- Total cost divided by the estimated useful life.
- Cost of asset minus expected market value at end of life. (correct)
- Initial cost plus accrued interest over time.
- Cost of replacement minus repair costs during its life.
Under the revaluation model, how is an asset carried on the balance sheet?
Under the revaluation model, how is an asset carried on the balance sheet?
Which of the following statements regarding depreciation under IAS 16 is correct?
Which of the following statements regarding depreciation under IAS 16 is correct?
What is prohibited regarding depreciation methods under IAS 16?
What is prohibited regarding depreciation methods under IAS 16?
Which of the following is a requirement for subsequent costs to be recognized under IAS 16?
Which of the following is a requirement for subsequent costs to be recognized under IAS 16?
What is the initial treatment of an asset recorded in accordance with IAS 16?
What is the initial treatment of an asset recorded in accordance with IAS 16?
What must be adjusted in the case of a revaluation of an asset?
What must be adjusted in the case of a revaluation of an asset?
How often should assets that experience significant changes in fair value be revalued?
How often should assets that experience significant changes in fair value be revalued?
What happens to the gain on disposal of a revalued asset?
What happens to the gain on disposal of a revalued asset?
Which of the following statements about component accounting is correct?
Which of the following statements about component accounting is correct?
What is the primary requirement when an item of property, plant, and equipment is disposed of?
What is the primary requirement when an item of property, plant, and equipment is disposed of?
What basis is used for the treatment of depreciation when assets have been revalued?
What basis is used for the treatment of depreciation when assets have been revalued?
Which of the following disclosures is NOT required?
Which of the following disclosures is NOT required?
In relation to depreciation, when does it commence for an asset?
In relation to depreciation, when does it commence for an asset?
What is required when changing the residual value or useful life of an asset?
What is required when changing the residual value or useful life of an asset?
Which of these statements about revaluation frequency is correct?
Which of these statements about revaluation frequency is correct?
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Study Notes
Effective Date
- IAS 16 is effective for periods beginning on or after 1 January 2005.
Recognition and Measurement
- An asset is recognized when it's probable that future economic benefits will flow to the entity, and its cost can be reliably measured.
- Initial measurement is at cost, which includes:
- Purchase price plus taxes and import duties
- Direct costs to make the asset operational
- Estimated costs for dismantling, removal, and site restoration
- Subsequent costs are recognized only if they can be reliably measured and enhance economic benefits.
Subsequent Measurement
Cost Model
- Assets are carried at cost minus accumulated depreciation and impairment losses.
Revaluation Model
- Assets can be carried at fair value less subsequent depreciation if fair value can be reliably measured.
Depreciation
- Depreciation is allocated systematically over the asset's useful life.
- Annual review of residual value, useful life, and depreciation method is mandatory.
- Revenue-based depreciation methods are prohibited.
- Reflects expected consumption of future economic benefits.
- Changes in estimates affect future accounting, following IAS 8 guidelines.
- Depreciation starts when the asset is ready for use and impacts profit or loss unless included in another asset's carrying amount.
Revaluation Guidelines
- Regular revaluations are necessary; carrying amounts should not materially differ from fair value.
- Frequency based on item volatility—annual for volatile assets, 3-5 years for stable assets.
- Entire asset class must be revalued if one item is revalued.
- Adjust the excess of gross carrying amount over revaluated carrying amount for accumulated depreciation.
Component Accounting
- Significant components must be depreciated over their useful life.
- Replacement costs for components are capitalized.
- Regular inspections may be necessary for ongoing operation, recognized as replacements if criteria are met.
Spare Parts Classification
- Spare parts classified as PPE if meeting PPE definition, otherwise classified as inventory.
Disposals
- Remove assets from the financial position upon disposal or when no future economic benefits are expected.
- Gains/losses on disposal calculated as the difference between proceeds and carrying amount, recognized in profit or loss.
- Upon disposal of revalued assets, any revaluation surplus can be transferred to retained earnings, not through profit or loss.
Disclosure Requirements
- Disclosures must include:
- Measurement bases for gross carrying amount
- Depreciation methods and useful lives/depreciation rates
- Gross carrying amount and accumulated depreciation at period's start and end
- Reconciliation of carrying amount changes throughout the period.
- Indications of title restrictions and PPE pledged as security must be disclosed.
- Details on contractual commitments for PPE acquisition are required.
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