Property, Plant and Equipment Recognition

Questions and Answers

What happens to the carrying amount of the previous major inspection after a new inspection is recognised?

It is only derecognised if it was identified in the transaction.

It is added to the cost of the new inspection.

It is fully retained in the asset's value.

It is derecognised from the carrying amount. (correct)

When recognising the cost of a major inspection, what criteria must be satisfied?

The cost must exceed a predetermined value.

The inspection results must show significant improvements.

The inspection must be performed regularly.

The recognition criteria for capitalising costs must be met. (correct)

How should land and buildings be accounted for when they are acquired together?

Land and buildings should be accounted for separately. (correct)

They should be grouped together as a single asset.

Only the buildings are accounted for separately.

The accounting depends on the size of the acquisition.

What can be used as an indication of the cost of the existing inspection component?

The estimated cost of a future similar inspection. Signup and view all the answers

What is the recognition treatment for costs associated with a major inspection as part of property, plant, and equipment?

Costs are capitalised if recognition criteria are satisfied. Signup and view all the answers

Under what conditions should the cost of an item of property, plant and equipment be recognized as an asset?

If it is probable that economic benefits will flow and the cost can be measured reliably. Signup and view all the answers

How should spare parts and servicing equipment be classified if they do not meet the definition of property, plant and equipment?

They should be classified as inventory. Signup and view all the answers

What should an entity do when part of a property, plant, and equipment item is replaced and it provides incremental future benefits?

The cost of the replacement should be capitalized, and the carrying amount of the replaced part should be derecognized. Signup and view all the answers

When is it acceptable for an entity to estimate the carrying amount of a replaced part?

When it is impracticable to identify the carrying amount of the replaced part. Signup and view all the answers

How should the initial cost of an asset be treated when its major components have different consumption patterns?

The cost should be allocated to its components and depreciated separately. Signup and view all the answers

Study Notes

Recognition of Property, Plant, and Equipment (PPE)

Items are recognized as assets only if future economic benefits are probable and costs can be measured reliably.
Spare parts, standby equipment, and servicing equipment are recognized as PPE if they meet the definition; otherwise, they are classified as inventory.

Replacement and Derecognition

Costs for replacing parts of PPE that provide incremental future benefits increase the asset's carrying amount.
Carrying amounts of replaced parts are derecognized, irrespective of whether these parts were previously depreciated.
If identifying the carrying amount of replaced parts is impractical, use the current replacement cost adjusted for depreciation and impairment.

Componentization of Assets

When assets have major components with different economic consumption patterns, initial costs must be allocated to these components, each being depreciated separately over its useful life.

Major Inspections for Continuing Operation

Regular major inspections are necessary for certain PPE (e.g., buses) to ensure continued operation, regardless of parts replacement.
Costs of major inspections can be added to the carrying amount if recognition criteria are satisfied, with the previous inspection's carrying amount being derecognized.
Estimated future inspection costs may serve as a proxy for initial inspection cost when determining carrying amounts.

Separable Assets

Land and buildings should be treated as separate assets for accounting purposes, even when acquired together.

Description

This quiz focuses on the recognition criteria for property, plant, and equipment as outlined in paragraph 2.27. It addresses the conditions under which costs can be recognized as assets and the importance of measuring costs reliably. Test your understanding of these concepts in relation to economic benefits.