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The cost model mean that property, plant and equipment are carried at cost less any accumulated
depreciation and any accumulated impairment loss.
The revaluation model means that property, plant and equipment are carried at revalued carrying
amount.
The revalued carrying amount is the fair value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment loss.
Acquisition on account
When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to
the invoice price minus the discount, regardless of whether the discount is taken or not.
Cash discounts are generally considered as reduction of cost
Exchange
PAS 16 paragraph 24, provides that the cost of an item of property, plant and equipment acquired in
exchange for a nonmonetary asset or a combination of monetary and nonmonetary asset is measured at
fair value plus any cash payment.
Commercial substance is a new notion and is defined as the event or transaction causing the cash flows
of the entity of change significantly by reason of the exchange.
Construction
The cost of self-constructed property, plant and equipment includes:
1. Direct cost of materials
2. Direct cost of labor
3. Indirect cost and incremental overhead specifically identifiable or traceable to the construction
PAS 16. paragraph 22, provides that the cost of abnormal amount of wasted material, labor or
overhead incurred in the production of self constructed asset is not included in the cost of the asset.
Derecognition means that the cost of the property, plant and equipment together with the related
accumulated depreciation shall be removed from the statement of financial position.
PAS 16, paragraph 67, provides that the carrying amount of an item of property, plant and equipment
shall be derecognized on disposal or when to future economic benefits are expected from the use or
disposal
Concept of depreciation
Depreciation is defined as the systematic allocation of the depreciable amount of an asset over the
useful life.
The objective of depreciation is to have each period benefit from the use of the asset bear an equitable
share of the asset cost.
Factors of depreciation
In order to properly compute the amount of depreciation, three factors are necessary, namely
depreciable amount, residual value and useful life.
Depreciable amount is the cost of an asset or other amount substituted for cost, less the residual value.
Residual value is the estimated net amount currently obtainable if the asset is at the end of the useful
life
Useful life in either the period over which an asset is expected to be available for use by the entity, or
the number of production or similar units expected to be obtained from the asset by the entity.
Depreciation method
Depreciation methods include straight line, production method and diminishing balance method.
Production method
The production or output method assumes that depreciation is more a function of it’s rather than
passage of time. The useful life of the asset is considered in terms of the output it produces or the
number of hours it works.
The accelerated depreciation is on the philosophy that new assets are generally capable of producing
more revenue in the earlier years than the later years.
CHAPTER 15 – PAS 20
Government Grant
GOVERNMENT GRANT
PAS 20, paragraph 3 defines government grant as assistance by government in the form of transfer of
resources of an entity in turn for part or future compliance with certain conditions relating to the
operating activities of the entity.
Government grant shall not be recognized on a cash basis as this is not consistent with generally
accepted accounting practice.
In other words, the grant is taken to income over one or more periods in which the related cost is
incurred.
The essence of government agency is that no value can reasonably be placed upon it. Examples of
government assistance are:
Government assistance does not include the following indirect benefits or benefits not specific to an
entity:
a. The accounting policy adopted for government grant including the method of presentation adopted
in the financial statements.
b. The nature and extent of government grant recognized in the financial statements and an indication
of other forms of government assistance from which the entity has directly benefited
c. Unfulfilled conditions and other contingencies attaching to government assistance that has been
recognized.
It is not required to lose the name of the government agency that gave the grant along with the date of
sanction of the grant by such government agency and the date when cash was received in case of
monetary grant.
SOURCE/S:
-Vince Pereda