Economic life

Economic life also known as useful life is either Economic life

  1. the period over which an asset is expected to be economically usable by one or more users, or Economic life
  2. the number of production or similar units expected to be obtained from an asset by one or more users. Economic life

Every asset has a lifecycle, which is its useful life from acquisition to disposal. Inevitably, the facilities we manage will outlive their installed building systems. The facility manager is responsible for managing not only the maintenance, but also the replacement of these systems. Additionally, facility managers replace components and systems for the purpose of improving performance or efficiency, which might occur prior to the end of the asset’s Read more

Equity reserves

Last update

Equity reserves are part of owner’s equity, Equity is defined as follows: The residual interest in the assets of the enterprise after deducting all of its liabilities. Equity reserves are defined/described in several IFRS Standards, let’s see….

Equity consists of several components such as Share capital, Treasury shares (issued shares held by the entity in a buyback), Share premium account (or Additional paid-in capital), Retained earnings and Non-controlling interest. But there is more….

  • Translation reserve (foreign currency translation reserve), that arises from the change in FX rates from translation of foreign operating entities (in other than the consolidationEquity reserves Equity reserves Equity reserves currency) from reporting period to reporting period, When realised in a sale the result is reclassified from other
Read more

Cost of self-constructed assets

Last update

IAS 16 22 sets out the core principle for determining the cost of self-constructed assets. Here is a very practical example to quickly understand and solve any IFRS issues.

The cost of a self-constructed asset is determined using the same principles as applicable to an purchased asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale. Any internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the asset.

Elements … Read more

Inventory or Equipment?

Last update

Inventory or Equipment – This distinction is important because inventory is current and equipment is non-current property plant and equipment. Inventory is cash flow from operating activities, equipment is cash flow used in investing activities. Inventory is cost of sales and equipment is depreciation. Inventory or Equipment

Equipment is recognised component-wise. This means each significant part is treated just like a non-current asset. When that part is replaced, it is derecognised (or scrapped) and the new part is purchased and capitalised. Inventory or Equipment

Therefore, the stocks of such significant parts are not classified as inventories. They are just like capital ‘work in progress’. The stock of significant parts awaiting utilisation may be classified as … Read more

PPE Components and parts

Last update

PPE Components and parts is about what to include in cost of letting a constructor build a certain technological type of asset/machinery. A complex asset is comprising of many major and small parts. Its cost excluding directly attributable costs is CU 1,000,000. One of its part costs CU 120,000 and another CU 180,000. All other parts cost less than CU 100,000.

Estimated useful life of the main asset and two parts are as follows: – Main Asset 30 years; Part1 10 years; Part 2 30 years. PPE – Components and parts

In this case, the company shall classify these parts in the following manner: PPE Components and partsPPE Components and parts

  • Complex asset: cost CU 1,000,000 – Useful life 30

Read more

What is Property plant and equipment?

Last update

What is Property plant and equipment – Property, plant, and equipment (PP&E) is tangible items that are expected to be used in more than one period and that are used in production, for rental, or for administration. This can include items acquired for safety or environmental reasons. In certain asset-intensive industries, PP&E is the largest class of assets.

PP&E items are commonly grouped into classes, which are groups of assets having a similar nature and use. Examples of PP&E classes are buildings, furniture and fixtures, land, machinery, and motor vehicles. Items grouped within a class are typically depreciated using a common depreciation calculation. What is Property plant and equipment

When recording an item within PP&E, include in … Read more

Purchase price of PPE

Last update

Purchase price of PPE – Here is one complete case of the purchase price and other cost that may be capitalised when acquiring a non-current asset in the day-to-day business.

THE CASE Purchase price of property

Entity K purchased a plant for a gross price of CU 200 million. The seller granted a 0.5% rebate. The gross price includes excise duty CU 18 million for which the buyer entity will get a tax refund and non-refundable VAT of CU 10 million. The company has also incurred CU 15 million for transportation costs, handling charges and insurance, CU 5 million for installation and CU 3 million for testing and technical engineering fees. It has earned CU 0.2 million Read more

Cost of Property plant and equipment

Last update

Cost of Property plant and equipment – The cost of an item of property, plant and equipment comprises: CosCost of Property plant and equipmentt of Property plant and equipment

  1. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. Cost of Property plant and equipment
  2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  3. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item
Read more

Revaluation model

Last update

As part of IAS 16 Property, Plant and Equipment it is possible to use the revaluation model. An asset will be carried at its fair value at the revaluation date less subsequent depreciation and/or impairment. Gains/losses arising on the revaluation of an entity’s property (other than investment property) are recorded within equity as a revaluation reserve.

When an item of property, plant and equipment is revalued, the entire class of the asset should be revalued. Classes of property plant and equipment are provided here. Fair value of an item of PPE is not necessarily the market price. Fair value of land and building is determined on the basis of market based evidence which is termed … Read more

What is the component approach?

Last update

What is the component approachWhat is the component approach – Property, plant and equipment (PPE) is often composed of various parts with varying useful lives or consumption patterns. These parts are (individually) replaced during the useful life of an asset.

Therefore: What is the ‘component approach’?

  • Each part of an item of PPE with a cost that is significant in relation to the total cost of the item is depreciated separately (except where one significant part has a useful life and a depreciation method that is the same as those of another part of that same item of PPE; in which case, the two parts may be grouped together for depreciation purposes [IAS 16.45]; and
  • The cost of a
Read more