Topic 3 (2014)

Apunte Español
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 3º curso
Asignatura International Financial Accounting
Año del apunte 2014
Páginas 10
Fecha de subida 22/06/2014
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International Financial Accounting Elisabeth Martinez 3. Tangible Assets There is different IAS depending on the Tangible Asset.
-Biological Assets: in agriculture (fruit trees, IAS 41) -Mineral resources, tangible assets (IFRS 6) for investments tangible assets for production.
PPE: -Held by the company for the production or supply of goods and services, for rental to others or for administrative purposes.
-Expected to be used for more than one period.
The accounting life of a PPE Recognition Subsequent Costs Measurement after recognition • Cost model • Revaluation model Derecognition 1. RECOGNITION I. You can have it either by purchased to a third party… You can capitalize your expenses: -Purchase price -Direct cost related to bringing the asset into a working condition (installations, delivery..) -Borrowing costs up to the moment it starts working -Transportation costs Never included: -Taxes -Estimate cost of dismantling -Training (the knowledge a person acquires is not guaranteed to stay) -General administration: they are not 2. …Or self-constructed (IAS 2) DIRECT -Direct cost related to bringing the asset to a -Operation costs: only included costs up working condition (labor, raw to the working condition -Insurance materials…) -Fixed and variable production overheard -Borrowing costs -Estimating costs of dismantling.
1 International Financial Accounting Elisabeth Martinez BORROWING COSTS (IAS 16 and IAS 23) They are capitalized up to the moment the PPE starts operating A) SPECIFIT BORROWING FOR A SPECIFIC ASSET (interest easily identifiable) B) GENERAL BORROWING 1) Average investment for the period: €950,000 for a 4 month period !"",!!!!!"",!!!!!,!"".!!!!!,!"",!!! 2) Calculate interest payments €4M*(0,1)*(4/12) = 133,000 €1M*(0,15)*(2/12)=25,000 ! 158,000 3) Calculate weighted average borrowings !!∗ ! !" !!! ! !" = 4,500,000 ! !"#,!!! 4) Calculate the average interest rate: !,!"",!!! = 3,5% 5) Multiply average investment*average interest rate 950,000*3,5%=33,250 DISMANTELLING COSTS Is the estimated cost of removing the PPE at present value.
𝒑𝒓𝒆𝒔𝒆𝒏𝒕  𝒗𝒂𝒍𝒖𝒆  𝒐𝒇  𝒅𝒊𝒔𝒎𝒂𝒏𝒕𝒆𝒍𝒍𝒊𝒏𝒈  𝒄𝒐𝒔𝒕𝒔 = it must be updated every year 𝒙 𝟏+𝒊 𝒏   EXAMPLE year 1 to 1000M+887,767.67PPE nuclear plant   *provision for dismantelling: year 2 1000M+4,208,697.337 PPE nuclear plant   *provision for dismantelling: Account Payable (1M) Provision for dismantelling (887767.87)* !,!!!,!!! !!!.!"# !" = 887767,87 to Account Payable (1M) Provision for dismantelling (4,208,697.337)* !,!!!,!!! !!!.!"# !" = 4,208,697.337 2 International Financial Accounting Elisabeth Martinez 2. SUBSEQUENT COSTS Changes in the estimate useful life, the residual value and depreciation policy will affect subsequent accounting years (IAS 8) The company must decide on systematic metjod of allocating an asset’s cost over its useful life: this method has to be consistent in life.
If a depretion method is changed, managers should explain and justify it.
Expenses -Depreciation: is a systematic loss of value and can be predictable -Impairement: It is unpredictable -Repairs and maintenance: the value remains the same Increases in the value of the asset -Increased capacity a specific repair that increases the value -Longer useful life improvement I. DEVALUATION METHODS EXAMPLE: Asset: 3,000 Residual values: 0 Useful life: 3 Devaluation methods • 1. Straight line (always used otherwise stated) 3,000 − 0 = 1,000  𝑝𝑒𝑟  𝑦𝑒𝑎𝑟 3 • 2. Diminishing value. At the beginning you depreciate more than at the end of the life. You get higher depreciation than with straight line 3 International Financial Accounting Elisabeth Martinez Year 1: 3,000*66%= 2,000 Year 2: 1,000*66%=666 Year 3: what you have left: 333 • 3. Sum of units “Like a factorial”: 3+2+1(useful life)=6 Year 1: Year 2: Year 3: • !,!!!!! ! !,!!!!! ! !,!!!!! ! ∗3 ∗2 ∗1 4. Activity based Additional information is needed. Assumption: 6,000 working hours !,!!!!! Year 1 4,000 hours: !,!!! ∗ 4, 000 Year 2 1,000 hours: Year 3 1,000 hours: !,!!!!! !,!!! !,!!!!! !,!!! ∗ 1, 000 ∗ 1, 000 II. CHANGES IN PREDICTIONS EXCERCICE 3.2 NEW MACHINE: 1ST SEPTEMBER 2008 (STARTS WORKING 1ST DECEMBER 2OO8) COST MACHINE: 5,000 TRANSPORT: 360 INSTALLATION: 200 ELECTRIC CONSUMPTION YEAR 2008: 180 REPAIRS: 10 LOAN: 1,200 at 10& 5 YEARS USEFUL LIFE 1ST DECEMBER 2O1O: IMPROVEMENT (700) GIVES 3 MORE USEFUL LIFE YEARS a) Register the acquisition cost of the machine.
5,590 PPE TO Accounts payable 5,000 Transport 360 Installation 200 Interest (1/12*10%*1,200) 30 b) Register the improvements of the machine on 1st December 2010.
TO 700 PPE Cash 700 c) Calculate the depreciation for the years 2008, 2009 and 2010.
4 International Financial Accounting 2008: !,!"# 2009: !,!"# ! ! Elisabeth Martinez ! ∗ !"= 93.16 =1,118 2010: Until 1st December !,!"# ! !! ∗ !" = 1024.83 From 1st December: -New book value: 5590+700=6,290 -Accumulated depreciation: 93.16+1,118+1024.83 = 2,236 -Remaining useful life: 6 years !,!"#!!,!"# ! New depreciation: ∗ (!") = 56.31 ! 3. Valuation after recognition You should use the same method for all assets! Cost method is the only allowed in Spain.
To cancel the previous one EXAMPLE Scenario 1 1. Register of the asset and the increase in value 800 Land TO Acc Payable 800 100 Land (increase in value) TO Asset revenue surplus 100 TO Land 100 TO Gain on value of land 50 2. To cancel it out 100 Asset revaluation surplus 3. To register an imapairement loss 50 Impairement loss 5 International Financial Accounting Scenario 2 1. Register the asset and the impairement loss 1,200 Land 120 Impairement loss 2. To cancel out the previous step 120 Accumulated impairement loss Elisabeth Martinez TO Acc Payable 1,200 TO Accumulated imparement loss 120 TO Gain in value of land 120 TO Asset revaluation surplus 40 3. increase of the value of land by 40 40 Land IMPORTANT! Acc. Depreciation and Acc Imapirement loss are contrassets, and are shown in the balance sheet as negative assets! 3.1 REVALUATION METHOD. ADJUSTING DEPRECIATION METHOD 1. Calculate New Value for Accumulated Depreciation Depreciation is 1,000 per year.
Book value in year 4 is 10,000-4,000=6,000 Fair value is 9,000.
There is an increase of 50% of the value. (9,000 is 1,5*6,000) 50%*4,000 (Accumulated depreciation) 50%*10,000 (historical value) The rest METHOD 2. Cancel accumulated depreciation. (Used for buildings or parts of buildings) We cancel the Accumulated depreciation (FIRST STEP).
Then we add the revaluation as normally, 6 International Financial Accounting Elisabeth Martinez 3.2 REVALUATION METHOD. THE TAX EFFECT The revaluation reserve has a potential (future) effect on the accounts that has to be registered. We need to know the tax rate.
This step is the same as the Method 2 but instead of adding “Asset revaluation surplus” we have to say “Net asset revaluation surplus” and then created an account “Deferred tax liability” with the amount of taxes.
3.3 EXCERCICE A. Method 1. Adjust depreciation = 34,62% 180,000 is the increase value in the revaluation and 520,000 is the book !"#,!!! !"#,!!! price.
Now, 34,62%*600,000 (Historical Price)=207,692.31 BUILDINGS B. Method 2. Cancel depreciation 80,000 Acc. Depreciation 180,000 Building TO Acc. Depreciation 34,62%*80,000=27,692.31 Net Asset revaluation surplus 180,00030%=126,000 Deferred tax liabilities 54,000 TO Buildings 80,000 Net asset revaluation surplus 126,000 Deferred tax liabilities 54,000 7 International Financial Accounting Elisabeth Martinez 4. Derecognition of PPE element CASE 1.
You just cancel any Acc. Dep or Acc. Imp and add any cash! 16,000 Acc Depreciation 2,000 Acc Impairement 3,000 Cash TO Machine 20,000 (Historical cost) Gain from tangible assets 1,000 CASE 2.
10,000 Acc. Depreciation 25,000 Cash 5,000 Revaluation surplus TO Flat 30,000 Gain from tangible assets 10,000 8 International Financial Accounting Elisabeth Martinez 4.1 EXCHANGE OF ASSETS A. EXHANGE ASSETS WITH COMMERCIAL SUBSTANCE FOR COMPANY A 40,000 Acc depreciation (A) 30,000 PPE (fair value B) 5,000 Cash (A recieves) TO PPE (Historical value A) 60,000 Gain of exchange of assets 15,000 FOR COMPANY B 25,000 Acc. Depreciation (B) 50,000 PPE (fair value A) TO PPE (Historical value B) 50,000 Cash (B pays) 5,000 Gain from exchange of assets 20,000 B. EXCHANGE ASSETS WITHOUT COMMERCIAL SUBSTANCE There are neither gains nor losses! FOR COMPANY A 10,000 Acc. Depreciation (A) 5,000 Book value (A) TO PPE CAR Historical value (A) 15,000 9 International Financial Accounting Elisabeth Martinez FOR COMPANY B 6,000 Acc. Depreciation (B) 5,000 Book value (B) TO PPE Car Historical Value (B) 11,000 5. Changes in PPE components (not in the slides) Case 2. Cost of the component not identified from the beginning.
Acquisition of Car: 100,000 Useful life: 20 years Inflation rate: 4% annually In year 5 we had to change the tires. Cost of changing the tires: 12,000 1. Value of the tires in year 0: !",!!! = 9,863.12 !.!" !,!"#.!" 2. Estimated acc. depreciation: !" ∗ 5 = 2,465.78 2,465.78 Acc depreciation 7,397.45 loss on tangible assets TO 12,000 PPE (tires) TO PPE CAR 9,863.12 Cash 12,800 10 ...