Property, Plant, Equipment and Intangible Assets
What you must know
PPE is recognised at cost when future economic benefits are probable and cost is measurable; cost includes purchase price, directly attributable costs and decommissioning obligations. Subsequent measurement is the cost model or the revaluation model (fair value reliably measurable, applied to an entire class, with revaluation surplus in OCI and deficits in profit or loss except to the extent of prior surplus). Depreciation is systematic allocation over useful life; residual value and useful life are reviewed at least annually. Know component accounting, borrowing costs capitalisation for qualifying assets, and the distinction between repairs (expense) and improvements (capitalise). Intangibles: recognise if identifiable, controlled and probable; internally generated brands and goodwill are not recognised; development costs are capitalised when criteria are met. Know impairment triggers and the recoverable amount (higher of fair value less costs of disposal and value in use).
Traps candidates fall into
- Revaluing only one asset within a class rather than the whole class.
- Charging a revaluation deficit to OCI when no prior surplus exists.
- Depreciating land with an indefinite life, or ignoring residual value.
- Capitalising training, advertising or start-up costs.
- Forgetting to derecognise an asset and recognise a gain or loss on disposal.
- Confusing the revaluation surplus with distributable retained earnings.
Rule of thumb
Ask: is the cost directly attributable to bringing the asset to working condition? If not, expense it. For revaluations, route surplus through OCI and deficits through profit or loss unless offsetting a prior surplus for the same asset.
Worked example
Machine cost 500,000, useful life 5 years, straight-line, residual 50,000. Annual depreciation = (500,000 − 50,000)/5 = 90,000. If revalued to 620,000 after two years (carrying amount 320,000), the surplus of 300,000 goes to OCI and is presented in a revaluation reserve within equity.