ACCT2011 Financial Accounting: Self-Study Material
Week 2: Accounting for Assets – Property, Plant & Equipment (PPE)
HPH Ch. 8 Accounting for Property, Plant and Equipment (Q8.13, P8.1, P8.4, P8.6) Q8.13 (a) The basic requirements of AASB 136 are set down in paragraphs 9 and 59. Paragraph 9 stipulates that, at each reporting date, an entity is to assess whether there is any indication that an asset may be impaired (i.e. if an asset’s carrying amount may exceed its recoverable amount). Paragraph 12 of AASB 136 lists the external and internal factors whose existence may be regarded as evidence of asset impairment. The list is not intended to be exhaustive and an entity may refer to other indications that an asset is impaired (para. 13). The external factors include: • declines in market value greater than would be expected as a result of normal wear and tear; • adverse changes in the technological, market, economic or legal environment in which the entity or the asset operates; • increases in interest rates that would reduce fair value calculations involving future cash flows; and • the carrying amount of net assets exceeding the entity’s market capitalisation. Internal factors include: • evidence of obsolescence or physical damage to an asset; • changes, such as restructuring, that could affect the value in use of an asset; and • evidence that an asset’s economic performance will be worse than expected. Where any of these external or internal factors suggest there is an impairment, the recoverable amount of the asset must be calculated (para. 9). Where there is no indication of an impairment loss, the entity is not required to make a formal estimate of recoverable amount (para. 8). If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss (para. 59). (b) It is possible that an asset previously considered impaired...