Answer to Question #208710 in Economics for Joseph zimba

Question

 Using hypothetical but realistic organizations, present different scenarios that may lead to a deviation from the proper use of the following accounting standards:

1. IAS 16 Property, plant and equipment

2. IAS 40 Investment Property

Answer 1

Definitions

Fixed assets are material objects that:

intended for use in the production or supply of goods and services, for rent to third parties, or for administrative purposes,

intended to be used for more than one period.

The cost of an item of property, plant and equipment is recognized as an asset if:

there is a reasonable likelihood that economic benefits will flow, and

the cost of an asset can be measured reliably.

Spare parts and service parts are recognized [5]:

stocks and written off in the income statement as consumed,

fixed assets when more than one period is used,

fixed assets when used only in connection with the operation of another fixed asset.

Property, plant, and equipment are measured at cost, that is, at the amount of cash or cash equivalents paid and at the fair value of the other consideration given to acquire the asset at the time of its acquisition or construction.

Fair value is the amount at which an asset could be exchanged in a current transaction between knowledgeable willing parties in an arm's length transaction.

The initial cost of an item of property, plant, and equipment includes:

the purchase price including duties and non-refundable taxes fewer trade discounts and refunds,

costs directly attributable to the delivery of the asset and bringing it into a condition that ensures its functioning in accordance with the intentions of the company's management,

an initial estimate of the costs of dismantling and removing an item of property, plant, and equipment and restoring natural resources in the area it occupies, the responsibility for which the company assumes either upon acquiring this item or as a result of its operation over a certain period of time,

costs of payment of employee benefits and professional services incurred in connection with the construction or acquisition of an item of property, plant, and equipment,

site preparation costs,

primary costs for delivery and unloading, installation and assembly,

the cost of testing the proper functioning of the asset,

borrowing costs in accordance with IAS 23 Borrowing Costs.

Costs not attributable to fixed assets

costs of opening a new production or technical facility,

costs of introducing a new product or service (including costs of advertising and product promotion),

costs of doing business in a new location or with a new category of customers (including costs of training and education of personnel),

administrative and other general overhead costs,

repair and maintenance,

excess losses of raw materials, labor, and other resources incurred when creating an asset on their own,

internal profit of a self-created asset,

the difference between the price and the total amount of the payment in case of deferred payment - the percentage of credit.