ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Initial Recognition of PPE - Notes ^{1 / 7}

We recognise (place in the accounts) PPE when:

1. it is RELEVANT to do so and in doing so

2. the item is FAITHFULLY REPRESENTED

3. Meets the definition of an Asset (PPE)

What gets included in 'Cost'

1. Directly attributable costs to get it to work and where it needs to be

   eg. site preparation, delivery and handling, installation, related professional fees for architects and engineers

2. Estimated cost of dismantling and removing the asset and restoring the site.

   This is:
   Dr PPE
   Cr Liability

   All at present value

   This will need discounting and the discount unwound:
   Dr interest (with unwinding of discount) 
   Cr liability

3. Borrowing costs 

   If it is an asset that takes a while to construct.

   Interest at a market rate must be recognised or imputed.

Future obligated costs

Dr PPE
Cr Liability

at present value

• The present value is calculated by discounting down at the rate given in the exam

  eg. 100 in 2 years time at 10% = 100/1.10/1.10 = 82.6

• So the double entry would be:

  Dr PPE 82.6
  Cr Liability 82.6

  However the LIABILITY needs unwinding..

• Unwinding of discount

  Dr Interest
  Cr Liability

  Use the original discount rate (so here 10%)

  10% x 82.6 = 8.26

  Dr Interest 8.26
  Cr Liability 8.26