When should we bring PPE into the accounts?
We recognise (place in the accounts) PPE when:
it is RELEVANT to do so and in doing so
the item is FAITHFULLY REPRESENTED
Meets the definition of an Asset (PPE)
What gets included in 'Cost'
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
Estimated cost of dismantling and removing the asset and restoring the site.
All at present value
This will need discounting and the discount unwound:
Dr interest (with unwinding of discount)
If it is an asset that takes a while to construct.
Interest at a market rate must be recognised or imputed.
Let's look at the Future obligated costs in detail..
Future obligated costs
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
Use the original discount rate (so here 10%)
10% x 82.6 = 8.26
Dr Interest 8.26
Cr Liability 8.26