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17.2.2.2 Replacement of a major components and periodic replacement
17.2.2.3 Separation of land and buildings
17.2.3 Measurement at initial recognition
17.2.3.1 Extract from FRS 102 – Section 17.9-17.13
17.2.3.3 Directly attributable costs
17.2.3.4 Not directly attributable costs
17.2.3.5 Decommissioning costs
17.2.3.6 Self-constructed assets
17.2.3.7 Cessation of capitalisation
17.2.3.9 Deferred payment terms – measurement of cost
17.2.4.1 Extract from FRS 102 – Section 17.14
17.2.5 Measurement after Initial Recognition
17.2.5.1 Extract from FRC – FRS 102 – Section 17.15-17.15F
17.2.5.2.2.1 Frequency of revaluations
17.2.5.2.2.2 Meaning of fair value
17.2.5.2.2.3 Accounting for revaluation surpluses/deficits
17.2.5.2.2.4 Treatment of depreciation on upward revaluations
17.2.6 Depreciation, residual value and useful lives
17.2.6.0 Extract from FRS 102 Sections 17.16 to 17.23
17.2.6.1.2 Depreciation and useful economic life
17.2.6.1.4 Change in residual value, depreciation rate or useful economic life – change in estimate
17.2.6.1.5 Non-depreciable assets
17.2.6.1.6 Commencement and cessation of depreciation
17.2.6.1.7 Depreciation methods
17.2.6.1.5.1: Straight line method
17.2.6.1.5.2: Diminishing balance method/sum of digits
17.2.6.1.5.3: Units of production method
17.2.7 Recognition and measurement of impairment.
17.2.7.1 Extract from FRS 102 Section 17.24-17.26
17.2.8.1 Extract from FRS 102 Section 17.27-17.30
17.2.9.0 Extract from FRS 102 – Section 17.31-17.32A
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17.2.4 Exchange of assets
17.2.4.1 Extract from FRS 102 – Section 17.14
17.14 An item of property, plant or equipment may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. An entity shall measure the cost of the acquired asset at fair value unless:
(a) the exchange transaction lacks commercial substance; or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. In that case, the asset’s cost is measured at the carrying amount of the asset given up.
17.2.4.2 OmniPro comment
In respect to (section 17.14(b) of FRS 102), the carrying amount is defined as the amount at which the asset is recognised after deducting any accumulated depreciation and accumulated losses. Where the consideration received comprises both a combination of monetary and non-monetary assets the fair value is adjusted by the amount of the monetary assets.
In deciding whether a transaction has commercial substance regard should be had to the guidance contained in IAS 16, it is regarded as having commercial substance, if:
- The configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
- The entity specific value of the portion of the entity’s operations effected by the transaction changes as a result of the exchange. Entity specific value is the present value of the cash flows an entity expects to arise from the continuing use of the asset and from its disposal at the end of its useful life or expects to incur when settling the liability. The post tax cash flows should be used.
- The difference in (a) and (b) is significant relative to the fair value of the assets exchanged (IAS 16.25).
As can be seen judgement will be required as to whether a transaction has commercial substance. However, in order for it to be shown at fair value it not only needs to have commercial substance, but also needs to be able to be reliably measured. If it cannot be reliably measured then it should be stated at the cost of the asset given up.
Example 7: Exchange of assets- assets that lack commercial substance
Company A exchanges van X with a book value of CU20,000 and a fair value of CU25,000 for cash of CU2,000 and van Y with a fair value of CU23,000. This transaction lacks commercial substance as cash flows are not expected to change as a result of the exchange, they are in the same position as before the transaction. Therefore, the company recognises the cost of VAN Y at the CU20,000. Hence accounting entries are to debit bank CU2,000, debit fixed assets CU18,000, credit profit/loss on disposal CU20,000 which is set against the disposal of the NBV of Van X to show a no profit/no loss.
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Examples
Example 2: Replacement of a major component which was previously not separated
Example 3: Periodic replacement
Example 4: Separation of land and buildings
Example 5: Employee costs during construction
Example 6: purchasing on deferred credit terms
Example 7: Exchange of assets- assets that lack commercial substance
Example 8: Revaluation of assets of the same class
Example 9: Accounting for revaluations and subsequent movements – depreciable assets
Example 11: Transfer of depreciation on revalued amount from profit and loss reserves
Example 12: Revising a residual value of an asset
Example 13: Change in accounting policy disclosure
Example 14: Commencement of depreciation
Example 15: Depreciation on basis of units of production
Example 17: Extract from notes to the financial statements (assuming revaluation upwards)
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