b Accounting policies determine how transactions are allocat

b) Accounting policies determine how transactions are allocated to one or more accounting periods and require judgements Required: Critically discuss the usefulness of financial statements in relation to the application of IAS 16 Property, Plant and Equipment. Your answer should specifically address the following issues: Areas of judgements required in the calculation of depreciation and choice of methods for calculation of depreciation; (a) (8 marks) (b) Change in the useful lives of assets; (4 marks) The measurement model used- with particular reference to the cost or revaluation models. (c) (8 marks) TOTAL 30 marks CONT

Solution

This Standard shall be applied in accounting for property, plant and equipment .

1) The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. Straight-line depreciation results in a constant charge over the useful life if the asset’s residual value does not change. The diminishing balance method results in a decreasing charge over the useful life. The units of production method results in a charge based on the expected use or output. The entity selects the method that most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. That method is applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benifit.

2) The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

3) Measurement models-

*Cost model-

After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

*Revaluation model-

After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.