FA – May 2025 – L1 – Q4 – IAS 16 PPE Recognition & Depreciable Amount

Define PPE, determine capitalised costs, expensed costs, and compute depreciable amount.

Question

a. IAS 16 – Property, Plant and Equipment sets out the measurement and recognition criteria on property, plant and equipment.

Required:
i. Define property, plant and equipment in accordance with IAS 16. (4 Marks)
ii. State the recognition criteria for items of property, plant and equipment. (2 Marks)

b. In June 2022, Bibiire Limited acquired an old building for the construction of their factory building. The construction of the building took about two years to complete.

Costs relating to the factory were as follows:

₦’000
Purchase of old building for site 196,000
Demolition of the old building 15,600
Stamp duties and legal cost on the land purchased 17,640
Cost of materials used at the site 254,000
Costs paid to contractors and other experts on the building 284,640
Costs incurred by expert due to errors on his original design 8,760
Costs of construction staff 84,000
Costs of planning permit paid to the relevant government agencies 48,020
Cost of management time apportioned to the project 21,560
Tendering and procurement cost 4,900
Rectification of part of building due to contractor’s error 12,740
Cost of transferring staff files and other office equipment to the new factory 30,269
Publicity cost of opening the factory 21,740

Notes:

The company decided to use the cost model for the building.
Expected useful life: 50 years.
Expected residual value: ₦18,500,000.

Required:
i. Compute the total costs to be capitalised in respect of the building. (8 Marks)
ii. State why some of the costs should be expensed. (2 Marks)
iii. Compute the depreciable amount of the building. (4 Marks)

Answer

a. Property, plant and equipment (PPE):

i. Definition: Tangible items that are:

Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
Expected to be used during more than one period.

ii. Recognition criteria:

Probable that future economic benefits associated with the item will flow to the entity.
The cost can be measured reliably.

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b. Expensed Costs (with reasons):

Costs of management time apportioned to the project → indirect and not directly attributable.
Cost of transferring staff files and other office equipment to the new factory → operating expense.
Publicity cost of opening the factory → incurred after availability of factory for use.

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Determination of cost of building

₦’000
Purchase of old building for site 196,000
Demolition of the old building 15,600
Stamp duties and legal cost on the land purchased 17,640
Cost of materials used at the site 254,000
Costs paid to contractors and other experts on the building 284,640
Costs of construction staff 84,000
Costs of planning permit paid to relevant government agencies 48,020
Tendering and procurement cost 4,900
Total cost of the factory 904,800

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Computation of depreciable amount

₦’000
Total cost of the factory 904,800
Less: Cost of land – (229,246)
= 675,554
Less: Residual value (18,500)
Depreciable amount = 657,054

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Tags: Capitalisation, Depreciation, Expensed Costs, IAS 16, PPE, Recognition
Level: Level 1

Topic: Capitalisation vs Expensing
Series: MAY 2025

Uploader: Samuel Duah