Tag (SQ): Significant Parts

Roonwood Ltd has recently finished building a new item of plant for its own use. The item is a press for use in the manufacture of industrial diamonds. Roonwood Ltd commenced construction of the asset on 1st April 20X2 and completed it on 1st April 20X4.

1st January 20X2, Roonwood Ltd took out a loan to finance the construction of the asset. Interest is charged on the loan at the rate of 5% per annum. The annual interest must be paid in four equal instalments at the end of each quarter. Roonwood Ltd capitalises interest on manufactured assets in accordance with the rules in IAS 23 Borrowing Costs.

The costs (excluding finance costs) of manufacturing the asset were GH¢28 million.

Required

(a). State the IAS 23 requirements on the capitalisation of borrowing costs, calculate the cost of the asset on initial recognition and explain the amount of borrowing cost capitalised.

(b). The press comprises two significant parts, the hydraulic system and the ‘frame.’ The hydraulic system has a three year life and the ‘frame’ has an eight year life. Roonwood Ltd depreciates plant on a straight line basis. The cost of the hydraulic system is 30% of the total cost of manufacture.

Roonwood Ltd uses the IAS 16 revaluation model in accounting for diamond presses and revalues these assets on an annual basis.

Revaluation surpluses or deficits are apportioned between the hydraulic system and the ‘frame’ on the basis of their year-end book values before the revaluation.

Required

Explain the IAS 16 requirements on accounting for significant parts of property, plant and equipment and show the accounting treatment of the diamond press in the financial statements for the financial years ending:

(i) 31st March 20X5 (assume that the press has a fair value of GH¢21 million)

(ii) 31st March 20X6 (assume that the press has a fair value of GH¢19.6 million).