22420 Chap.4 Asset Measurement: Inventories, PPE and Impairment
Asset Measurement: Inventories, PPE and Impairment
Cost first, then a ceiling
Under AASB 102 inventories are carried at cost or net realisable value, whichever is lower, using first-in first-out or weighted average where items cannot be tracked individually.
Property, plant and equipment starts at cost under AASB 116, which includes the purchase price net of recoverable taxes and every cost of bringing the asset to working condition.
Models and impairment
Each class of property, plant and equipment then follows the cost model or the revaluation model, with revaluation increases going to other comprehensive income.
AASB 136 caps every carrying amount at recoverable amount, the larger of value in use or fair value less costs of disposal.
The shared shape
The welcome page explains why these standards are taught together: they are historic cost standards that are very similar, in places almost word for word, so comparing them shows the common pattern of cost, a ceiling and a write-down that later standards adapt.
What this chapter covers
- 01
Components of inventory cost
- 02
Net realisable value and the lower-of rule
- 03
FIFO and weighted average cost formulas
- 04
What enters the cost of property, plant and equipment
- 05
Cost model versus revaluation model
- 06
Revaluation increases, decreases and the surplus
- 07
Indicators of impairment
- 08
Recoverable amount: fair value less costs of disposal or value in use
Worked example · free
Revaluing land up and down around its original cost
- 1Rise to $590,000: Dr Land $90,000; Cr Gain on revaluation (OCI) $90,000, accumulated in the asset revaluation surplus.
- 1Fall to $520,000: the $70,000 decrease reverses part of the surplus through OCI, leaving a surplus of $20,000.
- 1Fall to $470,000: of the $50,000 decrease, $20,000 uses up the surplus in OCI and the remaining $30,000 below cost is a loss in profit or loss.
Key terms
- Net realisable value
- The price expected in normal trade, minus the costs still needed to finish and sell the goods.
- Revaluation model
- Carrying a class of property, plant and equipment at fair value at the revaluation date less later depreciation and impairment.
- Asset revaluation surplus
- The equity reserve that accumulates revaluation increases recognised in other comprehensive income.
- Recoverable amount
- Whichever is larger of an asset’s value in use or its fair value less costs of disposal.
- Value in use
- What the cash an asset will generate through continued use is worth in today’s dollars.
- Impairment loss
- The amount by which an asset’s carrying amount exceeds its recoverable amount.
- Directly attributable cost
- A cost needed to bring an item to the location and condition for its intended use.
Asset Measurement: Inventories, PPE and Impairment FAQ
Can inventory ever be written back up?
Only to reverse an earlier write-down. If net realisable value recovers while the goods are still on hand, the write-down can be reversed up to the amount originally written down, but inventory is never carried above its cost.
Is GST part of the cost of a machine?
No. GST that the business can recover is excluded, so the cost starts from the invoice price net of GST. Non-refundable purchase taxes and import duties, by contrast, are included.
When must an impairment test be done?
At every reporting date the entity assesses whether there is any indication of impairment, such as a fall in market value, obsolescence or worse-than-expected performance. If there is, it estimates the recoverable amount.
Why is recoverable amount the higher of the two measures?
A rational owner would either sell the asset or keep using it, whichever recovers more, so the asset is worth the larger of value in use or fair value less costs of disposal.
Which outlays stay out of the cost of property, plant and equipment?
Staff training, insurance for periods of use, recoverable GST and any profit supposedly saved by building rather than buying. They are either operating costs of using the asset or not transactions at all, so they are expensed or ignored rather than capitalised.
What factors guide the choice between the cost and revaluation models?
The self-study answer lists three: relevance, because current values are generally preferred; reliability, because cost is generally more reliable than a valuation; and the cost of valuations and their audit. The chosen model applies to the whole class of assets.
Exam move
Draw the three-step picture for every asset class: measure at cost, apply the class’s own ceiling, then test for impairment. Practise a cost build-up with items to include and exclude, a revaluation sequence that crosses the original cost line, and one recoverable amount calculation, writing the journal entry each time.
Add one lower of cost and net realisable value write-down so that both of this module’s ceilings are rehearsed.
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