| Question: |
Property, plant and equipment (‘PPE’) has been damaged by the flooding. Will there be any impact on the carrying value of the PPE at the reporting date? |
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| Answer: |
This depends on the timing of the damage.
If the damage occurred after the reporting date: No adjustment needs to be made to the carrying value at the reporting date. However, appropriate disclosure is required to be made. (See FAQ on general considerations - timing of the impact)
If the damage occurred during the reporting period: Yes, there is likely to be an impact on the carrying value at the reporting date.
TAS 16 Property, Plant and Equipment states that items of PPE are derecognized (i.e. removed from the accounts) when there are no future economic benefits expected from their use or disposal (TAS 16.67(b)). Therefore, if an item of PPE has been damaged to the extent that it can no longer be used and is irreparable, the item of PPE should be derecognized immediately.
When only part of an item of PPE is irretrievably damaged, the damaged part should be derecognized regardless of whether the damaged party had been carried and depreciated as a separate asset in the accounts (TAS 16.70). The replacement cost of the damaged part is recognized in the carrying amount of the item of PPE when incurred.
TAS 36 Impairment of Assets includes physical damage of an asset as an indication of impairment (TAS 36.12(e). Therefore, impairment testing is required at the time that there has been physical damage to an asset as a result of the flooding. An asset, or a cash generating unit, is impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs to sell and its value in use. The impairment loss is the amount by which the carrying amount of the asset or cash generating unit exceeds its recoverable amount.
Determination of the value in use of an asset requires management to estimate future cash flows derived from the asset over its remaining life. In making this estimation, management should take into account the impact of the flooding, including repair and clean-up costs and reduced revenues, on such cash flows. |
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| Question: |
Property, plant and equipment (‘PPE’) is idle as a consequence of the flooding. Should PPE continue to be depreciated during this period? |
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| Answer: |
Yes. PPE should continue to be depreciated even though the asset is idle and retired from active use. Depreciation only ceases when either the asset is ‘held for sale’ (under TFRS 5) or is derecognized, i.e. removed from the accounts.
However, if the asset is depreciated based on usage methods, such as units of production, the depreciation charge can be zero while there is no production. (TAS16.55) |
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| Question: |
The company has incurred costs on sand bags and other flood prevention equipment. Can such costs be capitalized as property, plant and equipment (‘PPE’) or should they be expensed when incurred? |
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| Answer: |
It depends. Costs incurred on erecting permanent structures to improve site safety or machineries used to support the production or supply process in the event of flooding which are expected to be used during more than one period may meet the definition of PPE and be capitalized and depreciated over their useful lives. Costs of erecting temporary structures and purchasing items such as sand bags are unlikely to meet this definition and should be expensed when incurred. |
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| Question: |
The company has construction work in progress, work on which has temporarily halted as a consequence of the flooding. Can the company continue to capitalize borrowing costs over this period or should such costs be expensed? |
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| Answer: |
It depends. The general rule is that capitalization of borrowing costs ceases during extended periods in which active development is suspended (TAS 23.20). However, companies do not suspend capitalizing borrowing costs when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale (TAS 23.21). For example, capitalization may continue during a temporary delay that is caused by an external event such as rain or flooding that is normal for the region. Prolonged and severe seasonal rainfall is normal for Thailand but the degree and extent of the recent flooding is exceptionally severe. Accordingly, judgment should be exercised in each case to assess whether and to what extent delays to construction are significantly greater than would normally be expected. In all cases, it will be necessary to perform impairment testing of construction work in progress as for other PPE |
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