ACCT 1203 · Property, Plant, Equipment, and Depreciation

Led by Fra Luca de Pacioli Simulacrum

1. Module 3 ○ Open

   Property, Plant, Equipment, and Depreciation

   Led by Fra Luca de Pacioli Simulacrum

   The question

   How long-lived physical assets are accounted for under IAS 16 and FRS 1020 Section 17. The module covers the rationale for capitalisation and depreciation (matching principle), the components of cost (purchase price, directly attributable costs, decommissioning), the depreciable amount, the three depreciation methods (straight-line, reducing balance, units of production) and when each fits, journal entries for purchase and disposal, the annual review of useful life and residual value with prospective treatment of changes in estimate under IAS 8, the difference between depreciation and impairment, and component depreciation under IFRS. The closing exercise estimates useful life for a specific asset class.

   Outcome

   The student can record the purchase, depreciation, and disposal of a non-current asset, choose between the three depreciation methods with reasoning, calculate the carrying amount at any point in the asset's life, and recognise a change in estimate prospectively. (PPE and depreciation)

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   Practice scenarios

   Estimating Useful Life

   Your company has just acquired a £450,000 piece of manufacturing equipment. The financial controller has asked you to recommend the depreciation policy. The equipment supplier suggests a useful life of seven years; the engineering team thinks ten years if maintained well; a competitor uses five years for similar equipment. The CFO wants the seven-year option because it produces a depreciation charge that matches a banking covenant calculation. The auditor wants ten years because that's what the engineering team says. Your job is to recommend a policy that is technically defensible, not one that is convenient.

   Your goals

   • Identify the issue: useful life is an *estimate*, and the choice has direct profit impact (£450,000 / 5 = £90,000/year vs £450,000 / 10 = £45,000/year — a £45,000 swing on profit).
   • Apply the IAS 16 criterion: useful life is "the period over which an asset is expected to be available for use *by the entity*", which depends on usage intensity, technical obsolescence, legal limits, and physical wear.
   • Recommend evidence-based: use the engineering team's assessment if it's substantive; document the basis; benchmark against industry. Likely answer: seven to ten years, depreciated straight-line, with annual review.
   • Address the CFO's pressure honestly: covenant convenience is *not* a reason to choose a useful life. If the auditor disagrees, the auditor will likely prevail — and they will rightly question why a covenant calculation is driving the policy.
   • Recommend the seven-year choice if (and only if) genuine evidence supports it; otherwise recommend ten with prospective adjustment if conditions change.

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