LARGE OR COMPLEX ASSET
Depreciation of non-current assets with different components
Each significant part or components of an item of PPE should be depreciated separately if it can
be established that their useful life is significant different. For example, an aircraft's engines will
be depreciated separately from its airframe, when they have different useful lives. Land and
buildings are separable assets and should therefore be accounted for separately even where they
were acquired together. Land usually has an infinite life, with some exceptions such as quarries
and landfill sites, whereas buildings do not and should therefore be depreciated.
Exam Question 7 RP Ltd
RP Ltd acquired a new freehold building with a useful life of 40 years for N15 million. The company
has identified the following components:
Land (infinite years)
Roof (30years)
Lifts (20years)
Fixtures (10years)
Remainder of building (40years)
Total value (i.e asset cost)
N'000
3,600
2,400
3,000
2,000
4.000
15,000
The company's policy is to depreciate non-current assets on straight-line basis. It is estimated
that the asset will realise nil value at the end their respective useful life.
Required Calculate the annual depreciation charges
Exam Question 6
MAN Ltd
MAN Ltd began the construction of a new factory on 1st January 2014. Costs relating to the
construction are as follows:
Purchase of land
Purchases of materials to construct the factory (note 1)
Employees costs (note 2)
Costs of dismantling existing structure on the site
Production overheads directly related to the construction (note 3)
Architects and other consultants fees directly related to the construction
Costs relating to commissioning of the factory
Allocated general administrative overheads
Costs relocating staff who are to work factory
Interest on loan to partly finance factory construction (note 4)
Plant and machinery purchased for use in the building
N'000
45,000
36,500
30,000
4,000
6,500
3,200
2,400
2,800
1,850
5,500
8,000
Relevant notes:
i. Material costs were higher than anticipated. On investigation, it was discovered that materials
costing N2.1 million had been spoiled and was therefore wasted and a further N3.6million was
incurred as a result of faulty design work,
ii. The building took seven months to construct and was brought into use on 30th September
2014. The employment costs are for the twelve months to 31st December 2014.
iii. The production overheads were incurred in the seven months ended 31st July 2014. They
included an abnormal cost N750,000 caused by the need to rectify damage caused site
flooding,
iv. MAN Ltd received the loan of N20million on 1st January "2014. The factory meets the definition
of a qualifying asset in accordance with IAS 23 "borrowing cost". The loan carries a rate of
interest of 15% per annum.
Required
Determine the cost of the factory to be included in the statement of financial position upon initial
recognition, giving reasons for the inclusion or exclusion of costs.