Question

Playtime Corporation purchased a new piece of equipment for production of a new children's toy. According to market research tests, the toy is expected to be very popular among preschool-aged children. The equipment consists of the following significant and separable parts: injection unit (useful life of six years), clamping unit (useful life of six years), and electrical equipment (useful life of three years). The equipment also includes other parts (useful life of five years). Discuss

a. the recognition criteria for recording the purchase of the equipment

b. how the equipment purchase should be recorded if Playtime prepares financial statements in accordance with IFRS, and

c. how the equipment purchase should be recorded if Playtime prepares financial statements in accordance with ASPE.

Answer 1

a. Items of Property, plant and equipment should be recognised as assets when it is probable that future economic benefits associated with the asset will flow to the entity and Cost of the asset can be reliably measured. This recognition criteria is applied to all property, plant and equipment at the time when the costs to purchase them are incurred. These costs includes the costs incurred initially to purchase or contruct an item of equipment and costs subsequently incurred to add to or replace part of or service it. b. If Playtime prepares financial statements in accordance with IFRS, then component accounting is required for significant parts of the equipment and parts of an equipment whose cost are significant in comparison to the total cost of an item. Component accounting is required if the useful life and /or depreciation method is different from the other parts of the asset. Under IFRS, the company has the option to group significant components of an item of equipment if they have the same useful life and depreciation method. Similarly the company is required to make a choice to group or not group the insignificant components which do not have significant cost in relation to the total cost and accordingly depreciate the component. Playtime may choose to recognise the injection unit and clamping unit together as they both have same useful life. However it has to recognise the electrical equipment and other parts separately since they don't have same useful life. c. under section 3061 of ASPE, component accounting is required for significant component parts of an equipment if it is practicable and estimate of the useful life of the separate components can be determined. However it has not been practiced majorly. Also ASPE requires insignificant parts of an equipment to be grouped together. Playtime should recognise separately all the components of equipment i.e. injection unit, clamping unit, electrical equipment and other parts. As all the parts are significant they should be recognised separately and depreciated accordingly.