1. Non-current assets, depreciation and impairment Flashcards
What is a non-current asset?
What is the distinction between tangible and intangible assets?
How should Right-of-use assets be presented?
Assets are non-current assets when they are expected to be used over more than one reporting period.
Non-current assets may be tangible, which means they have physical substance such as property, machinery, delivery vehicles, servers (referred to as property, plant and equipment) or intangible which means they do not have physical substance, such as a brand or patent.
Tangible and intangible assets are presented separately on the statement of financial position.
Right-of-use assets should be presented within non-current assets in the statement of financial position.
Explain the significance of an entity buying an asset outright. (3)
An entity can buy an asset outright. In this case, the entity:
1. Is legally the owner of the asset (i.e., it has legal title to the asset);
2. Has full control over how the asset is used until it is disposed of or retired; and
3. Is exposed to all the risks and rewards of owning the asset.
How does an asset bought outright by an entity appear in the financial statements?
In the financial statements, the asst will be treated as a non-current asset, either as property, plant and equipment or an intangible asset.
Explain the significance of an entity leasing an asset.
If an entity leases an asset, it is paying another entity for the right to use that asset for an agreed period of time.
It is the owner’s (lessor’s) property, but the entity (lessee) is getting the right to use it and access to the benefits from using it for the agreed period of time.
What is the accounting treatment for the lease of an asset.
There are clear legal differences between owning and leasing an asset. However, many leasing arrangements transfer all the benefits and risks of owning an asset to the lessee for an agreed period.
In such cases, simply accounting for the lease payments as an expense each month does not appropriately reflect the substance of the arrangement.
In order to more accurately reflect the substance of such arrangements, IFRS 16, Leases requires a lessee to recognise a non-current right-of-use asset representing its right of use to the leased asset for a specified period and a lease liability, representing its obligation to make payments under the lease.
What is the objective of IAS 16, Property, Plant and Equipment? (3)
Why is this important to the users of financial statements?
How should IAS 16 be followed?
The objective of IAS 16 is to prescribe in relation to property, plant and equipment, the accounting treatment for:
1. The recognition of assets
2. The determination of their carrying amounts
3. The depreciation charges relating to them
This provides the users of financial statements with information about an entity’s investment in, and use of, its property, plant and equipment (PPE) and changes in such investments.
IAS 16 should be followed when accounting for PPE unless another IFRS Accounting Standard requires a different treatment, e.g. IFRS 5, Non-current Assets Held for Sale and Discontinued Operations or IFRS 16, Leases.
There are no material differences between IAS 16 and FRS 102.
What is included in the cost of PPE?
The cost of PPE includes all amounts incurred to acquire the asset and any amounts directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the way intended by management.
With the exception of cars, where the VAT is not usually recoverable, the amount capitalised will exclude VAT.
What costs are directly attributable to PPE? (6)
Directly attributable costs include:
1. Purchase price
2. Delivery costs
3. Stamp duty and import duties (and irrecoverable VAT on cars)
4. Costs of preparing the site for installation and assembly of the asset
5. Professional fees, such as legal and architects’ fees
6. Costs of testing whether the asset is functioning
Expenses such as general overhead costs, administration costs, training costs for staff, fuel in a vehicle on delivery and license fees for operating the asset are not included as part of the total costs of the non-current asset.
What is the accounting treatment for the cost of subsequent capital expenditure?
The cost of subsequent capital expenditure on a non-current asset will be added to the cost of the asset, provided this expenditure enhances the benefits of the non-current asset or restores any benefits consumed.
This means that costs of major improvements or a major overhaul may be capitalised. However, the costs of repairs that are carried out simply to maintain existing performance may not be capitalised: they will be treated as expenses of the reporting period in which the work is done and charged in full as an expense in that period.
How might a business pay for a new item of PPE? (3)
- Cash
- On credit
- Part-exchange
Explain part-exchange.
The supplier of the new asset agrees to take the old asset and gives the buyer a reduction in the price of the new asset. This reduction is the part-exchange value of the old asset.
What is the definition of economic life and useful life of an asset?
Economic life: The total period over which an asset is expected to be economically usable by one or more users.
Useful life: The estimated period for which an item of PPE is expected to be available for use to a business.
Give an example where the economic life of an asset may be longer than the useful life.
The economic life of an asset may be longer than it useful life.
Example: an entity which has company cars. A well-maintained car may have an economic life of ten years or more, but if an entity has a policy of replacing its cars every three years, the useful life of the car to the entity will be three years.
What is the only tangible asset deemed to have an unlimited useful life?
The only tangible asset that is deemed to have an unlimited useful life is freehold land. All other tangible assets have a finite useful life and will depreciate over that useful life.
How do you determine the useful life of PPE?
How is a leased asset depreciated over time?
Determining the useful life of PPE is a matter of judgement.
An accountant will consider the useful life of similar assets held in the past, the useful life of other similar assets, what is normal for the industry and the entity’s future plans for the asset.
The useful life determines the depreciation that is charged on an asset each year and therefore affects both the profit for the period and the carrying amount of assets.
In the accounting exam a leased asset will be depreciated over the lease term which will be the same as the useful life.
