1. Non-current assets, depreciation and impairment

Question 1

What is a non-current asset?

What is the distinction between tangible and intangible assets?

How should Right-of-use assets be presented

Answer 1

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.

Question 2

What is included in the cost of non-current assets? What is not included?

Answer 2

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.

It can include:
- Purchase price
- Delivery costs
- Stamp duty and import duties (and irrecoverable VAT on cars)
- Site preparation
- Installation and assembly costs
- Professional fees (i.e. legal fees, architect fees)
- Testing costs
- Subsequent costs that enhance the asset (i.e. major improvements or a major overhaul)

It cannot include:
- General overheads
- Staff training costs
- Fuel for cars
- License fees for operating the asset
- Repairs and maintenance

Question 3

What is the accounting treatment for the purchase of an asset?

Answer 3

The cost of the non-current asset is capital expenditure and and is accounted for by debiting the relevant non-current asset account and crediting cash/trade payables

Question 4

What is the useful life of a non-current asset?

Answer 4

The course of time over which the asset is expected to be functional and generate income for the entity

The “writing off” of the asset’s cost to the profit or loss over it’s useful life is known as depreciation (for tangible assets) and amortisation (for intangible assets)

Question 5

Define depreciation and amortisation

Answer 5

Depreciation (for tangible assets) and amortisation (for intangible assets) are the systematic allocations of the cost of an asset, less its residual value, over its useful life - they match the cost of the asset to the period that the business expects to gain the benefits from using it

Question 6

Which type of asset is not depreciated?

Answer 6

Land which is deemed to have an indefinite useful life

Question 7

Which three factors are relevant when calculating an assets depreciation?

Answer 7

• Cost
• Useful life
• Residual value

Question 8

Define residual value.

Answer 8

Residual value is the estimated amount that the entity would obtain from disposing of the asset at the end of its useful life, after deducting estimated disposal costs.

For exam purposes, always assume the residual value is zero unless told otherwise.