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Introduction to Accounting > 4- Non current assets > Flashcards

4- Non current assets Flashcards

1
Q

Non current assets

A

Assets that a firm intends to use for 12 month or more.

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2
Q

Examples of non-current assets

A
  • Property, plant and equipment
  • Intangible assets
  • Goodwill
  • Net pension assets
  • Associates and joint ventures
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3
Q

Value of property, plant and equipment

A

Depends on how the firm acquired the asset.

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4
Q

Value of PP&E if purschased?

A

Historic purchase cost

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5
Q

Value of PP&E if built?

A
  • Recorded at ‘construction cost’.
  • These costs may include capitalised interest from any project-specific financing.
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6
Q

Value of PP&E if acquired as a result of a business combination?

A
  • Recorded at their appraised value at the time of the transaction.
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7
Q

Where can one find the value for gross PP&E

A

In the notes (broken down by class).

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8
Q

Accrual principle for expense recognition

A
  • Expenses should be recognised when incurred regardless of when paid for.
  • The effective costs of owning a non-current asset should be recognised during the periods in which the firm derives an economic benefit from it.
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9
Q

Depreciation definition

A
  • The process for allocating the costs of using non-current assets.
  • Freehold land is an exception.
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10
Q

Causes of depreciation

A
  • Wear and tear
  • Market changes
  • Technology changes
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11
Q

4 factors to consider when calculating a depreciation charge for a period

A
  • Depreciable amount
  • Residual value
  • The useful economic life of the assets
  • Depreciation method
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12
Q

Depreciable amount

A

(Called the basis for depreciation) is thecostof an asset that can bedepreciatedover time. Running costs and maintenance taken as expenses at the time rather then depreciable amount.
= original cost - residual value

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13
Q

Residual value

A

The scrap or resale value

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14
Q

The useful economic life of the assets

A

Period of deriving an economic benefit.

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15
Q

Depreciation methods

A
  • Straight line method
  • Unit of production method
  • Reducing balance method
  • Double declining balance method
  • Sum-of the year’s digits method
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16
Q

Annual depreciation charge definition

A

A measure of how much has been used up in a current year and reflected as an expense through the Income Statement.

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17
Q

Accumulated depreciation definition

A

A measure of how much has been used up and reflected in the Statement of Financial Position.

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18
Q

Net book value

A
  • The value reported in the Statement of Financial Position is a “Net book value” - the purchase cost less accumulated depreciation.
  • The gross number (purchase cost) reported in notes is unchanged.
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19
Q

Net book value equation

A

= Gross P,P&E - Accumulated depreciation

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20
Q

Net book value at the end of year

A

= Net book value at start - Annual depreciation charge

21
Q

Straight line depreciation method

A

There is an equal depreciation expense for each year that the asset is held.

22
Q

Depreciable amount for straight-line method

A

Depreciable amount = purchase cost - residual value

23
Q

Annual depreciation charge for straight-line method

A

= Depreciable amount/ useful economic life (in years)

24
Q

Net book value at the end of year for straight-line method

A

Net book value at start - annual depreciation charge

25
Q

Reducing-balance method

A
  • This method applies a fixed percentage rate of depreciation to the Net book value of the asset each year.
  • More depreciation is charged in the earlier years.
  • This model is more closely to the way asset values behave in practice (e.g. vehicles).
  • The balance on the asset never reaches zero so an adjustment is necessary for the final year to write it off.
26
Q

2 accounting estimates that have to be made when the asset is acquired for reducing-balancing method

A
  • Its residual value – what it will be worth when the firm disposes of the asset
  • A “depreciation rate” – a decision on how much of the asset’s net book value is to be depreciated each year.
27
Q

Annual depreciation charge for reducing-balance method

A

= (Value at start of year - Residual Value) x Depreciation rate

28
Q

Value at end of year for reducing-balance method

A

= Value at start of year - annual depreciation charge

29
Q

What is the result of using the straight-line method opposed to reducing balance for a single asset?

A
  • Lower charges in early years, higher charges in later years.
  • Higher current period profit in early years, lower in later years.
  • Higher asset value in early years
    This will also be the case for a firm that continues to grow.
30
Q

How is depreciation shown in the statement of financial position?

A
  • It is netted against gross value to give the net book value
  • Negative sign
31
Q

How is depreciation included in the income statement?

A

As part of expenses netted against revenue.

32
Q

Where is accumulated depreciation shown?

A

In the notes to financial statement.

33
Q

Result if depreciation= 100% of the original cost

A

It will no longer be subject to further depreciation charges. It will, however, be tested for ‘impairment’.

34
Q

Impairment of P,P&E

A

The impairment charge occurs where
there is a reduction in future economic benefits forecast for an asset.

35
Q

Causes of impairment of an item in PP&E

A
  • Physical damage: fire, flooding.
    Valuation loss:
  • Worsening market conditions (lower prices)
  • Valuation based on discounted cash flows has fallen below the asset’s carrying value
  • Periodic reviews (annual)
36
Q

Where is impairment charge shown?

A

Income statement as expenses

37
Q

At what point will PP&E be removed from Statement of Financial Position

A

Until its sold or disposed of.

38
Q

Profit/loss on disposal

A

= Sales proceeds - net book value

39
Q

Residual value of an intangible asset e.g. a licence

A

0

40
Q

Unrealized gain/loss

A

Gain/loss from selling an asset compared to price from depreciation.

41
Q

What are investment properties accounted at fair value?

A

Company own’s but not in operation.
Fair value- what it would cost if tried to sell.

42
Q

Where do intangible assets go in the financial statements

A
  • If created- expense in income statement
  • If bought from elsewhere or bought through the acquistion of a company- SoFP
43
Q

Types of impairments

A
  • Receivables- when customers default on goods bought on credit
  • Non current assets
44
Q

Advantage of fair value

A

More realistic values

45
Q

Disadvantage of fair value

A

Profit more volatile- e.g. property prices

46
Q

What is depreciation of intangible assets called?

A

Amortisation

47
Q

What makes depreciation subjective?

A
  • Residual value and useful economic life are both estimated by management.
48
Q

Advantage of straight line method

A
  • Higher current period profits- less depreciation charges in early years
  • Higher SoFP asset value
49
Q

Goodwill equation

A

= Purchase cost- net revalued assets
Net revalued assets= revalued assets - liabilites

Introduction to Accounting (7 decks)

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