4- Non current assets Flashcards
Non current assets
Assets that a firm intends to use for 12 month or more.
Examples of non-current assets
- Property, plant and equipment
- Intangible assets
- Goodwill
- Net pension assets
- Associates and joint ventures
Value of property, plant and equipment
Depends on how the firm acquired the asset.
Value of PP&E if purschased?
Historic purchase cost
Value of PP&E if built?
- Recorded at ‘construction cost’.
- These costs may include capitalised interest from any project-specific financing.
Value of PP&E if acquired as a result of a business combination?
- Recorded at their appraised value at the time of the transaction.
Where can one find the value for gross PP&E
In the notes (broken down by class).
Accrual principle for expense recognition
- 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.
Depreciation definition
- The process for allocating the costs of using non-current assets.
- Freehold land is an exception.
Causes of depreciation
- Wear and tear
- Market changes
- Technology changes
4 factors to consider when calculating a depreciation charge for a period
- Depreciable amount
- Residual value
- The useful economic life of the assets
- Depreciation method
Depreciable amount
(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
Residual value
The scrap or resale value
The useful economic life of the assets
Period of deriving an economic benefit.
Depreciation methods
- Straight line method
- Unit of production method
- Reducing balance method
- Double declining balance method
- Sum-of the year’s digits method
Annual depreciation charge definition
A measure of how much has been used up in a current year and reflected as an expense through the Income Statement.
Accumulated depreciation definition
A measure of how much has been used up and reflected in the Statement of Financial Position.
Net book value
- 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.
Net book value equation
= Gross P,P&E - Accumulated depreciation
Net book value at the end of year
= Net book value at start - Annual depreciation charge
Straight line depreciation method
There is an equal depreciation expense for each year that the asset is held.
Depreciable amount for straight-line method
Depreciable amount = purchase cost - residual value
Annual depreciation charge for straight-line method
= Depreciable amount/ useful economic life (in years)
Net book value at the end of year for straight-line method
Net book value at start - annual depreciation charge
Reducing-balance method
- 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.
2 accounting estimates that have to be made when the asset is acquired for reducing-balancing method
- 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.
Annual depreciation charge for reducing-balance method
= (Value at start of year - Residual Value) x Depreciation rate
Value at end of year for reducing-balance method
= Value at start of year - annual depreciation charge
What is the result of using the straight-line method opposed to reducing balance for a single asset?
- 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.
How is depreciation shown in the statement of financial position?
- It is netted against gross value to give the net book value
- Negative sign
How is depreciation included in the income statement?
As part of expenses netted against revenue.
Where is accumulated depreciation shown?
In the notes to financial statement.
Result if depreciation= 100% of the original cost
It will no longer be subject to further depreciation charges. It will, however, be tested for ‘impairment’.
Impairment of P,P&E
The impairment charge occurs where
there is a reduction in future economic benefits forecast for an asset.
Causes of impairment of an item in PP&E
- 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)
Where is impairment charge shown?
Income statement as expenses
At what point will PP&E be removed from Statement of Financial Position
Until its sold or disposed of.
Profit/loss on disposal
= Sales proceeds - net book value
Residual value of an intangible asset e.g. a licence
0
Unrealized gain/loss
Gain/loss from selling an asset compared to price from depreciation.
What are investment properties accounted at fair value?
Company own’s but not in operation.
Fair value- what it would cost if tried to sell.
Where do intangible assets go in the financial statements
- If created- expense in income statement
- If bought from elsewhere or bought through the acquistion of a company- SoFP
Types of impairments
- Receivables- when customers default on goods bought on credit
- Non current assets
Advantage of fair value
More realistic values
Disadvantage of fair value
Profit more volatile- e.g. property prices
What is depreciation of intangible assets called?
Amortisation
What makes depreciation subjective?
- Residual value and useful economic life are both estimated by management.
Advantage of straight line method
- Higher current period profits- less depreciation charges in early years
- Higher SoFP asset value
Goodwill equation
= Purchase cost- net revalued assets
Net revalued assets= revalued assets - liabilites
