5. Non-current assets 2

Question 1

How is property held for trading (sale) or investment purposes reported?

Answer 1

At fair value - the current appraised value (estimated market value) with unrealised gains or losses for a period taken through the financial statements.

Question 2

How is property used in the operations of the firm reported?

Answer 2

At historic cost.

Question 3

What are intangible assets? Give some examples.

Answer 3

Assets that have no physical form.
E.g., patents, software, brand, website

Question 4

How are intangible assets recorded in a firm’s statement of financial position?

Answer 4

Intangible assets that have been:
- bought separately from another company are recorded initially at purchase cost.
- acquired as part of a business combination are recorded initially at their appraised value at the time of the acquisition.
- generated internally are not generally included in the financial statements even if they are of significant value.

Question 5

What is the amortisation of intangible assets?

Answer 5

An equivalent process to depreciation for intangible assets’ that have a finite economic life (e.g., patents and operating licenses). They are ‘amortised’ over their economic life. Amortisation has the same accounting treatment as depreciation.

Intangible asset = Initial cost of intangible asset - Accumulated amortisation

Question 6

What are associates?

Answer 6

Other companies in which the firm has a stake and where the firm has significant influence but no overall control (≥20% but <50% ownership of shares).

Question 7

What is a joint venture?

Answer 7

Joint ventures are firms that are owned by two or more partners with equal shares.

Question 8

What are the three ways to acquire PP&E?

Answer 8

• Buy
• Construct
• Acquire from a company through a business combination (e.g., merger or acquisition)

Question 9

Explain how depreciation accounting can result in fraud.

Answer 9

A firm can increase its reported profits in the short-term by increasing its estimates of residual value and useful economic life in depreciation calculations to unrealistic levels, excessively lowering the depreciation charge. This flexibility and auditors’ tolerance for it creates opportunity for fraud.