C4 - Accouting For Assets Flashcards
What in an asset?
A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
IAS 16 - property, plant and equipment
Definition of PPE
Tangible assets held for use in the production or supply of goods and services which are expected to be used for more than one period.
IAS 16 - property, plant and equipment
Definition of depreciation
Systematic allocation of the depreciable amount of an asset over its useful life.
IAS 16 - property, plant and equipment
Definition of depreciable amount
The cost or valuation of the asset, less any residual value (scrap value)
IAS 16 - property, plant and equipment
Definition of useful life
The length of time, or the number of units of production, for which an asset is expected to be used.
IAS 16 - property, plant and equipment
Definition of fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the date of revaluation.
IAS 16 - property, plant and equipment
Definition of impairment loss
The amount by which the carrying amount of an asset exceeds its recoverable amount.
IAS 16 - property, plant and equipment
Definition of recoverable amount
The higher of the assets fair value less costs to sell and its value in use.
IAS 16 - property, plant and equipment
Definition of carrying amount
The amount at which an asset is recognised on the balance sheet after deducting an accumulated depreciation and impairment loss
An item of plant property and equipment is to be recognised as an asset when…??
It is probable that future economic benefits will flow to the entity
The cost of the asset can be measured reliably.
What other costs are included in the purchase of assets?
Import duties Taxes Testing costs Professional fees Dismantling asset Removing costs of asset
Any other costs that are required to bring the asset to the location and condition for its intended use.
IAS 16 - property, plant and equipment
What is a cost model as an accounting policy
The asset is carried at cost less acc depreciation and impairment losses
IAS 16 - property, plant and equipment
What is a revaluation model as an accounting policy
Carried on balance sheet as fair value at date of revaluation minus depreciation and impairment (provided that fair value can be measured reliably)
Dealing with revaluations of PPE
Double entry for increase in value??
DR asset account
CR comprehensive income account
Dealing with revaluations..
Decrease in revaluation if PPE
DR comprehensive income account
CR asset account
Can freehold land be depreciated?
No because it has an unlimited useful life.
However leasehold land can be depreciated.
Can land be depreciated??
No as they also have unlimited useful life
3 Methods of depreciation??
Straight line
Reducing (diminishing) balance
Units of production
What is straight line depreciation?
A constant depreciation charge over the assets useful life
What is reducing (diminishing) balance depreciation?
A decrease in depreciation charge over the assets useful life for example the depreciation will be higher the early years of owning the asset.
What is units of production or service depreciation?
A depreciation charge based on the expected use or output
What is derecognition?
When an item of PPE is disposed of when no future economic benefits are expected from its use or disposal.
How is a loss on disposal recorded in bookkeeping?
DR P and l account as loss
CR disposals account
How is a gain recorded in bookkeeping?
DR disposals with gain
CR P&L account as gain
IAS 38 - Intangible assets
Definition
An identifiable non monetary asset without physical substance
IAS 38 - Intangible assets
Examples
Computer software
Patents
Customer list
Marketing rights
IAS 38 - Intangible assets
3 key elements and meaning
Identifiability - capable of being sold or transferred
Control - power to obtain future economic benefits from the asset
Future economic benefits - revenue from sales of product
What are the two main sources of intangible assets?
Purchased or internally generated
What two items can commonly be mistaken for intangible assets?
Goodwill and brands
IAS 38 - Intangible assets
Research definition
Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
IAS 38 - Intangible assets
Development definition
The application of research findings or other knowledge to a plan or design for production of new or improved products.
IAS 38 - Intangible assets
How is revenue expenditure on research treated in FS
An expense in the profit or loss and other comp. income of the year it is incurred
IAS 38 - Intangible assets
Finite meaning
An asset having a limited useful life
IAS 38 - Intangible assets
Indefinite meaning
An asset having no foreseeable limit to the period over which the asset is expected to generate net cash inflows.
IAS 36 - impairment of assets
Definition
This standard sets out accounting procedures to ensure that assets are carried on the FS at no more than their fair value or recoverable amount.
IAS 36 - impairment of assets
Carrying amount definition
The amount at which an asset is recognised after ducting any accumulated depreciation and accumulated impairment losses
IAS 36 - impairment of assets
Definition of amortisation
This has the same meaning as depreciation however amortisation is commonly used for intangible non-current assets
IAS 36 - impairment of assets
Impairment loss
The amount by which the carrying amount of assets exceeds its recoverable amount
IAS 36 - impairment of assets
Recoverable amount definition
The higher of an assets fair value less cost of disposal and its value in use
IAS 36 - impairment of assets
Fair value definition
The price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the date of the valuation
IAS 36 - impairment of assets
Value in use definition
The present value of the future cash flows expected to be derived from an asset
IAS 36 - impairment of assets
External sources of information about impairment
A significant fall in assets value
Increase in interest rates
Market value less than carrying amount of net assets
IAS 36 - impairment of assets
Internal sources of information on impairment
Physical damage to the asset
Economic performance is worse than expected
IAS 36 - impairment of assets
Impairment review 3 steps
- What’s the carrying amount? (Cost - acc depn)
- What’s the recoverable amount? (Higher of fair value less costs of disposal and value in use)
- If carrying amount is higher.. asset is impaired and should be written down to its recoverable amount of SOFP
IAS 36 - impairment of assets
What if the carrying amount is higher than assets recoverable amount?
The asset is impaired.
Difference is recorded as an expense to PL
IAS 17 Leases
Definition.
When a company obtains the right to use non current assets
IAS 17 Leases
Two types of leasing
- Finance lease - usually long term and all risks and rewards of ownership are transferred to the lessee
- Operating lease - usually short term and there is no transfer of risks and rewards of ownership.
IAS 17 Leases
Which type of lease has the following characteristics..
The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than fair value (what is can be exchanged for)
Finance lease
IAS 17 Leases
How is a finance lease recorded on FS
DR - asset BS
CR - bank loan/lesser
*amount shown is the lower of its fair value and present value of the minimum payments.
IAS 17 Leases
How is an operating lease recorded on FS
DR - expense PL
CR - bank BS
IAS 2 - inventories
Definition
Inventories should be valued at the lower of cost and net realisable value
*cost = cost price incl additional charges do bring the product to its present location and condition
** net realisable value = est. selling price less estimated costs of completion and other costs to make the sale
IAS 2 - inventories
What does AVCO mean?
Average cost (usually based on average weight using numbers of units bought as the weighting)
IAS 2 - inventories
3 types of inventories held at year end
- Raw materials
- Work in progress
- Finished goods
IAS 17 - Leases
How are finance leases displayed on BS
Liabilities at the lower of fair value (asset being leased) and present value of minimum lease payments.
IAS 2 - inventories
4 Different forms of inventories
- Raw materials
- Work in progress
- Finished goods
- Finished goods (bought in for resale)
