Chapter 10 - Non-current assets, depreciation and impairment

Question 1

What is a NCA?

What type of expenditure is this?

What is the journal if we acquire an NCA?

Answer 1

Non Current Asset

Asset kept for more the year When an asset is acquired that is expected to be held for more than one accounting period, we account for this capital expenditure

Dr Non-current asset £ cost
Cr Cash / Trade payables £ cost

(depends how we pay - cash or credit)

Question 2

What are examples of a NCA?

Answer 2

Non-current assets ** (eg land and buildings, motor vehicles, plant and equipment, fixtures and fittings, intangibles)

** disclosed net of accumulated depreciation (negative asset, will be a credit)

Question 3

What do we need to factor in to calculate the cost of a NCA?

Answer 3

The cost of an asset includes all directly attributable amounts to bring it to its present location and condition. It can include:
- Purchase price
- Delivery costs
- Stamp duty and import duties (and irrecoverable VAT on cars)
- Site preparation
- Installation and assembly costs e.g. Manufacturing costs
- Professional fees
- Testing costs

It can also include subsequent costs that enhance (increase the earning capacity) the asset, such as major improvements or a major overhaul.

Question 4

What is not factored in to calculate the cost of a NCA?

Answer 4

If it is going to maintain (so not increase) the earning capacity then it is an expense so not added to NCA.

Maintain earning capacity = Expense

These are all expenses

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

Question 5

If we are maintaining the earning capacity of a NCA what should I debit?

Answer 5

Should be an expense

If it is going to maintain (so not increase) the earning capacity then it is an expense so not added to NCA.

Maintain earning capacity = Expense

These are all expenses

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

Question 6

What does useful life mean?

Answer 6

How long something is useful to the business not the physical life. Every tangible NCA has a limited/useful life EXCEPTION IS LAND

Question 7

What tangible NCA is an exception to the useful life concept

Answer 7

Land

Question 8

What is depreciation? What accounting principle is used?

Answer 8

Depreciation is an application of the accruals principle. Matches cost to No of years the business can benefit from the asset

It matches the cost of the asset to the period that the business expects to gain the benefits from using it. It is defined as the “systematic allocation of the cost of an asset, less its residual value, over its estimated useful life”.

Question 9

What 3 factors should we consider when looking at an asset depreciation?

Answer 9

To calculate an asset’s depreciation, the following factors are relevant:
- Asset cost
- Useful life
- Asset residual value
The residual value is the estimated scrap value for an asset at the end of its useful life for the business.

Question 10

What is the residual value? If this not given in a question, how would we work this out?

Answer 10

The residual value is the estimated scrap value for an asset at the end of its useful life for the business.

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

Question 11

What is the journal when we want to a NCA accumulated depreciation what do we do?

Answer 11

For each period’s calculated depreciation charge:
Dr Depreciation expense (profit or loss)
Cr Accumulated depreciation (statement of financial position)

There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP

Question 12

When we journal the NCA to accumulated depreciation why do we not touch the NCA account?

Answer 12

There is no impact on the non-current asset cost accounts, but in the final statement of financial position the balance on the accumulated depreciation account (Cr) is offset against the cost account (Dr) to derive the carrying amount (carrying value or net book value) of the non-current assets. So the cost - accumulated depreciation = Carry Amount which is the final figure in our SOFP

For each period’s calculated depreciation charge:
Dr Depreciation expense (profit or loss)
Cr Accumulated depreciation (statement of financial position

Question 13

Depreciable Amount formula

Answer 13

Depreciable Amount = Cost - Residual Value

Question 14

Carrying Amount/Value (CA) formula

Answer 14

Carrying Amount = Cost - Accumulated depreciation

This is the figure that would appear in our SOFP under our NCA

Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it’s typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date.
a.g after 1 year would be price per year, after 7 years would be acc depreciation x7 and so on

Question 15

What financial statement would a Carrying Amount be detailed in?

Answer 15

SOFP

Question 16

What is Accumulated Depreciation?

Answer 16

Accumulated depreciation is all the years I have had the asset. Refers to the accumulated reduction in the value of an asset over time. When an asset is first purchased, it’s typically assigned a value reflecting its expected lifespan, gradually reducing over time. Accumulated depreciation is the total of this depreciation to date.

Question 17

What are the two key methods to calculate depreciate charge for a period?

Answer 17

1. Straight line basis - depreciation is the same each year e.g. property
2. Reducing balance basis - depreciation starts high then lowers each year e.g. computers/cars

Question 18

What is the reasoning behind charging depreciation in historical cost accounting?

A To ensure funds are available for the eventual replacement of the asset
B To comply with the consistency concept
C To ensure the asset is included in the statement of financial position at the lower of cost and net realisable value
D To match the cost of the non-current asset with the revenue that the asset generates

Answer 18

D To match the cost of the non-current asset with the revenue that the asset generates

Dep is an application of the accruals concept. It spreads the cost of the NCA over the period that the asset is expected to generate benefits over.

Question 19

How do you calculate straight line depreciation?

Answer 19

Depreciation Charge/Expense =
Cost - Residual Value
________________________
Useful life (month or years)

It can be expressed as a % of cost (assuming no residual value) or number of years. For example:
 10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS
 25% straight line = 4 years (48 months)
 20% straight line = 5 years (60 months)
 5% straight line = 20 years (240 months)

100/% = No of years
100/No of years = % of cost

In your exam, straight line depreciation will normally be calculated on a monthly basis.

Question 20

How many years/months is
 10% straight line
 25% straight line
 20% straight line
 5% straight line

Answer 20

It can be expressed as a % of cost (assuming no residual value) or number of years. For example:
 10% OF COST straight line = 10 years (120 months) - REDUCING IT OVER 10 YEARS
 25% straight line = 4 years (48 months)
 20% straight line = 5 years (60 months)
 5% straight line = 20 years (240 months)

Question 21

How do you calculate the depreciation to be charged to the profit or loss for a year?

Answer 21

From the ledger account, it is possible to distinguish assets held all year (the opening figure less the disposals during the year) on which a full years depreciation should be charged.
The depreciation on the additions and disposals should then be calculated on a pro-rata basis based on the number of months the assets were held.

Question 22

How do you calculate Reducing Balance depreciation?

Answer 22

The annual depreciation charge is a fixed percentage of the brought forward carrying amount (carrying value or net book value) of the asset. It allocates a greater proportion of the cost to the asset’s earlier years, and a lower proportion in its later years and the asset becomes less useful to the business.

(Cost - Accumulated Depreciation) x % given

Carrying Amount = (Cost - Accumulated Depreciation)

Would use a pro forma table in the layout as
Carrying Amount Accumulated depreciation
Asset at cost INITIAL COST
Depreciation Year 1 INTIAL COST X % INITIAL COST x depreciation %
Carrying Amount Year 1 INITIAL COST - ACC DEP
Depreciation Year 2 CA YR 1 X % CA YR 1 x depreciation %
Carrying Amount Year 2 CA YR 1 - ACC DEP YR 2
Depreciation Year 3 CA YR 2 X % CA YR 2 x depreciation %
Carrying Amount Year 3 CA YR 2 - ACC DEP YR 3
Depreciation Year 4 CA YR 3 X % CA YR 3 x depreciation %
Carrying Amount Year 4 CA YR 3 - ACC DEP YR 4
Depreciation Year 5 CA YR 4 X % CA YR 4 x depreciation %
Carrying Amount Year 5 CA YR 4 - ACC DEP YR 5

Question 23

How do you calculate Carrying Amount after N years in Reducing Balance depreciation?

Answer 23

Carrying Value after n years = Cost × (1 – depreciation rate as a decimal)n

power of n is the years

Question 24

When we enhance (increase the earning capacity) of an asset after its initial purchase this is added to the cost of the asset and we need to calculate the cost of the depreciation on this. What is that term called?

Answer 24

Depreciating enhancement expenditure
Where expenditure is incurred to enhance an asset after its initial purchase, this is added to the asset’s cost and depreciated over the asset’s remaining useful life. This type of expenditure is sometimes called subsequent expenditure.

e.g.

Malcolm buys a building on 1.1.X0 for £200,000. On 1.1.X2 he adds an extension that cost £50,000.
Calculate the annual depreciation charge before and after the extension is built, on the basis of straight line depreciation over 10 years, with no residual value.
SOLUTION
Before extension: £200,000/10 years = £20,000 per annum
After extension: £200,000/10years + £50,000/8 years = £26,250 per annum

Question 25

How ofter is the depreciation method of an asset reviewed?

Answer 25

The depreciation method should be reviewed annually for appropriateness.

Question 26

When there is a change in depreciation method how would we approach this?

Answer 26

The depreciation method should be reviewed annually for appropriateness. If there are any changes in the expected useful life, pattern of usage or residual value then the method should be changed. The remaining carrying value less the residual value should be written off over its remaining useful life. Only current and future periods will be affected.

Remaining Useful Life

Question 27

What is an impairment loss? When would this occur?

Answer 27

Impairment loss refers to the reduction in the carrying value of an asset when its recoverable amount falls below its book value (the amount it’s currently recorded at on the balance sheet). It indicates that the asset is worth less than the value it is recorded at, and this loss needs to be recognized in the financial statements.

Question 28

What triggers an impairment loss?

Answer 28

Impairment can occur when there is evidence or an event indicating that the asset’s value has declined.

Examples of triggers include:
- Significant decrease in market value.
- Physical damage to the asset.
- Adverse changes in legal, economic, or business conditions.
- Obsolescence (e.g., outdated technology).
- Underperformance of the asset (e.g., a manufacturing plant that no longer produces at the expected levels).

Question 29

How is impairment calculated?

Answer 29

The impairment loss is calculated by comparing the asset’s carrying amount (book value) with its recoverable amount:

Carrying amount: This is the value of the asset on the balance sheet, typically the original cost minus any accumulated depreciation or amortization.

Recoverable amount: We want to choose/use the higher of two values in questions:
1. Fair value less costs to sell: The amount you would get if you sold the asset in its current condition, minus any selling costs. SELL
2. Value in use: The present value of future cash flows expected from the asset. KEEP

Question 30

What is the recoverable amount?

Answer 30

Higher of the ‘fair value less cost to sell’ of the asset and its ‘value in use’

If my recoverable amount is lower than my CA this is an impairment

Question 31

What is Fair value less costs to sell?

Answer 31

Fair value less costs to sell (SELL)

This concept is based on what the asset would be worth if you sold it in its current state, after accounting for the costs associated with selling it.

Key points:
Fair value: This is the price you would get for the asset in the market under normal conditions.

Costs to sell: These are the expenses you would incur to sell the asset, such as:
Legal fees
Advertising costs
Commissions paid to sales agents
Transportation costs, etc.

Formula: FairValuelessCoststoSell = FairValue − CoststoSell

Example:
Let’s say you own machinery that you plan to sell, and it’s worth £80,000 in the market today. But you’ll have to spend £5,000 on advertising and legal fees to complete the sale.

FairValuelessCoststoSell = 80000-5000=75000
FairValuelessCoststoSell=80,000−5,000=75,000
So, the recoverable amount of the asset if you sold it would be £75,000.

This concept assumes you’re getting rid of the asset and aims to reflect how much you would actually receive after all selling costs are factored in.

Question 32

What is Value in Use?

Answer 32

Value in use (KEEP)

This approach considers how much the asset is worth if you keep it and continue using it. It’s based on the future cash flows that the asset is expected to generate over its useful life, discounted to their present value (i.e., their value today).

Key points:
Future cash flows: These are the amounts of money the asset will generate in the future (for example, income from a machine’s output).
Present value: Future cash flows are discounted back to today’s value because money now is worth more than the same amount in the future due to factors like inflation and risk.
Formula:

ValueinUse = PresentValueofFutureCashFlows

Example:
Suppose you own machinery that is expected to generate £30,000 per year for the next 3 years. The discount rate (which reflects the risk and time value of money) is 5%. You calculate the present value of these future cash flows as £78,000.

So, the Value in Use of the machine would be £78,000.

This method assumes you are keeping the asset and continuing to use it, focusing on how much value you can still extract from it through its future use.

Question 33

What is a Fall in value (impairment loss)

Outline the PROFORMA

Answer 33

Sometimes an asset might suffer a permanent fall in its value (perhaps due to damage) called an impairment loss. The asset should be written down to its new carrying value, called the “recoverable amount” with the difference being expensed to the profit or loss.
To decide the recoverable amount we choose the higher figure out of the “fair value less cost to sell” (SELL) of the asset and its “value in use” (KEEP)

PROFORMA

                                              NCA
                                    Lower               Recoverable Amount Carrying Amount                                              Higher

Cost X Fair value less Value In Use
Acc Dep (X) cost to Sale (KEEP)
___________________ (SELL)
Carrying Amount
___________________
___________________

Question 34

What is a non-current assets disposal

Answer 34

When a business sells NCA early
Decides to sell off a non-current asset it will make an accounting profit or loss on disposal.

Question 35

How can we calculate if we are making a profit or loss on a disposal?

Answer 35

PROFORMA
£
Net disposals proceeds x
(cash when sold)

Less carrying value (x)
(at disposal)
_______________
Profit/loss on disposal x/(x)

Profit would be reported in other income in SPL
Loss would be reported as an expense in SPL

Question 36

If I want to calculate the profit or loss on disposal or to deduce the carrying value of an asset that has been disposed of, how would I work this out?

Answer 36

PROFORMA
£
Net disposals proceeds x
(cash when sold)

Less carrying value (x)
(at disposal)
_______________
Profit/loss on disposal x/(x)

IF THE VALUE IS A CR Profit would be reported in other income in SPL
IF THE VALUE IS A DR Loss would be reported as an expense in SPL

Question 37

What is the journal when we dispose of an asset?

Answer 37

SHORT CUT
DR CASH
DR ACC DEPRECIATION (clear to 0)
CR NCA COST (clear to 0)

Step 1: Remove cost of disposed asset from cost ledger
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds
Dr Cash £ proceeds
Cr Disposals account £ proceeds

Question 38

3 Journal entries when disposing of a NCA

Answer 38

we know the short cut is
DR CASH
DR ACC DEPRECIATION (clear to 0)
CR NCA COST (clear to 0)

Step 1: Remove cost of disposed asset from cost ledger
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds
Dr Cash £ proceeds
Cr Disposals account £ proceeds

Question 39

What are the journal entries when doing a part exchange for NCA?

Answer 39

Accounting for disposals given in a part exchange
Sometimes an asset does not receive cash for an asset but instead receives a “part exchange” allowance against the cost of a new asset.
In this case, the three steps are the same but the cash proceeds in step 3 (Dr Cash) is replaced with part exchange value assigned to the old asset and debited to the new asset cost account.

Step 1: Remove cost of disposed asset from cost ledger (as before)
Dr Disposals account £ cost
Cr Non-current cost account £ cost

Step 2: Remove accumulated depreciation from the accumulated depreciation ledger (as before)
Dr Accumulated depreciation account £ accumulated depreciation
Cr Disposals account £ accumulated depreciation

Step 3: Account for the disposal proceeds (replace cash with trade in value)
Dr New asset cost account £ part exchange allowance
Cr Disposals account £ part exchange allowance

The remaining cash paid (after the part exchange allowance) for the new asset is then accounted for in the usual way:
Dr New asset cost account £ cash paid
Cr Cash £ cash paid

At the end my new NCA should total the full cost of the new asset (regardless of part exchange)

Question 40

Why remove accumulated depreciation when selling the NCA?

Answer 40

Accumulated depreciation represents the total amount of the asset’s cost that has been used up or expensed over its lifetime.

Since the asset is no longer in your possession (due to sale or disposal), you have to clear out both the asset’s cost and the depreciation that has been recorded against it.

Even though the depreciation has already been expensed over time, it’s part of how you’ve tracked the asset’s reducing value. By removing both the asset’s cost and its depreciation, you’re showing that you no longer have the asset or its corresponding value on your books.

In summary, you remove the accumulated depreciation because it was connected to the old asset, and since the asset is gone, you no longer need to track its depreciation.

Question 41

What is an asset register? What information can it contain?

Answer 41

The asset register is a detailed listing of all non-current assets held by an organisation.

It can be used to record information such as:
 Reference number (internal and/or manufacturers serial number)
 Location
 Purchase date
 Depreciation method
 Estimated useful life
 Residual value

In exam qs there will be a discrepancy between the nominal ledgers and asset register, this is usually due to a disposal not being recorded so we will need to look at the carrying value of the disposal.

Profit/loss on disposal = Proceeds - Carrying value at disposal

Question 42

Why would there be a discrepancy between the nominal ledgers and asset register?

Answer 42

In exam qs there will be a discrepancy between the nominal ledgers and asset register, this is usually due to a disposal not being recorded so we will need to look at the carrying value of the disposal.

Question 43

Why is an asset register useful?

Answer 43

As the asset register is not part of the double entry system, it can be reconciled to the ledgers as check on the completeness and accuracy of the ledgers. This reconciliation can help detect stolen, damaged or scrapped assets as well as new assets which may not have been accounted for in the ledgers.

Question 44

What is an intangible assets?

Answer 44

Some non-current assets do not have physical substance, these are called intangible assets.

Question 45

What are some examples of intangible assets?

Answer 45

 Licences: purchased to allow a business to operate in a particular area (e.g. a bus company may be granted a licence to operate in certain areas of the country)
 Patents: on ideas or designs that a business has developed
 Brands: these help to distinguish a business’ products or services from those of other
businesses
Goodwill

Question 46

How do we treat intangible assets?

Answer 46

Purchased intangible assets are treated in the same way as tangible non-current assets. They are initially valued at their directly attributable cost. This should then be amortised over the asset’s useful life, usually on a straight line basis and assuming a nil residual value.

Question 47

What is amortisation?

Answer 47

Same as depreciating an tangible NCA

Question 48

What is goodwill?

Answer 48

Goodwill is an intangible asset that represents the excess value of a business over the fair value of its identifiable net assets (assets minus liabilities). This excess value arises from factors that contribute to a company’s reputation and operational success, such as:

A strong brand reputation and customer loyalty.
Established relationships with suppliers and customers.
Skilled and experienced employees.
Strategic location advantages.
Proprietary technology or processes that enhance business value.
Key Characteristics of Goodwill:
- Intangible: Goodwill has no physical substance and cannot be seen or touched.
- Not Separately Identifiable: It cannot be sold or transferred independently of the business itself.
- Acquisition-Based: Goodwill can only be recognized when it is purchased as part of an acquisition of another business.
- Impairment Testing: Unlike tangible assets, goodwill is not depreciated but is subject to annual impairment tests to determine if its value has declined.

Importance of Goodwill:
Goodwill reflects the ability of a business to generate future profits based on its established market position and operational strengths. It is an important factor in mergers and acquisitions, as it can significantly influence the purchase price of a business

Question 49

Can we recognise internally generated goodwill?

Answer 49

No

Internally Generated Goodwill: Cannot be recognized as an asset in financial statements because:
1. It is not separately identifiable from the business.
2. It does not arise from legal rights.
3. It is not controlled by the entity.

Question 50

Can we recognise purchased goodwill?

Answer 50

Purchased Goodwill: Arises when a business acquires another business and pays more than the fair value of its identifiable assets and liabilities.

This is calculated as:
PurchasedGoodwill = Purchase Consideration − Fair Value of Identifiable Net Assets

Purchased goodwill is recognized on the acquirer’s balance sheet as an intangible non-current asset and is subject to annual impairment reviews (not depreciation).

Question 51

Can we depreciate goodwill? Why and how?

Answer 51

No we do not depreciate goodwill instead we do an annual impairment review.

Annual Impairment Review: This means that at least once a year, a company must assess whether the carrying amount of goodwill on its balance sheet exceeds its recoverable amount (the higher of its fair value less costs to sell and its value in use). If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.

Why is this Necessary?
- Reflect True Value: This review ensures that the financial statements accurately reflect the value of the goodwill. If the value has declined (e.g., due to changes in market conditions, loss of customers, or adverse economic factors), it is crucial to adjust the carrying amount to avoid overstating the company’s assets.
- Investor Confidence: Regular impairment testing helps maintain transparency and provides investors and stakeholders with a realistic view of the company’s financial health and value.
- Accounting Standards Compliance: Many accounting standards (such as IFRS and GAAP) require companies to perform annual impairment tests for goodwill, ensuring consistency and reliability in financial reporting.

Question 52

How is purchased goodwill treated in the financial statements?

Answer 52

Purchased goodwill is treated as an intangible non-current asset on the statement of financial position (balance sheet). It appears under a separate line item, usually called “Goodwill,” within the non-current assets section.
Since it arises from the acquisition of another business, it reflects the excess of the purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired.
Goodwill is not amortized (depreciated) over time like tangible assets. Instead, it remains on the balance sheet at its recorded amount until it is deemed to be impaired or until the business is sold.

Question 53

How do we treat research and development (R&D) for our intangible assets?

Answer 53

Research Expenditure:
- All research costs must be expensed in the profit or loss as incurred. This means they are recognized immediately in the income statement and do not create an intangible asset on the balance sheet.
- DR Expense, CR Cash

Development Expenditure:
Development costs may be capitalized as an intangible asset if they meet certain criteria. This means that instead of being expensed immediately, they are recorded on the balance sheet as an asset, reflecting that they are expected to provide future economic benefits.
DR Intangible NCA, CR Cash

To capitalize development costs, the business must be able to demonstrate:
- Technical feasibility of the product.
- Intention to complete the development.
- Ability to use or sell the product.
- Ability to generate future economic benefits (such as profitability).
- Once capitalized, these costs are then amortized over the product’s commercial production period, matching the expense to the revenue generated from the product.
Dr Amortization Expense (Profit or Loss)
Cr Intangible Asset (Balance Sheet)

Internally Generated Brands:
Internally generated brands or goodwill cannot be capitalized as intangible assets. This is due to the uncertainty surrounding future economic benefits and the inability to measure the cost reliably.

Question 54

Why do we expense research expenditures?

Answer 54

Research costs are expensed because they do not meet the criteria for capitalization. At the research stage, there is uncertainty about the future economic benefits, as a profitable product has not yet been created. Companies typically cannot demonstrate the technical feasibility or market viability of the product at this stage.

Question 55

WILL NOT BE EXAMINED BUT FOR CONTEXT

Why must all research expenditures be expensed in the profit or loss? What are the implications of this treatment on the financial statements?

Answer 55

Reason for Expensing Research Expenditures:
Research costs are expensed because they do not meet the criteria for capitalization. At the research stage, there is uncertainty about the future economic benefits, as a profitable product has not yet been created. Companies typically cannot demonstrate the technical feasibility or market viability of the product at this stage.

Implications on Financial Statements:
Impact on Profit or Loss: By expensing research costs, companies directly impact their profit or loss for the period, which could reduce net income. This is especially important for businesses that spend heavily on R&D.
Impact on Balance Sheet: Since research costs are not capitalized, they do not contribute to the total assets shown on the balance sheet, potentially affecting financial ratios like return on assets (ROA) and asset turnover.
Investment and Valuation: Investors may view high R&D spending as a sign of potential growth, but if those costs are expensed, it might lead to lower short-term profitability, which could influence investment decisions.

Defining Profitability:
A product is typically considered “profitable” when it generates revenue that exceeds its associated costs, including both the initial development costs and ongoing operational expenses. Profitability is determined after the product is brought to market and begins generating sales.

Question 56

Q
Which of the following statements about intangible assets in public company financial statements are correct?
(1) Internally generated goodwill should not be capitalised.
(2) Goodwill arising on acquisition of a business should be capitalised and subsequently amortised through the statement of profit or loss.
(3) Development expenditure must be capitalised if certain conditions are met.
A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3

Answer 56

A 1 and 3 only

Goodwill arising on acquisition is recognised by the SOFP subject to an impairment review

Question 57

Q
The directors of Ellen Ltd are considering whether any impairment has arisen in respect of its plant and machinery in the year ended 31 March 20X2.
Requirement
Which of the following are indicators that an impairment of plant and machinery may have occurred:
(1) There have been technological advances which means the plant and machinery is not as efficient as that currently available
(2) The market capitalisation of Ellen Ltd is above the value of its non-current assets
(3) The plant and machinery are being used to produce a new product which is generating more sales than the previous product
A 1only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3

Answer 57

A 1only

Technological advances which mean the plant and machinery is not as efficient as that currently available is an indicator of impairment. Market capitalisation exceeding the value of non-current assets is not an indicator of impairment but market capitalisation that is less than the value of non-current assets would be. Using the plant and machinery for a new product that is expected to generate benefits does not indicate impairment.

Question 58

Right-of-use asset random bits

Answer 58

If a company leases an asset they will recognise a right-of-use asset and lease liability

Right of use assets are depreciated

Leases are capitalized: If an entity leases an asset, it will recognize:
A right-of-use asset on the balance sheet (non-current asset).
A lease liability representing the future lease payments.

Substance over form: Even if the lessee doesn’t legally own the asset, they effectively control and use it for economic benefits during the lease term, so it should be recognized as an asset.

Presentation:
Right-of-use assets are presented within non-current assets in the statement of financial position.
They are depreciated over the lease term (similar to other PPE) and reviewed for impairment.

Question 59

What are Right-of-Use (ROU) Assets?

Answer 59

ROU assets represent the lessee’s right to use an underlying asset for a specific period of time under a lease agreement.

IFRS 16 (Leases) requires the recognition of ROU assets on the lessee’s balance sheet, paired with a corresponding lease liability.

ROU assets are part of non-current assets in the statement of financial position and are typically presented under property, plant, and equipment (PPE) or intangible assets.

Question 60

When are Right-of-Use Assets Recognized?

Answer 60

When an entity leases an asset, even though it doesn’t own it, the entity controls the asset’s use during the lease period.
IFRS 16 aims to reflect the substance of leasing arrangements where the lessee gains control of the asset’s benefits and bears the risks, despite not having legal ownership.

Question 61

1 Materials purchased and used by Pola & Co for repairs to office buildings have been included in the draft financial statements as purchases.

Requirement
The necessary amendment will:
A Increase gross profit with no effect on net profit
B The decrease and increase to net profit cancel out
C Increase gross profit and reduce net profit
D Have no effect on either gross profit or net profit
E Reduce gross profit and increase net profit

Answer 61

A Increase gross profit with no effect on net profit

To correct, reduce purchases (increase to GP and NP), increase repairs (decrease NP, no effect on GP).
The decrease and increase to NP cancel out. Overall effect on GP is an increase.