Lecture 2 - Non-Current Assets

Question 1

PPE

What is the difference between current vs. non-current assets?
(4 factors)

Answer 1

An asset is current when

• the entity expects to realize or intends to sell or consume the asset in its normal operating cycle
• the entity holds the asset primarily for the purpose of trading
• the entity expects to realize the assets within 12 months after the reporting period
• the asset is cash or equivalent (unless restricted to be exchange or used to settle liabilities for at least 12 months after the reporting period.

Non-current assets include tangible, intangible, and financial assets of a long-term natured (e.g. building, patent, and stocks)

Fixed assets are one type of non-current assets
- Finite life: depreciated
- indefinite: value-adjusted (impairment)

Question 2

PPE

Definition and Recognition

Answer 2

Definition
PPE are tangible assets that are:
- held for use in production or supply of G&S for rental to others or for administrative purposes and
- are expected to be used during more than one period

Recognition
Propable that future benefits will flow to entity AND cost can be measured reliably

Question 3

PPE

Initial Measurement

Answer 3

An item of PPE should initially be measured at cost
- “Cost” = amount of cash or equivalent paid or FV given to acquire asset at the time of acquisiiton

Purchase price
- trade discounts/rebates
+ and costs directly attributable to bringing the asset to working conditions for intended use
+ borrowing costs
- governments grants
= COST OF ASSET

Question 4

PPE

Directly Attributable costs vs. NOT included

Answer 4

OK:
- Site preparation
- Initial delivery and handling
- Installation and assembly
- Professional fees such as architect and engineers
- Estimated costs of dismantling and removing the asset and restoring the site

NO:
- Cost of opening a new facility
- Cost of relocating operations
- Initial operating costs (e.g. low demand)
- Cost incurred during a time which the asset is operable but it not yet used at full capacity
- Cost of introducing a new product (ad and promo)
- Cost of conducting new business in new location or with new customers
- Admin and general overhead

Question 5

PPE

Component Approach

Answer 5

= “significant parts depreciation”
- Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separately
- An entity is required to determine the depreciation seprarately for each significant part of an item of PPE

Question 6

PPE

Subsequent Measurement (FV=CA)

Answer 6

Question 7

PPE

Subsequent Measurement (FV /= CA)

Answer 7

Question 8

PPE

If one item of PPE is revalued, should the entire class be revalued?

Answer 8

Yes. When an item of PPE is revalued, any accumulated depreciation at the date ofthe revaluation is treated in one of the two ways:
- Restated proportionaly with the changes in gross CA so that CA after = revalued amount
- Eliminated against the gross CA of the asset and the net amount restated to the revalued amount of the asset

Question 9

PPE

Impairment, Derecognition, and Disclosure

Answer 9

*Impairment *
- at each reporting date: is there evidence an item was subject to an impairment?
- if yes: Test!

Derecognition
When?
- On disposal OR
- When no future economic benefits probable

Gains or losses disclosed in IS

Disclosures
The FS shall disclose, for each class of PPE:
- measurement bases to determine gross CA
- the depreciation methods
- the useful lives and depreciation rates
- the gross CA and accumulated depreciation at beginning of period
- A reconciliation of the CA at the beginning and end of period

Question 10

Reminder

FV vs. CV

Answer 10

Fair Value (FV):
- Market Value: Estimated price for selling an asset or transferring a liability in the market.
- Financial Reporting: Provides current and realistic valuations based on market conditions.
- Calculation: Uses observable market data or valuation techniques like discounted cash flows.

Carrying Amount (CA):
- Book Value: Value recorded on the balance sheet, reflecting original cost adjusted for depreciation/amortization.
- Accounting Record: Shows historical cost minus accumulated depreciation and impairment.
Calculation: Initial cost minus accumulated depreciation, amortization, and impairment losses.

Question 11

Investment Properties (IP)

Definition

Answer 11

IP: Property held by the owner of lessee to earn rentals or for capital appreciation or both.

NOT FOR
- use in production/supply
- sale in the ordinary course of business

Owner-occupied property: held by the owner or lessee for use in the production or supply of G&S or admin purposes

Purpose:
- To conduct business activities
- To house the company’s offices or operations

Question 12

Investment Properties (IP)

Recognition and Initial Measurment

Answer 12

Recognition
Probable economic benefits & Cost can be mesured reliably

Initial Measurment
At cost: transactions cost included
- Purchased IP: purchas price + directly attributable expenditure
- Self-constructed IP: cost at date when the construction/development is completed

Question 13

Investment Properties (IP)

Subsequent Measurment

Answer 13

Question 14

Investment Properties (IP)

Is it an IP? A decision tree

Answer 14

Question 15

Investment Properties (IP)

IFRS 13 - The FV Hierarchy
LEVEL 1

Answer 15

Question 16

Investment Properties (IP)

IFRS 13 - The FV Hierarchy
LEVEL 2

Answer 16

Question 17

Investment Properties (IP)

IFRS 13 - The FV Hierarchy

Answer 17

Question 18

Investment Properties (IP)

IFRS 13 - FV Measurement.
What’s the objective?

Answer 18

To estimate the price at which an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions, i.e. an exit price from the standpoint of a market participant holding the asset or owing the liability.

Question 19

Intangible Assets

From BV of Equity to Market Value

Answer 19

Question 20

Examples of Intangible Assets & NOTs

Answer 20

OK:
- Patents
- Brands
- Trademarks
- R&D
- Copyrights
- Software license

NOT:
- Newly developed management concept
- Portfolio of customers, market shares, customer relationships, customer loyalty
- Internally generated brand names, mastheads, publishing titles, customer lists, and similar

Question 21

Intangible Assets

Definition (3 key)

Answer 21

3 KEY:
- Identificable
- Non-monetary
- Not physical
EXCLUDES GOODWILL

Question 22

Intangible Assets

Recognition and Initial Measurment

Answer 22

Recognition: Probable economic benefits & cost can be measured reliably

Initial measurment at cost
Four modes of acquisition are considered:
1) Separate acquisiiton
2) Part of a business combination
3) With a government grang
4) With an exchange of assets

Or, Internally generated intangible assets

Question 23

Intangible Assets

Recognition of R&D

Answer 23

Research = te original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
- NOT an intangible aset
- Expense research when it is incurred

Development = the application of research findings to a plan or design for the production of new ot subbstantially improved materials, devices, products, processes, systems, or services before the start of commercial use
May be recognized IF ALL fulfilled:
a) Technical feasibility of completion for use or sale
b) Intention to complete
c) Ability to use or sell
d) Probable future economic benefits
e) Availability of sufficient resources to complete
f) Ability to measure expenditures reliably

Question 24

Intangible Assets

Subsequent Measurement
(FV = CA)

Answer 24

Question 25

Intangible Assets

Subsequent Measurment (FV /= CA)

Answer 25

Question 26

Intangible Assets

Goodwill - Overview

Answer 26

= the future economic benefits arising from assets that are not capable of being individually identified and separately recognized

= the difference between FV and any aggregate FVs of the identifiable assets and liabilities

*Goodwill itself is NOT an identifiable asset or liability! But a Residual Amount. Nevertheless, the IFRS requires it to be shown as an asset.

Question 27

Intangible Assets

Goodwil - Determination

Answer 27

Acquirer, at acquisition date:
- allocation of cost of business combination by recognizing the acquiree’s identifiable assets, liabilities, and contingent liabilities that satisfy the recognition criteria at their FVs at that date,
- EXCEPT for non current-assets (or disposal groups) that are classified as assets for sale –> recognize FV minus cost to sell

Goodwill = Cost of the business combination - acquirer’s interest in the net FV of the identifiable assets, liabilities, and contingent liabilities

Badwill? = net FV of the acquirer’s interest is greater than the cost of business combination, the acquirer shall:
- reassess the identification and measurement of the identifiable assets, liab, and con. liab.
- recognize immediadetly in P/L and excess remainming after that reassessment

Question 28

Intangible Assets

What is Goodwill?

Answer 28

Goodwill is an intangible asset that represents the excess value paid by a company when acquiring another company. It’s essentially the premium paid over the fair market value of the identifiable assets and liabilities.

Question 29

Intangible Assets

Goodwill - Formula Breakdown

Answer 29

Goodwill=Cost of the business combination − Acquirer’s interestinthe net FV of the identifiable assets, liabilities, and contingent liabilities

Here’s what each part means:

Cost of the business combination: This is the total amount the acquiring company pays to buy the target company. It includes cash, stock, debt assumed, or other consideration given.

Acquirer’s interest in the net FV (Fair Value) of the identifiable assets, liabilities, and contingent liabilities: This is the fair market value of the target company’s tangible and intangible assets, minus its liabilities, at the time of acquisition.