Non-current Assets Flashcards
Definition of Asset
A present economic resource controlled by the
entity as a result of past events. An economic
resource is a right that has the potential to produce
economic benefits.
Non-current assets definition
An asset that does not meet the definition of a current asset. i.e. not expected to be realised, sold
or consumed in the normal business cucle. not held for trading purposes, not expected to be realised witbi f2 month
Tangible Non-Current Assets:
Physical substance, e.g. property, plant and equipment
Held for production, supply of goods or services, rental, administration activities
On a continuing basis
Intangible Non-Current Assets:
No physical substance, e.g. Patents, Trade marks, Development costs, Goodwill
Investments held long term
Net book value formula
Cost less accumulated depreciation equals depreciated cost or NET BOOK VALUE (NBV)
Revaluation of non-current (fixed) assets
Definition:
Some Non-Current Assets, like land and buildings, are occasionally “revalued,” assigning a valuation above cost.
Basis:
Revaluation is based on the concept of ‘fair value,’ representing the price if the asset were to be sold.
Frequency:
If fair value is relatively volatile, assets are revalued annually.
If less volatile, revaluation may occur every 3 to 5 years.
Cost of Non-Current Asset at Acquisition
Definition:
The cost at acquisition includes the purchase price of the asset plus the expenses associated with preparing it for use.
Components:
Includes bringing the asset to working condition, encompassing installation and commissioning costs.
Additional Costs:
Legal costs related to acquisition are also considered part of the overall cost.
Improvements to Non-Current Assets after purchase
Purpose of Improvement Expenditure:
May extend the asset’s annual output capacity.
Increase its economic life.
Reduce associated running costs.
Improve the quality of its output.
Examples of Improvement Costs:
Costs incurred to improve the asset’s original condition.
Examples include extensions to a building or rebuilding shop fittings to attract a new type of customer.
Treatment After Acquisition:
Financial Treatment:
Improvement costs add to the cost of the non-current asset.
Depreciated over the remainder of its useful life.
Repair, restoration
Costs incurred to maintain, repair or restore the asset to its original condition, e.g.
replacing roof damaged in storm.
replacing engine in bus.
Treatment:
Repair and maintenance TREAT AS AN EXPENSE
Depreciation
Non-current (fixed) assets are gradually used up in providing goods and services over time.
Purpose of accounting depreciation is to spread the cost of a non-current (fixed) asset over its expected useful life.
Depreciation is a method of allocating cost.
Achieves a matching of costs against the related revenues.
the Net Book Value (NBV)
Calculation:
NBV is calculated as the original cost of the asset minus the accumulated depreciation.
Definition:
Represents the unallocated original cost of the asset.
Purpose:
NBV is not intended to represent the asset’s market value.
Yearly depreciation and Accumulated depreciation
Annual Process:
Each year, a portion of the non-current (fixed) asset’s cost is deducted from the balance sheet value.
Purpose:
The deducted portion is matched against the revenues of that year, resulting in the depreciation charge for that year (Income Statement).
Accumulation:
The depreciation of the non-current (fixed) asset in each year is added to the depreciation of earlier years to arrive at the Accumulated depreciation. (Statement of Financial Position).
TOTAL DEPRECIATION formula
TOTAL DEPRECIATION = COST – RESIDUAL VALUE
Straight line method
Formula: (Cost -Expected Residual Value) / Expected life
Reducing balance method
First year: Fixed percentage for depreciation is deducted from the cost
From second year: Same percentage is taken from the reduced balance
