Non-current Assets Flashcards
Asset definition
a resource controlled by the entity as a result of past event from which future economic benefits are expected to flow to the entity
(Per Chapter 4 of the IASB Conceptual Framework)
IAS 16 Property, Plant and Equipment (PPE)
Objective:
To ___________ the accounting treatment for property, plant and equipment so that _____ of the financial statements can _________ information about an entity’s _____________ in its PPE and the changes in such investment.
Key issues (4)
IAS 16 property plant and equipment defines PPE as tangible assets that are: (2)
To prescribe the accounting treatment for property, plant and equipment so that users of the financial statements can discern information about an entity’s investment in its PPE and the changes in such investment.
Key issues:
- Recognition
- Carrying amount
- Depreciation
- Impairment
IAS 16 property plant and equipment defines PPE as tangible assets that are:
a. Held by an entity for use in the production or supply of goods and services, for rental to others, or for administrative purposes; and
b. Expected to be used during more than one period
What are non-current assets?
An entity shall classify an asset as current when: (4)
Therefore non current?
a. It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realise the asset within twelve months after the reporting period; or
d. The asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.
Recognition of PPE
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: (2)
a. It is probable that future economic benefits associated with the item will flow to the entity;
and
b. The cost of the item can be measured reliably
Measurement at recognition
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
Per IAS 16 cost comprises: (3)
- Purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates
- Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
- The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period
Asset cost
What are directly attributable costs according to IAS16 (5)
Directly attributable costs (IAS 16):
- Site preparation
- Delivery and handling costs
- Installation costs
- Professional fees
- Commissioning costs
Extra
- Self-constructed assets
- Subsequent expenditure
In any given scenario, work through the list of costs to determine which can be capitalised
Asset Cost example
The settlement discount should be classed as other income in the IS
Two types of accounting policy for depreciation
Cost model
Held at cost less accumulated depreciation and any accumulated impairment losses
Revaluation model
Held at revalued amount less accumlated depreciation and any accumulated depreciation and any accumulated impairment losses
Depreciation – definition
What is net book value not and what is a better description?
IAS 16: Property, Plant and Equipment
Depreciation is :
‘the systematic allocation of the depreciable amount of an asset over its useful life’
Depreciable amount being cost less residual value
Freehold land does not depreciate
5678 land does not depreciate
Net book value is not market value or replacement cost, it is better described as the unallocated cost
Depreciation considerations
The depreciation method used shall reflect the __________ in which the asset’s ___________ ____________ ______________ are _____________ to be _____________ by the entity.
The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
Revaluation model (3)
What is fair value?
Why do revaluations need to be performed regularly? (2)
If an asset is revalued…?
3 steps
Revalued amount: fair value
- The amount for which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.
Revaluations need to be performed regularly:
- To ensure validity
- Depends on movement in fair values
If an asset is revalued, the entire related class of assets must be revalued
- Restate asset at revalued amount
- Remove accumulated depreciation on the asset
- Credit the revaluation reserve
Why revalue? (3)
Cost of a non-current asset usually differs to its true (market) value
- Enhances non-current assets on the Statement of Financial Position
- Investors
- Acquirers - Competitors/peers may have adopted this practice
Potential issues with revaluation model (5)
- Cost of Valuing
Using a revaluation model can be expensive because it often requires professional appraisals to determine the fair value of the assets. These valuations may need to be performed periodically, adding to the overall cost.
- A Ready Market? If Not - How Valued?
For some assets, there may not be an active market where their value can be easily determined. In such cases, alternative methods like discounted cash flow analysis or replacement cost method might need to be used to estimate the asset’s value. These
methods can be subjective and may introduce a degree of uncertainty.
- Effect on Income Statement
Depreciation
When assets are revalued, their depreciation expense changes because the depreciation is now calculated based on the revalued amount rather than the original cost. This can lead to higher or lower depreciation expenses, affecting the reported profits.
Profit or Loss on Disposal
If a revalued asset is sold, the profit or loss on disposal will be based on the revalued amount rather than the original cost. This can result in different profit or loss amounts compared to if the asset had not been revalued, impacting the income statement.
- Effect on Ratios
Revaluing assets can affect various financial ratios used to assess the company’s performance. For example, an increase in asset values can improve the asset turnover ratio or return on assets ratio, potentially making the company appear more efficient.
However, it may also affect the gearing ratio, altering the perceived financial leverage.
- Taxation Effect
Revaluation can have tax implications, as changes in asset values may lead to differences in tax liabilities. For example, an increase in asset value could result in higher capital gains taxes upon disposal or affect the amount of depreciation that can be deducted for tax
purposes.
Revaluation example
Other revaluation changes (2/2,1)
Decrease in market value
- Written-off against revaluation reserve up to the value of its balance
- Remainder to the Income Statement as an impairment
If a previously impaired asset’s market value increases
- Previous impairment reversed, up to values previously written-off, to Income Statement
Balance (if any) to revaluation reserve
Transfer of excess depreciation (3)
- A revaluation gain will lead to a higher depreciation charge in the IS
- IAS 16 allows for the ‘excess depreciation’ to be transferred between reserves.
- So it doesn’t affect profit
Note: it does not change the depreciation charge in the SOCI
Dr Revaluation Reserve
Cr Retained Earnings
IAS 16, Property, Plant and Equipment: Disclosure (7)
- Effective date of the revaluation
- Whether valuer was independent
- Methods and significant assumptions used
- Carrying amount that would have been recognised had assets been carried under the cost model
- The revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders
- Gross carrying amount, accumulated depreciation and impairment losses
2nd Example
