Tangible Non Current Assets

Question 1

What does IAS 1 Say about current assets and Liabilities

Answer 1

That these should be recognised as Current when:
They will be settled within 12 months of the reporting date or
They are part of the entities normal reporting cycle

Question 2

What additional types of business organisation are there?

Answer 2

Public Sector - Administer Central and Local Government activity for the benefit of the public. Are subject to specific laws and regulations.
Charities - Must be established for charitable purposes only.
Not for Profit - Tend to have benevolent or social objectives. Fund raise to support objectives.

Question 3

How should a question on preparing financial statements be approached?

Answer 3

1. Read the requirement - What statements are required & what else is requested.
2. Scan the TB - is everything where it should be?
3. Read the notes - consider what these will affect.
4. Set up proforma’s
5. Transfer figures from TB (place figures in brackets)
6. Deal with the notes, adding separate workings if ness.

Question 4

What is IAS 16?

Answer 4

This deals with the recognition of assets, determination of the carrying value and depreciation/ revaluation.

Question 5

Under IAS 16 what should be recognised as the initial cost of an asset?

Answer 5

All directly attributable costs necessary to bring the asset in to use. This may include:
1. Purchase price
2. Delivery and Installation (inc own labour cost)
3. Professional fee’s
4. End of life costs.
NOTE this can never include training costs.

Question 6

What about subsequent expenditure on an asset - can any of this be capitalised?

Answer 6

Subsequent expenditure would be recognised as CapEx if:
* It enhances the economic benefits of the asset.
Repairs and maintenance will be recognised as revenue expenditure.

Question 7

How should end of life costs be recognised as part of the initial cost?

Answer 7

The present value of any End of Life costs will be recognised as an asset along with a provision for the same value.
The asset should be depreciated on a straight line for the period to EoL
Provision is increased by finance cost at given % per annum.

Question 8

What is depreciation?

Answer 8

Depreciation is the systematic allocation of the depreciable amount of an asset over it’s useful life.
Depreciable amount - Cost - residual value.

Question 9

How is a revision of useful economic life carried out?

Answer 9

Under IAS 16 this should be carried out at the end of each reporting period.

1. The carrying value of the asset at the reporting date is calculated.
2. Revised depreciation will be applied to the carrying amount going forward.

NOTE watch out for changes part way through a year- will need to time apportion.

Question 10

What is the revaluation model in relation to Non Current assets (not investment property)

Answer 10

Where assets are revalued each period and the carrying amount adjusted.
All assets in the same class must be revalued.
The accounting entries when revaluing an asset up are:
DR - restate asset cost to it’s new value.
DR - Remove accumulated depreciation.
CR - Revaluation surplus.
Gains are recognised as Other comprehensive income.
Losses are charged to P&L as an expense after being offset against and previous revaluation surplus for the asset.

Question 11

What about the increase in depreciation expense that may arise from a revaluation?

Answer 11

The excess depreciation arising from a revaluation can be offset against the revaluation surplus.
Accounting entries would be:
DR Revaluation surplus
CR Retained earnings.

Question 12

What is IAS 20

Answer 12

IAS 20 covers Accounting for Government grants and disclosure of Government assistance.

Question 13

What types of Government grant are there?

Answer 13

Capital - Related to assets i.e to purchase/construct/otherwise acquire.
Revenue - any grant other than those related to Assets.

Question 14

How are revenue Grants accounted for?

Answer 14

These will likely be dependant on conditions.
The Grant should be matched against the identifiable costs of achieving the Grant.
* As Net - Deduct grant from cost and show in account as Net.
* Gross - CR to P&L and show all expenses.
Suggested accounting Entries:
Post initial receipt to deferred income, release deferred income over time period to P&L accounts.

Question 15

How are capital grants accounted for?

Answer 15

These should be used against the agreed asset.

• As Net - Reduces cost in SoFP & Dep’n charge
• Deferred Credit - recognise separately inline with Dep’n cost.

Question 16

What doe IAS 23 cover?

Answer 16

IAS 23 relates to Borrowing costs.
These must be capitalised as part of the cost of the asset if the asset is a qualifying one.

Qualifying Asset = One that necessarily takes substantial time to get ready.

Question 17

When can borrowing costs be capitalised?

Answer 17

When all of the follow conditions are met:

• Expenditure is being incurred
• Borrowing costs are being incurred.
• Necessary activities to prepare the asset are in progress.

Question 18

When should capitalisation of borrowing costs stop?

Answer 18

When either:

• Substantially all activities to prepare the asset are complete.
• Activities to prepare the asset are suspended.

Question 19

How should the borrowing cost (interest) be calculated?

Answer 19

Interest to be capitalised should be calculated on either:
* The actual rate of interest, where specific funds are borrowed.
* A weighted average, where general borrowings are used.
NOTE Any interest income on surplus borrowings is either:
*Offset against cost of asset - if earned during construction.
* Recognised on the P&L if earned prior to commencement of construction.

Question 20

What is IAS 40?

Answer 20

IAS 40 relates to Investment property and how it is accounted for.
Investment property = property owned by a business, not occupied by the business, from which economic benefits flow in to the business.

Question 21

What two models can be used to account for Investment property?

Answer 21

Cost model - Same as with IAS 16
Fair value model - Property is revalued to fair value at the end of each year.
Any Gain/Loss is take to the P&L
No Depreciation is charged.

Question 22

How are changes between PPE and Investment property dealt with?

Answer 22

PPE - Investment

1. Revalue to fair value @ date of transfer under IAS 16. Gains to Other comprehensive income.
2. Move carrying amount to investment from transfer date.

Investment to PPE

1. Revalue to fair value @transfer date, take gains/losses to P&L
2. Move carrying amount to PPE & Depreciate over remaining useful life.