Tangible Non current assets Flashcards
What are examples of tangiable( physical substance)?
Buildings, Land, Office equipment and Vehicles.
Why are tangiable non current assets important?
Have huge B/S and I/S effects, as we can see half of TA are tangiable NCA.
Also
Waste management Inc in North America committed fraud, which was what?
avoiding depreciation expenses by assigning and inflating salvage values and extending the useful lives of the garbage trucks that the company owned. They had to restate its FS’s which was the largest in history. It had reportedly overstated pre tax earnings by $1.7 billion.
We are mainly focusing on PPE what is PPE?
1)Tangible
2) Held for use in production or supply of goods or services, for rental to others, or for administrative purposes.
3) Expected to be used during more than one period
An item of PPE should be recognised as an asset if and only what?
It is probable that future economic benefits associated with the item will flow to the entity
* The cost of the item to the entity can be measured reliably
1) Lets look at initial recognition of NCA? What should the initial cost be recorded down as?
2) What is the initial cost if the asset is acquired in exchange for another asset?
3) If payment is deferred then what do you recognise as initial cost?
1)Cost = Purchase price ( might include import duties)+ Directly attributable costs bringing the asset to present location ( e.g. like handling fees) + removal costs( cost of dismantling asset).
2) Cost is measured at fair value.
3) interest must be recognised
What happens with you repair the PPE where does this value go?
But what happens if you do something that extends the uselife of PPE?
If you have rountine repairs or maintence costs, these are put as expenses on the income statement, e.g. company transporting goods and you have multiple trucks, some trucks have punctured typres, and you have to do maintence that goes to expenses.
It is added onto the cost of the asset on the (SOFP) e.g. the same truck, and you replace a very old motor in a truck that extends its useful life by 3 years, so if truck is worth £7000 and you spend £200 replacing the motor, this means the value of the PPE becomes £7,200.
There is 2 basic models for revaluation of PPE, which are what? and do we need to be conisstent. ( subsequent measurement)
Cost model = Cost - Acculmulated dep - Accumulated impairment loss.
Reevaluation model = Every year you will revalue the asset and ask is the asset, the same value as it originally was. So Revalue cost - any accumulated depreciation - accumulated impairment losses?
If we pick one we need to apply it to all assets the same way to avoid cherry picking.
What does depreciable amount mean?
What is Carrying amount ?
How is depreciation allocated?
Cost - Residual value ( requires estimates).
Cost - AD.
Matching princple.
Name 4 depreication methods?
1) Straight line method
2) Reducing balance method
3) Sum of digits method
4) Usuage ( machine hours)
So the frequency of re valuing asset using revaluation method depends on the asset so therefor management. So if you record at cost first, which you need to and do the first valuation what happens if the value is higher than cost or lower than cost.
Then on subsequent measures do the same thing?
- Cost €12,000
- Useful life Four years
Depreciation percentage 40% - Scrap value €2,000
Calculate dep for each of the 4 years using the reducing balance method?
f
Cost €12,000
* Useful life Four years
* Scrap value €2,000
Calculate dep for each of the 4 years using the sum of digits method.
We find depreciable amount then find sum of the digits of years then in the first year ask how many years to useful life and we do that for each year/ sum of digits X depriceable amount
Assume Company X owns land. The carrying value of the land before revaluation is €40,000. The fair value of the land has increased and the current market price is
€50,000. Company X values its PPE using the revaluation model.
* What entries need to be made at the end of the period to bring the carrying value of the asset in line with the principles of the revaluation model?
WHAT WE DO ANYTHING HERE UNDER THE COST MODEL?
Dr Land 10,000
Cr Revaluation surplus 10,000
* Revalued carrying value on the balance sheet is €50,000 and under equity there will be a revaluation surplus of €10,000.\
UNDER THE COST MODEL WE WILL NOT DO ANYTHING, ONLY WHEN WE SELL LAND WE RECOGNISE PROFIT.
REMEMBER THIS ISNT COST MODEL Assume that another piece of land owned by Company X with an initial value of €20,000 recorded a revaluation
decrease last year of €3,000. Due to a changing
economic climate, the industrial activity in the area in
which the land is situated is increasing. The current
market price for that land is estimated at €21,000.
* What entries are needed to bring the carrying value of the asset in line with the principles of the revaluation model in IAS 16?
REMEMBER THIS ISNT COST MODEL
Assume company X owns a piece of land in an area
where the economic activity is deteriorating and the
market prices of land have fallen. The land has a carrying value prior to revaluation of €30,000. The current market price is €25,000.
* What are the journal entries that need to be made at the year-end?
Assume that the land in the books of company X in the
previous activity with a carrying value of €30,000, had
been revalued two years before from €27,000 to €30,000.What journal entries would then be needed to reduce the carrying value of the land to €25,000?
Dr Loss/revaluation decrease (in profit or loss) €5,000
Cr Land €5,000
Two years ago when the revaluation of the land occurred, Company X would have recorded the following in their books:
Dr Land €3,000
Cr Asset revaluation surplus €3,000
Two years later, when Company X needs to record the
decrease in the carrying amount of the land to €25,000,
they will make the following entries in their books:
Dr Asset revaluation surplus 3,000
Cr Land 3,000
Dr Loss – downward revaluation of land (P/L) 2,000
Cr Land 2,000
A company has a plant with a carrying amount of €21,000, being an initial cost of €35,000 and accumulated depreciation of €14,000. The fair value of the asset now is €25,000.
* Show how depreciation will be adjusted under the net
method.
Under this method we first write off the accumulated
depreciation of the plant, which reduces the carrying
value of the plant to €21,000 (€35,000 - €14,000).
Dr accumulated depreciation 14,000
Cr Plant 14,000
* Subsequently we adjust the carrying amount of €21,000 to the fair value of the asset which is €25,000.
Dr Plant 4,000
Cr Gain on revaluation of plant (OCI) 4,000
Suppose we have an asset cost €10,000, useful life five
years, estimated residual value nil. The asset is now three years old and has a carrying value of €4,000.
* After three years, the asset’s value is reviewed and its fair value is €6,000.
* Show how the depreciation will be adjusted under the
gross method.
We start of with the carrying amount we have and the carrying amount it should be It is a 50% increase, so if we were to adjust our AD 50% increase and the same for cost.
Now here there is an example of a change in assumption? An asset which costs £1,000 was estimated to have a useful life of 10 years and residual value £200. After two years, the useful life was revised to 4 remaining years. The revised depreciation using the straight line method would be:
Inital cost - residual value / Uselife life = Deprication expense
1000-200/10 = £80 Depriecation expense was £80 per year ( in year one accumlated depreication is £80.
Year 1
1000- 80 = 920
NBV = 920
Year 2
1000- 160 = £840
Now the change of assumption has happened so
Yout take the NBV you year 2 then calculate from there so
840-200/4 = 160 accumluated depreication
Year 3
840 -( accumlated + 160) = 680
Year 4 you do
840 - 320( accumlated) = 520 or
1000 - 480 = 520
When should a tangiable non current asset be derecognised?
An asset should be removed from the BS on disposal or no future economic benefits are expected
If an asset is disposed gain or loss can be created, which is what?
Net dispoal proceeds - Carrying amount of any PPE
THEY ARE INCLUDED IN PROFIT OR LOSS BUT NOT AS REVENUE.
When are assets impaired?
When the carrying amount > recoverable amount.
What is the recoverable amount?
max (asset’s fair value less
costs to sell , value in use)
It is important that its not always necessary to estimate both, because if one is higher than CA then there is no impairment.
What is value in use ?
Is the present value of the future cash
flows from asset
