Tangible Non-Current Assets Flashcards
Asset Register
- internal check on accuracy of general ledger
- separate from gen ledger
- contains more detail- purchase date, cost, location, serial number, description
- non-current assets have significant costs so large impact on financial statements, important to get right
Non- current Assets
- intended to be used by business on continuing basis
- includes tangible/intangible
Current Assets Criteria
- expects to realise, sell or consume asset in normal operating cycle
- hold asset primarily for purpose of trading
- expects to realise asset within 12 months after reporting period
- asset is cash/cash equivalent
all other assets should be classified as non-current
IAS 16
Property, Plant and Equiptment
Property Plant and Equipment definition as per IAS 16
- tangible items
- held for use in production/supply of goods/services, rental to others, admin purposes
- expected to be used during more than one period
Cost Definition as per IAS 16
- amount of cash/cash equivalent paid/fair value of other consideration
- given to acquire asset at time of acquisition/construction
Fair Value Definition as per IAS 16
- amount for which asset could be exchanged between knowledgable willing parties in arms length transaction
Carrying Amount Definition IAS 16
- amount which asset is recognised after deducting any accumulated depreciation/impairment losses
Recognition
means incorporation of asset in business’s accounts
What does recognition of property/plant/equipment depend on?
- probable that future economic benefits associated with asset will flow to entity
- cost of asset can be measured reliably
Why might some non-current assets be written off as expense?
- smaller items (tools) are written off depending on companies policy instead being capitalised
- items where too many at small price bought
Asset Capitalised Expenditure
- results in acquisition of non-current assets
- improvements to existing NCA
- replacement of NCA
- long-term benefits
- any costs needed to acquire NCA
How will Asset Capitalised Expenditure been shown in statements?
- Appear in SoFP in year that asset bought
- and then cost of purchased NCA taken to SoP/L over years in which used to make goods
- matching concept as cost of machine matched with revenue generate over life
- accruals concept as NCA is also gradually depreciated
Examples of Asset Capitalised Expenditure
- Purchase of Property
- solicitors fees for purchase
- adding extra storage capacity to computer
- cost of new plant
- customs duty charged on plant when imported
- carriage costs of plant to factory
- installing new plant in premises
Other Expenditure/revenue Expenditure
- for trade of business
- to repair/maintain/service NCA
- short term
How is Other expenditure shown in Statements?
- SoP/L - if to be used fully in accounting period in which purchased - inventory
- current asset at end of period such as Closing Inventory on SoFP
Other Expenditure Examples
- electricity
- annual depreciation of property
- computer repairs/maintenance
- wages of machine operators
How should tangible NCA initially be recorded?
at cost under IAS 16
What are the components of a NCA Costs?
purchase price
- include import duties
- estimate for dismantling/removing item from where situated and restoring site
Directly attributable costs
- to bring asset to intended location and ready to use
- delivery
- installation/assembly
- testing
- professional fees
What choice does the company have with NCA once cost recorded?
- keep at cost and depreciate
- revalue tangible NCA
whichever, decision must be consistent every yr and across every item in same class
What costs can not be included in NCA cost?
recorded as expenses instead
- maintenance contracts
- start up/pre-production costs
- staff training- they could leave and then not providing economic benefits
- admin/OH costs
What is the double entry for the acquisition of a NCA?
Dr relevant Property, Plant, Equipment Ledger A/c
Cr bank/trade payables
depending whether paid for immediately or via invoice
Subsequent Expenditure on Assets
- added to carrying amount of asset
- only when probable that it will have future economic benefits
- all other sub. expenditure recognised as expense
What are some examples of Subsequent Expenditure on Assets
- Modification of plant to extend useful life
- increasing capacity of plant
- upgrade machine parts to improve output quality
- adoption of new production process
Why does the need to depreciate NCA arise?
- from accruals accounting
- if money expended to purchase an asset it must be charged against profits at some time
Depreciation
- systematic allocation of depreciable amount of an asset over its useful life
- spreading the cost to match cost with consumption of assets economic benefits
How does land get depreciated?
- It doesn’t as has an unlimited useful life
Depreciable Amount
- cost of an asset/ other amount substituted for historical cost less estimated residual value
Useful Life
- period over asset is expected to be available for use by entity
OR - number of production units expected to be obtained from asset by entity
What factors should be considered when estimating useful life of depreciable asset? (5)
- expected usage
- expected physical wear/tear
- obsolescence
- legal/other limits on use of asset- length of lease
- previous experience with similar assets
How should estimated useful life of depreciable assets be reviewed?
- reviewed at least each financial yr end
- depreciation rates adjusted for current/future periods if expectations vary
- effect of change disclose in accounting period
what will affect the physical wear and tear of an asset - positively or negatively?
- number of shifts asset is used
- repair/maintenance programme
Residual Value
- estimated amount an entity would currently obtain from disposal of asset
- after deducting costs of disposal
- if asset at age/condition expected at end of useful life
- estimated at date of purchase/revaluation
What are the two main types of depreciation?
- straight line
-diminishing/reducing balance methods
What does depreciation = with straight line method (2 formulas)
= cost - residual value / useful life in yrs
= (costs -residual value) x depreciation %
- depends on what figures given in Q
What situation is straight line depreciation for?
- suitable for assets which are used up evenly over useful life as depreciation charge is same every year
Where does carrying amount appear in statements?
the figure for each asset in Statement of Financial Position
What should the carrying amount of a depreciable asset be at end of useful life with straight line method?
- Residual value
Table format for depicting straight line depreciation method
- years on y axis
- across x cost (stays the same), Accumulated depreciation (intervals will be the same), carrying amount
Carrying Amount =
= cost - accumulated depreciation to date
when is Diminishing Balance Depreciation suitable?
- where benefits obtained by entity from using asset decline over time
- eg. machine that becomes progressively less efficient as gets older
What happens to the Depreciation Charge over time in Diminishing Balance Depreciation?
- will be higher in earlier years and reduce over time
Depreciation = using diminishing balance method
= depreciation rate % x carrying amount
Table format for depicting depreciation with diminishing balance
- years down y axis
- across x axis
Carrying amount b/d
Depreciation rate (stays the same)
Depreciation Charge
Accumulated Depreciation
Carrying Amount c/d - Last two will always = cost
How should the choice between depreciation method be made?
- decision up to entity
- should be applied consistently every yr
How should the choice between depreciation method be reviewed?
- method should be reviewed every financial yr
- If been significant change in expected pattern of economic benefit then method changed to suit
- remaining/current carrying amount depreciated under new method
- only current/future periods affected
- not a retrospective change
What is the double entry for depreciation?
Dr Depreciation Charge- expense in SoP/L
Cr Accumulated Depreciation - reducing value of asset in SoFP
How can depreciation be charged?
- monthly pro-rata basis (proportionate depreciation in yr of purchase/disposal)- assume it is this way if not told
- full yr in yr of purchase and none in disposal yr
What is the accumulated depreciation account for?
- used to provide for reduction in value of asset
- reduces original cost of asset on SoFP
- balance is offset against separate cost account for corresponding asset
- separate account for each class of asset (MV, buildings, plant)
what does profit/loss on disposal represent?
- not a ‘true’ profit/loss
- accounting adjustment to reflect fact that depreciation charged over assets life was not completely accurate
What are the 4 Steps to dispose of asset within accounts?
- remove cost of asset
Dr disposal account
Cr Non-current Asset - Remove accumulated depreciation
Dr Accumulated Depn
Cr Disposal account
CA now transferred to disposal a/c
- Account for sales processed
Dr Cash
Cr Disposal a/c - balance off disposal account to find P/L on disposal
How is the Profit/Loss on disposal shown on financial statements?
- on Statement of Profit/Loss
- Gain = sundry income
- loss = expense
Sales proceeds of disposal > CA =
= profit on disposal
Sales proceeds of disposal < CA =
= Loss on disposal
Simple way to work out P/L on disposal
sale price
(carrying amount)
____________________
Profit/Loss
Part Exchange allowance =
= cost of new asset - any cash paid
Gain/Loss on part exchange =
= part exchange allowance - carrying amount
what is part exchange against disposal of asset?
- not receive cash as proceeds, instead replace with new asset and pay the difference
What is the difference in the double entry to record disposal of asset if done with part exchange?
- all the same
- when accounting for proceeds in Step 3
Dr new assets a/c instead of cash
What are the journal entries used to record new asset if acquired through part exchange?
- part exchange allowance
Dr new asset a/c
Cr Disposal A/c - cash paid for asset
Dr new asset a/c
Cr Bank
What must be done if an asset is revalued as per IAS 16?
- all assets of same class must be revalued as well
- the same must be done every financial year
What is excess depreciation?
- difference between old depreciation chg and new depreciation chg
What choice does a business have if an asset is acquired part way through a yr?
- charge 12 months worth of depn in yr of acquisitions no matter what month
- calculate depreciation on pro rata basis so only charge for months held
(can also be the same options for yr of disposal)
What is a class of asset?
- group with similar nature and use
- land/buildings
- machinery
- Motor Vehicles
- Fixtures/fittings
How will a revaluation affect depn charge?
make annual depn chg higher as calculated on revalued amount and remaining useful life
How is the revaluation amount that needs To be added to capital calculated? (and why added here?)l
- new asset value
(previous carrying amount)
_______________________________
revaluation amount - added to capital as as asset has increased so liability must as well
What happens to the gain from revaluation in the statements?
- not realised on SoP/L until sold so non- current asset cost of SoFP
- revaluation surplus within capital on SoFP
What are the two journal entries for Revaluation of Asset?
- adjust cost a/c to revalued amount
Dr Non-current Asset cost (SoFP)
Cr revaluation Surplus (SoFP) - remove accumulated depn to date as asset not fallen in value
Dr accumulated depn (SoFP)
Cr revaluation surplus (SoFP)
How is disposal of revalued NCA accounted for/ P/L for disposal calculated?
- in exactly the same way as asset not revalued
P/L?
Procceds
(Carrying Amount)
___________________
P/L on disposal - any balance in revaluation surplus transferred to retained earnings on disposal of evaluated asset
What are the disclosure requirements in IAS 16 for NCA?
- both numerical and narrative
- show reconciliation of NCA at begin - end of period
- additions
- disposals
- increases/decreases from revaluations
- reductions in Carrying amount
- depreciation
- other movement
what is the format commonly used for the reconciliation of NCAs?
column for each class of assets and total
Cost/valuation
- at begin
- revaluation surplus
- additions
- disposals
- at end
Depreciation
- at begin
- charge for yr
- eliminated on disposals
- at end
carrying amount (reflected in in cost-depreciation above)
- at begin
- at end
What should the financial statements disclose about NCAs?
- accounting policy disclosing measurement bases for determining depreciable assets value
What should the financial statements disclose about NCAs for each class?
- depreciation method
- useful lives/depn rates used
- gross amount of depn assets
- accumulated depn at begin/end
What should the financial statements disclose about NCAs that have been revalued assets?
- effective date of revaluation
- whether independent valuer was involved
- carrying amount of each class that would have been in statements if asset has been carried at cost less depreciation
- revaluation surplus- indicating movement for period
In statement of financial positions what does carrying amount represent?
cost of asset - accumulated depreciation
