Topic 8 non current assets PDF

could currently obtain from disposal of the asset after deducting the estimated costs of disposal Depreciable amount = cost – residual Useful life : The period over which an asset is

REPORTING & ANALYSING CURRENT ASSETS

NON-PART 1: ACQUISITION &

DEPRECIATION

TOPIC 8

Topic 8 Learning

Objectives

Part 1 of 2

On completion of this topic, you should be able to:

1 Explain the business context of non-current assets and the need

for decision making for non-current assets.

2 Describe how the cost principle applies to property, plant and

equipment assets.

3 Explain the concept of depreciation.

4 Calculate depreciation using various methods and contrast the

expense patterns of the methods.

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DEFINITIONS

Definition of an asset

An asset is 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 (Conceptual

Framework, 4.5)

Presentation

An entity shall present current and

non-current assets (& non-current and non-non-current

liabilities) as separate classifications in its

balance sheet Non-current assets are

those the entity expects to hold for more

than one year.(AASB101, 60-61)

Types of Non current assets Property, Plant & Equipment (PPE)

• Property: Land and buildings

• Plant & Equipment: Machinery,

equipment & fixtures held for operational purposes.

• Tangible items that are held for use

in the production or supply of goods

or services, for rental to others, or for administrative purposes; and

• are expected to be used during more than one period

• INTANGIBLES (patents, copyrights,

trademarks, goodwill)

IMPAIRMENT REVALUATION

RECOGNISING GAIN/LOSS ON DISPOSAL

1

2

3

ACCOUNTING ISSUES

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ACQUISITION –

COST OF LAND

COST METHOD (AASB116)

 The cost of an asset equals the

sum of all of the costs incurred to

bring the asset to its intended

purpose

Example: Assume that land with warehouse (requiring removal), is acquired for $100 000 plus associated costs (ignore GST).

1 Feb Land (Demolition) 6 000

(Establish non-current asset – land)

Cash price of property $100 000Net Removal of Warehouse 6 000Solicitors Fee 1 000Stamp Duty 2 000

COST METHOD (AASB116)

An asset must be carried on

the balance sheet at the amount of cash

or the fair value of other consideration

given to acquire it.

The cost of an asset equals the sum of all

of the costs incurred to bring the asset to

its intended purpose and includes:

 Purchase price (including duties/taxes)

 Any directly attributable costs (e.g

transport/installation)

 Estimate of required costs of

dismantling, removing and restoring

List price of the machine $55 000Insurance during shipping 550Installation & Testing 1 100

Purchase price (GST inc) $56 650

IMPAIRMENT REVALUATION

RECOGNISING GAIN/LOSS ON DISPOSAL

1

2

3

ACCOUNTING ISSUES

asset (less any residual) over the useful life of that

asset.

could currently obtain from disposal of the asset

after deducting the estimated costs of disposal

Depreciable amount = cost – residual

Useful life : The period over which an asset is

expected to be available for use by an entity; or the

number of production or similar units expected to be

obtained from the asset

in a contra account “Accumulated Depreciation”

CONTRA ACCOUNTS

 A contra account is a “companion account”.

 Accumulated depreciation is a contra account to PPE asset

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DEPRECIATION

Straight Line Depreciation

Allocates an equal amount of

depreciation to each full

accounting period in asset’s

useful life

Example: Kelly Cook eTravel

purchases a company vehicle

on 1 July 2018 at cost of

$41,000 (net of GST) with a

residual value of $1,000, and a

useful life of 5 years.

8 000

(Depreciation expense for the year)

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DEPRECIATION

Units-of-Production

Determines fixed amount of

depreciation per unit of output

(e.g hours, kilometres, units)

Annual depreciation is

depreciable amount divided by

the production capacity or useful

life in units

Example: Kelly Cook eTravel

purchases a company vehicle on 1

July 2018 at cost of $41,000 (net of

GST) with a residual value of

$1,000, and a useful life of

100,000 kms Assume that in its

first year it recorded 20,000 Kms,

100 000 Kms

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DEPRECIATION

Diminishing Balance also

referred to as reducing balance

assumes asset is more

productive in the earlier years &

earns more revenue

Applies a predetermined rate to

the carrying amount of the

asset at the beginning of the

period

Example: Example: Kelly Cook eTravel purchases a company vehicle on 1 July 2018 at cost of $41,000 (net of GST) with a residual value of $1,000, and a useful life of 5 years

Rate = 1 − n r

c = 1 - 5 1 000

41 000 ≈ 52.42%

Year Carrying amount at

beginning of the year Rate

Annual depreciation expense

Carrying amount at end of year

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DEPRECIATION

Comparison

Comparison Of Depreciation Methods

 Different annual charges

 Same total charge

 Choice should match consumption of benefits:

• Generate revenue evenly - straight line

• Accurately record usage - units of

• The revised amount or period is used

to recalculate the depreciation amount

• Depreciation is an estimate that is rarely precise

• Accumulated depreciation does not represent cash

• Contra asset representing portion of cost that has been “used up”.

Year Straight Line Units of

production

Diminishing Balance

Topic 8 Learning

Objectives

Part 1 of 2

On completion of this topic, you should be able to:

1 Explain the business context of non-current assets and the need

for decision making for non-current assets.

2 Describe how the cost principle applies to property, plant and

equipment assets.

3 Explain the concept of depreciation.

4 Calculate depreciation using various methods and contrast the

expense patterns of the methods.

Topic 8 Learning

Objectives

Part 2 of 2

On completion of this topic, you should be able to:

1 Account for subsequent expenditures, asset impairments & for the

revaluation of PPE assets.

2 Account for the disposal of PPE assets.

3 Describe the common types of intangible assets & identify the basic

issues related to reporting intangible assets.

4 Describe the nature and measurement of agricultural assets & natural

resources

5 Explain the methods of evaluating the use of non-current assets.

IMPAIRMENT REVALUATION

RECOGNISING GAIN/LOSS ON DISPOSAL

1

2

3

ACCOUNTING ISSUES

Need to consider impact on

useful life/future economic

benefits by asking question

Distinction Between Capital Expenditures and Expenses

Does the expenditure increase capacity

or efficiency or extend useful life?

Capital Expenditure

Debit Non-currentAssets accounts

Expense

Debit Repairs &

Assetsrequires all PPE items

must be tested for impairment

and if ‘carrying amount’ is greater

than its ‘recoverable amount’

then the carrying amount must be

reduced (‘written down’)

• Recoverable amount is the

greater of selling price or ‘value in

use’ (present value of future cash

flows)

• An impairment loss is the

amount by which the carrying

amount of an asset (or a

cash-generating unit) exceeds its

recoverable amount

with an original cost of $10,000; accumulated depreciation of $5,000 Annual depreciation is 2,500 and 2 years of useful life remain The fair value and value in use are $3,000 Calculate and record any impairment

General Journal

Jun 30 Impairment Loss 2 000

Accum Depreciation &

Impairment loss

2 000

(Record write-down of equipment)

Steps to revalue downwards:

1 Record depreciation to date (debit depreciation expense

& credit accum depreciation).

2 Clear out accumulated depreciation account (debit accum dep & credit asset).

3 Recognise loss on revaluation & bring asset down to fair value (debit loss & credit asset).

This is conservatism principle.

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REVALUATION OF NON-CURRENT ASSETS

AASB116 Property, Plant and

Equipment allows assets to be

recorded at ‘cost’ or ‘fair value*

referred to as:

1 Cost Model

2 Revaluation Model

All assets in class must be

recorded by selected method

(land or buildings or plant &

equipment)

* Fair value is the amount obtainable from

the sale of an asset or cash-generating unit in

an arm’s length transaction between

knowledgeable, willing parties, less the costs

of disposal.

Cost Model:

• Record initially at cost of acquisition

• Charge depreciation systematically

• Asset in Balance Sheet at Acquisition Cost less Accumulated Depreciation & Accumulated Impairment Losses

• Need to regularly assess for impairment and record impairment losses (decrements ) - no increase (increments) in valuations recorded

Revaluation Model:

• Initially at cost of acquisition

• Charge depreciation systematically

• Regularly revalued to fair value

• All items in PP&E class must be revalued – not just some

• Account for revaluation decrements and increments

• Re-estimate useful life and residual value & begin depreciating again after revaluation

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DISPOSAL OF NON-CURRENT ASSETS

Sale or Scrapping of

3 Record any proceeds from

disposal and the difference is

either a loss or a gain

• Gains recognised as other

income - not revenue

• Losses recognised as

expense

Kelly Cook eTravel P/L

Assume it is now 30 September 2020 and the vehicle belonging to Kelly Cook eTravelP/L faces the following 3 scenarios:

1 Kelly Cook eTravel P/L sells the vehicle for 10,000 cash

2 The vehicle is in an accident and is destroyed It is worthless ($0) and Kelly Cook eTravel P/L has no insurance

3 Kelly Cook eTravel P/L trades the vehicle in for a new model with a fair value of $32,000

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DISPOSAL OF NON-CURRENT ASSETS

Kelly Cook eTravel P/L:

Assume it is now 30 September

2020 and the vehicle belonging to

Kelly Cook eTravel P/L faces the

following 3 scenarios:

1 Kelly Cook eTravel P/L sells

the vehicle for 10,000 cash

2 The vehicle is in an accident

and is destroyed It is

worthless ($0) and Kelly Cook

eTravel P/L has no insurance

3 Kelly Cook eTravel P/L trades

the vehicle in for a new model

with a fair value of $32,000

Accumulated Depreciation (vehicle) 2,000

(3 months SL depreciation for vehicle)

Accumulated Depreciation (vehicle) 2,000

(3 months SL depreciation for vehicle)

30/09/2020 Accumulated Depreciation (vehicle) 18,000

Loss on disposal of vehicle (no T account

(remove asset from book and record loss)

3 30/09/2020 Depreciation Expense 2,000

Accumulated Depreciation (vehicle) 2,000

(3 months SL depreciation for vehicle)

30/09/2020 Accumulated Depreciation (vehicle) 18,000

(record trade in gain)

30/9/20

30/9/20

30/9/20 30/9/20

30/9/20 30/9/20

Depreciation Expense Accumulated Depn (Vehicle)

Cash Accumulated Depn (Vehicle) Loss on disposal of vehicle

Vehicle Vehicle (New model) Accumulated Depn (Vehicle) Vehicle

Gain on trade in of vehicle

(3 mths SL depreciation for vehicle)

(Remove asset from books and record loss)

(3 mths SL depreciation for vehicle)

(Remove asset from books and record loss)

(3 mths SL depreciation for vehicle)

(Record trade-in gain)

41,000 9,000

10,000 18,000 13,000

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OTHER NON-CURRENT ASSETS

AASB138 Intangible assets are

defined in as identifiable

non-monetary assets that have no

• Trademarks and brand names

• Franchises & licenses

Unidentifiable intangibles:

• Goodwill

AASB 141 Agriculture prescribes the accounting treatment and disclosures relating to agricultural activity

An agricultural activity is the management by an entity of the biological transformation of biological assets for sale, into agricultural produce or into biological assets

A biological asset is a living animal or plant.

AASB6 Exploration for and Evaluation of Mineral Resources

• Entities in extractive industries are involved in the search and extraction from the ground of natural substances e.g minerals, oils, natural gas

• Pre-production costs capitalised and off/depleted to cost inventory

written-• Once production has begun, pre-production costs are charged to inventory by amortisation

• Value of mineral and oil reserves not shown on face of statement of financial position

its assets to generate sales. AVERAGE AGE OF PPE

an indication of the potential effectiveness of an entity’s

PPE assets relative to others in the industry. AVERAGE

competitors

Topic 8 Learning

Objectives

Part 2 of 2

On completion of this topic, you should be able to:

1 Account for subsequent expenditures, asset impairments & for the

revaluation of PPE assets.

2 Account for the disposal of PPE assets.

3 Describe the common types of intangible assets & identify the basic

issues related to reporting intangible assets.

4 Describe the nature and measurement of agricultural assets & natural

resources

5 Explain the methods of evaluating the use of non-current assets.