Bài giảng kế toán kiểm toán chapter 4 non current assets

Property, plant and equipment Definition  Recognition  Measurement  Disclosure  Chapter 4 Non-current assets (IAS 16 Property, plant and equipment) 2 PPE - Definition PPE - Recognition PPE are items that:  Are held for use in the production or supplies of goods or services, for rental to others, or for administrative purpose; and  Are expected to be used during more than one period The cost of an item of PPE should be recognized as an asset only if: - It is probable that future economic benefits associated with the item will flow to the entity; and - The cost of the item can be measured reliably 3 4 1 PPE - Measurement Initial measurement AT COST PPE - Disclosure For each class of PPE: ?  For PPE stated at revalued amount: ?  Other required discloses?  Subsequent measurement COST MODEL REVALUATION MODEL less Accumulated IMPAIRMENT LOSS REVALUED AMOUNT less Accumulated DEPRECIATION less Accumulated IMPAIRMENT LOSS 5 Detailed issues 1. Capital and revenue expenditure – COST of PPE 2. Depreciation: accounting and the mechanics 3. Impairment of non-current assets 4. Revaluation of non-current assets 5. Non-current asset disposals 6 1 CAPITAL AND REVENUE EXPENDITURE is expenditure which results in the acquisition of noncurrent assets, or an improvement in their earning capacity Revenue expenditure is expenditure incurred for either of the following reasons. (a) For the purpose of the trade of the business. (b) To maintain the existing earning capacity of non-current assets. Capital expenditure 2 Capital expenditure is not charged as an expense in the income statement, although a depreciation charge will usually be made to write off the capital expenditure gradually over time. Depreciation charges are expenses in the income statement. Capital income and revenue income is the proceeds from the sale of non-trading assets Revenue income is income derived from the following sources. (a) The sale of trading assets, such as goods held in inventory (b) The provision of services (c) Interest and dividends received from investments held by the business Capital income Questions? Scope How about -“Income” from selling “long-term investments”? -Interest and dividends received from “long-term investments”? -Raising additional capital from the owner(s) of the business, or raising and repaying loans. The terms “capital income” and “capital expenditure” do not mention raising additional capital from the owner(s) of the business, or raising and repaying loans. 3 Classification Example State whether each of the following items should be classified as 'capital' or 'revenue‘ expenditure or income (a) The purchase of a property (eg an office building) (b) The annual depreciation of such a property (c) Solicitors' fees in connection with the purchase of such a property (d) The costs of adding extra storage capacity to a mainframe computer used by the business (e) Computer repairs and maintenance costs (f) Profit on the sale of an office building (g) Revenue from sales by credit card (h) The cost of new plant (i) Customs duty charged on the plant when imported into the country Components of PPE cost (j) The 'carriage' costs of transporting the new plant from the supplier's factory to the premises of the business purchasing the plant (k) The cost of installing the new plant in the premises of the business (l) The wages of the machine operators price, less any trade discount or rebate of dismantling and removing the item and restoring the site on which it is located 3.Directly attributable costs of bringing the asset to working condition for its intended use, eg: The cost of site preparation Initial delivery and handling costs Installation costs Professional fees (architects, engineers) 1.Purchase 2.Costs 4 Cost of PPE  2. DEPRECIATION ACCOUNTING Depreciable assets are assets which: ° are expected to be used during more than one accounting period; ° have a limited useful life; and ° are held by an enterprise for use in the production or supply of goods and service, for rental to others, or for administrative purposes. How about cost of PPE under financial lease and exchanged PPE? 17 Useful life is either: Nearly all non-current assets are depreciable. The most important exceptions being freehold land non-current investments ° the period over which a depreciable asset is expected to be used by the enterprise; or ° the number of production or similar units expected to be obtained from the asset by the enterprise. A review of the useful life of property, plant and equipment should be carried out at least annually 5 Depreciable amount Depreciable amount of a depreciable asset is the historical cost or other amount substituted for historical cost in the financial statements, less the estimated residual value. Disclosure 1. 2. 3. 4. Depreciation methods used Useful lives or the depreciation rates used Total depreciation allocated for the period Gross amount of depreciable assets and the related accumulated depreciation Two common misconceptions Provision for depreciation 1. The net book value (NBV) of an asset is equal to its net realizable value: False or the object of charging depreciation is to reflect the fall in value of an asset over its life: False However, “Accumulated depreciation” or 'aggregate depreciation' is a 'provision for depreciation' because it provides for the fall in value of the noncurrent asset. 6 3 DEPRECIATION: THE MECHANICS 2. Depreciation is provided so that an asset can be replaced at the end of its useful life: False (i) If there is no intention: no need to provide for any depreciation? (ii) If prices are rising, the replacement cost of the asset will exceed the amount of depreciation provided. The straight line method Annual depreciation charge = (Cost of asset - residual value)/Expected useful life of the asset  Methods of depreciation  Straight-line method  Reducing balance method  Sum of the digits method The reducing balance method calculates the annual depreciation charge as a fixed percentage of the net book value of the asset, as at the end of the previous accounting period 7 Example Sum of the digits method A business purchases a non-current asset at a cost of $10,000. Its expected useful life is 3 years and its estimated residual value is $2,160. The business wishes to use the reducing balance method to depreciate the asset, and calculates that the rate of depreciation should be 40% of the reducing (net book) value of the asset. similar to the reducing balance method as it produces higher depreciation charges in the early years of ownership of a non-current asset Example Icho Co purchases a non-current asset for $10,000 on 1 January 20X0. The useful life of the asset is five years and the residual value is $1,000. What is the depreciation charge for each year of the asset's life? Applying a depreciation method It is up to the business concerned to decide which method of depreciation to apply. Once that decision has been made, however, it should not be changed (consistently from year to year). 8 Change in method of depreciation If there are any changes in the expected pattern of use of the asset, then the method used should be changed. In such cases, the remaining net book value is depreciated under the new method, ie only current and future periods are affected; the change is not retrospective (change in accounting estimate). Change in expected useful life or residual value of an asset New depreciation = NBV less residual value/Revised useful life Example Jakob Co purchased an asset for $100,000 on 1.1.X1. It had an estimated useful life of 5 years and it was depreciated using the reducing balance method at a rate of 40%. On 1.1.X3 it was decided to change the method to straight line. Show the depreciation charge for each year (to 31 December) of the asset's life. 3. IMPAIRMENT OF ASSETS When the fair value of a non-current asset falls so that it is worth less than the amount of its net book value (carrying amount), and the fall in value is expected to be permanent, the asset should be written down to its new low market value (recoverable amount). 36 9 Frequency of impairment test Fair Value At least annually or whenever there is any indication with:  An intangible asset with an indefinite useful life  An intangible asset not yet available for use  Goodwill  Others: whenever there is any indicator value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Recoverable amount is the amount which the entity expects to recover from the future use of an asset, including its residual value on disposal. Market 37 Asset Impairment amount is the amount at which an asset is recognized after deducting any accumulated depreciation and impairment losses. Carrying $ X (X) Beginning Net BV Less new reduced value Equals the charge for the diminution. (Asset impairment) X 10 5. REVALUATION OF NON NON--CURRENT ASSETS Revaluation: accounting Principles:  Revalued amount represents the fair value  If an item is revalued, the entire class of assets to which that asset belongs should be revalued  Revalued assets are depreciated in the same way as under the cost model Examples 41 5 NONNON-CURRENT ASSET DISPOSALS The profit or loss on disposal is the difference between: (i) The sale price of the asset (if any) (ii) The carrying value of the asset at the time of sale Ledger accounting entries (i) Disposal of non-current asset account Non-current asset account with the carrying value of the asset disposed of. (ii) Accumulated depreciation account Disposal of non-current asset account with the accumulated depreciation on the asset as at the date of sale. (iii) Receivable account or cash Disposal of non-current asset account 11 Comments  The sale is not recorded in a sales account, but in the disposal of noncurrent asset account itself.  The effect of these entries is to remove the asset, and its accumulated depreciation, from the balance sheet. 12 [...]...5 REVALUATION OF NON NON CURRENT ASSETS Revaluation: accounting Principles:  Revalued amount represents the fair value  If an item is revalued, the entire class of assets to which that asset belongs should be revalued  Revalued assets are depreciated in the same way as under the cost model Examples 41 5 NONNON -CURRENT ASSET DISPOSALS The profit or loss on disposal... non- current asset account Non- current asset account with the carrying value of the asset disposed of (ii) Accumulated depreciation account Disposal of non- current asset account with the accumulated depreciation on the asset as at the date of sale (iii) Receivable account or cash Disposal of non- current asset account 11 Comments  The sale is not recorded in a sales account, but in the disposal of noncurrent... depreciation on the asset as at the date of sale (iii) Receivable account or cash Disposal of non- current asset account 11 Comments  The sale is not recorded in a sales account, but in the disposal of noncurrent asset account itself  The effect of these entries is to remove the asset, and its accumulated depreciation, from the balance sheet 12 ... Impairment of non- current assets Revaluation of non- current assets Non- current asset disposals CAPITAL AND REVENUE EXPENDITURE is expenditure which results in the acquisition of noncurrent assets, ... entries (i) Disposal of non- current asset account Non- current asset account with the carrying value of the asset disposed of (ii) Accumulated depreciation account Disposal of non- current asset account... impairment) X 10 REVALUATION OF NON NON CURRENT ASSETS Revaluation: accounting Principles:  Revalued amount represents the fair value  If an item is revalued, the entire class of assets to which that