Bài giảng kế toán kiểm toán chapter 4 non current assets

Chapter Chapter 4 4 Non-current assets IAS 16 Property, plant and equipment Property, plant and equipment Definition Recognition Measurement Disclosure 2 PPE PPE -- Definition Defin

Chapter Chapter 4 4

Non-current assets

(IAS 16 Property, plant and equipment)

Property, plant and equipment

Definition

Recognition

Measurement

Disclosure

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PPE

PPE Definition Definition

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

PPE PPE Recognition Recognition

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

PPE

PPE Measurement Measurement

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Initial

measurement

Subsequent measurement

AT COST

COST MODEL

less Accumulated IMPAIRMENT LOSS

REVALUATION MODEL

REVALUED AMOUNT less Accumulated DEPRECIATION less Accumulated IMPAIRMENT LOSS

PPE PPE Disclosure Disclosure

For each class of PPE: ?

For PPE stated at revalued amount: ?

Other required discloses?

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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

1 CAPITAL AND REVENUE EXPENDITURE

Capital expenditure is expenditure which results in the acquisition of non-current 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

Capital expenditure

is not charged as an expensein 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

Capital 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 dividendsreceived from investments held by the business

Questions?

How about

-“Income” from selling “long-term

investments”?

-Interest and dividendsreceived from

“long-term investments”?

-Raising additional capitalfrom the

owner(s) of the business, or raising and

repaying loans

Scope

The terms “capital income” and “capital expenditure” do not mention raising additional capitalfrom the owner(s) of the business, or raising and repaying loans

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

(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

Components of PPE cost

1 Purchase price, less any trade discount or rebate

2 Costs 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)

Cost of PPE

How about cost of PPE under financial lease

and exchanged PPE?

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2 DEPRECIATION ACCOUNTINGDEPRECIATION 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

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

Useful life Useful life is either: is either:

Depreciable amount of a depreciable

asset is the historical costor other

amount substituted for historical costin

the financial statements, less the

estimated residual value

1. Depreciation methodsused

2. Useful livesor the depreciation rates

used

3. Total depreciation allocatedfor the period

4. Gross amountof depreciable assets

and the related accumulated depreciation

Two common misconceptions

1 The net book value(NBV) of an asset

is equal to its net realizable value:

False

or

the objectof charging depreciation is to

reflect the fall in value of an asset over

its life: False

Provision for depreciation

However, “Accumulated depreciation”

or 'aggregate depreciation' is a 'provision for depreciation' because it provides for the fall in value of the non-current asset

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

3 DEPRECIATION: THE

MECHANICS

Methods of depreciation

Straight-line method

Reducing balance method

Sum of the digits method

The straight line method

Annual depreciation charge =

(Cost of asset - residual value)/Expected useful

life of the asset

The reducing balance method

calculates the annual depreciation charge as a

fixed percentage of the net book value of the

period

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

Sum of the digits method

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)

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)

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

Change in expected useful life or

residual value of an asset

New depreciation = NBV less residual

value/Revised useful 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)

Frequency of impairment test

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

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Fair Value

Market 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 useof an asset, including its residual value on disposal

Carrying amount is the amount at which an

asset is recognized after deducting any

losses

Asset Impairment

$ Beginning Net BV X Less new reduced value (X) Equals the charge for the diminution

(Asset impairment) X

5 REVALUATION OF NON

ASSETS

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

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Revaluation: accounting

Examples

5 NON

5 NON CURRENT ASSET DISPOSALSCURRENT 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

The sale is not recorded in a sales

account, but in the disposal of

non-current asset account itself

The effect of these entries is to remove

the asset, and its accumulated

depreciation, from the balance sheet