Topic 8 non current assets PDF

TOPIC REPORTING & ANALYSING NONCURRENT ASSETS PART 1: ACQUISITION & DEPRECIATION Topic Learning Objectives Part of On completion of this topic, you should be able to: Explain the business context of non-current assets and the need for decision making for non-current assets Describe how the cost principle applies to property, plant and equipment assets Explain the concept of depreciation Calculate depreciation using various methods and contrast the expense patterns of the methods DEFINITIONS Types of Non current assets 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) 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 Presentation An entity shall present current and noncurrent assets (& current and 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) • INTANGIBLES (patents, copyrights, trademarks, goodwill) | ACCOUNTING FOR NON CURRENT ASSETS ACQUISITION DISPOSAL INITIAL COST DEPRECIATION SUBSEQUENT EXPENDITURE IMPAIRMENT REVALUATION ACCOUNTING ISSUES RECOGNISING GAIN/LOSS ON DISPOSAL | ACQUISITION – COST OF LAND Example: Assume that land with warehouse (requiring removal), is acquired for $100 000 plus associated costs (ignore GST) Cash price of property 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 $100 000 Net Removal of Warehouse 000 Solicitors Fee 000 Stamp Duty 000 Cost of land $ 109 000 General Journal Jan Land Land (Solicitors Fee) Land (Stamp Duty) 100 000 000 000 Cash at bank Feb Land (Demolition) Cash at Bank (Establish non-current asset – land) 103 000 000 000 | ACQUISITION - COST OF PROPERTY, PLANT AND EQUIPMENT 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) List price of the machine Insurance during shipping  Any directly attributable costs (e.g transport/installation) Installation & Testing  Estimate of required costs of dismantling, removing and restoring Less GST (1/11th) Purchase price (GST inc) Cost of machinery $55 000 550 100 $56 650 150 $51 500 | ACCOUNTING FOR NON CURRENT ASSETS ACQUISITION DISPOSAL INITIAL COST DEPRECIATION SUBSEQUENT EXPENDITURE IMPAIRMENT REVALUATION ACCOUNTING ISSUES RECOGNISING GAIN/LOSS ON DISPOSAL | PERIOD OF USE – Depreciation Depreciation is the allocation of the cost of an asset (less any residual) over the useful life of that asset Residual value: the estimated amount that an entity 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 Depreciation Methods Straight Line Units of Production Diminishing Balance (accelerated depreciation method) Depreciation is an adjusting entry (Topic 4) recorded in a contra account “Accumulated Depreciation” CONTRA ACCOUNTS     A contra account is a “companion account” Accumulated depreciation is a contra account to PPE asset account A contra account’s normal balance is opposite to that of the companion account Users of financial statements use this information in decision making | DEPRECIATION Straight Line Depreciation Allocates an equal amount of depreciation to each full accounting period in asset’s useful life Depreciable cost (Cost – Residual) Annual Depreciation = = Annual = Depreciation Depreciable amount Useful life $41 000 - $1 000 = years $8 000 p.a Useful life Example: Kelly Cook eTravel purchases a company vehicle on July 2018 at cost of $41,000 (net of GST) with a residual value of $1,000, and a useful life of years General Journal Jun 30 Depreciation Expense 2019 000 Accumulated Depreciation – Motor Vehicle (Depreciation expense for the year) 000 | 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 Depreciable Depreciation cost = cost per unit Total Units Example: Kelly Cook eTravel purchases a company vehicle on 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, 2nd year 30,000 Kms, 3rd 25,000 Kms, 4th 15,000 Kms & 5th year 10,000 kms Depreciation per unit = = = Depreciable amount Total units of production $41 000 - $1 000 100 000 Kms $0.40 per Km General Journal Jun 30 Depreciation Expense 2019 000 Accumulated Depreciation – Motor Vehicle (Depreciation expense for the year) 000 | 10 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 July 2018 at cost of $41,000 (net of GST) with a residual value of $1,000, and a useful life of years 000 n r Rate = − c = ≈ 52.42% 41 000 Year Carrying amount at beginning of the year Rate Annual depreciation expense Carrying amount at end of year 41,000 x 0.524 21,491 19,509 19,509 x 0.524 10,226 9,283 9,283 x 0.524 4,866 4,417 4,417 x 0.524 2,315 2,102 2,102 x 0.524 1,102 | 11 1,000 DEPRECIATION Comparison Year Straight Line Units of production Diminishing Balance 8,000 8,000 21,491 8,000 12,000 10,226 8,000 10,000 4,866 8,000 6,000 2,315 8,000 4,000 1,102 40,000 40,000 40,000 Comparison Of Depreciation Methods Other Issues • AASB 116 requires review of residual value & useful life annually • 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”  Different annual charges  Same total charge  Choice should match consumption of benefits: • Generate revenue evenly - straight line • Accurately record usage - units of production • Generate more revenue in early years reducing balance | 12 Topic Learning Objectives Part of On completion of this topic, you should be able to: Explain the business context of non-current assets and the need for decision making for non-current assets Describe how the cost principle applies to property, plant and equipment assets Explain the concept of depreciation Calculate depreciation using various methods and contrast the expense patterns of the methods Topic Learning Objectives Part of On completion of this topic, you should be able to: Account for subsequent expenditures, asset impairments & for the revaluation of PPE assets Account for the disposal of PPE assets Describe the common types of intangible assets & identify the basic issues related to reporting intangible assets Describe the nature and measurement of agricultural assets & natural resources Explain the methods of evaluating the use of non-current assets ACCOUNTING FOR NON CURRENT ASSETS ACQUISITION DISPOSAL INITIAL COST DEPRECIATION SUBSEQUENT EXPENDITURE IMPAIRMENT REVALUATION ACCOUNTING ISSUES RECOGNISING GAIN/LOSS ON DISPOSAL | 15 SUBSEQUENT EXPENDITURES Distinction Between Capital Expenditures and Expenses Does the expenditure increase capacity or efficiency or extend useful life? YES Additional costs after acquisition • Repairs • Maintenance • Improvements • Modifications Need to consider impact on useful life/future economic benefits by asking question NO Capital Expenditure Debit Non-current Assets accounts Expense Debit Repairs & Maintenance account Example: Kelly Cook eTravel spent $670 (plus GST) for a service and new battery General Journal Jun Repairs & Maintenance Expense GST Receivable (Paid) Cash at Bank (Repairs on vehicle) 670 67 737 | 16 IMPAIRMENT of NON-CURRENT ASSETS • AASB136 Impairment of Assets requires 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 cashgenerating unit) exceeds its recoverable amount Example: Kelly Cook eTravel has office equipment with an original cost of $10,000; accumulated depreciation of $5,000 Annual depreciation is 2,500 and 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 000 Accum Depreciation & Impairment loss 000 (Record write-down of equipment) Steps to revalue downwards: Record depreciation to date (debit depreciation expense & credit accum depreciation) Clear out accumulated depreciation account (debit accum dep & credit asset) Recognise loss on revaluation & bring asset down to fair | 17 value (debit loss & credit asset) This is conservatism principle REVALUATION OF NON-CURRENT ASSETS Cost Model: • Record initially at cost of acquisition • Charge depreciation systematically • Asset in Balance Sheet at Acquisition Cost less Accumulated Depreciation & Accumulated Impairment Losses AASB116 Property, Plant and Equipment allows assets to be recorded at ‘cost’ or ‘fair value* referred to as: • Need to regularly assess for impairment and record impairment losses (decrements ) - no increase (increments) in valuations recorded Cost Model • Initially at cost of acquisition Revaluation Model • Charge depreciation systematically All assets in class must be recorded by selected method (land or buildings or plant & equipment) • Regularly revalued to fair value * 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 Revaluation Model: • 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 18 DISPOSAL OF NON-CURRENT ASSETS Sale or Scrapping of noncurrent assets Bring the depreciation up to date Remove the asset and accumulated depreciation 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 eTravel P/L faces the following scenarios: Kelly Cook eTravel P/L sells the vehicle for 10,000 cash The vehicle is in an accident and is destroyed It is worthless ($0) and Kelly Cook eTravel P/L has no insurance Kelly Cook eTravel P/L trades the vehicle in for a new model with a fair value of $32,000 | 19 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 scenarios: 2,000 2,000 2,000 2,000 (3 mths(3 SL depreciation forforvehicle) months SL depreciation vehicle) Kelly Cook eTravel P/L sells the vehicle for 10,000 cash The vehicle is in an accident and is destroyed It is worthless ($0) and Kelly Cook eTravel P/L has no insurance 30/9/20 Depreciation Expense 30/09/2020 DepreciationExpense Accumulated Depn (Vehicle) Accumulated Depreciation (vehicle) 30/9/20 Cash 30/09/2020 Cash Accumulated Depn (vehicle) (Vehicle) Accumulated Depreciation Loss on disposal of vehicle Loss on disposal of vehicle 10,000 10,000 18,000 18,000 13,000 13,000 Vehicle Vehicle 41,000 41,000 (Remove asset from andloss record (remove asset from bookbooks and record on sale)loss) Depreciation Expense 30/9/20 30/09/2020 Depreciation Expense Accumulated Depn (Vehicle) Accumulated Depreciation (vehicle) 2,000 2,000 2,000 2,000 (3 mths SL depreciation forforvehicle) (3 months SL depreciation vehicle) Kelly Cook eTravel P/L trades the vehicle in for a new model with a fair value of $32,000 Accumulated Depn (vehicle) (Vehicle) 30/9/20 30/09/2020 Accumulated Depreciation Loss on disposal of vehicle (no T account Loss on disposal of vehicle above) 18,000 18,000 23,000 23,000 41,000 41,000 Vehicle Vehicle (Remove asset books (remove assetfrom from book and and recordrecord loss) loss) Depreciation Expense 30/09/2020 Depreciation Expense 30/9/20 Depreciation Expense(vehicle) Accumulated Depreciation 2,000 2,000 2,000 2,000 (3 mths SL depreciation forforvehicle) (3 months SL depreciation vehicle) 30/9/20 Accumulated Depn (vehicle) (Vehicle) 30/09/2020 Accumulated Depreciation Vehicle Vehicle (new(New model)model) Vehicle Vehicle Gain ontrade-in tradeofinVehicle of vehicle Gain on 18,000 18,000 32,000 32,000 41,000 41,000 9,000 9,000 (Record trade-in (recordgain) trade in gain) | 20 OTHER NON-CURRENT ASSETS 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 AASB138 Intangible assets are defined in as identifiable nonmonetary assets that have no physical substance Identifiable intangibles include: • Patents • Research and development costs • Copyrights • Trademarks and brand names • Franchises & licenses Unidentifiable intangibles: • Goodwill 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 writtenoff/depleted to cost inventory • 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 | 21 ANALYSING FINANCIAL STATEMENTS FOR DECISION MAKING ASSET TURNOVER indicates how efficiently an entity uses its assets to generate sales AVERAGE AGE OF PPE ASSETS: Comparing the average age of PPE assets gives an indication of the potential effectiveness of an entity’s PPE assets relative to others in the industry AVERAGE USEFUL LIFE OF PPE ASSETS: to compare it to that of its competitors | 22 Topic Learning Objectives Part of On completion of this topic, you should be able to: Account for subsequent expenditures, asset impairments & for the revaluation of PPE assets Account for the disposal of PPE assets Describe the common types of intangible assets & identify the basic issues related to reporting intangible assets Describe the nature and measurement of agricultural assets & natural resources Explain the methods of evaluating the use of non-current assets  ... Presentation An entity shall present current and noncurrent assets (& current and non- current liabilities) as separate classifications in its balance sheet Non- current assets are those the entity expects.. .Topic Learning Objectives Part of On completion of this topic, you should be able to: Explain the business context of non- current assets and the need for decision making for non- current assets. .. 12 Topic Learning Objectives Part of On completion of this topic, you should be able to: Explain the business context of non- current assets and the need for decision making for non- current assets