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)

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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

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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

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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

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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

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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.

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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

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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?

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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

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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.

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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

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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).

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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).

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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

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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

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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

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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

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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.

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