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Tangible
Non-Current
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Context
Tangible non-current assets were introduced in detail at the F3 level. This chapter provides a reminder of the
material which you have seen before, and also introduces the more complex accounting issues of
• Borrowing costs relating to non-current assets
• Government grants (which may or may not relate to the purchase of non-current assets), and
• Investment properties – a particular type of non-current asset which has its own accounting rules.

Exam Hints
This area of the syllabus is examined either as part of the published accounts question (Q2) or in its own
right within question 4 or 5 of the paper.

Key Learning Points
IAS 16 Property, Plant and Equipment
• A tangible non-current asset is initially recorded at cost which may include: purchase price after any trade
discounts, transport and handling costs, non-refundable tax such as import duties, site preparation, installation
costs, professional fees, labour costs of the entity’s own employees (Where asset is self constructed), borrowing
costs, future dismantling and restoration costs.
• Any abnormal costs such as wastage and costs arising from errors do not form part of the cost of the asset,
and must be expensed as incurred
• Subsequent expenditure on a non-current asset may be capitalised where it enhances the economic benefits
of the asset in excess of its current standard of performance.
• A complex asset is one which is made up of several constituent parts, each with a different useful life. Each

part of the complex asset is depreciated over its useful life and, after this time, the cost of the replacement
part is capitalised.
• Where the useful life or residual value of an asset changes, the change is applied on a prospective basis
• A change in the method of depreciation is allowed only where the new method is more appropriate. The
change is applied prospectively
• IAS 16 allows non-current assets to be measured using either the cost model or the revaluation model.
• Where the revaluation model is applied, it must be applied consistently to all assets in the same class, and
the valuation must be kept sufficiently up to date so that it is not significantly different from fair value
• An upwards revaluation is credited to other comprehensive income (other than where it reverses a previous
downwards revaluation recognised in the income statement)
• A downwards revaluation is charged to the income statement (other than where it reverses a previous
upwards revaluation recognised in other comprehensive income)
• Depreciation is charged on a revalued asset as normal, based on a depreciable amount of valuation less
residual value spread over the remaining useful life.
• A reserves transfer may be made to transfer the difference between the actual depreciation charge and the
historical cost depreciation charge from the revaluation reserve to retained earnings
• Where a previously revalued asset is disposed of, any balance remaining in the revaluation reserve relating
to this asset is transferred to retained earnings and disclosed in the statement of changes in equity.
IAS 23 Borrowing Costs
• IAS 23 requires that borrowing costs associated with the acquisition, construction or production of a
qualifying asset are be capitalised as part of the cost of that asset
• Interest related to specific borrowings is capitalised net of income generated by the investment of surplus
funds
• Interest related to general borrowings is capitalised based on the amount of borrowings used on the
qualifying asset and the weighted average cost of general borrowings
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•
•
•

Capitalisation commences when expenditure is being incurred on the asset, borrowing costs are being
incurred and activities to prepare the asset for its intended purpose are in progress
Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its
intended use or sale are complete
Capitalisation is suspended when work on the asset is suspended

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
• A grant is recognised in the financial statements only when there is reasonable assurance that:
o The entity will comply with the conditions attached to the grant, and
o The grants will be received
• A revenue grant is held as deferred income and released to the income statement over the period in which
the related expenditure is incurred
• A capital grant is either :
o netted off against the cost of the asset with the net amount spread over the asset’s useful life and
charged to the income statement as depreciation; or
o held as deferred income and released to the income statement over the useful life of the asset.
• Grants which relate to costs already incurred should be recognised in the income statement in the period
in which they become receivable.
IAS 40 Investment Property

• Investment properties are defined as property (land or a building – or part of a building – or both) held to
earn rentals or for capital appreciation or for both rather than for use or sale in the ordinary course of
business.
• They are accounted for according to either the cost model of IAS 16 or the fair value model of IAS 40
• Where the cost model is applied, investment property is held at cost less depreciation. It is not revalued
• Where the fair value model is applied, investment property is re-measured to fair value each year with any
changes in fair value recognised in the income statement. It is not depreciated.

Relevant Accounting Standards
IAS 16 Property, Plant and Equipment
IAS 23 Borrowing Costs
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 40 Investment Property

Technical Articles
The following article (in two parts) explains property, plant and equipment and is available on ACCA’s website.
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5

Introduction
Tangible non-current assets is one of the biggest balances in the statement of financial position. Although IAS
16 Property, Plant and Equipment is the main accounting standard which provides guidance on this topic, others
are also relevant:
IAS 23 Borrowing Costs provides rules as to when borrowing costs should be capitalised as part of the
cost of a non-current asset.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
considers how support received from the government, and often related to the purchase of non-current assets,
should be reflected in the financial statements.

IAS 40 Investment Properties provides specific guidance on how to account for properties held only
for investment purposes rather than to use within a business.

2

IAS 16 Property, Plant and Equipment
Property, plant and equipment (PPE) is defined as:

Tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.
IAS 16 requires that PPE is shown in the statement of financial position at its carrying value, defined as:
The amount at which an asset is recognised after deducting any accumulated
depreciation and any accumulated impairment losses.

IAS 16 provides guidance on the calculation of an asset’s carrying value, and in particular:
1. the initial measurement of PPE, and treatment of any subsequent expenditure
2. the depreciation of PPE
3. the revaluation of PPE
4. the disposal of PPE.

Guidance on accounting for impairments is provided in IAS 36. This is covered in detail in chapter 7.
2.1

TANGIBLE NON-CURRENT ASSETS: MEASUREMENT

2.1.1

INITIAL MEASUREMENT
A tangible non-current asset is initially recorded at cost. This may include:
•

•

purchase price after any trade discounts (but before settlement discounts)

transport and handling costs

•

non-refundable tax such as import duties

•

installation costs

•

•

•

•

•

site preparation

professional fees such as legal costs

If the asset is self-constructed, labour costs of the entity’s own employees

Borrowing costs (see section 3 of this chapter)

Future dismantling and restoration costs.

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Illustration
Future dismantling and restoration costs are included as part of the cost of a non-current asset only where
these costs are recorded as a provision under IAS 37 (see chapter 12).

An entity builds a research centre in the rainforest at a cost of $250,000, having signed a contract with local
government to dismantle the centre and restore the land after 10 years at an estimated cost of $100,000.
Assuming a discount rate of 5%, a provision is made for:
$100,000/1.0510 = $61,391.

The debit entry is to the non-current asset cost account, such that the total cost of the research centre is:
Building cost
Restoration cost

$
250,000
61,391
311,391

Each year, the discount is unwound, and recorded as interest:
Year 1

Dr Interest expense

Cr Provision

$61,391 x 5% = $3,070

$3,070

$3,070

The measurement of the non-current asset is not affected by the unwinding of the discount.
Any abnormal costs such as wastage and costs arising from errors do not form part of the cost of the asset,
and must be expensed as incurred.

Exam Hint
In December 08, 7 marks were available for discussion of the treatment of a non-current asset and future
clean up costs.The examiner reported that common problems were:
- failure to include the clean up costs as part of the cost of the asset
- failure to discount the clean up costs.

Even more common was a failure by those candidates who had discounted the clean up costs to unwind the
discount and arrive at a finance cost.

In a different question on the same exam paper, 10 marks were available for the production of extracts of
financial statements relating to a non-current asset over 3 years. The examiner commented that a number of
candidates calculated the initial cost of the asset wrongly because they deducted a settlement discount from
cost. This amount should have been recorded as income.
The initial measurement of non-current assets may also appear in the published company accounts question
(Q2), as it did in December 07.

2.1.2

SUBSEQUENT COSTS
Subsequent expenditure on a non-current asset may be capitalised where:
• The expenditure enhances the economic benefits of the asset in excess of its current standard of performance.

This may be through
o Extension of the asset’s life
o Increase in production capacity
o Improved quality of output

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•
•

5

A component of an asset is treated separately for depreciation purposes and is replaced or restored
A major overhaul restores the asset and the cost of previous overhauls have been reflected in past
depreciation charges.

Any other subsequent expenditure, including repairs, must be expensed to the income statement in the period
in which it is incurred.

Learning Example 5.1

Broadoak has recently purchased an item of plant from Plantco. The details of this are:
$
240,000
Basic list price of plant
Trade discount applicable to Broadoak
12.5% on list price
Ancillary costs:
Shipping and handling
2,750
Estimated pre-production testing
12,500
Maintenance contract for 3 years
24,000
Site preparation costs:
Electrical cable installation
14,000
Concrete reinforcement
4,500
Own labour costs
7,500

Broadoak paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an
early settlement discount of 3%.
Broadoak had incorrectly specified the power loading of the original electrical cable to be installed by the
contractor. The cost of correcting this error of $6,000 is included in the above figure of $14,000.

The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of $15,000
to dismantle the plant and $3,000 to restore the site to its original use condition.
Calculate the amount at which the initial cost of the plant should be measured, ignoring discounting.

2.2

TANGIBLE NON-CURRENT ASSETS: DEPRECIATION
Depreciation is:
The systematic allocation of the depreciable amount of an asset over its useful life.
The depreciable amount is:
The cost of an asset, or other amount substituted for cost, less its residual value.

2.2.1

METHODS OF DEPRECIATION
There are two key methods of depreciation, both of which are examined frequently:
1. the straight line method
2. the reducing balance method
Straight Line Method

This method results in a constant annual charge over the asset’s useful life. It is calculated as
Cost – residual value
Useful life

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Reducing Balance Method

This method results in a decreasing annual charge over the asset’s useful life. It is appropriate for assets such as
motor vehicles and IT equipment which provide greater benefit in earlier years.

In both cases, depreciation is charged from the time that the asset becomes available for use in the normal
manner (even if it is not yet being used).

Learning Example 5.2
The following figures are extracted from the trial balance of Telenorth.
25 year leasehold building – cost
Plant and equipment – cost
Computer system – cost
Depreciation 1 October 20X7 (note)
Leasehold building
Plant and equipment
Computer system

$000
56,250
55,000
35,000

$000

18,000
12,800
9,600

Note: Telenorth has the following depreciation policy:
Leasehold building – straight line over lease term
Plant and equipment – five years straight line with residual values estimated at $5m
Computer system – 40% per annum reducing balance

Depreciation of the leasehold building and plant is treated as cost of sales; depreciation of the computer
system is an administration cost.

Calculate the depreciation charge and amounts to be included in the statement of financial position for the
year ended 31 September 20X8.

2.2.2

DEPRECIATION OF COMPLEX ASSETS
Complex assets are those which are made up of various component parts, each of which has a different
useful life.

In this case, each part of the complex asset is treated separately for depreciation purposes. The part is
depreciated over its useful life and, after this time, the cost of the replacement part is capitalised.
2.2.3

CHANGE IN DEPRECIATION ESTIMATES
IAS 16 requires that the residual value and useful life of an asset is reviewed at least at each financial year-end,
together with the depreciation method applied to the asset.

If the residual value or useful life has changed, or the depreciation method applied to the asset is no longer
appropriate to the pattern of consumption of economic benefits associated with the asset, then these are
changed.

The change in estimate is applied to the carrying value of the asset on the date of the change on a prospective
basis. No adjustment is required to previously reported amounts

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Learning Example 5.3
Addingham has owned a non-current asset for 5 years, depreciating the cost of $40,000 on a straight line
basis over 20 years. The company has conducted a review of its assets and now believes the asset to have a
remaining useful life of 12 years, and a scrap value at the end of that life of $800.
What is the old and new depreciation charge?

2.3

TANGIBLE NON-CURRENT ASSETS: REVALUATION
IAS 16 allows non-current assets to be measured using either the cost model or the revaluation model. Where
the revaluation model is applied, the carrying value of a non-current asset is
Valuation

Accumulated depreciation
Impairment losses

$000
X
(X)
(X)
X

The standard requires that where the revaluation model is applied:
o It is applied consistently to all assets of a class of property, plant and equipment
o Assets are revalued sufficiently regularly that their carrying amount is not significantly different from
their fair value
2.3.1

ACCOUNTING FOR A REVALUATION
Upwards Revaluation
Where an asset is revalued upwards, this is accounted for by:

Dr

Non-current asset

Dr

Accumulated depreciation

Cr

Other comprehensive income

(revaluation surplus)

the difference between cost and
revalued amount
all depreciation on the revalued
asset to date
β

Therefore the credit to other comprehensive income is equal to the difference between the carrying amount
of the asset prior to revaluation and its revalued amount.
Downwards Revaluation
Where an asset is revalued downwards, the accounting entries depend on whether the asset has previously
been revalued upwards:
Not previously revalued upwards
Dr
Cr

Income statement
Non-current asset

Previously revalued upwards
Dr

Dr
Cr

Other comprehensive income (to extent revaluation
surplus exists in relation to the asset)
Income statement
Non-current asset

Where an asset has been revalued downwards and is subsequently revalued upwards, the revaluation surplus is
credited to the income statement to the extent that the downwards revaluation was previously charged
against profit or loss.

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2.3.2

DEPRECIATION OF A REVALUED ASSET
Depreciation is charged on a revalued asset as normal, based on a depreciable amount of valuation less residual
value spread over the remaining useful life.

Depreciation is charged to the income statement, but a reserves transfer may be made to transfer the difference
between the actual depreciation charge and the historical cost depreciation charge from the revaluation reserve
to retained earnings:
Dr
Cr

Revaluation reserve

Retained earnings

excess depreciation
excess depreciation

Learning example 5.4
Allisterco buys property on 1 January 20X1 at a cost of $400,000, and commences depreciation on the basis
of 5% straight line. On 31 December 20X4, the property is revalued to $750,000. Depreciation continues to
be charged over the remaining useful life of 21 years.
On 31 December 20X8, the property is sold for $780,000.

Prepare extracts from the statements of changes in equity and statement of comprehensive income for the
year ended 31 December 20X8.

Exam hint
The published accounts questions (Q2) in the December 07, June 08 and December 08 exam papers all
included a revaluation which had not yet been accounted for. After each of these sittings, the examiner
commented that many candidates had accounted for the revaluation as though it had arisen at the start of
the period, even though the question clearly stated that it had occurred at the end. If the question states
that a revaluation occurs at the end of an accounting period, ensure that you charge depreciation for the
year before revaluing the asset.
2.4

TANGIBLE NON-CURRENT ASSETS: DISPOSAL
The gain or loss on disposal of a non-current asset is calculated as the difference between proceeds and the
asset’s carrying value on the date of disposal.
This applies to assets held under both the cost and revaluation model.

Any resulting gain or loss on disposal is recognised in the income statement.

Where a previously revalued asset is disposed of, any balance remaining in the revaluation reserve relating to
this asset is transferred to retained earnings and disclosed in the statement of changes in equity.

Learning Example 5.5
Hunt buys a building on 1 March 20X4 costing $500,000. It is depreciated monthly on a straight line basis
over 40 years. On 31 December 20X8, Hunt carries out a revaluation exercise and assesses the fair value
of the building to be $640,000, and its remaining useful life to be 38 years.
How is the building reflected in the financial statements of Hunt for the year ended 31 December 20X8?

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2.5

5

TANGIBLE NON-CURRENT ASSETS: DISCLOSURE
The standard disclosure note required by IAS 16 is sometimes required within a question. Even where this is
not the case, it often provides a useful layout for workings.
Land and
Buildings

$000

Fixtures and
Fittings
$000

Plant and
Machinery
$000

Total
$000

At 1.1.X8

340

120

100

560

Revaluation

100

-

-

100

At 31.12.X8

440

Cost

Additions
Disposal

Accumulated Depreciation
At 1.1.X8

Revaluation
Disposal

Charge for the year
At 31.12.X8

CV at 31.12.X8
CV at 1.1.X8

-

50

20

70

-

(30)

(10)

(40)

140

50

20

210

-

(12)

(2)

22

66

29

117

81

573

(140)

22

418
200

140

-

28

74
70

110

690

-

(140)

11

61

80

(14)

350

The land and buildings were revalued by a qualified surveyor on 31 December 20X8. They are being depreciated
on a straight line basis over 20 years.

3

IAS 23 Borrowing Costs
IAS 23 requires that borrowing costs associated with the acquisition, construction or production of a qualifying
asset are be capitalised as part of the cost of that asset.
Borrowing costs are defined as:
interest and other costs that an entity incurs in connection with the borrowing of
funds.
A qualifying asset is defined as:
an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

3.0.1

ELIGIBLE BORROWING COSTS
Where an entity borrows money specifically to acquire or construct a qualifying asset, all of the actual borrowing
costs incurred, less any income from the temporary investment of the money borrowed, must be capitalised.

Where money is borrowed centrally from a number of sources, and to fund a number of projects, the borrowing
costs to be capitalised as part of the cost of a non-current asset must be calculated based on the weighted
average cost of general borrowings.

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3.0.2

PERIOD OF CAPITALISATION
The capitalisation of borrowing costs commences when:
o Expenditure on the asset has commenced, and
o Borrowing costs are being incurred, and
o Activities necessary to prepare the asset for its intended use are in progress.

The capitalisation of borrowing costs ceases when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.

If construction of the asset is suspended due to industrial action, for example, then the capitalisation of
borrowing costs is also suspended.

Learning Example 5.6
MurphyCo commences building a new head office on 1 May 20X7. The project is anticipated to cost
$400,000 which MurphyCo believes can be financed from reserves. On 1 October 20X7 it becomes apparent
that a loan is required to finance the project and $350,000 is advanced from the Northern Bank at a rate of
4%. Half of this is invested in an interest bearing account at a rate of 2.5% until it is required on 1 May 20X8.
Building commences throughout the year ended 31 December 20X8, although work is forced to stop
temporarily for the month of February due to inclement weather. At 31 December 20X8, it is anticipated
that there are a further two months of work before the building is complete.
What borrowing costs must be capitalised in the years ended 31 December 20X7 and 20X8?

3.0.3

DISCLOSURE OF BORROWING COSTS
The following should be disclosed in relation to borrowing costs:
o The amount of borrowing costs capitalised during the period
o The capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation.

4

IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance
Government grants are monetary amounts paid to a business by the authorities in return for meeting certain
conditions such as employing a certain number of people.
They may be categorised as either:
o Capital grants i.e. those grants which are made to contribute towards the acquisition of an asset
o Revenue grants i.e. those grants which are made for other purposes such as the payment of wages

4.0.1

RECOGNITION OF GOVERNMENT GRANTS
A grant is recognised in the financial statements only when there is reasonable assurance that:
o The entity will comply with the conditions attached to the grant, and
o The grants will be received

The grant should be recognised in the income statement in the period in which the expenditure towards
which it was intended to contribute is recognised.

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4.0.2

5

ACCOUNTING FOR REVENUE GRANTS
The receipt of a revenue grant is recorded by:
Dr
Cash
Cr
Deferred income (liability)

The grant held as deferred income is then released to the income statement over the period in which the
related expenditure is incurred:
o Revenue grants which are made to subsidise specific expenditure are recognised in the income statement
in the period in which that expenditure is recognised.
o Revenue grants which are made to held achieve a non-financial goal are recognised in the income
statement in which the costs of meeting that goal are recognised.
The credit to the income statement may be:
o presented as a separate item of income; or
o deducted from the related expense which is then shown net.

4.0.3

ACCOUNTING FOR CAPITAL GRANTS
IAS 20 allows two treatments with regard to the recognition of a capital grant:
1. Deduct grant from cost of the non-current
asset to which it relates
Dr Cash
Cr Non-current asset

2. Record grant separately as deferred
income.
Dr Cash
Cr Deferred income

Depreciate the net cost of the non-current
asset over its useful life.

Release the deferred income to the income
statement over the useful life of the

non-current asset.

Therefore both the grant and the full cost of
the non-current asset are spread over the
useful life of the asset.

Note that where the grant is recognised as deferred income in the statement of financial position, this amount
will be split between current and non-current liabilities.
4.0.4

GRANTS TO REIMBURSE PREVIOUSLY INCURRED COSTS
Grants which relate to costs already incurred should be recognised in the income statement in the period in
which they become receivable.

4.0.5

DISCLOSURE OF GOVERNMENT GRANTS
IAS 20 requires disclosure of the following in relation to government grants:
o The accounting policy adopted for government grants including methods of presentation in the financial
statements
o The nature and extent of government grants recognised in the financial statements

Learning Example 5.7
BrownCo is entitled to receive a grant of $30,000 on the condition that it is used to cover part of the cost of
the purchase of new safety equipment. The equipment is purchased on 1 December 20X8 at a cost of $55,000.
It is expected to have a useful life of 10 years after which it will require replacing.

Prepare extracts from BrownCo’s financial statements for the year ended 30 June 20X9 using both of the
permitted treatments under IAS 20 and comment on which is most useful to the users of financial statements.

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5

IAS 40 Investment Property
Investment properties are defined as:
Property (land or a building – or part of a building – or both) held to earn rentals or
for capital appreciation or for both rather than for use or sale in the ordinary course
of business.
The definition would therefore include:
o Land held for a currently undetermined future use
o A building leased out under an operating lease
o Land held long term in order to benefit from an increase in market value

It also includes property which is currently under construction but will be used in the future to earn rentals or
for capital appreciation.
5.0.1

EXCLUDED PROPERTIES

The following are not within the scope of IAS 40 investment property:
o Property intended for sale in the ordinary course of business (IAS 2)
o Property being constructed or developed on behalf of third parties (IAS 11)
o Owner occupied property (IAS 16)
o Property leased to another entity under a finance lease (IAS 17)

5.0.2

THE ACCOUNTING ISSUE
In effect, acquiring investment properties is an alternative way for a company to utilise surplus cash to earn
returns rather than putting it in a bank or using it to purchase stocks and shares. These properties are not
used by the business, but rather held to generate income and long term capital growth.

It therefore follows that the accounting treatment for non-current assets is not necessarily applicable to
investment properties. In particular, there is little need to depreciate such assets when they are held specifically
for long-term capital appreciation.

The provisions of IAS 40 are therefore applied to such investment properties, rather than those of IAS 16 or
any other standard.
5.1

ACCOUNTING TREATMENT OF INVESTMENT PROPERTIES
IAS 40 requires that investment properties are initially measured at cost. It then allows a choice of subsequent
treatment. Companies can choose to apply either
o The cost model of IAS 16, or
o A fair value model

The choice must be applied consistently to all investment properties held by a company, and a change from one
model to the other is not allowed unless it results in more appropriate presentation.
5.1.1

THE COST MODEL
Investment properties accounted for using the cost model are held in accordance with IAS 16, at cost less
depreciation less impairment losses.
These properties can not be revalued.

5.1.2

THE FAIR VALUE MODEL
Where a fair value model is applied to investment properties, the property is measured to fair value each year.
This is normally established by reference to the market price of the asset.

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Any change in fair value since the last measurement date is recognised in the income statement.

Properties held under the fair value model are not depreciated.

Learning Example 5.8
In the light of poor market interest rates and a dip in property prices, the financial controller of Abbott Inc
was instructed by the managing director in June 20X8 to invest some of the company’s surplus cash in a plot
of land costing $1million. This land may be used by Abbott Inc in the future to build a new factory on, or it
may be sold to realise a profit, depending on property prices in the coming years.

It is now the year end, 30 June 20X9 and the financial controller is preparing Abbott Inc’s financial statements
for presentation to the Board. He knows that the land has fallen slightly in value to $950,000, but is unsure of
how to account for it.
Advise the financial controller.

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Solution 5.1
Basic list price
Trade discount of 12.5%
Shipping and handling
Estimated pre-production testing

Electrical cable installation (14,000 – 6,000)
Concrete reinforcement
Own labour costs
Dismantling and restoration costs
-

$
240,000
(30,000)
2,750
12,500
8,000
4,500
7,500
18,000
263,250

the early settlement discount is treated as income rather than a reduction in the asset cost;
the abnormal costs associated with the cable error are not allowed to form part of the capitalised;
cost per IAS 16
the maintenance contract is a revenue expense and may not be capitalised.

Solution 5.2
Income Statement for the Year Ended 30 September 20X8
Cost of sales (2,250 + 10,000)
Administration cost

$000
12,250
10,160

Statement of financial position at 30 September 20X8
Leasehold building
Plant and equipment
Computer system

36,000
32,200
15,240

Working
Leasehold building
Cost
Depreciation to 1.10.X7
Depreciation charge (56,250/25)

CV at 30.9.X8
Plant and equipment
Cost
Depreciation to 1.10.X7

Depreciation charge ((55-5)/5)

CV at 30.9.X8
Computer system
Cost
Depreciation to 1.10.X7

Depreciation (25,400 x 40%)

CV at 30.9.X8
160

$000

$000

56,250
(18,000)
38,250
(2,250)

36,000

2,250

55,000
(12,800)

42,200
(10,000)
32,200

10,000

35,000
(9,600)

25,400
(10,160)

15,240

10,160


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TANGIBLE NON-CURRENT ASSETS

Solution 5.3

5

$000
2,000
30,000
3,125

Old depreciation charge ($40,000/20)
CV at date of change ($40,000 – ($2,000x5))
New depreciation charge ($30,000 – 800)/12years

Solution 5.4
Statement of Financial Position of Hunt at 31 December 20X8

Property
Revaluation reserve

$000
640,000
200,417

Statement of Comprehensive Income for Hunt for Year Ended 31 December 20X8
Depreciation charge
12,500
Other comprehensive income
Revaluation surplus
200,417
Workings
Cost of building
Depreciation X4 10/12 x $500,000/40
Depreciation X5
Depreciation X6
Depreciation X7
Depreciation X8

$000
500,000
(10,417)
(12,500)
(12,500)
(12,500)
(12,500)

Revaluation surplus (β)

200,417

CV at date of revaluation

FV at 31 December 20X8

439,583
640,000

Solution 5.5
Statement of Changes in Equity for Allisterco for the Year Ended 31 December 20X8

Reserves transfer

Retained Earnings
$
367,144

Revaluation Reserve
$
(367,144)

Statement of Comprehensive Income for Allisterco for the Year Ended 31 December 20X8
$
Profit on disposal of property
172,856
Depreciation charge (750/21)
35,714

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Workings
Cost of property
Depreciation X1
Depreciation X2
Depreciation X3
Depreciation X4

CV on 31 December 20X4
Revaluation surplus

$
400,000
(20,000)
(20,000)
(20,000)
(20,000)
320,000
430,000

FV on 31 December 20X4
Depreciation X5 (750/21)
Depreciation X6 (750/21)
Depreciation X7 (750/21)
Depreciation X8 (750/21)

750,000
(35,714)
(35,714)
(35,714)
(35,714)

Profit on disposal
Balance on revaluation reserve at disposal

172,856

CV on 31 December 20X6
Sale proceeds

607,144
780,000

Reserves transfer
$ Rev Res
$ Ret E’gs

430,000
(15,714)

(15,714)
(15,714)
(15,714)

15,714
15,714
15,714
15,714

367,144

Solution 5.6
Year ended 31 December 20X7
$350,000 x 4% x 3/12
Investment income $175,000 x 2.5% x 3/12

Capitalised borrowing costs
Year ended 31 December 20X8
$350,000 x 4% x 11/12
Investment income $175,000 x 2.5% x 3/12*
Capitalised borrowing costs

$000
3,500
(1,094)

2,406

12,833
(1,094)

11,739

* investment income relating to February is not relevant, as interest costs relating to this month are ineligible
for capitalisation.

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TANGIBLE NON-CURRENT ASSETS

5

Solution 5.7
Statement of Financial Position for BrownCo at
30 June 20X9
Non-current asset
Non-current liability: deferred income
Current liability: deferred income

Income Statement for BrownCo for Year Ended
30 June 20X9

Depreciation

Government grant
Working
Non-current asset cost
Grant

25,000

Depreciation (10 years UL; 7 months charge)

Method 1:
netting off

Method 2:
separate liability

23,542

51,792

-

25,250

$000

$000

$000

3,000

$000

(1,458)

(3,208)

Netting off
$000

Separate
presentation
$000

55,000

(30,000)

55,000

1,750

55,000
-

(1,458)

(3,208)

Deferred income

-

30,000

CV at 30 June 20X9

-

CV at 30 June 20X9

Credit for y/e 30.6.X9 (30,000/10 x 7/12)
Current liability (30,000/10)
Non-current liability (β)

23,542

-

51,792

(1,750)

28,250
3,000

25,250

Method 2, separate presentation, is more useful to users of the financial statements, as it provides a
clearer indication of the performance and position of the company. In particular, assets financed in part
through government grants are shown at the same value as those which are not. This means that
comparison of BrownCo’s results with those of other companies is more meaningful. The existence of
the government grant is also more obvious in the income statement

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Solution 5.8
This land meets the IAS 40 definition of investment property. As yet the future purpose is undetermined, and
therefore despite a possible use of the land by Abbott Inc itself, the land is currently treated as held for capital
appreciation.
The land should initially be measured at the cost of $1million, and then either the cost or fair value model of
IAS 40 should be applied.

If Abbott Inc currently has any other investment properties, the model applied to these should also be applied
to the land, as IAS 40 requires consistency.

If the cost model is applied, the land should be held in accordance with the requirements of the cost model of

IAS 16. In other words it should be held at cost of $1million. There is no requirement to depreciate land as its
benefits are not consumed.
If the fair value model is applied, the land should be held at its year end fair value of $950,000, with a $50,000
loss recognised in the income statement.

Where the model applied is not dictated by an existing policy, in the light of the current fair value, the cost
model seems more attractive in terms of showing a better position and performance in the financial statements.
It should, however, be remembered that the policy adopted can not be changed other than to result in a fairer
presentation, and therefore adopting the cost model now may mean that future increases in market value can
not be reflected in the financial statements.

Learning Summary
•

•
•
•
•
•
•

164

Ensure that you are familiar with the following in relation to non-current assets:
o The elements of cost
o Methods of depreciation and changes in depreciation estimates
o Rules regarding revaluations
Learn the rules regarding when borrowing costs must be capitalised, and how much can be capitalised
Learn the different rules for accounting for a capital government grant and a revenue government grant
Learn the definition of an investment property and relevant accounting treatment

Complete the quick test for Chapter 5
Watch the video clip called ‘x
Attempt question x from the Question and Answer book


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6
Intangible
Assets


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6

Context
This chapter considers intangible non-current assets, and in particular:
•

How to identify them

•

How they are measured in the financial statements

•

When they should be recognised in the financial statements, and

It also recaps the accounting rules on goodwill, as seen in chapter 1 of this book.

Exam Hints

This topic is often examined as part of the published company accounts question (Q2). Alternatively, it may
feature in its own right within question 4 or 5.

Key Learning Points
•
•

•

•

•
•

•

•

•
•
•
•

In order for an intangible asset to be recognised in the financial statements it must:
1
meet the IAS 38 definition of an intangible asset;
2

meet the IAS 38 recognition criteria.

An intangible asset is defined as an identifiable non-monetary asset without physical substance.

An asset is identifiable when it is separable (it can be sold as a single item) or it arises from contractual
rights.
IAS 38 requires that an intangible asset meeting the definition is recognised only where:

It is probable that the expected economic benefits that are attributable to the asset will flow to the entity,
and
The cost of the asset can be measured reliably.

Most internally generated intangible assets do not meet the recognition criteria, as their cost can not be
distinguished from the costs of developing a business as a whole (e.g. brands, mastheads, customer lists)
Intangible assets which are recognised in the financial statements are measured initially at cost.

Where an intangible asset has a finite useful life, it is amortised over that useful life, beginning when the
asset is available for use.
Where an intangible asset has an indefinite useful life, then it is not amortised, but is tested for
impairment annually, and in between if there are indications of impairment.

The revaluation model may be adopted for intangible assets only where a fair value can be established by
reference to an active market.
An active market is a market in which all of the following conditions exist:
1

items traded are homogenous;

3

prices are available to the public.

2

willing buyers and sellers are available;

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FINANCIAL REPORTING (INTERNATIONAL)
Research and Development
•

•

•
•

Research is defined as original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
Research costs are expensed to profit or loss as incurred.

Development is defined as the application of research findings or other knowledge to a plan or design for
the production of new or substantially improved materials, devices, products, processes, systems or services

before the start of commercial production or use.
Development costs are recognised as an intangible asset where they meet the SECTOR criteria. Other
wise they are expensed to profit or loss:
1

2

ability to measure reliably the Expenditure on the intangible asset;

4

Technical feasibility of completing the intangible asset so that it will be available for use or sale;

3

5

•

ability to use or Sell the intangible asset;

6

intention to Complete the intangible asset and use or sell it;
Overall probable future economic benefits;

The availability of adequate technical, financial and other Resources to complete the development.

Development costs are amortised in line with the revenues they generate. Amortisation begins when
commercial production or sales commence.

Goodwill
• Purchased positive goodwill is recognised as an intangible asset in the statement of financial position. It is
not amortised but is tested for impairment annually.

•

•

Purchased negative goodwill is expensed immediately to profit or loss

Internally generated goodwill can not be capitalised as an intangible asset.

Relevant Accounting Standards
IFRS 3 Business combinations

IAS 38 Intangible assets

Technical Articles
The following article explains IAS 38 in respect of R & D and is available on ACCA’s website.

/>
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INTANGIBLE ASSETS

1

6

Intangible Assets – an Introduction
Accounting guidance relating to intangible assets is provided within a number of accounting standards.
Of particular relevance to F7 are:
•
IAS 38 Intangible assets (which does not include guidance on goodwill)
•
IFRS 3 Business Combinations (which does include guidance on goodwill)

2

IAS 38 Intangible Assets
In order for an intangible asset to be recognised in the financial statements it must:
- meet the IAS 38 definition of an intangible asset;
- meet the IAS 38 recognition criteria.

2.1

DEFINITION OF AN INTANGIBLE ASSET
An intangible asset is defined as:
An identifiable1 non-monetary2 asset3 without physical substance
1. An asset is identifiable when it

•
It is separable; in other words it can be sold as a single item, or
•
It is not separable, but arises from contractual rights.
2. A non-monetary asset is any asset other than cash or an asset to be settled in a fixed amount of cash
(such as a receivable)
3. An asset is a resource:
•
Controlled by an entity as a result of past events, and
•
From which future economic benefits are expected to flow to the entity

Learning Example 6.1
Which of the following examples of potential intangible assets do not meet the IAS 38 definition of an
intangible asset?
•
Goodwill
•
The skills of the workforce
•
The rights to produce a particular item to sell
•
A brand name developed by a company
2.2

RECOGNITION CRITERIA FOR AN INTANGIBLE ASSET
IAS 38 requires that an intangible asset meeting the definition above is recognised only where:
•
It is probable that the expected economic benefits that are attributable to the asset will flow to the
entity; and

•
The cost of the asset can be measured reliably.

Learning Example 6.2
Consider the assets which did meet the IAS 38 definition of an intangible asset in learning example 6.1.
Which of these meet the IAS 38 recognition criteria and can therefore be capitalised in the statement of
financial position?

169