A4_Tangible non current assets class.pptx

tangible assets

1. Tangible non-current assets

2. Topics Asset (capital) and revenue expenditure Property, plant and equipment Depreciation Revaluations (IFRS) Disposals

3. Asset and revenue expenditure Asset expenditure results in the acquisition of non-current assets, or an increase in their earning capacity. Recognised as non-current asset in balance sheet Expensed gradually as the asset is used (depreciation) Examples: Purchase of machinery Installing AC to all rooms of a building

4. Asset and revenue expenditure Revenue expenditure is incurred for the purpose of trade or to maintain the existing earning capacity of the non-current assets. Expensed in income statement as incurred Examples: Purchase of inventory Painting a building

5. Tangible non-current assets Tangible resources controlled by an entity Held for production, delivery of service, rental, administration etc. Expected to be used for more than one period

6. Tangible non-current assets Examples: Building Land Machinery Equipment Plant Vehicles Furniture

7. Property, Plant and Equipment Recognition criteria: U.S GAAP: Cost model IFRS: Cost model & revaluation (fair value) model

8. Property, Plant and Equipment Cost: Cash or cash equivalents paid to acquire/construct asset Fair value: Amount at which knowledgeable, willing parties in an arm’s length transaction Carrying amount: Amount at which asset is valued in balance sheet net of depreciation

9. Components of cost Cost: Cash or cash equivalents paid to acquire/construct asset Components of cost: Purchase price Directly attributable costs to get asset ready to be used

10. Components of cost Purchase price also includes: Import duties Carriage inwards Net of any trade discount

11. Components of cost Directly attributable costs of bringing the asset to working condition. Site preparation costs Installation and assembly costs Professional fees Staff costs for construction or acquisition of assets

12. Property, plant and equipment Costs not considered: Administration and general overheads Initial costs before assets reaches planned efficiency Staff training* Repair and maintenance

13. Staff costs Only staff costs arising directly from the construction or acquisition of the asset can be capitalised as part of the cost of the asset. The costs of training staff to use a new asset cannot be capitalised because it is not probable that economic benefits will be generated from training the staff as we can't guarantee that those staff will stay and use the asset. The costs of training staff should be expensed.

14. Property, plant and equipment Subsequent expenditure Added to carrying amount if improves condition beyond previous performance

15. Property, plant and equipment Subsequent expenditure Added to carrying amount if improves condition beyond previous performance Examples: Modifications that increases useful life of an asset Upgrade of machinery to improve quality of output Repairs and maintenance costs are expensed.

16. Property, plant and equipment When purchased/developed: Dr. Asset Cr. Cash/Bank/Payable

17. Depreciation It is a process of spreading the original cost of a non-current asset over the accounting periods in which its benefit will be earned. Depreciation is systematic allocation of the depreciable amount of an asset over its useful life Accruals concept Matching concept Depreciable amount = Asset value – Residual value

18. Depreciation The double entry for depreciation is as follows: DEBIT Depreciation expense ( Income Statement ) CREDIT Accumulated depreciation ( Balance Sheet ) Accumulated depreciation is a contra asset account against PPE Credit balance account Netted off against the related asset and only the remaining appears as asset balance (carrying value) in the SoFP

19. Depreciation Methods of depreciation: Straight line Declining (reducing) balance Sum-of-the-years'-digits Units-of-Production (Output) Double declining balance Note: At end of useful life, irrespective of the method used, net book value = salvage value

20. Depreciation Straight line: Depreciation = Reducing balance: Depreciation = Balance × depreciation % Depreciable amount = Asset value – Residual value

21. Depreciation Double declining balance method: Depreciation = Balance × double rate of depreciation % Sum of the years digit method: Depreciation = (Cost - Salvage value) x Remaining life Sum of the years digit Units-of-Production (Output) method: Depreciation = Output units x Rate/output Rate/output = Depreciable value/Total output expected

22. Depreciation Useful life: expected period of usage of an asset Residual value: expected resale value at the end of useful life also known as salvage value, scrap value etc.

23. Change in expected life Changes in: Useful life Residual value Both are estimates; changes will be accounted prospectively . Updates made in the period when changes occur; no need to revise earlier accounts.

24. Method of depreciation Factors to consider when determining the most appropriate method: How will the asset be used by the business? Will the benefit be received evenly over the useful life or will the majority of the benefit be received earlier on? Is there a measurable output produced by the company?

25. Revaluations IFRS allows a choice between: Keeping asset at cost Revaluing to fair value Fair value may give fairer view on business.

26. Revaluations Recording the value of an asset at its market value Annually compare the book value with fair value Revaluations must be done for all assets in that category (classification)

27. Revaluations If fair value > NBV, we will record revaluation gain Revaluation gain is added to other comprehensive income (reserve) After revaluation entry, carrying value must be equal to fair value Revaluation surplus represents an increase in shareholders' wealth Revaluation surplus cannot be used for dividends or business operations

28. Revaluation loss If revaluation reserve is available: Reverse revaluation reserve (other comprehensive income) If no revaluation reserve: Charge to profit or loss as expense

29. Impairment Reduction in value of assets. Applicable even if cost model is followed. Results in: Write-off of fixed asset value Same accounting treatment as revaluation losses

30. Non-current asset disposals Depreciate the asset until the date of disposal Remove all accounts pertaining to the asset and take them to disposal account Compare CV and sales proceeds

31. Non-current asset disposals Disposal On disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than the carrying value of the asset. If proceeds > NBV = profit If proceeds < NBV = loss

32. Component vs composite depreciation Component depreciation: Separate depreciation of each part of an item of property, plant, and equipment that is significant to the total cost of the fixed asset Profit or loss on disposal of each item separately identified Composite depreciation: The process of averaging the economic lives of a number of property units and depreciating the entire class of assets over a single life Simplifying record keeping of assets and depreciation calculations Profit or loss on disposal of composite assets are adjusted to accumulated depreciation

33. U.S. GAAP vs IFRS Items U.S. GAAP IFRS Revaluation method Not applicable Allowed Depreciation methods Management choice Consistent with usage Valuation technique Not applicable* Consistent for a class of assets Component depreciation Management choice Mandatory *Only one valuation method allowed in U.S. GAAP – Cost method

34. Thank you!