Chapter 1_Accounting_for_Tangible_Non_current_Asset.pdf

Non Current Assets

1. Accounting for
Tangible Non
current Assets
Initial Recognition and Subsequent
Measurement of NCA Expenditure

2. Introduction
Themainaccountingstarndardrelatingtothe
recognitionandmeasurementoftangiblenon
currentassetsisIAS16Property,Plantand
Equipment.
Howeverthefollowingaccountingstandardsare
relevantaswell:

3. Other relevant standards
❑IAS 20 Accounting for Government grants
❑IAS 23 Borrowing costs
❑IAS 36 Imparements of assets
❑IAS 40 Investment property

4. Definition
IAS16definesproperty,plantand
equipmentas"tangibleitemsthat:
(a)areheldforuseintheproductionor
supplyofgoodsorservices,forrentalto
others,orforadministrativepurposes;
and
(b)areexpectedtobeusedduringmore
thanoneperiod."

5. Definition
It is clear that items which will benefit more than
one accounting period fit the description of PPE.
The ammendments 2009-2011 finalised in May
2011 clasifies that items of spareparts, standby
equipemnt and servicing equipment that will be
used during more than one period meet the
definition of PPE.

6. Definition
Items that are not used during more
than one period are accounted for as
inventories under IAS 2

7. Recognition of Property, Plant
and Equipment
Anitemofproperty,plantandequipmentshould
berecognisedasanassetifandonlyif:
(a)itisprobablethatfutureeconomicbenefits
associatedwiththeitemwillflowtotheentity
concerned,and
(b)thecostoftheitemcanbemeasuredreliably.

8. Initial Measurement of
Property, Plant and Equipment
Oninitialrecognition,property,plantand
equipmentshouldbemeasuredatcost.Cost
includes:
Purchaseprice,includingimportdutiesand
non-refundablepurchasetaxes,lesstrade
discounts
Coststhataredirectlyattributabletobringing
theitemtothelocationandcondition
necessaryforittobeoperatedasintended

9. Initial Measurement of
Property, Plant and Equipment
The estimated costs of dismantling and
removing the item and restoring the site on
which the item is located, as long as the
obligation to meet these costs is incurred
when the item is acquired

10. Subsequent Measurement of
Property, Plant and Equipment
Afterinitialrecognition,itemsofproperty,plant
andequipmentmaybemeasuredusingeither:
Thecostmodel;itemsarecarriedatcost(initial
costplussubsequentexpenditure)lessany
accumulateddepreciationandlessany
accumulatedimpairmentlosses

11. Measuring non current assets
Direct atributable costs might include:
Proffesional fees
Delivery costs
Site prepartion costs
Assembly and testing costs

12. EXAMPLE 1
On 1 March 20X0 Yucca Co acquired a machine
from Plant Co under the following terms:

13. Inadditiontotheaboveinformation,YuccaCowas
grantedatradediscountof10%ontheinitiallistprice
ofthemachineandasettlementdiscountof5%if
paymentwasreceivedwithinonemonthofpurchase.
YuccaCopaidforthemachineon25March20X0.
Required:
Explainhowtheaboveinformationshouldbe
accountedforinthefinancialstatementsofYuccaCo
fortheyearended28February20X1

14. Solution:

15. Self-constructed assets
Forself-constructedassets(non-currentassetsthat
areconstructedbytheentityitself):
❑internalprofitsandabnormalcostsshouldbe
excludedfromcost
❑administrativeexpensesandothersimilar
overheadsshouldalsobeexcludedfromcost
❑interestcostsincurredinthecourseof
constructionmaybeincluded,inaccordancewith
IAS23Borrowingcosts

16. Subsequent Expenditure
Subsequentexpenditurerelatingtonon-current
assets,aftertheirinitialacquisition,shouldbe
capitalizedifitmeetsthecriteriaforrecognisingan
asset.Inpractice,thismeansthatexpenditureis
capitalizedifit:
improvestheasset(forexample,byenhancingits
performanceorextendingitsusefullife)

17. Subsequent Expenditure
isforareplacementpart(providedthatthe
partthatitreplacesistreatedasanitemthat
hasbeendisposedof).
Repairsandmaintenanceexpenditureis
revenueexpenditure.Itisrecognisedasan
expenseasitisincurred,becauseno
additionalfutureeconomicbenefitswillarise
fromtheexpenditure

18. Subsequent Expenditure
Examples of subsequent expenditure on a
building, for example, include:-
❑constructing an extension to the building
❑replacing the elevators or the heating or air
conditioning system

19. Measuring non current assets
Undertherevaluationmodel,anitemof
property,plantandequipmentis‘carried’in
thestatementoffinancialpositionat:
❑itsrevaluedamount(itsfairvalue)
❑lessaccumulateddepreciationcharges
andimpairmentlosses(sincethe
revaluation).

20. Revaluation model
Fairvalueisnormallyopenmarketvalue.If
thereisnoreliablemarketvalue(for
example,becausetheassetisspecializedor
becausesalesarerare),depreciated
replacementcostcanbeused.
Valuationshouldnormallybeperformedby
aprofessionallyqualifiedvaluer

21. If the revaluation model is
adopted:
assetsmustberevaluedregularlysothat
theircarryingvaluesdonotdiffermaterially
fromtheirfairvalues
onceanassetisrevalued,allassetswithin
thatclassmustalsoberevalued

22. Revaluationmodel
IAS16doesnotprescribeatimeintervalbetween
revaluations.Howeveritstatesthatrevaluations
shouldbemadewith‘sufficientregularity’to
ensurethatitscarryingvalueinthestatementof
financialpositionisnotmateriallydifferentfrom
whatitsfairvaluewouldbe

23. Measurement model
Ameasurementmodelmustbechosenforeach
classofnon-currentassets.Itisanaccountingpolicy
choice.
Thechosenaccountingpolicyforaclassofassets
shouldbeappliedconsistentlytoalltheassetsin
thatclass.
Forexample,anentitymaychoosetherevaluation
modelforallitslandandbuildings,andthecost
modelforallitsplantandequipment.

24. Gains on revaluation
Whenanassetisrevaluedupwardsfromits
carryingamount,thereisagainon
revaluation
Thegainonrevaluationisincludedasother
comprehensiveincomeinthestatementof
comprehensiveincomeandisnotincludedin
profitorlossfortheperiod.

25. Exception
Thereisanexceptiontothisrule.Ifthegainon
revaluationreversesapreviouslossonrevaluation,
wherethelosswasrecognisedinprofitorloss,the
revaluationgainshouldberecognisedinprofitor
loss,not‘othercomprehensiveincome’.

26. Gains on revaluation
When a gain on revaluation is recognised in
other comprehensive income, it is a
requirement of IAS 1 and IAS 12 that the
tax associated with the revaluation should
also be included in other comprehensive
income.

27. Gains on revaluation

28. Losses on revaluation
When an asset is revalued down from its
carrying value there is a loss on revaluation
The amount of the reduction in valuation
should be recognised in profit or loss (not in
other comprehensive income).

29. Losses on revaluation
There is an exception to this rule. If the loss
on revaluation reverses a previous gain on
revaluation that was reported in other
comprehensive income, the decrease should
be reported in other comprehensive income
and not recognised as a loss.

30. Losses on revaluation

31. Reserves transfer
The depreciation charge on the revalued asset will be different to
the depreciation that would have been charged based on the
historical cost of the asset.
As a result of this, IAS 16 permits a transfer to be made of an
amount equal to the excess depreciation from the revaluation
surplus to retained earnings.

32. Summarized as:

33. Example: Revaluation Surplus

34. Example: Revaluation Decrease

35. The objective of depreciation
IAS 16 states that the objective of depreciation
is to allocate the depreciable amount of an
asset on a systematic basis over its useful life.
The depreciable amount of a non-current asset
is:
its cost minus its expected residual value,
where the cost model of valuation is used

36. The objective of depreciation
the amount substituted for cost, less its
expected residual value, where the
revaluation model is used
The depreciation charge has the effect of
spreading the cost/fair value of the asset
over the financial periods that will benefit
from its use.

37. The depreciation charge for the year (whether
based on cost or revalued amount) is
recognised in profit or loss in the statement of
comprehensive income.
All tangible non-current assets must be
depreciated. The only exception to this rule is
land, which normally has an indefinite useful
life (unless the land is used in mining or
similar industries).

38. Depreciation methods
Methods of depreciation that may be
used include:
❑the straight-line method
❑the reducing balance method
❑the units of production method.

39. ✓The asset must continue to be depreciated
following the revaluation. However, now
that the asset has been revalued the
depreciable amount has changed.
✓In simple terms the revalued amount
should be depreciated over the asset’s
remaining useful life.
Depreciation of revalued assets

40. A change in the method of
measuring depreciation
IAS 16 requires depreciation methods to be
reviewed at least annually. It only allows a
change in the method of measuring
depreciation where this would give a fairer
presentation of the entity’s financial results
and financial position.

41. Reserves transfer
✓The depreciation charge on the revalued asset will be
different to the depreciation that would have been
charged based on the historical cost of the asset.
✓As a result of this, IAS 16 permits a transfer to be made
of an amount equal to the excess depreciation from the
revaluation surplus to retained earnings.
Journal entry:
DrRevaluation surplus
CrRetained earnings

42. A change in the method of
measuring depreciation
Where there is a change in the depreciation
method used, this is a change in accounting
estimate. A change of accounting estimate is
applied from the time of the change, and is
not applied retrospectively.

43. Example
EntityLownsamachinewhichoriginallycost
30,000on1JanuaryYear1.Ithasnoresidual
value.Itwasbeingdepreciatedoveritsusefullife
of10yearsonastraightlinebasis.
AttheendofYear4,whenpreparingthefinancial
statementsforYear4,EntityLdecidedtochange
themethodofdepreciation,fromstraight-lineto
thereducingbalancemethod,usingarateof25%.

44. Solution
Cost on 1 January Year 1 = 30,000
Depreciation for Years 1 to 3 (30,000 ×3/10) = (9,000)
Carrying amount at end of Year 3 = 21,000
Depreciation for Year 4 will therefore:
$21,000 ×25% = 5,250

45. A change in the asset’s useful
life
IAS 16 requires useful lives to be reviewed
at each year-end. Any change is a change in
accounting estimate. The carrying amount
(cost minus accumulated depreciation) of
the asset at the date of change is written off
over the (revised) remaining useful life of
the asset

46. Example
EntityMownsamachinewhichoriginallycost60,000on
1JanuaryYear1.Ithasnoresidualvalue.Itwasbeing
depreciatedoveritsusefullifeof10yearsonastraight-
linebasis.On31DecemberYear4EntityLrevisedthe
totalusefullifeforthemachinetoeightyears.
Required
CalculatethedepreciationchargeforYear4and
subsequentyears.

47. Solution
The change in accounting estimate is made at the
end of Year 4 but may be applied to the financial
statements from Year 4 onwards
Cost on 1 January Year 1 = 60,000
Depreciation for Years 1 to 3 (60,000 ×3/10) =
(18,000)
Carrying amount at end of Year 3 = 42,000

48. Solution
Remaining useful life at the end of Year
3 = 8 –3 years = 5 years.
Depreciation for Year 4 and
subsequent years will be 42,000 ÷5
years = 8,400.

50. Derecognition of non current
asset
When an asset is de-recognised, its carrying
amount is removed from the statement of
financial position.
IAS 16 Property, plant and equipment states
that the carrying amount of an item of
property, plant and equipment should be
derecognized in the following circumstances

51. Derecognition of non current
asset
❑ondisposaloftheasset,or
❑whennofutureeconomicbenefitsareexpected
toarisefromitsuseorfromitsdisposal
❑Ifanon-currentassetisdisposedof,thegainor
lossonthedisposalshouldbeincludedinprofitor
lossintheperiodinwhichthedisposaloccurs.The
gainorlossshouldnotbeincludedinsales
revenue.

52. EXAMPLE

55. Investment property: IAS 40
Definitions
An investment property is property held
to earn rentals or for capital appreciation
or both. It differs from non-investment
property, which is property:

56. ❑usedintheproductionorsupplyofgoods,or
foradministrativepurposes,or
❑heldforsaleintheordinarycourseofbusiness.
❑Propertycouldbelandorabuilding(orpartof
abuilding)orboth,anditincludesthebuilding
whilstitisunderconstructionforeventualuseas
aninvestmentproperty.
Investment property: IAS 40

57. Investment property: IAS 40
The property could be held by:
❑the owner, or
❑the lessee under a finance lease or an
operating lease.

58. The following are not
investment property:
Property intended for sale in the ordinary course
of business
❑property being constructed or developed on
behalf of third parties
❑owner-occupied property
❑property being leased to another entity under a
finance lease.

59. Accounting treatment of
investment property
Therecognitioncriteriaforinvestmentproperty
arethesameasforproperty,plantandequipment
underIAS16.
itisprobablethatfutureeconomicbenefits
associatedwiththepropertywillflowtothe
entity,
andthecostofthepropertycanbemeasured
reliably

60. Measurement
Investmentpropertyshouldbemeasured
initiallyatcostplusthetransactioncosts
incurredtoacquiretheproperty.
Afterinitialrecognitionanentitymay
chooseasitsaccountingpolicy:
❑thefairvaluemodel,or
❑thecostmodel

61. Fair Value Model

62. ThisisdifferenttotherevaluationmodelofIAS16,
wheregainsarereportedas
othercomprehensiveincomeinthestatementof
comprehensiveincome(andarenotincludedin
profitorloss)andcreditedtoarevaluation
reserve.
Fair Value Model

63. Treatment of loss or gain
Gainsorlossesondisposalsofinvestment
propertiesareincludedinprofitorlossin
thestatementofcomprehensiveincomein
theperiodinwhichthedisposaloccurs.

64. Example

65. Cost Model

66. Fair Value Model

67. The End!