TANGIBLE NON CURRENT ASSETS

Transcription

TANGIBLE NON CURRENT ASSETS
TANGIBLE NON CURRENT ASSETS
Definition
Acquisition
 Measure cost
Use within the Depreciate
business
 Accounting treatment
 Straight line ] Record and accounting
Reducing balance] treatment
Appreciates in value  Revalue  Record valuation
Dispose of
[ Cash disposal ]  Record and accounting treatment
[ Part exchange]
Definition
NCA are assets bought for business for continuing use.
are those with physical form
Intangible Assets you cannot touch because it has no
physical form.
Tangible Assets
Characteristics
NCA-
•
•
•
•
long term in nature
Not acquired for resale;
used to generate income directly/indirectly for a business
Cannot be easily converted to cash
NCA summary
Non current assets
Tangible
motor vehicles,
Land and building,
plant and
machinery
Usually acquired
at cost in
accordance with
the cost concept
Intangible
copyrights,
patents, mailing
lists, trademarks,
brand names
Only treated as
assets when they
have been
acquired at a
measurable cost
Acquisition of Non current assets
Capital and revenue expenditure
Capital expenditure• buys a NCA required for use in the business
• Spends money to add to the value of an existing asset
• has a limited life the only exception is land. Is long term in nature
• Capex is not charged to the income statement
• includes all costs of acquiring and installing
Entries: Dr Non current asset
Cr Bank/Payables
Revenue expenditure
Incurred:
(a) For the purpose of running the business- Includes selling & distribution
expenses, admin expenses and finance charges
(b) to maintain the existing earning capacity of NCA- Repairs,
renewals, repainting
(c ) is expensed immediately
In summary, When all or part of an asset is used up or consumed, in
the operations of the business, an expense is incurred.
Capital & Revenue expenditure (cont’d)
Expenditure
Buying van
Capital
Cost of rebuilding warehouse wall which had fallen down
Revenue
Building extension to warehouse
Capital
Painting extension to the warehouse when it is first built
Capital
Carriage costs on blocks for new warehouse extension
Capital
Carriage costs on purchases
Revenue
Carriage costs on sales
Revenue
Legal costs of collecting debts
Revenue
Legal charges on acquiring new premises for office
Capital
Fire insurance premium
Revenue
Costs of erecting new machine
Capital
The costs of adding extra storage capacity to a mainframe
computer used by the business
Capital
Customs duty charged on the plant when imported into the
country
Capital
Profit on the sale of an office building
Capital income (net of the
costs of sale)
Capital income and revenue income
Capital incomethe proceeds from the sale of non trading assets
Profits / losses from the sale are included in the income
statement
Revenue incomethe amount earned from a company’s main activities:
(a) Sale of trading assets
(b) Provision of services
(c) Interest and dividends received
Why is the distinction between capital and
revenue items important?
To classify asset as capital
 increases NCA assets
 reduces expenses,
 increases profit and capital.
This makes the business look more profitable than it
actually is so can mislead the user of financial statements.
Illustration 1-4
Determining cost of acquiring NCA (IAS 16)
Cost- bringing the asset to its present location and condition
- acquire the asset
-Bring it into working condition
-Purchase price, import duties, inbound freight
-Initial estimates of dismantling, removing, site restoration
-Directly attributable costs
- costs of site preparation
- Initial delivery, and handling charges
-Installation and assembly costs
- related professional fees
-Insurance while in transit
-Testing before use whether asset is working properly
Excluded costs
-Advert and promotional costs
-Administration and general overheads
-Training costs
-Initial operating losses
-Costs of relocating/re organising part or all of an entities
operation
-Costs of introducing a new product/service.
-Costs incurred while asset is left idle
-Insurance when asset is in use
Illustrations 5-7
Accounting for assets acquired
When an asset is acquired, it is recorded in a NCA register.
This register is periodically reconciled to the NCA account in the
G/L
$
Motor Vehicle- Cost
xx
Addition
xx
31/12/xx
xx
Entries:
Dr NCA MV
Cr Cash/payables
xx
xx
Or you can use T a/c if you are more comfortable with it
Subsequent expenditure
Is added to the carrying amount of the asset, but
only when it is probable that future economic
benefits, in excess of the originally assessed standard of
performance of the existing asset, will flow to the enterprise.
Such expenditure include:
(a)Modification of an item of plant to extend its useful
life, including increased capacity
(b) Upgrade of machine parts to improve the quality of
output
(c) Adoption of a new production process leading
to large reductions in operating costs
Depreciation Accounting
A mechanism to reflect the cost of using a NCA
NCA will become completely useless in future time. Usually this
process occurs gradually, i.e. a portion of the asset is used
up in each year of its life until completely used up.
As an asset is used, there is wear and tear. This wear
and tear could be due to:-Obsolescence (out of date, due to development of improved equipment, changes in style)
-Use/wearing out or physical deterioration
-Depletion (mines)- due to extraction of minerals from
them
-Inadequacy- no longer used due to growth and changes in
size of business
Before we continue, let us deal with some key definitions
Useful life
Period over which a depreciable NCA is expected to be
used by the company.
Factors affecting useful life:-
-physical wear and tear
-Obsolesence
Depreciation considers both physical wear and
obsolesence; it is the shorter of the 2 periods, thus an
asset with an estimated physical life of 10 years that is
considered to become obsolete in 5 years has an
estimated useful life of 5 years
Is reviewed periodically and depreciation rates adjusted,
requires judgment based on previous experience
Residual value
Depreciation is not related to changes in the market
value of an asset (consistent with cost concept)
In some cases entity expects to be able to sell asset at
end of useful life. Amount it expects to sell the asset
for  RESIDUAL VALUE
In summary, it is the amount received when the asset
is put out of use by the business or amount coy
estimates it can sell asset for at end of useful life.
Illustration
Asset costing $22,000 is expected to have a residual
value of $4,000 at the end of its 10 yr life. Each year,
22,000-4,000 (depreciable cost)/10= $1,800 will be recorded as
depreciation expense for the year.
Depreciation methods
Applied consistently from period to period unless altered
circumstances justify a change. When the method is changed, the effect
should be quantified and disclosed and the reason for the
change should be stated. Change for profitability not allowed.
Two methods of depreciation are specified in your syllabus:
•straight line method;
•reducing balance method
Straight line method= The total depreciable amount is charged
in equal installments to each accounting period over the expected
useful life of the asset =
Cost of asset - residual value
Expected useful life of the asset
OR
The % of cost charged off each year is called the depreciation rate. The rate
is 1/ no. of years of service life. E.g. if asset is to be depreciated over 5
years, rate is 1/5 = 20%
Straight line method (cont’d)
What is the depreciation rate of the following assets
estimated life?:
2 years ½ = 50%; 4 years  ¼ = 25% , e.t.c
Illustration
A non-current asset costing $100,000 with an estimated life
of 5 years and no residual value would be depreciated at the
rate of:100,000/5= $20,000 per annum.
Illustration 8-11
The reducing balance method
If you want a car to go faster, you press on the accelerator.
Accelerated depreciation writes off the cost of an asset faster than
straight line depreciation.
This method allocates a relatively large proportion of the
cost of an asset to the early years of the assets useful life with a
progressively lower charge in subsequent years and so on
- Do not deduct the residual value of the asset
- The depreciation charge is a fixed % of NBV at end of previous year.
Illustration 11, 15, 16
Accumulated depreciation
When assets are converted into expenses with the passage of time,
there is a reduction to the asset (Cr) and equal increase in the
expense a/c (Dr).
For assets, accountants prefer to show the original cost of the
asset on the BS at all times, therefore rather than decrease the
asset account directly, decreases in the asset amount due to
depreciation are accumulated in a separate account called Accumulated
depreciation.
Subsequently, the total depreciation of NCA builds up as asset ages.
Whichever method is used to calculate depreciation, the accounting
remains the same:
Dr Depreciation expense (IS) X
Cr Accumulated depreciation (SFP) X
Accumulated depreciation (cont’d)
Each year
-In the SOFP, the balance in the accumulated depreciation
account is shown as a deduction from the original cost of the asset.
The net is referred to as the book value or as the carrying value of the
equipment
Plant
Accumulated depreciation
CV
10,000
( 4,000)
______
6,000