Accounting
For
Non-current Assets
Prepared By:
A.M. Lipunga
Accountancy Department
Malawi Polytechnic
Intended Learning Outcomes
By the end of the module students should be able to:
1. Discuss the Conceptual Framework of Accounting and the
standard setting process
2. Present financial statements in accordance with IAS 1:
Presentation of Financial Statements
3. Account for non-current assets in the financial
statements
4.
5.
6.
7.
8.
Account for changes in accounting policies, estimates and errors
Account for government grants
Apply accounting principles to recognise revenues
Impair non-current assets
Account for non-current assets held for sale in the financial
statements
Coverage
Accounting for non-current assets covers the
following standards:
1.
2.
3.
4.
IAS 16 Property, Plant and Equipment
IAS 38 Intangible Assets
IAS 40 Investment Property
IAS 17 Leases
IAS 16
Property, Plant and Equipment
(PPE)
Objective of the Standard
• To prescribe the accounting treatment for property,
plant and equipment so that users of the financial
statements can discern information about an entity’s
investment in its property, plant and equipment and
the changes in such investment.
• The principal issues being:
– recognition of the assets,
– the determination of their carrying amounts; and
– determination of the depreciation charges to be
recognised in relation to them.
Key Definitions
• Carrying amount is the amount at which an asset is recognised
after deducting any accumulated depreciation and accumulated
impairment losses.
• Cost is the amount of cash or cash equivalents paid or the fair
value of the other consideration given to acquire an asset at the
time of its acquisition or Construction.
• Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life.
• Depreciable amount is the cost of an asset, or other amount
substituted for cost, less its residual value.
• Fair value is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm’s length
transaction.
Defn… cont..
• Residual value of an asset is the estimated amount that an entity would
currently obtain from disposal of the asset, after deducting the
estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
• Useful life is:
a)
b)
the period over which an asset is expected to be available for use by
an entity; or
the number of production or similar units expected to be obtained
from the asset by an entity.
• Property, plant and equipment are tangible items that:
a)
b)
are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
are expected to be used during more than one period.
Recognition
• An item of property, plant and equipment
should be recognised as an asset when:
– it is probable that future economic benefits
associated with the asset will flow to the entity;
and
– the cost of the asset can be measured reliably.
Measurement at recognition
• An item of property, plant and equipment should initially
be measured at its cost.
• The cost of an item of property, plant and equipment
comprises:
a)
its purchase price, including import duties and non-refundable purchase
taxes, after deducting trade discounts and rebates.
b) any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management.
c) the initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an entity
incurs either when the item is acquired or as a consequence of having used
the item during a particular period for purposes other than to produce
inventories during that period.
IAS 16 – Elements of acquisition cost
Examples of directly attributable costs are:
a) costs of employee benefits arising directly from the
construction or acquisition of the item of property, plant and
equipment;
b) costs of site preparation;
c) initial delivery and handling costs;
d) installation and assembly costs;
e) costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced
while bringing the asset to that location and condition (such as
samples produced when testing equipment); and
f) professional fees.
Example 1
Chi Products has recently purchased an item of plant, the details of this are:
Basic list price of plant
K240,000
Trade discount applicable to Chi Products
12.5% on list price
Ancillary costs:
Shipping and handling costs
K2,750
Estimated pre-production testing
K12,500
Maintenance contract for three years
K24,000
Site preparation costs:
electrical cable installation
14,000
concrete reinforcement
4,500
own labour costs
7,500
K26,000
Chi Products paid for the plant (excluding the ancillary costs) within four weeks of order, thereby
obtaining an early settlement discount of 3%.
Chi Products had incorrectly specified the power loading of the original electrical cable to be
installed by the contractor. The cost of correcting this error of K6,000 is included in the above figure
of K14,000.
The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of
K15,000 to dismantle the plant and K3,000 to restore the site to its original use condition.
Calculate the amount at which the plant will be measured at recognition.
Answer
Value of the Plant:
Basic list price of plant
Less: Trade discount (12.5%xK240,000)
Shipping and handling costs
Estimated pre-production testing
Electrical cable installation (14,000-6000)
Concrete reinforcement
Labour costs
Dismantling costs
Restoration Costs
TOTAL
240,000
(30,000)
2,750
12,500
8,000
4,500
7,500
15,000
3,000
263,250
Subsequent expenditure
• Subsequent expenditure on property, plant and
equipment should only be capitalised if it results
in the total economic benefits expected from the
asset to increase above those expected on original
recognition, e.g. the cost of an extension to a
building should be capitalised (capital
expenditure) as economic benefits will increase
with greater space.
• All other subsequent expenditure should be
recognised in the income statement, because it
merely maintains the economic benefits originally
expected e.g. the cost of general repairs should be
written off immediately (revenue expenditure).
Depreciation
• Depreciation is the systematic
allocation of the depreciable amount
of an asset over its useful life.
• Depreciation must be charged from
the date the asset is available for use,
i.e. it is capable of operating in the
manner intended by management.
Method of depreciation
• The depreciation method used should reflect as fairly as
possible the pattern in which the asset’s economic
benefits are consumed by the entity. Possible methods
include:
– straight line
– reducing balance
– machine hours
• A change from one method of providing depreciation to
another:
– is permissible only on the grounds that the new method will
give a fairer presentation of the results and of the financial
position
Review of useful lives and
residual values
Useful life and residual value should be
reviewed at the end of each reporting period
and revised if expectations are significantly
different from previous estimates.
The carrying amount of the asset at the date of
revision less any residual value should be
depreciated over the revised remaining useful
life.
Example 2
An asset was purchased for K100,000 on 1 January
20X5 and straight-line depreciation of K20,000 per
annum is being charged (five year life, no residual
value). The annual review of asset lives is undertaken for
this particular asset and found the remaining useful life
as at 1 January 20X7 is eight years.
The financial statements for the year ended 31 December
20X7 are being prepared. What is the depreciation
charge for the year ended 31 December 20X7?
Answer
Carrying amount on 1 January 20X7 is
100,000 – (20,000 x 2) = 60,000
Depreciation Charge is
60,000/8 = 7,500
Separate components
• A complex asset is an asset that may be
thought of as having separate
components within a single asset, e.g. an
engine within a piece of plant.
• Each separate part of the asset should
be depreciated over their useful life.
Example 3
BT Cargo has recently purchased an item of earth moving plant at a
total cost of K24 million. The plant has an estimated life of 10 years
with no residual value, however its engine will need replacing after
every 5,000 hours of use at an estimated cost of K7.5 million.
Required
Explain how the plant should be treated in accordance with
IFRSs.
The engine should be separated from the rest of the plant and
depreciated based on no. of hours (Depn per hr =
K7.5m/5000hours = K1,500). The remainder is depreciated over
10 years [Depn per yr = (K24m-K7.5m)/10 = K1.65M]
Major inspection or overhaul costs
• Inspection and overhaul costs are
generally expensed as they are incurred.
• They are, however, capitalised as a noncurrent asset to the extent that they satisfy
the IAS 16 rules for separate components.
• Where this is the case they are then
depreciated over their useful lives.
Example 4
• An entity purchases an aircraft that has an
expected useful life of 20 years with no residual
value. The aircraft requires substantial overhaul
at the end of years 5, 10 and 15. The aircraft cost
K25 million and K5 million of this figure is
estimated to be attributable to the economic
benefits that are restored by the overhauls.
Calculate the annual depreciation charge for
the years 1 - 5 and years 6 -10.
Note
• Land and buildings are separable assets
and are accounted for separately, even
when they are acquired together.
• With some exceptions, such as quarries
and mines , land has an unlimited useful
life and therefore is not depreciated.
• Buildings have a limited useful life and
therefore are depreciable assets.
Measurement after recognition
An entity should choose either
the cost model or the revaluation
model as its accounting policy
and should apply that policy to an
entire class of property, plant and
equipment.
Cost model
PPE should be valued at cost less
accumulated depreciation.
Carrying Amount
=
Cost – Accumulated Depreciation
Revaluation model
• PPE should be carried at a revalued amount less
any subsequent accumulated depreciation.
• If the revaluation alternative is adopted, two
conditions must be complied with:
– Revaluations must subsequently be made with
sufficient regularity to ensure that the carrying
amount does not differ materially from the fair value at
each reporting date.
– When an item of PPE is revalued, the entire class of
assets to which the item belongs must be revalued.
Classes of PPE
A class of property, plant and equipment is a
grouping of assets of a similar nature and use in
an entity’s operations. The following are examples
of separate classes:
a)
b)
c)
d)
e)
f)
g)
h)
land;
land and buildings;
machinery;
ships;
aircraft;
motor vehicles;
furniture and fixtures; and
office equipment.
Accounting for a revaluation
1) Restate asset from cost to revalued
amount.
2) Remove (extinguish) any existing
accumulated depreciation provision.
3) Include increase in carrying value in
revaluation reserve (part of other
components of equity within the
statement of financial position).
Recognising revaluation gains and losses
• Revaluation gains are recorded in the
revaluation reserve and reported as a
component of other comprehensive income
either within the statement of comprehensive
income or in a separate statement.
• Revaluation losses which represent an
impairment are recognised in the income
statement as an expense.
Revaluation model
- Revaluation increases credited to:
 Profit or loss to the extent they reverse
previous revaluation decrease of that asset.
 Otherwise, equity (revaluation surplus).
- Revaluation decreases debited to:
 Equity to the extent of any revaluation
surplus in equity related to that asset.
 Otherwise, profit or loss.
Depreciation of revalued asset
• Once an asset has been revalued the
following treatment is required.
– Depreciation must be charged, based on valuation less
residual value, over remaining useful life.
– The whole charge must go to the income statement for
the year.
– An annual reserves transfer may be made (revaluation
reserve to retained earnings) for extra depreciation on
the revalued amount compared to cost.
Disposal of revalued PPE
• The profit or loss on disposal of a revalued noncurrent
asset should be calculated as the difference between
the net sale proceeds and the carrying amount.
• It should be accounted for in the income statement of
the period in which the disposal occurs.
• The remainder of the revaluation reserve relating to
this asset should now be transferred to retained
earnings.
Example 5
A property costing K750,000 was purchased on 1
January 20X4 and is being depreciated over its useful
life of 10 years. It has no residual value.
At 31 December 20X4 the property was valued at
K810,000. There was no change to its useful life.
On 31 December 20X7 the property was sold for
K600,000.
What is the profit or loss on disposal?
Direcognition of PPE
• Derecognition of a fixed asset occurs:
– On disposal, or
– When future economic benefits are no longer
expected
• Accounting effect of asset derecognition:
– Net book value of asset is eliminated in the balance
sheet
– A gain or loss on disposal is recognised in the income
statement
• Gain or loss on disposal = difference
between the net disposal proceeds and the
carrying value of the asset at disposal date
Disclosure
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