Financial Accounting BFA201

BFA201_13 2

• Deegan Ch 4 & 5, scan Ch 7
– Scan to ensure you are familiar with the fundamental concepts covered in these chapters; they revisit many of the areas already completed in your prerequisite units.
• AASB 116 & Scan AASB 101 & 102
3

Tutorial questions (for workbooks)
• Not yet advised
Independent study questions (not for workbooks)
• Not yet advised
4

• AASB 101 applies to the general purpose financial statements of all entities prepared in accordance with IFRS
• AASB 101:9 restates the purpose of financial statements from the AASB Framework which is:
‘provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions’
• GPFS are therefore communication tools to a wide range of users

• AASB 101 specifies the:
• components of a complete set of financial statements;
• Overall considerations in preparing financial statements;
• Structure and content of particular financial statements
• Implicit in the presentation of financial statements are required disclosures. AASB 101 therefore deals with issues such as:
• preparation on a going concern basis
• accrual basis of accounting
• materiality and aggregation
• frequency of reporting
• Presentation and disclosure of financial statements is covered more comprehensively in topics 10 and 11

General Purpose Financial Statements
The complete set of financial statements
Statement of financial postition
Statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes to the financial statements

• AASB 101:10 indicates that a complete set of financial statements contains the following:
• A statement of financial position;
• A statement of comprehensive income;
• A statement of changes in equity
• A statement of cash flows
• Notes which include accounting policies and explanatory notes; and
• A statement of financial position if there are retrospective changes.
• The titles listed above are not mandatory and entities may choose to use other titles (e.g. Income statement, balance sheet, cashflow statement).

• The main topic of today concerns property, plant and equipment, which is an asset in the statement of financial position (balance sheet)
• In this session we will briefly look at some aspects of the presentation and disclosures in the statement of financial position
• Later in the semester, this and the other financial statements and required disclosures will be examined in more detail.

• AASB 101 prescribes:
• The presentation requirements for assets and liabilities; and
• Disclosure requirements for a balance sheet and its components.
• Presented as at the end of a reporting period
• an abridged post balance day adjustments trial balance that lists the balances of assets, liabilities, and equity in the ledger accounts on one particular day.

• AASB 101 does not required the statement of financial position to be presented using a single format.
Presentation of assets and liabilities
Current / noncurrent categories
In order of liquidity
• The traditional current/non current categories can be used, or assets and liabilities can be presented in order of liquidity (para. 60)

• AASB 101: 54 also indicates that at a minimum, there should be line items in the statement of financial position for certain items including:
• Property, plant and equipment;
• Inventories;
• Biological assets
• Trade and other receivables;
• Cash and cash equivalents;
• Trade and other payables;
• Provisions;
• Issued capital and reserves.
• See paragraph 54

• AASB 101: 66 defines a current asset as an asset that satisfies any of the following criteria:
• It is expected to be realised in, or is intended for sale or consumption in, the entity’s normal operating cycle;
• It is held primarily for trading purposes;
• It is expected to be realised within 12 months after the reporting period;
• It is a cash or cash equivalent
• The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents (para 68)
• All other assets are to be classified as non-current assets
(including tangible, intangible and long-term financial assets)

• AASB 101: 669 defines a current liability as an asset that satisfies any of the following criteria:
• It is expected to be settled in the entity’s normal operating cycle;
• It is held primarily for trading purposes;
• It is due to be settled within 12 months after the reporting period;
• There is no unconditional right of deferring settlement beyond 12 months after the reporting period
• All other liabilities are to be classified as non-current liabilities

XYZ GROUP LTD
Balance Sheet as at 30 June 20X4
ASSETS
Current Assets
Cash and cash equivalents
Trade receivables
Investments
Inventories
Other current assets
Total Current Assets
Non Current Assets
Available for sale investments
Other financial assets
Investments in associates
Deferred tax assets
Property, plant and equipment
Goodwill
Other intangible assets
Other non-current assets
Total Non Current Assets
Total Assets
X
X
X
X
X
X
X
X
X
X
X
X
X
NOTE 20X5
$ x x x x x
Consolidated
0
20X4
$
X
X
X
X
X
0
20X5
Parent
20X4
$ x x x x x
0
$
X
X
X
X
X
0 x x x x x x x x
0
$0
X
X
X
X x x x x
0
$0
X
X
X
X
X
X
X
X
0
$0
X
X
X
X x x x x
0
$0

LIABILITIES
Current Liabilities
Trade and other payables
Short term borrowings
Current tax payable
Short term provisions
Current portion of long term borrowings
Other current liabilities
Total Current Liabilities
Non Current Liabilities
Long term borrowings
Deferred tax liabilities
Long term provisions
Other non-current liabilities
Total Non Current Liabilities
Total Liabilities
Net Assets
Equity
Share capital
Other reserves
Retained earnings
Parent interest
Non-controlling interest
Total Equity
X
X
X
X
X
X
X
X
X
X
X
X x
X
X
X x x
0
X
X
X
X
0
$0
$0
X
0
X
X x x
$0 x
0 x x x x x x x x x x
0 x x x x
0
$0
$0
$0 x
X
X
X x x
0
X
X
X
X
0
$0
$0
X
0
X
X x x
$0 x
0 x x x x x x x x x x
0 x x x x
0
$0
$0
$0

• AASB Framework defines an asset (para 49):
•
A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
Result of a past event
Control
Expected economic benefits

• AASB Framework (para 83) indicates that provided an asset meets the definition, it will be recognised in the financial statements if:
• It is probable that an future economic benefit will flow to the entity; and
•
The item has a cost or value that can be reliably measured.
Meets definition
Probable future economic benefits
Measured reliably

• Update: Following discussions with the IASB and
FASB a number of shortcomings have been identified with the existing definition of an asset
(see page 69 of Deegan)
• It is proposed that a new definition be developed:

Current assets are dealt with AASB 101: 66
Expected to be realised; sold or consumed in normal operating cycle
Cash or cashequivalent
Current
Assets
Held primarily to be traded
Realised within 12 months
24

• Current assets usually comprise:
• Cash assets (including short-term deposits)
• Accounts receivable
• Investments maturing within 12 months
• Inventory
25

• Accounts receivables are:
• Amounts due to the entity as a result of the provision of goods and services on credit terms
• Measured at the undiscounted amount that is expected the entity will ultimately receive
26

• If an amount of $1,000 is considered doubtful:
Doubtful debts expense
Provision for doubtful debts
1 000
1 000
• If efforts to recover the debt are unsuccessful, it must be written off:
Provision for doubtful debts
Accounts receivable
1 000
1 000

• If the debt is subsequently repaid
Cash at bank
Accounts receivable
1 000
1 000
And
Accounts receivable
Provision for doubtful debts
1 000
1 000

• If the debt is subsequently repaid
Cash at bank
Accounts receivable
1 000
1 000
And
Accounts receivable
Doubtful debts recovered
1 000
1 000

• Inventories are assets held for future sale or use in manufacturing or rendering services
• AASB 102 applies to all inventories except:
• Work in progress under construction contracts;
• Financial instruments;
• Biological assets
• Inventories may be divided into three categories:
• Goods ready for sale
• Work in progress
• Raw materials
• These 3 categories make up the definition of inventories under paragraph 6.

• AASB 102:10
• The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
• Includes: duties; inward freight

Accounting for Inventory
• Continuous
• COGS recorded as occurs
• Not continuous
• Relies on physical stocktake to determine the value of closing stock
• COGS = OI + P - CI

• FOB destination:
• Control does not pass until the purchaser receives the merchandise from the common carrier
• Merchandise should be included in the seller’s inventory until the buyer receives it
• FOB shipping point:
• Control passes when the seller delivers the merchandise to the common carrier
• Merchandise should be included in the buyer’s inventory after it has been delivered to the common carrier by the seller

• Cost flow assumptions
• AASB 102 allows the use of one or more of the following methods:
• specific identification
• weighted-average cost
• first-in first-out (FIFO)
• AASB 102 does not permit the use of:
• last-in first-out (LIFO)

• The lower of cost and net realisable value rule
• AASB 102 para 9
• This rule requires that an item of inventory should be carried at the lower of its:
– Cost and
– Net realisable value (NRV)
• If the NRV falls below cost:
– The inventory should be written down (and the loss expensed)
• Eg. Selling price falls; inventory is damaged; becomes obsolete
• If the circumstances that previously caused inventories to be written down change, the amount of the previous writedown can be reversed (subject to the upper limit of the original writedown.

• If NRV > cost… item is left as cost
(Upwards revaluations of inventory not allowed by AASB 102)
• If NRV is less than cost, the item must be written down to the net realisable value (para 34)
Dr Inventory write down expense (or COGS)
Cr Inventory
The write down may be reversed if circumstances that previously caused the write down change.

• Mammoth Company purchased an item of inventory for resale.
The purchase price was $1000.
• Mammoth intended to sell the item for $1300, but subsequently found that its net realisable value was only $850.
• At the end of the reporting period after the write down, the item of inventory was still on hand. The management of Mammoth found that its initial estimate of a net selling price of $1300 was now correct and the net realisable value was $1300.
•
Required: Prepare the journal entries for each of the listed events.

Inventory
Cash at bank
1 000
150 Inventory write down expense
Inventory
Inventory
Reversal of writedown (income)
150
1 000
150
150

See Para. 6 definition:
• ‘Tangible’ (physical) assets
• Specific use (e.g. production, supply, rental, administration)
• Expected to be used for greater than one accounting period
• Excludes assets held for sale, biological assets and mineral rights and reserves (covered by other AASBs)
• May be divided into classes for disclosure. eg:
– Land;
– Machinery;
– Motor vehicles
– Office equipment
Class = group of assets of a similar nature and use in an entity’s operations

AASB 116 para 7 :
The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: a.
It is probable that future economic benefits associated with the item will flow to the entity; and b.
The cost of the item can be measured reliably
BFA201/SJA
41

If an item qualifies as an asset it must be recognised at
‘cost’ (para.s 15 and 16):
(a) purchase price, including import duties and nonrefundable 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; and
(c) initial estimates of the costs of dismantling and removing the item and restoring it.
42

‘Directly attributable costs’ include (para 17):
(a) Costs of employee benefits arising 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 asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (e.g. samples)
(f) Professional fees
43

At Cost (of acquisition) + location costs
• Purchase price (at fair value)
Purchase price includes duties and taxes but excludes rebates and discounts
• Directly attributable costs required to bring the asset to the location and condition necessary for it to operate
Refer section 4.7 of text for detailed lists of items specifically included and excluded from this component
• Initial estimate of costs of dismantling, removing the item or restoring the site
Eg- an offshore oil platform

Plant and equipment
Cash at bank
10 000
10 000
Depreciation expense
Accumulated depreciation
1 000
1 000

Allocation of cost / revalued amt
Systematic expense over useful life
Method not prescribed but must reflect expected consumption of FEBs
Estimates must be reviewed annually
BFA201_BS11

Base
(cost)
Method
Dep.
Expense
Useful
Life
Residual
Value

• Straight Line = Cost – Residual value
Useful life (in years)
• Units of production = Cost – Residual value
Useful life (in units of production)

• Diminishing-balance = Carrying amount x Deprec. rate
Depreciation rate = [1ⁿ√Residual value] amt) cost (or other revalued
• Sum-of-digits = Yrs remaining ÷ sum-of-digits X
(cost – residual value)
{sum-of-digits = 1+2+3+4+5 OR n(n +1)/2}

Depreciation of Property, Plant and Equipment
• Depreciation is a process of allocation (paras 50 and 60)
• Recognition of the decrease in the service potential of a noncurrent asset across time
•
Allocate a proportion of the acquisition cost of the asset to particular financial periods throughout the asset’s useful life
•
Depreciation is recognised even if the fair value of an asset is greater than the carrying amount (para 52)
• If depreciable assets form significant proportion of total assets the choice of depreciation policy has significant effect on profits

Depreciation of Property, Plant and Equipment –
Allocation considerations
• Depreciation is an allocation process, not the consideration of variations in valuations.
• In determining how to allocate the cost of an asset address three issues:
– What depreciable base should be used for the asset?
– What is the asset’s useful life?
– What method of cost apportionment is most appropriate for the asset?
• Allocation of depreciable amount is recognised as an expense.

Depreciation of Property, Plant and Equipment –
Depreciable Amount
• Historical cost of a depreciable asset (or revalued amount) less its residual value
• The residual value is the amount expected to be obtained from disposal of the asset at the end of its useful life less the estimated costs of disposal.
– If equal to or greater than the carrying amount, no depreciation is recorded (para 54).
– Based on professional judgement

Depreciation of Property, Plant and Equipment –
Determination of useful life
• Reflects the asset’s useful life to the entity holding the asset; not necessarily its economic life
• Estimated period of time, or total service (in terms of production), over which future economic benefits are expected to be consumed by the entity
• Factors to consider:
– physical life (wear and tear)
– technical obsolescence (out of date as result of technological advances)
– commercial obsolescence (fall in market demand for goods and services produced by the asset)
– Legal life (e.g. patents, licences)

Depreciation of Property, Plant and Equipment –
Method of cost apportionment
• The accounting policy that an entity must adopt for depreciation is specified in paras 50 and 60 of AASB
116, namely the systematic allocation of the cost or other revalued amount of an asset over it useful life in a manner that reflects the pattern in which the assets future economic benefits are expected to be consumed .

A photocopying machine was purchased on 1 st July 2000 for $12,500.
It was expected to have a useful life of 5 years at the end of which it was estimated that it would have a residual value of $2,500. It was also anticipated that during the 5 years, 200,000 copies would be produced. In calculations of depreciation using the reducing balance method the company uses a rate that is 1½ times the straight-line method. The copies made by the photocopier in each year were:
• 2001 – 50,000
• 2003 – 40,000
• 2005 – 30,000
2002 – 60,000
2004
– 20,000
Required:
Calculate the depreciation charge each year using straight line, diminishing-balance and units of production

a) Straight-line $12,500 - $2,500
5 years (20%)
Depreciation expense each year is $2,000 b) Diminishing balance - Rate is 30%
Year
1
2
3
4
5
Depreciation
$
3,750.00
2,625.00
1,837.50
1,286.25
900.38
Accumulated
Depreciation
$
3,750.00
6,375.00
8,212.5
9,498.75
10,399.13

c) Units of production
$12,500-$2,500 Rate is 5 cents per unit.
200,000
Year
1
2
3
4
5
Depreciation
$
2,500.00
3,000.00
2,000.00
1,000.00
1,500.00 d) Sum of digits
[$12,500-$2,500] x yrs remaining
15
Year
1
2
3
4
5
Depreciation
$
3333.33
2666.67
2,000.00
1,333.33
666.67

Depreciation of Property, Plant and Equipment –
Method of cost apportionment
• Should best reflect the economic reality of the asset’s use
• Consider underlying physical, technical, commercial and/or legal facts
• Para 62 of AASB 116 notes three methods
– straight-line method
– Diminishing balance method
– Units of production method
– (OTHER – sum of the years’ digits)

• Depreciation expense is calculated as:
Cost

Residual (salvage) value
Useful life
• This method is appropriate when benefits to be derived from the asset are expected to be uniform throughout the asset’s useful life
59

Depreciation of Property, Plant and Equipment –
Sum of the years’ digits method
• Calculated by multiplying cost
 residual by successively smaller fractions
• Denominator in fraction is calculated by adding the years in the asset’s useful life
• Numerator changes each year, and is the years remaining in the asset’s useful life at the beginning of the period
• Appropriate when economic benefits expected to be derived are greater in the early years than the later years
60

Depreciation of Property, Plant and Equipment –
Diminishing balance method
• Depreciation expense is calculated on the asset’s opening written-down value
• Written down value:
– Cost (or revalued amount) less accumulated depreciation
• Percentage of depreciation expense calculated as 1
 n th root of (residual value/original cost)
• Appropriate when economic benefits expected to be derived are greater in the early years than the later years

Depreciation of Property, Plant and Equipment –
Units of production method
• Depreciation expense is calculated as: no. of units produced x (cost
 residual) total expected production
• Appropriate where useful life may be more related to production output than time

Depreciation of Property, Plant and Equipment –
When to start depreciating an asset
• From the time an asset is first put into use, or is held ready for use
• If constructing an asset, it is not depreciated until ready for use
• If an asset is able to be used but not actually used for a number of periods, the asset is still depreciated from the time it was able to be used
– accounts for obsolescence rather than wear and tear

Depreciation of Property, Plant and Equipment –
Revision of depreciation rate and method
• Residual value and useful life must be reviewed at least annually under AASB 116
• If the expected useful life or residual value are different from that previously expected the entity must revise the depreciation rate
• The depreciation method must also be reviewed annually. AASB 116 provides the method must be changed where there is a significant change in pattern of benefits from the asset.
• Of course, material changes in depreciation charges must be disclosed.

Modifiying Existing Non-Current Assets
• Expenditure on modifications or improvements should be capitalised where:
– Expenditure is material; and
– Expenditure is expected to enhance the service potential of the asset
• The capitalised expenditure must be depreciated:
– Additions that become an integral part of the asset are to be depreciated over the asset’s remaining life
– Additions that retain a separate identity are to be depreciated on the basis of their own useful life.
65

• Where acquired together, cost must be apportioned between land and buildings (AASB
116)
• buildings to be depreciated over time
• land not depreciated (unlimited useful life)

• Separate components (para 43)
– Parts can be depreciated separately eg. aircraft body & engines
• Revision of life, rate, method, residual value:
– Rework depreciation charge taking account of amount already used
– Prospective recognition i.e. relates to current and future periods (AASB108 para 36)
• Improvements – capitalise
• Derecognition – ‘net basis’ para 71

Defiant company purchased machinery in 2000 for
$60,000. At the time of the purchase, its estimated useful life was eight years with a residual value of $4,000.
Depreciation was charged until 2004 (five years) on a straight line basis. At the beginning of 2005 it was estimated that its useful life was now ten years (an increase of two years) and that the residual value would be
$4500 at the end of its useful life.
Required:
• Calculate depreciation expense for each year.

(a) 2000 – 2004
Depreciation = (60,000 – 4,000)/8 = $7000 per annum.
Depreciation expense Dr $7000
Accumulated depreciation Cr $7000
(b) 2005 – 2009
Depreciation = (60,000 – 35,000 – 4,500)/5 = $4100 pa
Depreciation expense Dr $4100
Accumulated depreciation Cr $4100

BFA201_BS11

• Para 67 identifies two occasions where derecognition
( what we used to call disposal ) of an item of property, plant and equipment should occur:
– On disposal, such as the sale of the asset;
– When no expected future economic benefits are expected, either from future use or disposal
• When asset sold, gain or loss recognised which is the difference between:
– the carrying amount of an asset (cost or revalued amount less accumulated depreciation); and
– the amount received for the asset at fair value

• Because the carrying amount is net of depreciation and impairment losses, it is necessary to calculate the depreciation from the beginning of the reporting period up to the point of sale.
• The gain or loss on sale is included in the profit or loss for the period, with the gains not being classified as revenue
• Only the disclosure of the gain or loss on sale is required to be dislcosed, as opposed to the separate disclosure of the income and the carrying amount of asset sold.

Dr Cash at bank
Cr Gain/Loss on sale of asset
Dr Gain/Loss on sale of asset
Dr Accumulated depreciation
Cr Asset

• Gain or loss on disposal:
– Shall be included in profit or loss
Remember:
Do not classify gains as revenue
• Associated Revaluation Surplus
– May be transferred to retained earnings
– NOT to profit & loss

• Sandon Point acquired an item of machinery on 1 July
2008 for a cost of $100,000
• When the asset was acquired it was considered that the asset would have a useful life to the entity of 5 years, after which time it would have no residual value
• It was considered that the pattern of economic benefits would best be reflected by applying the sum of digits method
• Contrary to expectations, on 1 July 2010 the asset was sold for $70,000
• What was the profit on disposal and what are the journal entries to record the disposal?

n ( n + 1) ÷ 2 = 5 × 6 ÷ 2 = 15
First year depreciation = 5 ÷ 15 × $100 000 = $33 333
Second year depreciation = 4 ÷ 15 × $100 000 = $26 667
Total accumulated depreciation at 1 July 2010 = $60 000
Asset carrying amount = $40 000 [$100 000 - $60 000].
The accounting entry would be:
Dr Cash at bank 70 000
Dr Acc.depreciation
—machinery 60 000
Cr Gain on sale of machinery
Cr Machinery
30 000
100 000

Depreciation
Accumulated depreciation
33 333
Depreciation
Accumulated depreciation
26 667
33 333
26 667

Depreciation
Accumulated depreciation
Disposal
Machinery
Accumulated depreciation
Disposal
Cash at bank
Disposal
Disposal
Gain on disposal
0
0
100 000
100 000
60 000
60 000
70 000
70 000
30 000
30 000

• For each class of depreciable asset, the following must be disclosed:
– Measurement bases used for determining gross carrying amount
– Depreciation methods used
– Useful lives or depreciation rates used
– Gross carrying amount and accumulated depreciation at the beginning and end of the period
– Detailed reconciliation of the carrying amount at the beginning and end of the period

Impairment of Assets
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