CHAPTER 5
Accounting for and Presentation of
Property, Plant, and Equipment (PPE) and
Other Non-current Assets
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PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Learning Objectives
• Describe how the cost of land, buildings and equipment is
reported on the balance sheet.
• Explain the differences between the terms capitalise and
expense with respect to property, plant and equipment.
• Discuss the alternative methods of calculating depreciation and
the relative affect of each on the Income Statement
(depreciation expense) and the Balance Sheet (accumulated
depreciation).
• Discuss the accounting treatment for maintenance and repair
expenditures.
• Describe the differences between an operating and a finance
lease.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Learning Objectives
• Describe and explain the meaning of
various intangible assets, how their values
are measured and how their costs are
reflected in the Income Statement.
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Types of Non-current Assets
Future economic benefits, controlled, that entity will USE
(infrastructure assets; capital assets)
• Land
• Buildings
• Equipment
• Leased assets
• Intangible assets
• Natural resources
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Non-current Assets
PRIMARY ISSUES
Acquisition
COST
of the asset.
Cost of using
asset:
Depreciation of
the asset.
Repair and
maintenance
costs.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Disposal of the
asset at the end
of useful life.
5
Land
All costs incurred to get land ready for its
intended use are capitalised.
• Purchase price
• Title (search) fees
• Razing costs of building on the
land
• Legal fees including transfer fees
• Real estate commissions
Land is not depreciated.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Land
HISTORIC COST PRINCIPLE - basis of
acquisition cost
Criticisms:
• Understates asset values on balance sheet.
• Fails to provide proper matching in the income
statement.
• Market value may be more relevant for decision
makers, BUT (on the other hand)
• Cost basis is reliable, consistent and prudent.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
All costs incurred to get the asset ready for
use are capitalised. Cost accumulation stops
when assent is commissioned. Acquisition cost
• Purchase price
• Architectural fees
• Cost of permits
• Interest on loans
• Installation and commissioning costs
• Transportation costs
• Excavation and construction costs
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
EXPENDITURE
Capitalise?
Adds value (Useful life)
OR
Expense?
Restores value
• Increases value of
asset.
• Depreciation expense
recognised over life of
• Full cost reflected in
income statement for
year.
asset.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
EXPENDITURE
Capitalize?
OR
Expense?
• How material is the asset?
• In practice, most accountants will favour
expensing costs over capitalising.
• For income tax purposes, most taxpayers
want deductions now rather than later.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment Depreciation
Depreciation is the allocation of the cost of an
asset to the years in which the benefits of the
asset are expected to be received. It is an
application of the matching concept.
Balance Sheet
Acquisition
Cost
Income Statement
Cost
Expense
Allocation
(Unused or future
economic benefit)
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(Used up or
consumed)
11
Buildings and Equipment
Depreciation
Depreciation is the allocation of the cost
of an asset to the years in which the
benefits of the asset are expected to be
received. It is an application of the
matching concept.
Depreciation is NOT an attempt to
recognise a loss in the MARKET VALUE
of the asset.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment Depreciation
• Accumulated depreciation.
• Cumulative total of all depreciation charges.
• Contra asset.
- Balance sheet disclosure:
Asset
Less: Accumulated depreciation
Carrying amount of asset (NBV)
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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XXX cost
(XXX) Amt
used up
XXX
13
Buildings and Equipment Depreciation
Depreciation Methods
Straight line
Accelerated
Accelerated depreciation methods result in greater
depreciation expense and lower net income than
straight-line depreciation in early years of an
asset’s life.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
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Buildings and Equipment
Depreciation
Accelerated Depreciation
Annual
Depreciation
Expense ($)
Annual
Depreciation
Expense ($)
Straight-Line Depreciation
Years of Life
Years of Life
Accelerated depreciation methods result in greater
depreciation expense and lower net profit than
straight-line depreciation in early years of an
asset’s life.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
Depreciation
Accelerated Depreciation
Annual
Depreciation
Expense ($)
Annual
Depreciation
Expense ($)
Straight-Line Depreciation
Years of Life
Years of Life
Straight-line methods
Accelerated methods
Straight-line
Reducing balance
Units of Production
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
Depreciation
Straight-line method
Annual Depreciation
Expense
= Cost - Estimated Salvage Value
Estimated Useful Life
On 1/1/07, cruisers purchased machinery for
$42,000. The equipment has an estimated
useful life of four years and an estimated
residual value of $2,000.
The projected production is 200 boat hulls.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
Depreciation
Straight-line method
Annual depreciation = Cost - Estimated salvage value
Estimated useful life
expense
Annual depreciation =
expense
=
$42,000 - $2,000
4 years
$10,000
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
Depreciation
Units-of-production method
Step 1:
Depreciation
expense per unit
produced
=
Cost - Estimated salvage value
Estimated total units to be made
Step 2:
Depreciation
Annual depreciation
= expense / unit
expense
produced
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Number of units
produced
×
in the year
19
Buildings and Equipment
Depreciation
Units-of-production method
Step 1:
Depreciation
expense per unit
produced
=
$42,000 - $2,000
200
Step 2:
Annual depreciation
=
expense
$200 / unit
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
Number of units
produced
×
in the year
20
Buildings and Equipment
Depreciation
Reducing-balance method
Double the straight-line depreciation rate
2 × 25% = 50%
Depreciation for 2007
50% × $42,000 = $21,000
Depreciation for 2008
50% × ($42,000 - $21,000) = $10,500
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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22
Buildings and Equipment
Depreciation
Comparison of methods
Year
2007
2008
2009
2010
Straight Line
Annual
Accum Carrying
Dep'n
Dep'n
Value
10000
10000
10000
10000
10000
20000
30000
40000
40000
Salvage value
32000
22000
12000
2000
Reducing Balance
Annual
Accum
Carrying
Dep'n
Dep'n
Value
21000
10500
5250
3250
21000
31500
36750
40000
21000
10500
5250
2000
40000
Last year’s depreciation required to
make carrying value = salvage value
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Buildings and Equipment
Depreciation
Tax
depreciation
The useful life of various depreciable
assets is determined by the Income
Tax Assessment Act 1997 (Cwlth)
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
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Maintenance and Repair Expense
Preventative maintenance expenditures and routine
repair costs are clearly expenses of the period in
which they are incurred.
Repair expenses that extend the useful life and/or
increase the salvage value of an asset should be
capitalised. This would require a change to the
original depreciation expense calculation.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Maintenance and Repair Expense
Repair expenses that extend the useful
life and/or increase the salvage value of
an asset should be capitalised. This
would require a change in the
depreciation expense calculation.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Disposal of Depreciable Assets
• Asset and accumulated depreciation
must both be removed from the books.
• Gain or loss on disposal will affect the
Income Statement.
Sales price (of the asset)
– Carrying value (original cost – accumulated
depreciation)
= Gain (loss)
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Disposal of Depreciable Assets
Asset and accumulated depreciation must
be removed from the books, for example:
• Fully depreciated asset scrapped.
BALANCE SHEET
Assets
= Liabilities
+ Owners
Equity
INCOME STATEMENT
< Net
= Revenue
-
Expenses
Profit
- Equipment
+ Accumulated
Depreciation
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
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Disposal of Depreciable Assets
• Asset sold with a gain on sale recognised
Sale Proceeds
Carrying value
Gain on sale
Cost
Accum Dep’n
$6000
$4500
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$1800
$1500
$300
29
Disposal of Depreciable Assets
BALANCE SHEET
Assets
= Liabilities
+ Owners'
Equity
INCOME STATEMENT
< Net
= Income
-
Expenses
Profit
- Equipment
-6000
+ Accumulated
Depreciation
+4500
+ Cash
+1800
+ Gain on disposal NCA
+300
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
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Disposal of Depreciable Assets
• Asset sold with a loss on sale recognised
Sale Proceeds
Carrying value
Loss on sale
Cost
Accum Dep’n
$6000
$4500
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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$0
$1500
($1500)
31
Leased Assets
An operating lease is an ordinary
lease for the use of an asset that
does not involve any attributes of
ownership.
A finance lease results in the lessee (renter)
assuming virtually all of the benefits and risks
of ownership of the leased asset.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Leased Assets
Finance lease characteristics:
1. The lease is non-cancellable.
2. Lease term is  75% of useful life of asset.
3. Present value of lease payments is  90%
of fair value of asset.
The economic impact of a financial lease is
not really any different to buying the asset
outright. It is really a disguised purchase
and loan agreement.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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33
Finance Leases
Prior to the accounting standard on
Leases, many companies did not
record finance leases on their Balance
Sheets- a practice known as off
balance sheet financing.
Now assets under a finance lease are
included along with purchased assets
on the Balance Sheet along with the
related lease liability (shown as the
present value of the lease payments to be
made).
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Intangible Assets
• Non-current assets without physical substance.
• Often provide exclusive rights or privileges.
• Useful life is often difficult to determine.
• Usually acquired for operational use.
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Intangible Assets
Leasehold
improvements
Contractual
rights
Goodwill
Intangible
assets
Patents,
trademarks
and copyright
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Resulting
from a
purchase
transaction
36
Intangible Assets
Leasehold
improvements
Where tenant has
made
modifications to a
building
• Capital expenditure on leased premises
to be amortised over useful life to the
tenant or the life of the lease, whichever is
shorter.
• Amortisation is like depreciation- where the
cost is allocated over the useful life of the
intangible asset.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
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Intangible Assets
• Cost of obtaining asset should be capitalised.
• Amortised over remaining useful life to entity
or statutory life, whichever is shorter.
• Internally generated assets cannot be
recognised.
Patents,
trademarks and
copyright
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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A patent is a
monopoly licencegives holder
exclusive right
38
Intangible Assets
Goodwill
• Results when one firm purchases another for a
price that is greater than the fair market value of
assets acquired.
WHY PAY MORE?
• acquisition of future profits.
• excellent management, great location,
customer loyalty, unique product or service.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
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Intangible Assets
Goodwill
• Subject to impairment test each year.
• Must be purchased.
• Australian Accounting Standards do not
recognise internally generated goodwill.
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Intangible Assets
Amortisation - allocation of the cost of intangible assets
over their useful life. The process is similar to
depreciation.
Recent changes due to international harmonisation:
•
Most intangible assets are subject to an impairment test.
•
Expense associated with amortisation will become an
impairment loss.
•
Expense is recorded as a direct reduction in the carrying
value of the intangible asset.
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Natural Resources
•Total cost, including exploration, rights and
development, is capitalised.
• Extracted from the natural environment
and reported at cost less accumulated
depletion.
• Examples: oil, coal, iron ore, gas
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PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Natural Resources
Depletion is the term
used to refer to the
allocation of the cost of
natural resources over
their useful life.
It is usually recognised
on a units-of-production
basis.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
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Other Non-current Assets
Long-term investments
Loans receivables (with maturities
more than a year after the balance
sheet date).
When these assets become current,
they will be reclassified to current
assets.
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn
PowerPoint presentation prepared by John Tretola
44