ACC100 Introduction to Accounting

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1 ACC100 Introduction to Accounting

2 Week 8 Accounting for Non-Current Assets Chapter 15 Non-Current Assets: Revaluation, Disposal and Other Aspects Study Group Australia Pty Limited, SGA1286-F2/10/12 2

3 Learning Outcomes On completion of this session, you should be able to: ability to account for NCAs over time particularly in relation to overhauls, repairs, revaluation and disposal identify and explain intangible assets and goodwill. Study Group Australia Pty Limited, SGA1286-F2/10/12 3

4 Accounting Principles Last week we looked at accounting rules for the cost of Non- Current Assets (NCA) and their linked depreciation. This week we look at accounting rules concerning revaluation and disposal methodologies for NCA. Particular issues will be looked at: Subsequent costs, overhauls, repairs, revaluation and disposal Additionally we identify and explain intangible assets and goodwill.

5 Subsequent Costs Additional costs after acquisition Repairs Maintenance Improvements Modifications Need to consider impact on useful life/future economic benefits. 5

6 Subsequent Costs Day-to-day Maintenance Day-to-day repairs and maintenance are expensed Jun 6 Repairs and Maintenance Expense 670 GST Outlays 67 Cash at Bank 737 Repairs on delivery truck 6

7 Subsequent Costs - Overhauls An overhaul results in a change in the cost base of the asset. Accumulated depreciation to date should be reversed against the asset at date of overhaul. The annual depreciation charge must be re-calculated based on the new carrying value of the asset and any re-estimates of residual value and useful life after the overhaul is completed. 7

8 Subsequent Costs Overhauls example Assume the following example: initial cost of van = $34 000, original est. residual value = $4 000 and original useful life = 5 years. Have used van for 4 years prior to overhaul Accumulated depreciation = (( )/5)* 4 years) = Instal a new engine for $4500 Disposal costs of old engine of $500 Assume overhaul changes residual value to $2 000, and extends useful life to a further 3 years from the date of the overhaul. 8

9 Subsequent Costs Overhauls Example Jul 4 Accumulated Depreciation Delivery Van Reversing accumulated depreciation Jul 4 Delivery Van GST Outlays 450 Cash at Bank Installation of a new engine Jul 4 Expense on Disposal 500 Delivery Van 500 Disposal of old engine 9

10 Subsequent Costs Overhauls Example Cost base is now = Recalculated depreciation charge = = $4 000 per year 10

11 Property And Plant Records : Asset register Subsidiary ledger for each individual NCA provides information such as: Original cost Depreciation rate, depreciation per year, accumulated depreciation Location, Servicing and maintenance information Insurance claim information in event of loss or accident Divided into functional groups with separate asset and accumulated depreciation accounts for each group Land Buildings Equipment, etc 11

12 Disclosure Of Property, Plant And Equipment XX LTD Balance Sheet (partial) as at 30 June. Non-current assets Property, plant and equipment Land (at cost) $ Buildings (at cost) $ Less: Accumulated depreciation Plant and equipment (at cost) Less: Accumulated depreciation $

13 The Revaluation Model (Chapter 15) After acquisition of property, plant and equipment an entity must adopt either the cost or revaluation model. Under the revaluation model an asset must be re-valued to its fair value each accounting period. May be a revaluation increase or decrease. Model must be applied to entire class of assets (eg plant and machinery, land and buildings, motor vehicles). 13

14 Initial Revaluation Increments Increase is initially recognised in other comprehensive income Not included in profit for the period. Rather it will be shown as an increase in a reserve (revaluation reserve) At the end of the period it is closed to the revaluation surplus account A reserve account an equity account. For depreciable assets, existing depreciation is written off before revaluation upward. 14

15 Example Initial Revaluation Increments Assume that Garden Landscaping has two non-current assets on 31 December NON-CURRENT ASSETS Property Plant and Equipment Land (at cost) $ Motor vehicle (at cost) $ Less: Accumulated depreciation The entity uses a revaluation model and has established a fair value of $ for the land and $ for the motor vehicle 15

16 Example Initial Revaluation Increments General Journal Dec 31 Land Gain on Revaluation Land (OCI) (Revaluation increase on land) Accumulated Depreciation Motor Vehicle Motor Vehicle (Write back accumulated depreciation) Motor Vehicle Gain on Revaluation Motor Vehicle (OCI) (Revaluation increase on motor vehicle) 16

17 Example Initial Revaluation Increments General Journal Dec 31 Gain on Revaluation Land (OCI) Gain on Revaluation Motor Vehicle (OCI) Other Comprehensive Income Summary (Transfer of OCI gains) Other Comprehensive Income Summary Revaluation Surplus (Transfer of OCI to appropriate reserve) 17

18 Initial Revaluation Decrements Occur only when carrying amount exceeds fair value Decrease carrying value of asset Decrease must be recognised as an expense, which reduces profit NOTE: Different treatment to where FV> cost 18

19 Example Initial Revaluation Decrements Assume that Garden Landscaping has two non-current assets on 31 December NON-CURRENT ASSETS Property Plant and Equipment Land (at cost) $ Motor vehicle (at cost) $ Less: Accumulated depreciation The entity uses a revaluation model and has established a fair value of $ for the land and $ for the motor vehicle 19

20 Example Initial Revaluation Decrements General Journal Dec 31 Expense on Revaluation of Land (P/L) Land (Revaluation decrease on land) Accumulated Depreciation Motor Vehicle Expense on Revaluation of Motor Vehicle (P/L) Motor Vehicle (Revaluation decrease on motor vehicle) 20

21 Subsequent revaluation Increases And Decreases Subsequent fair value increases (decreases) must be offset against previous decreases (increases). Subsequent decreases in value: To the extent of any credit balance existing in the revaluation surplus (reserve), first recognise as a decrease in other comprehensive income (OCI) (reverse existing reserve). Additional decreases (over and above reserve value) are expensed. Subsequent increases are first recognised in profit and loss to the extent that it reverses any previously recognised revaluation expense, additional amounts are recognised in OCI (to the reserve). 21

22 The Impairment Test Many non-current assets are subject to impairment testing under AASB136. Where the carrying amount exceeds recoverable amount, the asset must be written down to recoverable amount. Assets accounted for under cost model - Impairment loss Assets accounted for under revaluation model - Revaluation decrease 22

23 Derecognition Of Non-current Assets: scrapping Scrapping of non-current assets - No longer useful Example 1: scrap fully depreciated asset Jul 2 Accumulated Depreciation Machinery Machinery Scrapped a fully depreciated machine Example 2: scrap partially depreciated asset Jul 2 Accumulated Depreciation Machinery Loss on Disposal of Machinery 500 Machinery Scrapped a partially depreciated machine 23

24 Derecognition Of Non-current Assets: scrapping Example 3: scrapped partially depreciated asset and incurred disposal costs of $400 + GST Jul 2 Accumulated Depreciation Machinery loss on Disposal of Machinery 900 GST Outlays (asset) 40 Machinery Cash at Bank 440 Note that the loss consists of the carrying value plus disposal costs = =900 24

25 Derecognition Of Non-current Assets: sale Proceeds recorded at the gross amount received (income). Carrying value represents expense for the period. The difference represents a net gain or loss on sale and recorded in profit and loss. Gains recognised as other income - not revenue ( separated) Losses recognised as expense Must remove the asset value and accumulated depreciation value from the accounts. 25

26 Example Sale Of Non-current Assets Example 1: Machine with carrying amount of $8600 sold for $9300 (ignore GST) (Note net gain of $700) General Journal Feb 1 Cash Proceeds from Sale of Machinery (Gross proceeds from sale) Carrying Amount of Machine Sold Accumulated Depreciation Machinery Note net gain of $700 Machinery (Recognition of expense of machine sold) 26

27 Example Sale Of Non-current Assets Example 2: Machine with carrying amount of $8600 sold for $8200 (ignore GST) (Note loss of $400 which is the proceeds less carrying value) General Journal Feb 1 Cash Proceeds from Sale of Machinery (Gross proceeds from sale) Carrying Amount of Machine Sold Accumulated Depreciation Machinery Machinery (Recognition of expense of machine sold) Note net loss of $400 27

28 Derecognition Of Revalued Assets Sale treated as outlined in previous slide Revaluation Surplus remains in accounts Cannot be transferred to profit May be transferred to: - Retained earnings - Owner s capital account - General reserve May be left untouched Pay out the surplus as a cash or share dividend 28

29 Exchanging Non-current Assets Record disposal of old asset Record acquisition of new asset Trade-in amount is treated as income Difference between income and expense components represents net gain or loss on disposal of old asset. 29

30 Example - Exchanging Noncurrent Assets A trade-in allowance for an old asset is deducted from the price of the new asset, and balance is paid. Feb 1 Machinery (new machine) Cash at Bank Proceeds from Sale of Machinery (P&L) Exchange of new machine for trade-in of $4000 and payment of $ Feb 1 Carrying Amount of Machinery Sold (P&L) Acc. Depreciation Machinery Machinery (old machine) Recognition as an expense the carrying amount of the machine traded-in 30

31 Intangible Assets AASB 138: An identifiable non-monetary asset without physical substance Identifiable e.g. patents, trademarks, brand names Unidentifiable Goodwill Separately acquired intangibles Can only be recognised if cost of asset can be measured reliably Similar treatment to PPE assets Internally generated intangibles Much more stringent tests before allowed to recognise in the books Few likely to satisfy criteria even though may be quite valuable. 31

32 Intangible Assets Amortisation Allocation of depreciable amount of intangibles to periods benefiting from their use. Method must reflect pattern in which asset s future economic benefits are consumed by the entity. No amortisation if intangible asset has indefinite life. Must test asset for impairment each period. 32

33 Intangible Assets Patents and research and development costs A patent is an exclusive right to produce and sell a particular product for a period of 20 years In reality, most R&D costs charged to expense as incurred (i.e. not asset). Copyrights An exclusive right to reproduce and sell an artistic or published work (life + 70 years). 33

34 Intangible Assets Trademarks and brand names Main cost lies in advertising which should be charged to expense when incurred Internally generated trademark or brand name cannot be recognised as asset. Franchises Right granted by a company to conduct business at a specific location Initial cost should be capitalised and amortised over shorter of term of franchise or useful life. 34

35 Goodwill AASB 3 Business Combinations Future benefits from unidentifiable assets Non-current asset Purchased vs. generated goodwill. Reassessment on regular basis. 35

36 Summary On completion of this session, you should now be able to: Be able to differentiate between different classes of non-current assets (NCA) Be able to account for NCAs over time particularly in relation to overhauls, revaluation, impairment and disposal. Study Group Australia Pty Limited, SGA1286-F2/10/12 36

15/10/2015. The nature of PP&E. Initial recognition of PP&E. Chapter 7. Property, Plant & Equipment

15/10/2015. The nature of PP&E. Initial recognition of PP&E. Chapter 7. Property, Plant & Equipment Chapter 7 Property, Plant & Equipment Prepared by Emma Holmes The nature of PP&E AASB 116 defines property, plant & equipment (PP&E) as: tangible items Tangible vs. intangible distinction discussed in