Professional Accounting Education Provided by Academy of Professional Accounting (APA) ACCA F3 Financial Accounting (FA) 财务会计第十二讲 ACCA Lecturer: Carrie NI ACCAspace 中国 ACCA 特许公认会计师教育平台 Copyright ACCAspace.com
D4-D5: Tangible Non-Current Assets Non-current assets (NCA) and current assets (CA) Capital and revenue expenditure Property, plant and equipment Depreciation accounting Revaluation of non-current assets Non-current asset disposals Disclosures in financial statements The asset register 2
NCA & CA Non-current assets are assets that are bought by the business for use in the long term. Non-current assets include tangible assets and intangible assets. Current assets are assets that will be realised, consumed or sold in the normal operating cycle of the business or are assets held primarily for trading. Current assets are assets which will be converted into cash in the near future (in the short term). 3
Capital and Revenue Expenditure Expenditure by a business can be classified as either capital expenditure or revenue. Capital expenditure Capital expenditure results in the acquisition of noncurrent assets, or an improvement in their earning capacity. Dr non-current assets (SOFP) Cr cash / payables 4
Capital and Revenue Expenditure Revenue expenditure Expenses Purchases Maintenance and repairs to non-current assets which do not result in extra capacity to earn income (e.g., painting and decorating) Dr expense (P/L) Cr cash / payables 5
Capital and Revenue Expenditure Learning example Which of the following is an example of capital expenditure? A. The replacement of carpets in a hotel B. The purchase of a chair for resale by a furniture shop C. The replacement of the front door of an office block D. The installation of extra shelving units in a book shop 6
PPE Definition Property, plant and equipment (PPE) are tangible assets that: Are held by an entity 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. 7
PPE Initial measurement Tangible non-current assets should initially be recorded at cost (IAS 16) Cost includes: Purchase price: excluding sales tax and trade discounts but including import duties. Directly attributable costs to bring the asset to its intended location and ready to use. These include: Initial delivery and handling costs Installation and assembly costs Costs of testing whether the asset is working properly Professional fees 8
PPE Initial measurement cont d The following costs may not be included: a) The cost of maintenance contracts b) Administration and general overhead costs c) Staff training costs The asset can then be kept at cost and depreciated or the entity may choose to revalue its tangible non-current assets. 9
PPE Subsequent expenditure is added to the carrying amount of the asset only when subsequent expenditure on an asset improves the condition of the asset beyond the previous performance, such as modification of an item to extend its useful like, upgrade of machine to improve the quality of output, adoption of a new production process leading to large reductions in operating costs Normal repairs and maintenance on property, plant and equipment items merely maintain or restore value, they do not improve or increase it, so such costs are recognised as an expense when incurred. 10
PPE Learning example Arthur buys a new machine for his factor at a cost of $23,000. He also incurs the following costs: $200 to have the machine delivered $115 import duties with regard to the machine $1,000 to have the floor releveled to accommodate the machine $3,000 for a 3 year maintenance contract What amount should be capitalised as a non-current asset in Arthur s statement of financial position? A. $23,200 B. $23,315 C. $24,315 D. $26,315 11
Depreciation Accounting Definition of depreciation the systematic allocation of the depreciable amount of an asset over its useful like. (Accruals Concept) Depreciation results in the non-current asset being systematically charged to profit or loss over several accounting periods in recognition of the fact that the asset will contribute to the income-generating activities of each of these periods. 12
Depreciation Accounting Dual effect Depreciation has a dual effect which needs to be accounted for: It reduces the value of the asset in the statement of financial position. It is an expense in the statement of profit or loss. The asset remains at its original cost in the asset account. Two accounts are set up to record depreciation: Dr Depreciation expense Cr Accumulated depreciation 13
Depreciation Accounting Accumulated depreciation account a) Used to provide for the reduction in the value of the asset. b) Reduces original cost of the asset on the statement of financial position. (The balance on the account is offset against the cost account for the corresponding asset.) c) Separate account kept for each class of asset (e.g., motor vehicles, buildings, plant and machinery). 14
Depreciation Accounting Depreciable amount = cost / revalued amount residual value. Residual value = the amount the asset is expected to be sold for at the end of its useful like (scrap value). Land normally has an unlimited useful life and is therefore not depreciated. Buildings have a limited life and, therefore, are depreciable assets. 15
Depreciation Accounting There are two main methods for calculating depreciation: a) Straight line method b) Reducing balance method 16
Depreciation Accounting Straight line method The depreciation charge is the same every year. Formula Depreciation = [(cost residual value) / useful life] or = (cost residual value) x %, Where residual value is the expected proceeds/scrap value at the end of the asset s useful life, and useful life is the number of years the business expects to make use of the asset. This methods is suitable for assets which are used up evenly over their useful life. 17
Depreciation Accounting Straight line method cont d Learning example A business which has an accounting year which runs from 1 January to 31 December purchases a new non-current asset on 1 April 20x1, at a cost of $24,000. The expected life of the asset is 4 years, and its residual value is nil. What should be the depreciation charge for 20x1. 18
Depreciation Accounting Straight line method cont d Solution The annual depreciation charge will be $24,000 / 4 years = $6,000 per annum However, since the asset was acquired on 1 April 20x1, the business has only benefited from the use of the asset for 9 months instead of a full 12 months. It would therefore seem fair to charge depreciation in 20x1 of only: 9 / 12 x $6,000 = $4,500 19
Depreciation Accounting Reducing balance depreciation This method is suitable for those assets which generate more revenue in earlier years than in later years; under this method the depreciation charge will be higher in the earlier years and reduce over time. Formula Depreciation = Depreciation rate (%) x Net Book Value (NBV), Where Net Book Value = cost accumulated depreciation to date 20
Depreciation Accounting Learning example A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis. Required Calculate depreciation expense, accumulated depreciation and net book value of the asset for the first three years. 21
Depreciation Accounting Solution NBV b/d Depreciation Depreciation Accumulated NBV c/d Rate Expense Depreciation $ $ $ $ Year 1 (6,000 0) x 40% 2,400 2,400 3,600 Year 2 (6,000 2,400) x 40% 1,440 3,840 2,160 Year 2 (6,000 3,800) x 40% 864 4,704 1,296 22
Depreciation Accounting Changes in expected useful life or residual value of an asset Learning example 11.x1 Asset cost $40,000 Estimated useful like 5 years No residual value 1.1.x3 Total useful life revised to 4 years Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset s life (year end 31 December) 23
Depreciation Accounting Solution Year Depreciation Accumulated NBV Charge Depreciation $ $ $ 20x1 40,000/5 = 8,000 8,000 32,000 20x2 40,000/5 = 8,000 16,000 24,000 20x3 24,000/2 = 12,000 28,000 12,000 20x4 24,000/2 = 12,000 40,000 0 40,000 24
Depreciation Accounting Change in depreciation method The depreciation method should be reviewed at least every financial year-end and, if there has been a significant change in the expected pattern of the asset s use, the method should be changed. This is achieved by writing the net book amount off over the remaining useful life, using the revised method. 25
Depreciation Accounting Learning example 1.1.x1 Asset cost $40,000 Residual value $1,500 Useful life 5 years Depreciation: 25% reducing balance 1.1.x3 Change depreciation method to straight line Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset s life (year ended 31 December) 26
Depreciation accounting Solution Year Depreciation Accumulated NBV Charge Depreciation $ $ $ 20x1 40,000 x 25% 10,000 10,000 30,000 20x2 30,000 x 25% 7,500 17,500 22,500 20x3 (22,500 1,500) / 3 7,000 24,500 15,500 20x4 7,000 31,500 8,500 20x5 7,000 38,500 1,500 38,500 27
Revaluations If an entity owns a property it may notice that its value increases over time. IAS 16 requires tangible non-current assets to initially be recorded at cost. The entity can then either keep the asset at cost (or depreciate it) or choose to revalue it (depreciation is still required). This is a choice of accounting policy. If an entity chooses a policy of revaluation then all items in the same class of assets must be revalued. Examples of classes of assets are: Land and buildings Plant and machinery Motor vehicles 28
Revaluation Revaluations must be carried out sufficiently often so that the assets carrying value is not materially different from its market value. Revaluation upward Steps and accounting treatment a) Adjust cost account to revalued amount. b) Remove accumulated depreciation charged on the asset to date. c) Put the balance to the revaluation reserve. Note: the balance posted to the revaluation reserve will equal the new revalued amount less the previous net book value. 29
Revaluation Revaluation upward A revaluation is record as follows Dr Non-current asset (revalued amount less original cost) Dr Accumulated depreciation (total depreciation to date) Cr revaluation surplus (revalued amount less CV) Revaluation surplus = part of the capital section of a company s SOFP. The gain cannot be recorded in the profit or loss because it is not realised in the form of cash. Instead it is recognised in the statement of profit or loss and other comprehensive income, as other comprehensive income. From here, the gain is transferred to a revaluation surplus, part of capital in the SOFP. 30
Revaluation Excess depreciation Debit Depreciation expense (P/L) Credit Accumulated depreciation account (SOFP) To record the new depreciation charge Debit Revaluation surplus (SOFP) Credit Retained earnings (SOFP) To record the transfer of the excess depreciation 31
Revaluation Learning example Gusna Co. purchased a building on 31 December 20x1 for $750,000. At the date of acquisition, the useful life of the building was estimated to be 25 years and depreciation is calculated using the straight-line method. At 31 December 20x6, an independent valuer valued the building at $1,000,000 and the revaluation was recognised in the financial statements. Gusna s accounting policies sate that excess depreciation arising on revaluation of non-current assets can be transferred from the revaluation surplus to retained earnings. 32
Revaluation Learning example cont d What is the depreciation charge on the building for the year ended 31 December 20x7 A. $40,000 B. $50,000 C. $30,000 D. $42,500 33
Revaluation Learning example cont d What is the journal entry to record the transfer of excess depreciation from the revaluation surplus to retained earnings? A. Dr Revaluation surplus $20,000; Cr Retained earnings $20,000 B. Dr Revaluation surplus $12,500; Cr Retained earnings $12,500 C. Dr Retained earnings $20,000; Cr Revaluation surplus $20,000 34
Non-Current Assets (NCA) Disposal Profit or loss on disposal A non-current asset is ultimately disposed of, normally at a profit or a loss. On disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than the carrying value of the asset. If proceeds > CV = profit If proceeds < CV = loss 35
NCA Disposal Accounting treatment Everything to do with the disposal is transferred to a Disposal Account. Steps: 1. Eliminate cost DEBIT Disposals CREDIT Non-current assets 2. Eliminate accumulated depreciation DEBIT Accumulated depreciation CREDIT Disposals 36
NCA Disposal 3. Account for sales proceeds DEBIT Cash CREDIT Disposals Or if part exchange deal DEBIT Non-current assets CREDIT Disposals With part exchange value 4. Transfer balance on disposals account to profit or loss Note: steps 1 and 2 have effectively transferred the NBV of the asset to the disposal account. 37
NCA Disposal The disposals T account is a statement of profit or loss account which reveals the profit or loss on disposal as a balance figure: Disposals Cost of NCA 2,000 Profit (bal fig) 200 AD 500 Proceeds 1,700 2,200 2,200 Disposals Cost of NCA 2,000 A gain on disposal is shown in the statement of profit or loss as sundry income, a loss as an expense. 2,000 AD 500 Proceeds 1,000 Loss Beta 500 2,000 38
NCA Disposal Learning example A non-current asset was purchased for $20,000 on 30 June 20x4. It had an estimated residual value of $2,000 and a useful life of 10 years. On 1 July 20x7, the asset was sold for $15,000. What is the effect of this disposal on the statement of profit or loss? A. $400 profit B. $3,000 loss C. $3,200 loss D. $1,000 profit 39
NCA Disposal Part exchange allowance Instead of receiving sales proceeds as cash, a part exchange allowance could be offered against the cost of a replacement asset: Dr New asset cost Cr Disposal account The part exchange allowance takes the place of proceeds in the disposals account. 40
NCA Disposal Part exchange allowance Learning example A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis. The machine was sold in year 3. No depreciation is charged in the year of disposal. There is part exchange allowance of $3,000 on a replacement machine costing $10,000. Required a) Calculate the profit or loss on disposal of the machine. b) Calculate the amount of cash paid for the new machine. c) Complete the ledger accounts to show both the disposal and the acquisition. 41
NCA Disposal Solution a) The profit on disposal is $840. b) Cash paid for the new machine is $7,000 ($10,000 - $3,000) $ Bal b/d 6,000 Old machine (SOFP) $ a) Disposal account 6,000 Accumulated depreciation (SOFP) $ b) Disposal account 3,840 $ Bal b/d 6,000 42
NCA Disposal New machine (SOFP) $ c) Disposal account 3,000 Cash 7,000 10,000 Bal b/d 10,000 $ Bal c/d 10,000 10,000 $ a) Machine 3,000 Profit on disposal 840 6,840 Disposal account (I/S) $ c) New machine (part exchange) 3,000 b) Accumulated depreciation 3,840 6,840 43
Disclosure The following format is commonly used: Cost or valuation Total $000 Land and buildings $000 Plant and equipment $000 At 1 January 20x7 160 100 60 Revaluation surplus 20 20 ---- Additions in year 50 30 20 Disposals in year (45) (15) 30 At 31 December 20x7 185 135 50 Depreciation At 1 January 20x7 30 20 10 Charge for year 7 5 2 Eliminated on disposals (3) ---- (3) At 31 December 20x7 34 25 9 Carrying value At 31 December 20x7 151 110 41 At 1 January 2x07 130 80 50 44
Disclosure IAS 16 requires a reconciliation of the opening and closing carrying amounts of non-current assets to be given in the notes to the financial statements. Other disclosure required include: The valuation bases used for determining the amounts at which depreciable assets are stated, along with the other accounting policies. Depreciation methods used Useful lives or the depreciation rates used Total depreciation allocated for the period Gross amount of depreciable assets and the related accumulated depreciation at the beginning and end of the period 45
Disclosure For revalued assets, some additional disclosure is also required: Basis used to revalue the assets Effective date of the revaluation Whether an independent valuer was involved Carrying amount of each class of property, plant and equipment that would have been included in the financial statements had the assets been carried at cost less depreciation. Revaluation surplus, indicating the movement for the period and any restrictions on the distribution of the balance to shareholders. 46
The Asset Register Purpose and function of an asset register The asset register is separate from the nominal ledger and contains much more detail about the assets owned by the business. Its main use is as an internal control, to make sure that the information about non-current assets reported in the nominal ledger (and therefore the financial statements) is accurate and correct. The asset register can be used as an internal control by regularly reconciling the net carrying amounts of all the assets on the asset register with the net carrying amount of non-current assets recorded in the nominal ledger. 47
Summary 48
Professional Accounting Education Provided by Academy of Professional Accounting (APA)