HI5020 Corporate Accounting

Session 1b
Accounting for Assets

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 Session Objectives
•Understand what an Asset is and the various
classifications under AASB.
•Disclosure requirements to AASB 101
•Understand how to recognise costs
•Recognition issues
•Methods of recognising asset value
•Methods of accounting for assets
•Capitalisation of expenditure – subsequent to
acquisition
•Allocation of costs to individual items
•Deferred payments on acquisition
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 Acquisition of an Asset Using Fair Value
What if the asset, say land was paid for via the following:
A. Cash $200,000
B. Truck
Cost $150,000
Accumulated Depreciation $ 60,000
Market Value $ 75,000
C. Shares 5,000 shares with a market value of $8.00.

How much should the asset value be recorded at?

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 Acquisition of Fixed Asset
It is necessary to recognise the value of the
assets based on Fair Value (market value), not at
book value, so the assets would have a value of:
Truck $75,000
Shares $40,000
Plus of course the cash of $200,000

$200,000 + $75,000 + $40,000 = $315,000

Journal entries are shown on the next slide.

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 Recording the Acquisition
Recording of acquisition would be:
Dr. Cr.
Land 315,000
Accumulated depreciation - Truck 60,000
Loss on disposal of Truck 15,000
Cash 200,000
Share Capital 40,000
Truck 150,000
To record the purchase of land

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 In-class Worked Example
A machine purchased was paid for via the following:
A. Cash $350,000
B. Motor vehicle
Cost $45,000
Accumulated Depreciation $15,000
Market Value $25,000
C. Shares
3,000 shares with a market value of $4.50.
How much should the asset value be recorded at?
Prepare the journal entry for the transaction.

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 Solution
Dr. Cr.
Machine 388,500
Accumulated Depreciation 15,000
Loss on disposal 5,000
Cash 350,000
Share Capital 13,500
Vehicle 45,000
To record purchase of machine

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 Methods of Accounting for Assets
Three recognised method:
1. Historical-cost accounting – basis for
recognising the value of the asset on price
paid
2. Present-value accounting – basis for
recognising value of an asset based on net-
present value.
3. Market-value accounting – assets recorded at
net market value, any changes in value treated
as profit or loss from previous period.

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 Methods of Accounting for Assets (cont.)
Most companies in Australia favour the
historical method as it is easy to understand,
based on an actual costs and a measureable
reduction in value (pre-determined method and
rate of depreciation).
Whilst may have changed in recent years, a
survey in 1995 of CFO’s from “Group of 100”,
80% favoured historical cost, but it could be
assumed that little change has occurred.

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 Capitalisation of Expenditure - Asset
Earlier we discussed what costs could be
recognised as being part of an asset. Now we
will look at those costs subsequent to an
acquisition which would be considered.

Refer to worked example 4.4 (pp. 162-164).

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 Costs Associated with an Asset

What about costs for restoration and

dismantling once the asset has completed its
useful life?

Consider a mine. Dig the hole with a mining

machine but once the mine is exhausted, the
equipment needs to be dismantled, the land
restored to an approved level. These costs also
need to be considered.

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 Example: Libom Ltd.
Libom Ltd. purchase a drill for raw materials on 1/7/14. Cost
of drill is $3,455,000. Installation costs are the following:
Site access costs $1,548,000
Transportation of drill 330,500
Set-up 190,000
Licence/consent 854,900
Engineer’s fees 250,000
Total $3,173,400

Dismantling costs $ 110,500 (in 6 years time)

Site clean-up 1,749,000
Transport costs 285,000
Replacement-Flora 427,700
Total $2,572,200
Costs to be over life of the mine. Discount rate is 9%.

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 Example: Libom Ltd. (cont.)
We need to consider PV (Present value) of the
clean-up/removal costs and use the equation:
(1+i)yx +/-p
Total costs is $2,572,200 for clean-up in 6 years so
PV will be:
(1.09)yx +/-6 = 0.596267326
Using your Scientific Calculator 1/(1+k)^n
0.596267326 x $2,572,200 = $1,533,719
Why PV, because $1.00 in 6 years will have less
value than $1.00 today.

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 Example: Libom Ltd.
Libom Ltd. purchase a drill for raw materials on 1/7/14. Cost
of drill is $3,455,000. Installation costs are the following:
Site access costs $1,548,000
Transportation of drill 330,500
Set-up 190,000
Licence/consent 854,900
Engineer’s fees 250,000
Total $3,173,400

Dismantling costs $ 110,500 (in 6 years time)

Site clean-up 1,749,000
Transport costs 285,000
Replacement-Flora 427,700
Total $2,572,200
Costs to be over life of the mine. Discount rate is 9%.

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 Example: Libom Ltd. (cont.)
Dr. Cr.
Drill 8,162,119
Cash/Payables 6,628,400
Provision for Restoration 1,533,719
To record acquisition of drill and provision for restoration.

Let’s consider following accounting periods. What is the

interest expense and provision for restoration costs?
Remember the discount rate is 9%.

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 Example: Libom Ltd. (cont.)

Opening Interest
Date Balance (9%) Balance
1/7/14 1,533,719

30/6/15 1,533,719 138,035 1,671,754

30/6/16 1,671,754 150,458 1,822,212

30/6/17 1,822,212 163,999 1,986,211

30/6/18 1,986,211 178,759 2,164,970

30/6/19 2,164,970 194,847 2,359,817

30/6/20 2,359,817 212,383 2,572,200

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 Example: Libom Ltd. (cont.)
30/6/15 Journal
Interest expense 138,035
Provision for restoration 138,035
To record the interest expense on restoration of drill site
30/6/16 Journal
Interest expense 150,458
Provision for restoration 150,458
To record the interest expense on restoration of drill site.

Did you notice the balance in the final year matched the full
restoration amount ($2,572,200)?

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 Example: Libom Ltd. (cont.)

Opening Interest
Date Balance (9%) Balance
1/7/14 1,533,719

30/6/15 1,533,719 138,035 1,671,754

30/6/16 1,671,754 150,458 1,822,212

30/6/17 1,822,212 163,999 1,986,211

30/6/18 1,986,211 178,759 2,164,970

30/6/19 2,164,970 194,847 2,359,817

30/6/20 2,359,817 212,383 2,572,200

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 In-class Worked Example
PHB Ltd purchase a drilling rig for raw materials on 1/1/15. Cost of drill is
$5,125,000. Installation costs are:
Site access costs $1,998,000
Transportation of drill 472,500
Set-up 364,000
Licence/consent 773,600
Engineer fees 326,400
Total $3,934,500

Dismantling costs $ 243,650 (in 5 years time)

Site clean-up 2,204,715
Transport costs 289,000
Replacement-flora 388,700
Total $3,126,065
Costs to be over life of the mine. Discount rate is 7.5%.

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The End

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