Tangible Non-Current Assets: Learning Objectives

Session 8: Tangible NCA
Tangible
Non-Current Assets
oSession 8
AC2091: Financial Reporting
Learning Objectives
• Discuss tangible non-current assets owned by
entity
• Explain the implications of revaluation on
interpretation of the financial statements
• Appreciate accounting for investment
property as distinct from accounting for
property more generally
1
Definition of Assets
• Asset
o a resource controlled by the enterprise as a result of
past events and from which future economic
benefits are expected to flow to the enterprise [IASB
Conceptual Framework]
o Recognition criteria:
Probable
Reliable Recognition
flow of
measurement in Financial
economic
of cost Statements
benefits
Tangible Non-Current Assets

• Property, plant & equipment are tangible
assets that:
o are held for use in
, for rental to
others, or for administrative purposes; and
o are expected to be used during
. [IAS 16]
• Examples include land, buildings, machinery,
motor vehicles, furniture & fixtures and office
equipment
2
Measurement of
• Property, plant and equipment that qualifies
for recognition as an asset shall be measured
at its cost
• Components of costs:
Directly
Purchase Restoration
Attributable Cost of PPE
Price # Costs
Costs
# Includes import taxes and non-refundable purchase taxes
Measurement of
• Directly attributable costs
o Costs of bringing asset to the
of operating in
the manner intended by management, including:
 initial
delivery & installation, site preparation, testing costs,
professional fees
• Restoration costs
 Estimate of unavoidable costs of
the item and restoring site to original condition
3
Measurement of
• Costs not included in the cost of property,
plant & equipment include:
o Costs of opening a new facility;
o Costs of introducing a new product or service
(including costs of advertising and promotional
activities)
o Costs of conducting business in a new location or
with a new class of customer (including costs of
staff training)
o Administration and other general overhead costs
Measurement of
• Recognition of costs ceases when the item is in
the location and condition necessary for it to
be capable of operating in the manner
intended by management
o Costs incurred in using or redeploying an item are
not included in the carrying amount, such as:
 initialoperating losses, such as those incurred while demand
for the item’s output builds up
 costs of relocating or reorganising part or all of an entity’s
operations
4
Measurement of
• Self-constructed assets
o Business can construct their own assets such as
office building, equipment etc.
o Same principles for measuring the cost of acquired
assets are applicable
o If similar assets are made for sale in the normal
course of business, asset cost will be its cost of
production under IAS 2 Inventories
10
Measurement of
• Measurement of costs
o Cost of an item of property, plant and equipment is
the at the
recognition date.
o If payment is deferred beyond normal credit terms,
the difference between the cash price equivalent
and the total payment is recognised as interest over
the period of credit unless such interest is
capitalised in accordance with IAS 23
5
11
Measurement of
• Measurement of costs
o Exchange of one non-monetary asset for another
 Costof such an item of property, plant and equipment is
measured at fair value unless
a) the exchange transaction lacks commercial substance or
b) the fair value of neither the asset received nor the asset given up
is reliably measurable.
 Ifthe acquired item is not measured at fair value, its cost is
measured at the of the
asset given up
12
Measurement of
• Borrowing Costs (IAS 23)
o An entity shall capitalise borrowing costs that are
to the acquisition,
construction or production of a
as part of the cost of that asset
o Other borrowing costs expensed off in the period
incurred
6
13
Measurement of
Assumption Description
Qualifying asset  Asset that necessarily takes a
to get ready for its intended use or sale

Borrowing costs  Interest & other costs incurred in
connection with the borrowing of funds
Directly attributable  Costs that would have been avoided if
the expenditure on the qualifying asset
had not been made
 Funds borrowed specifically for the
purpose of obtaining a particular
qualifying asset
14
Measurement of
• Borrowing Costs (IAS 23)
o Capitalisation should commence when:
Expenditure on asset is incurred
Borrowing costs are incurred
Activities are undertaken to prepare the asset for its
intended use or sale
o Capitalisation should end when substantially all the

activities to prepare asset for its intended use or sale
are complete
7
15
Measurement of
• Subsequent expenditure
o Costs incurred to
. Includes:
 Modification in
order to extend useful life
 Upgradeso as to improve output quality
 New production process to reduce costs
o Added to carrying amount of non-current asset

 Has to fall into initial cost criteria to be capitalised
o Costs incurred to restore asset to its original

condition or performance standard is written off to
the income statement as expense
16
Measurement after Recognition

• Measurement of expenditure after recognition
Subsequent
measurement
Cost model Revaluation model
Asset carried at cost less Asset carried at revalued

depreciation and any amount (i.e. fair value less
accumulated impairment subsequent depreciation
loss and impairment loss)
8
17
Cost Model
• Depreciation
o Systematic
 Periodic recording of the cost of fixed assets to expense

o Depreciable amount is the cost of an asset, or other
amount substituted for cost, less its residual value
o Residual value of an asset is the estimated amount
that an entity would currently obtain from disposal
of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in
the condition expected at the end of its useful life
18
Cost Model
• Depreciation
o Useful life is
 period over which an asset is expected to be available for use
by an entity; or
 number of production or similar units expected to be
obtained from the asset by an entity
o Useful life of property, plant and equipment is
reviewed at least at each financial year end
 Depreciation charge for current and future periods to be
adjusted in event of changes in expectations
9
19
Cost Model
Physical Obsolescence
Wear & Tear
Expected Limits on use

Usage of asset (e.g.
legal)
Factors in
estimating
Useful Life
20
Cost Model
• Depreciation method used should reflect the
pattern in which asset’s economic benefits are
consumed by business entity
• Depreciation charge should be recognized as
expense in each period unless it is included in
the carrying amount of another asset
• Depreciation method should be
and reviewed at least at each
year end
10
21
Depreciation
Depreciation
Methods
Diminishing Units
Straight Line
Balance of Production
Accounting treatment:
Dr [SCI]
Cr [SFP]
22
Depreciation Methods
Method Formulae for Annual Depreciation
Straight Line  (Cost – Residual Value) / Useful Life
Reducing Balance  1 – (Residual Value/Cost)1/n

[where n = expected useful life]
OR
 Depreciation rate x Net Book Value (NBV)
Units  (Cost – Residual Value) X Period’s
of Production Output/Total Expected Output
11
Illustration 1: Cost & Depreciation 23
a) A machine was purchased on 1 January 2012.

Details of the payments made are as follows:
$
List price of machine 60,000
Delivery costs 2,000
Installation costs 1,500
Insurance coverage till 31 December 2012 1,200
Trade discount given 5,300
1 year maintenance contract 2,800
Customs and other taxes 1,400
Determine the cost of the machine that should

be reflected in the company’s financial
statements and explain why certain payments
made are excluded from the asset cost.
24
Illustration 1: Cost & Depreciation
b) An equipment was acquired on 1 Jan
2012 and requires 1 year to be ready
for use. It has a useful life of 10 years
and no residual value. Costs incurred
in developing the asset were $60,000.
Depreciation is charged using the
straight-line method.
In addition, a 2-year bank loan of
$50,000 was taken on 1 Jan 2012 to
finance the purchase. Interest is
payable at year-end at 5% per annum.
Discuss the relevant accounting
treatment for 2012 and 2013.
12
25
c) A vehicle was acquired on 1 Jan 2012. The
following terms were offered by the
vendor:
 Cash price is $60,000
 $72,600 if paid on 31 Dec 2013
Due to cashflow issues, the company has
decided to pay for the vehicle on 31 Dec
2013. The vehicle has a useful life of 8 years
and no residual value. Depreciation is
charged using the straight-line method.
Discuss the relevant accounting treatment
with relation to the asset purchase.
How would the answer differ if the machine
is under construction and would only be
ready and delivered on 31 Dec 2012?
26

d) A van was acquired on 1 January 2012
for $60,000.
Additional information:
• Useful life: 4 years
• Residual value: $12,000
• Total expected output in units = 10,000
Year Output
1 4,000
2 3,000
3 2,000
4 1,000
13
27

Required:
Calculate the annual depreciation charge for
years ended 31 December 2012 and 2013
using:
i) Straight line method
ii) Reducing balance method at 40% per annum
iii) Units of production method
28
Revaluation Model
• Non-current assets can be carried at a revalued
amount, being its fair value at the date of the
revaluation less any
.
o Fair value: amount for which an asset can be
exchanged between knowledgeable and willing
parties in an arm’s length transaction
• Revaluations shall be made with
14
29
Revaluation Model
• Depreciation is conducted and calculated in
the same way as the cost model
• If an item of property, plant and equipment is
revalued, the entire class of property, plant
and equipment to which that asset belongs
shall be revalued
• Class: grouping of assets of similar nature and use
in the entity’s operations (e.g. machinery, buildings)
30
Revaluation Model
• Increase in value
1) Increase shall be recognised in other
comprehensive income and accumulated in equity
under the heading of revaluation surplus
 First revaluation exercise

 Previous revaluation
resulted in surplus
Dr
Cr
15
31
Revaluation Model
• Increase in value
2) Increase shall be recognised in profit or loss to the
extent that it reverses a revaluation decrease of the
same asset previously recognised in profit or loss
 Previous revaluation resulted in

decrease in value recognised as
expense in income statement
Dr
Cr
32
Revaluation Model
• Decrease in value
1) Decrease shall be recognised in profit or loss
 First revaluation exercise

resulted in deficit
Dr
Cr
16
33
Revaluation Model
• Decrease in value
2) Decrease shall be recognised in other comprehensive
income to the extent of any credit balance existing
in the revaluation surplus in respect of that asset,
i.e. reduces the balance in the revaluation surplus
resulted in surplus
recognized in
revaluation surplus
Dr
Cr
34
Revaluation Model
Illustration of Asset Life using Revaluation Model
Purchase of asset
Depreciation
o Fair value = market value

Periodic revaluation o Determined by appraisal
to fair value normally undertaken by
professionally qualified
valuers
Depreciation (based
on revalued amount)
17
35
Illustration 2: Revaluation Model
UOL 2007 ZA Q4 (1)
Dolphin Plc entered into the following transactions
during the year ended 31 December 2006:
Revalued a building which had cost $600,000 on 1
January 2001 to $800,000 on 1 January 2006. The
building was depreciated using straight line
method at a rate of 5% per annum. The useful
economic life of the building remains unchanged.
Required:
Show how the above transaction is treated in the
final accounts of Dolphin Plc for the year ended 31
December 2006. Justify your treatment with
reference to accounting standards where applicable.
36
Disposal of Non-Current Assets

• Business may make gain or loss from
disposing of their non-current assets
Gain or Carrying
Net sales
loss from value of
price
disposal asset
Asset cost –
Price – Costs in making the sale Accumulated
depreciation
Recognised as income or expense in profit or loss
18
37
Illustration 3: Asset Disposal
Equipment acquired at cost of $10,000 was disposed
on 10 October of its eighth year of usage. It had
been depreciated at the rate of 10% on cost.
Accumulated depreciation as of the preceding 31
December is $7,000. It had no residual value.
Required:
Show the accounting treatment for the asset
disposal in the following scenarios:
a) Discarded at no cost nor received any proceeds
b) Sold for (i) $2,250; (ii) $1,000; (iii) $2,800
38
Government Grants (IAS 20)

• Assistance by government in the form of
transfers of resources to an entity in return for
past or future
relating to the operating activities of the entity.
Provision of economic benefits
Government
grants
Grants related to asset

Grants related to income
Primary condition is that entity
Any grant other than those
purchase, construct or acquire
related to asset
long-term assets
19
39

• Should only be recognised in entity’s books if
there is reasonable assurance that:
a) Entity will comply with conditions attached
b) Entity will receive the grants
• Grant is accounted for in the same manner
regardless of manner in which grant is
received (i.e. cash receipt or reduction in
liability to government)
40

• Accounting treatment
o Government grants shall be
on a systematic basis over the periods in which the
entity recognises as expenses the
for which the grants are intended to compensate
Comply with accrual concept
 Period when specific expenses incurred

o Depreciable assets – period when depreciation is
charged
o Non-depreciable assets - period when the cost of
meeting the obligations is incurred
 Amount allocation
o Same proportion as depreciation charged
20
41
Presentation in Financial Statements
Grants related to asset Grants related to income

• Statement of Financial • Income Statement
Position • Separate credit (e.g.
• Set up as deferred other income ) or
income account • Deduct from related
• Deduct grant amount expense
from asset’s carrying
value
42

• Disclosure requirements
o Accounting policy adopted
o Nature & extent of government grants recognised
o Unfulfilled conditions and other contingencies
attaching to recognised government assistance
21
43
Illustration 4: Government Grants

ACCA Past Year Question (Adapted)
Government grant representing 50% of cost of
depreciating asset purchased for $40,000. Residual
value is nil and useful life is 4 years.
Required:
Show the accounting treatment for the following
depreciation approaches:
a) 4 years using straight-line
b) 40% per annum using reducing balance
44
Investment Property (IAS 40)

• Property held to
o Property: land or building (including part of) or

both held by owner or lessee under finance lease
o Property is not:
 Used in production of goods or supply of services
 Used for administrative purposes
 For sale in the ordinary course of business
 Owner-occupied property
 Property leased to another entity under a finance lease
• Includes property being constructed or

developed for use as investment property in
the future.
22
45

• Recognition of investment property
Probable flow Reliable Recognition

of economic measurement in Financial
benefits of cost Statements
• Initial recognition
o Measured initially at its cost, including transaction
costs
46

• Measurement subsequent to initial recognition
Cost Model Fair Value Model
Measured at fair value

As in IAS 16 to reflect market
conditions
Changes in fair value

Depreciation charged
recognised in the profit
after initial recognition
or loss for the period
23
47

• Fair value model
o Price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction
between market participants
o Fair value of investment property should reflect
market conditions at the end of the reporting period
o A gain or loss arising from a change in the fair value
of investment property shall be
for the period in which it arises
48

• Measurement subsequent to initial recognition
o If fair value cannot be determined, cost model in
IAS 16 to be applied until investment property is
disposed. Residual value is assumed to be zero.
o Entity should not change from one model to
another unless the change results in a more
appropriate presentation
24
49

• Transfer to and from investment property
• Only made when there is a change in use
 E.g.
investment property used as owner-occupied property
(IAS 16) or sold as part of entity’s inventories (IAS 2)
Investment property to PPE/Inventory to

PPE/Inventory investment property
Depreciation charged till

Cost for subsequent
date of change and
accounting is its fair value
subsequently adopt fair
at the date of the change
value model
50

• Disposal of investment property
o Derecognise asset when disposed or permanently
withdrawn from use
o Difference between net disposal proceeds and
carrying amount results in gain or loss on disposal
o Gain or loss is recognised as income or expense
respectively in profit or loss
25
51
Illustration 5: Investment Property

Building has been classified as an investment property
using the fair value model to measure its carrying
amount in the financial statements.
Its carrying amount as at 1 January 2012 was $10m. Fair
value ascertained by valuer as at 31 December 2012 was
$15m.
Required:
a) Prepare the necessary journal entries relating to the
above change in fair value of the investment
property
b) How different would your solution be if the fair
value was $8 million as at 31 December 2012
instead?
52
Practice Questions
• What are “non-current tangible assets” and
“investment properties”? Discuss the differences in
the accounting treatment of “non-current tangible
assets” and “investment properties” and discuss how
the different accounting treatments affect the financial
statements (UOL 2011 ZA Q6a)
• Revalued a building which had cost $200,000 on 1

January 2001 to $500,000 on 1 January 2006. The
building was depreciated using straight line
depreciation at a rate of 10% per annum. The useful
economic life of the building remains unchanged.
Show how the revaluation will be treated in the final
accounts for the year ended 31 December 2006.
(Prelim Paper 2011)
26

Tangible Non-Current Assets: Learning Objectives

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Session 8: Tangible NCA

Tangible Non-Current Assets

# Includes import taxes and non-refundable purchase taxes

to get ready for its intended use or sale

o Capitalisation should end when substantially all the

o Added to carrying amount of non-current asset

o Costs incurred to restore asset to its original

Measurement after Recognition

Cost model Revaluation model

Asset carried at cost less Asset carried at revalued

 Periodic recording of the cost of fixed assets to expense

Expected Limits on use

Reducing Balance  1 – (Residual Value/Cost)1/n

Illustration 1: Cost & Depreciation 23

a) A machine was purchased on 1 January 2012.

Determine the cost of the machine that should

Illustration 1: Cost & Depreciation

Illustration 1: Cost & Depreciation

 First revaluation exercise

 Previous revaluation resulted in

 First revaluation exercise

o Fair value = market value

Disposal of Non-Current Assets

Recognised as income or expense in profit or loss

Government Grants (IAS 20)

Grants related to asset

Government Grants (IAS 20)

Government Grants (IAS 20)

 Period when specific expenses incurred

Government Grants (IAS 20)

Presentation in Financial Statements

Grants related to asset Grants related to income

Government Grants (IAS 20)

Illustration 4: Government Grants

Investment Property (IAS 40)

o Property: land or building (including part of) or

• Includes property being constructed or

Investment Property (IAS 40)

Probable flow Reliable Recognition

Investment Property (IAS 40)

Cost Model Fair Value Model

Measured at fair value

Changes in fair value

Investment Property (IAS 40)

Investment Property (IAS 40)

Investment Property (IAS 40)

Investment property to PPE/Inventory to

Depreciation charged till

Investment Property (IAS 40)

Illustration 5: Investment Property

• Revalued a building which had cost $200,000 on 1

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