Lecture notes – chapter 10

Non-current assets and depreciation

truongthihanhdung@uel.edu.vn
Topic list
1. Tangible NCA and depreciation IAS 16 Property, plant and equipment
2. The objective of Depreciation
3. Calculating depreciation
4. Accounting for depreciation
5. Non-current asset disposals
6. The asset register
7. Intangible NCA
8. The NCA note to the SFP

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Definitions
Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period. [IAS16.06]
An intangible asset is an identifiable non-monetary asset without physical substance.
 Common examples: computer software, patents, copyrights, motion picture films, customer
lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier
relationships, customer loyalty, market share and marketing rights. [IAS 38.08-09]
Practical aspects
Practical aspects
Practical aspects
IAS 16 Property, plant and equipment
IAS 16
 Recognition: Items of property, plant, and equipment should be
recognised as assets when it is probable that:
– it is probable that the future economic benefits associated with
the asset will flow to the entity, and
– the cost of the asset can be measured reliably. [IAS16.07]

Recognition Measurements Presentation Disclosures

Initial measurement
Initial measurement Subsequent measurement
Subsequent measurement
(at
(at recognition)
recognition) (at year end)
(at year end) 9
IAS 16 Property, plant and equipment
IAS 16
 Initial measurement – at cost
 Components of cost:
 Purchase price
 Delivery costs
 Stamp duty and import duties (and irrecoverable VAT on cars used in the business)
 Costs of preparing the site for installation and assembly of assets
 Professional fees, such as legal fee and architects’ fee
 Cost of testing whether the assets are functioning
 the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
 Subsequent expenditure: Capital expenditure vs Revenue expenditure – Link to chapter 1
— Capital expenditures: added to carrying amount (increase the asset useful life and capacity)
— Revenue expenditures: repairs and maintenance costs are expensed (book to expenses in P&L) (won’t increase
the asset useful life and capacity)

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Depreciation
Depreciation – is the systematic allocation of the depreciable amount of an asset
over its useful life [IAS16.06].
Common depreciation misconcepts:
a) It does not reflect the fall in value of an asset over its life.
b) It is not ―setting aside money‖ to replace the asset at the end of its useful life.
Even if the asset was not going to be replaced, its cost should still be
allocated over its useful life.

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Depreciation methods
Two methods in this course:
 Straight line method: We call it: depreciable amount
cost – RV
Depreciation =
useful life

RV = Residual value (Estimated scrap value of an asset at the end of its

economic or useful life)
 Reducing balance method:
Depreciation = Carrying value × % to be applied

US: Reducing balance rate = Starting with: Cost of the asset

double of straight line rate
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Note on Depreciation method in exam
1. Since straight – line depreciation is charged monthly, you should make the
monthly depreciation calculation in the exam.
2. In this course, with declining balance, you will not be concerned with the ass
ets’ residual value or how to compute the % of declining (they’re available).
3. Exam question wouldn’t include monthly depreciation for declining
balance method (full year depre for Declining method).
4. Entry for depreciation:
Dr Depreciation expenses (SPL)
Cr Accumulated depreciation (SFP)

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Depreciation
 Change in expected life
If after a period of an asset's life it is realised that the original useful life has
been changed, then the depreciation charge needs to be adjusted.
The revised charge from that date becomes (treat as Changes in estimates
 prospective application – ap dung phi hoi to – IAS 8):

Carrying value at revised date

Remaining useful life

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Methods of depreciation
Depreciation Methods

Straight line method Reducing balance method

Example in Excel practice

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DEPRECIATION METHODS (full example)
Illustration: Bob’s Florist purchased a small delivery truck on April 1, 2017.
Cost €13,000
Expected residual value €1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance.

LO 2
Impairment (IAS 36, Impairment of assets)
Impairment: occurs when the CA (carrying amount) of an asset exceeds its
RA (recoverable amount)
 CA: the amount at which an asset is recognised in the balance sheet after
deducting accumulated depreciation and accumulated impairment losses
 RA: the higher of an asset's fair value less costs of disposal* (sometimes
called net selling price) and its value in use
(*) Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was
referred to as 'fair value less costs to sell'.

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Impairment (IAS 36, Impairment of assets)
Fair value: the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (see IFRS 13 Fair Value Measurement) (this value
would be available in the exam)
Value in use: the present value of the future cash flows expected to be
derived from the asset or cash-generating unit.

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Reviewing and changing carrying amount:
fall in value (impairment loss)

Impairment loss = carrying amount – recoverable amount (IAS 36)

Journal Entry:
Dr Impairment expense/loss (SCI)
Cr CA of asset (SFP)

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Indications of impairment [IAS 36.12]
External sources:
ꟷ market value declines
ꟷ negative changes in technology, markets, economy, or laws
ꟷ increases in market interest rates
ꟷ net assets of the company higher than market capitalisation
Internal sources:
ꟷ obsolescence or physical damage
ꟷ asset is idle, part of a restructuring or held for disposal
ꟷ worse economic performance than expected
ꟷ for investments in subsidiaries, joint ventures or associates, the carrying amount is high
er than the carrying amount of the investee's assets, or a dividend exceeds the total com
prehensive income of the investee

Note: Impairment is the fall in value of NCA, completely different with Depreciation or
Amortisation definitions. 20
Example 1
A business purchased a building on 1/1/x1 at a cost of $100,000. The building had a 20 year
useful life. On 31/12/x5 the business undertook an impairment review and determined that
the building’s FV less disposal costs is now only $60,000 and Value in use is just $50,000
since property prices have fallen sharply and future trading prospects are poor. The value of
the building should be reduced accordingly in the FSs of the business for the 12-month
reporting period ended 31/12/x5.
Compute expenses regard the building in the year x5 and the CA of the building at 31/12/x6
?
--- Hint: remember 2 types of expenses related to NCA: Depreciation ex and
Impairment loss? Then total.

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Reviewing and changing useful life or
residual value after impairment
When an impairment loss is recognised, the asset’s remaining useful life and residual value should also be
reviewed and revised if approriate.
Example:
In 1/1/x1 Tiger buys a NCA for $120,000, with an estimated useful life of 20 years and no residual value. Tiger
depreciates its NCA on a straight line basis. Its reporting period is the 12 months ended 31 December.
Require:
a) On 31/12/x3 the remaining useful life is revised to 15 years from that date. Compute the resived
depreciation commencing 20x4.
b) On 31/12/x3 the remaining useful life is revised to 10 years from that date. An impairment review has
been carried out which shows that the FV less costs of disposal are $80,000 and the Value in use is
$95,000 as at 31/12/x3. Show how the impairment loss would be recognised in the FSs for the year
ended 31/12/x3 and compute the resived depreciation commencing 20x4.

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Derecognition
(retirements and disposals)

An asset should be removed from the statement of financial position on

disposal or when it is withdrawn from use and no future economic benefits
are expected from its disposal. The gain or loss on disposal is the
difference between the proceeds and the carrying amount and should be
recognised in profit and loss. [IAS 16.67-71]

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Hint: Entry of disposal NCA
1/ Buy NCA:
Dr NCA
Cr Cash/AP
2/ Depreciation computing:
Dr Depreciation expenses
Cr Accumulated depreciation
3/ Impairment loss: Different with
Dr Impairment loss POV of textbook
Cr NCA
4/ Dispose NCA:
Dr Accumulated depreciation
Dr Cash/TR
Dr Loss on disposal (or Cr Gain on disposal)
Cr NCA

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Note: Textbook’s POV on disposals

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Example 2
A business purchased a machine on 1/7/x1 for $39,000. The machine had
an estimated residual value of $3,000 and a life of 8 years. The machine
was sold for $18,600 on 31/12/x4 from A party. To make the sale, the
business had to incur dismantling costs and costs of transporting the
machine to the buyer’s premises of $1,200 paid to B party/shipper.
The business uses straight line method of depreciation. What was the
profit or loss on disposals? Book the entries.

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Example 3
A business trades in an asset that cost $30,000 two years ago for a new asset that costs
$60,000. A cheque for $41,000 was also handed over in full settlement. Assets are
depreciated on straight line basis over 5 years.
Book the entry of exchanging asset?
 Instead of receiving Cash in full, we receive new NCA and pay some additional money
- Compute Accum depre, in order to compute the Carrying mount ( Cost – Accum depre) at
the date of exchanging asset- identify whether we have any Gain/loss on exchanging
assets.

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Example
Asset A, costing £20,000 is acquired by a business for £12,000 cash, plus
its old Asset B. Asset B cost £15,000 and has had £4,000 depreciation
charged in respect of it, so its carrying amount at the date of the
part-exchange disposal is £11,000.
Book the exchange entry.

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Example 5: Trial balance and NCA

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Example 5: Trial balance and NCA

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Solution

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SCI, SCE, SFP?

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The asset register
Depreciation method Manufacturer's serial
and estimated useful life (for number (for maintenance
calculation of depreciation.) purpose)

The internal reference Net book value

number (for physical (or written down value)
identification purpose)
Data kept in an
asset register
Description of the
Cost
asset

Purchase date
Location of the asset Department which (for calculation of depreciation)
'owns' the asset

The asset register lists out all the details of each NCA
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Intangible Assets
Intangible non-current assets
IAS 38 defines intangible assets as an identifiable non-monetary asset
without physical substance.

The asset must be:

• controlled by the entity as a result of events in the past; and
• something from which the entity expects future economic benefits to
flow
 Common examples: computer software, patents, copyrights, motion picture
films, customer lists, mortgage servicing rights, fishing licences, import quotas,
franchises, customer or supplier relationships, customer loyalty, market share
and marketing rights. [IAS 38.08-09]
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Intangible Assets
 Amortisation
Intangible assets must be amortised systematically over their useful life.
An intangible asset with an indefinite useful life is not amortised but
should be reviewed each year for impairment.
2 items in focus:
 Goodwill/Purchase goodwill
 Developments cost

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(Internal) goodwill
If a company has goodwill, it means market value > carrying amount of its net assets (=
total assets – liabilities).
Goodwill created by good relationships between the business and its customers, for ex:
 Good reputation for high quality products or standards of service.
 Queries and complaints are responded promptly.
 Good personality of staff (skills and attitude to customers)
 ....
 Internal Goodwill changes day by day + valuation are subjective  it cannot be
recorded in the accounts (we do nothing with internal generated GW).

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Purchased goodwill
The excess of the purchase consideration paid for a business over the fair value
of the individual assets and liabilities acquired (acquired net assets).
 Just appear in business combination (acquisition of a business)

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Example 6
A purchases B for $30,000. B has total assets less liabilities ( EQUITY = NET ASSETS) of
$25,000, all of which are taken over by A.
The different = cash consideration (CASH PAYMENT IN THE BUSINESS COMBINATION)
– net assets = $5,000 is goodwil.
A’s SFP:
Goodwill 5,000 ( A part of intangibles in sfp of group/or mother company)
Other net assets 25,000
Net assets 30,000
Capital 30,000

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Example
Toad goes into business with £10,000 capital and agrees to buy Thrush's shop for £6,500.
Thrush's recent financial statements show total assets less liabilities of £3,500, which Toad
values at £4,000.
Requirement
Prepare the statement of financial position of Toad's business at the following times:
(a) before he purchases Thrush's business
(b) after the purchase

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Solution

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Accounting for purchased goodwill
 Goodwill should be treat as intangible NCA.
 Recognized at cost in SFP (―Cost‖ here means revalued cost after testing Impairment
loss annually)
 Not depreciated/amortised- just test impairment loss annually (because the carrying
amount of goodwill is not trusted by the valuers and no one trust the useful life of good
will)
Research and Development costs
IAS 38 Intangible assets
 Pure or basic research
 Applied research
 All research costs written off as incurred (SPL/SCI)
 Development expenditure must be capitalised if all criteria stated
under IAS 38 can be demonstrated.

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Research and Development costs
There are some special intangibles that developed internally (within the company), if
we wanna record these types of intangibles, they have to be qualified 6 criteria:
IAS 38 criteria for development cost satisfied Intangible NCA: (PIRATE)

• P – Probable future economic benefits

• I – Intention to complete the intangible asset and use or sell it
• R – the availability of Resources to complete the development and use or sell
• A – Ability to use or sell
• T – Technical feasibility of completing the asset
• E – reliable measurement of Expenditure
If satisfied all:
Dr Intangible NCA
Cr Cash or Payable

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Other intangible

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Other NCA
The NCA note to the SFP

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Homework

Self test textbook chap 10 (exclude question 6)

Testbank chap 10

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Multiple choice questions
Multiple choice questions