09/19/2022

TOPIC LIST
1. Tangible non-current assets (NCA) and
depreciation (IAS 16 Property, plant and
equipment)
2. The objective of Depreciation
3. Calculating depreciation
4. Accounting for depreciation
5. Calculating impairment
6. Non-current asset disposals
CHAPTER 10 7. The asset register
NON-CURRENT ASSETS 8. Intangible NCA
AND DEPRECIATION 9. The NCA note to the SFP

Slide 2

OVERVIEW IAS 16 PROPERTY, PLANT AND

Capital versus revenue
EQUIPMENT (PPE)
Cost
expenditure

Tangible non-current
assets IAS 16

Revaluations Depreciation Disposals

Initial
Recognition measurement
– At cost
Straight line Reducing balance
method method

Slide 3

IAS 16 PROPERTY, PLANT AND
EQUIPMENT (PPE)
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.
Slide 5
IAS 16 PROPERTY, PLANT AND
EQUIPMENT
 Subsequent expenditure
— added to carrying amount if improves
condition beyond previous performance
(capital expenditures increase the asset
useful life and capacity)
 Repairs and maintenance costs are
expensed (revenue expenditures won’t
increase the asset useful life and capacity)
Slide 7
09/19/2022
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)
 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
Slide 6
DEPRECIATION
Depreciation – accruals concept
The systematic allocation of the cost of an
asset, less its residual value, over its useful
life.
Residual value: The estimated amount that
the entity would obtain from disposing of
the asset at the end of its useful life, after
deducting estimated disposal costs.
Depreciable amount = Cost – Residual value
Slide 8
 09/19/2022

DEPRECIATION METHODS OF DEPRECIATION

Common depreciation misconcepts: Straight line Reducing balance

a) It does not reflect the fall in value of an
asset over its life.
The
b) It is not “setting aside money” to replace residual
the asset at the end of its useful life. Even value will
Cost - Accumulated Depreciation not be
if the asset was not going to be replaced, concerned
its cost should still be allocated over its
This method allocates the The annual charge for this method is higher
useful life. total depreciable amount in the earlier reporting periods of the asset’s
in equal amounts life, and lower in the later reporting periods
between different
reporting periods The balance remaining at the end of the
asset’s useful life is the estimated residual
value
Slide 10

WORKED EXAMPLE: STRAIGHT LINE WORKED EXAMPLE: REDUCING

METHOD BALANCE METHOD
A business has a reporting period from 1
January to 31 December and purchases a A business purchases a non-current asset at a
non-current cost of £10,000 on 1 January 20X1, which it
asset on 1 April 20X1, at a cost of £24,000. The plans
useful life of the asset is four years, and its
residual value is nil. to keep for three years to 31 December 20X3.
Requirement The business wishes to use the reducing
What is the depreciation charge for the balance
reporting period to 31 December 20X1? method to depreciate the asset, and
calculates that the rate of depreciation should
be 40% of
the reducing balance (carrying amount) of
the asset.
 09/19/2022

APPLYING A DEPRECIATION METHOD

TACKLING THE EXAM CONSISTENTLY
A business can choose which method of
1. Since straight – line depreciation is depreciation to apply to its property, plant
charged monthly, you should make the and equipment. Once this decision has been
monthly depreciation calculation in the made it should be applied consistently from
exam. reporting period to reporting period. A change
2. In this course, with declining balance, you in the method of depreciations is permitted if
will not be concerned with the assets’ there is a change in the way in which the asset
residual value or how to compute the % is used.
A business can depreciate different categories
of declining.
of non-current assets in different ways.
3. Exam question wouldn’t include monthly
depreciation for declining balance
method.

DEPRECIATING SUBSEQUENT
EXPENDITURE WORKED EXAMPLE
Where subsequent expenditure is Subsequent
incurred on an asset, it may be expenditure Malcolm buys a building on 1.1.X0 for
capitalised if it is probable that it will incurred to maintain £200,000. On 1.1.X2 he adds an extension
generate future economic benefits. an existing asset,
Capitalised subsequent expenditure such as the costs of that cost £50,000.
should be depreciated separately from ongoing servicing or Requirement
the initial asset unless it has a useful life maintenance, is not Calculate the annual depreciation charge
and depreciation method that are the capitalised and is
same as the initial asset. instead charged as before and after the extension is built, on
=> We will assume that subsequent an expense to profit the basis of straight line depreciation over
expenditure is depreciated over the or loss when the
remaining useful life of the initial asset expenditure is 10 years, with no residual value.
unless it is stated otherwise. incurred
 09/19/2022

TACKLING THE EXAM CHANGE IN DEPRECIATION

In the exam you will not be required to Change in

depreciate subsequent expenditure using depreciatio
the reducing balance basis n

Change in Change in
Change in
depreciatio residual
useful life
n method value

CHANGE IN DEPRECIATION WORKED EXAMPLE

• Change in depreciation method
The depreciation method used should be reviewed
annually for appropriateness. If there are any
changes in the expected pattern of use of the asset
(and hence economic benefit), then the method
used should be changed. The remaining carrying
amount is depreciated under the new method, ie,
only current and future periods are affected. When
the basis of depreciation is changed, the effect on
current and future periods should be quantified and
disclosed in the financial statements, and the
reason for the change should be stated.
Jakob Co purchased an asset for £100,000 on
1.1.X1. It had an estimated useful life of five
years and it was depreciated using the
reducing balance method at a rate of 40%.
On 1.1.X3 it was decided to change the
depreciation method to straight line. There
was no change to the useful life, and no
residual value is anticipated.
Requirement
Show the depreciation charge for each year (to
31 December) of the asset's life.
 09/19/2022

DO IT YOURSELF CHANGE IN DEPRECIATION

Interactive question 3 / p.260  Change in useful 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):
Carrying amount at revised
date
Remaining useful life

Slide 22

WORKED EXAMPLE
CHANGE IN DEPRECIATION
A business purchased a non-current asset
costing £12,000 with an estimated useful life of • Change in residual value
four years and no residual value. Interactive question 4
The business decides after two years that the An asset had a cost of £1,000, an estimated
useful life of the asset has been
useful life of 10 years and a residual value
underestimated, and it still has five more years
in use to come, making its total useful life of £200. At the start of Year 3 a review
seven years. shows its remaining useful life was
Requirement: unchanged but the residual value was
Calculate the annual depreciation charge for reduced to nil.
the final five years after revising if the business Requirement
uses the straight line method of depreciation Calculate the depreciation charge for each
of Years 1 to 3 on the straight line basis.
 09/19/2022

ACCOUNTING FOR DEPRECIATION ACCOUNTING FOR DEPRECIATION

Accumulated depreciation
account
 The double entry for depreciation is as follows:
Opening balance
DEBIT Depreciation expense (SPL)
Contra – asset CREDIT Accumulated depreciation (SFP)
Decrease Increase account

Closing balance

Slide 26

IMPAIRMENT (IAS 36) ACCOUNTING FOR IMPAIRMENT

The impairment loss should be recognized if carrying Debit Impairment expense (SPL)
amount > recoverable amount of the NCA.
Credit Carrying amount (SFP)
What
accounting
Prudence as principle is
it ensures applied in
Fair value
that assets accounting for
– Costs of
Recoverable disposal are not impairment?
amount is overstated
Note:
the higher of
In this course, do not worry about Value in
how to calculate recoverable use
amount.
 09/19/2022

CHANGE IN USEFUL LIFE OR RESIDUAL VALUE

WORKED EXAMPLE AFTER IMPAIRMENT

When an impairment loss is recognized, the

A business purchased a building on 1/1/x1 at a
cost of $100,000. The building had a 20 year asset’s remaining useful life and residual
useful life. On 31/12/x5 the business determines value should be reviewd and revised if
that the building is now worth only $60,000 appropriate
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 builiding in the
year x5?

INTERACTIVE QUESTION 5
INTERACTIVE QUESTION 5

On 1 January 20X1 Tiger buys a non-current

asset for £120,000, with an estimated useful
life of 20 years and no residual value. Tiger
depreciates its non-current assets on a
straight line basis. Its reporting period is the
12 months ended 31 December.
On 31 December 20X3 the asset will be
included in the statement of financial
position as follows:
Requirements
Consider each of these alternatives separately.
(a) On 1 January 20X4 the remaining useful life is
revised to 15 years from that date.
Calculate the revised annual depreciation charge.
(b) On 1 January 20X4 the remaining useful life is
revised to 10 years from that date. An impairment
review shows that the value is £95,000 as at 1
January 20X4.
Show how the impairment loss would be recorded
and calculate the revised annual depreciation
charge.

NON-CURRENT ASSET DISPOSALS
Disposal
On disposal of an asset a profit or loss will
arise depending on whether net disposal
proceeds are greater or less than the
carrying amount of the asset.
 Net disposal proceeds > Carrying
amount: profit
 Net disposal proceeds < Carrying
amount: loss
Slide 33
ACCOUNTING FOR NON-CURRENT
ASSET DISPOSALS
Steps:
 Remove the cost of the asset
 Remove the accumulated
charged to date
 Account for the sales proceeds
 Balance off disposal account
Slide 35
09/19/2022
WORKED EXAMPLE
A business purchased a machine on 1 July
20X1 for £39,000. The machine had an
estimated residual value of £3,000 and a
life of eight years. The machine was sold for
£18,600 on 31 December 20X4. 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.
Requirement
The business uses the straight line method of
depreciation. What was the profit or loss on
disposal of the machine?
ACCOUNTING FOR NON-CURRENT
ASSET DISPOSALS
Double entry for a disposal
(1) Eliminate cost
DEBIT Disposal
depreciation CREDIT Non-current assets
(2) Eliminate accumulated depreciation
DEBIT Accumulated depreciation
CREDIT Disposal
Slide 36

ACCOUNTING FOR NON-CURRENT
ASSET DISPOSALS
(3) Account for disposal proceeds
DEBIT Cash / Receivables
CREDIT Disposal
(4) Account for costs of making sale
DEBIT Disposal
CREDIT Cash
 Transfer balance on disposals account to
the statement of profit or loss
Slide 37
ACCOUNTING FOR DISPOSALS OF
NCA GIVEN IN PART-EXCHANGE
Quite often a business does not receive cash
for the asset, but instead get a 'part-
exchange' or 'trade-in value' for it against
the cost of a new asset. Instead of disposal
proceeds being received in the form of
cash or promised in the form of a
receivable, use the part-exchange value
given to the asset by the other party as its
disposal value.
09/19/2022
EXAMPLE
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. 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.
The business uses straight line method of
depreciation. What was the profit or loss on
disposals? Book the entries.
EXAMPLE
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?
 09/19/2022

WORKED EXAMPLE - TRIAL

DO IT YOURSELF BALANCE AND NCA

Interactive question 6 / p.272

WORKED EXAMPLE - TRIAL BALANCE THE ASSET REGISTER

AND NCA Depreciation method Manufacturer's serial
and estimated useful life (for number (for
calculation of depreciation) maintenance purpose)

The internal reference Net book value

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

Department which Purchase date

Location of the (for calculation of
asset 'owns' the asset
depreciation)

The asset register lists out all the details of each NCA

Slide 44
 09/19/2022

INTANGIBLE NON-CURRENT ASSETS INTANGIBLE NON-CURRENT ASSETS

Intangible non-current assets
Non-current assets which have a value to the entity  Amortisation
but no physical substance. Intangible assets must be amortised systematically
over their useful life. An intangible asset with an
indefinite useful life is not amortised but should be
IAS 38 defines intangible assets as an identifiable non-monetary asset reviewed each year for impairment.
without physical substance. 2 items in focus:
 Goodwill/Purchase goodwill
The asset must be:
 Developments cost
• controlled by the entity as a result of events in the past; and
• something from which the entity expects future economic benefits to
flow

Slide 45 Slide 46

(INTERNAL) GOODWILL PURCHASED GOODWILL

If a company has goodwill, it means market value > carrying The excess of the purchase consideration
amount of its net assets (total assets – liabilities).
Goodwill created by good relationships between the business paid for a business over the fair value of
and its customers, for ex: the individual assets and liabilities acquired
 Good reputation for high quality products or standards of
service.
(acquired net assets).
 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 (do
nothing).
 09/19/2022

ACCOUNTING FOR PURCHASED

EXAMPLE GOODWILL

A purchases B for $30,000. B has total assets  Goodwill should be treat as intangible
less liabilities of $25,000, all of which are NCA.
taken over by A.  Recognized at cost in SFP (“Cost” here
The different = cash consideration – net means revalued cost after testing
assets = $5,000 is goodwil.
A’s SFP: Impairment loss annually)
Goodwill 5,000  Not depreciated.
Other net assets 25,000
Net assets 30,000
Capital 30,000

RESEARCH AND DEVELOPMENT RESEARCH AND DEVELOPMENT

COSTS COSTS
IAS 38 Intangible assets IAS 38 criteria for development cost satisfied Intangible
 Pure or basic research NCA: (PIRATE)
 Applied research • P – Probable future economic benefits
• I – Intention to complete the intangible asset and
--- All research costs written off as incurred use or sell it
 Development expenditure must be capitalised • R – the availability of Resources to complete the
if all criteria stated under IAS 38 can be development and use or sell
• A – Ability to use or sell
demonstrated. • T – Technical feasibility of completing the asset
• E – reliable measurement of Expenditure
If satisfied all:
Dr Intangible NCA
Cr Cash or Payable

Slide 51 Slide 52
 09/19/2022

OTHER INTANGIBLE ASSETS OTHER NCA

Licences Tangible Intangible

fixed assets Other NCA
• Finite life assets
(PPE)
• Amortised during useful life • Inside of • Inside of • Included in
scope scope NCA on SFP
Patents but
accounting
• Amortised during useful life. treatment
• Test impairment loss when there is indicator like financial
instruments.
of impairment.
• Outside of
scope

THE NCA NOTE TO THE SFP

This is the end of

chapter 10
56
 09/19/2022

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.