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ACCA Chapter 8

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Non-current assets are assets which are bought by the business for continuing use. Tangible
non-current assets are those with physical form. Non-current assets are assets that are bought by
the business for use in the long term. 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 include trade receivables and inventories

Capital Expenditure - is expenditure which forms part of the cost of non-current assets. Capital
Expenditure is expenditure which results in the acquisition of non-current assets, or
improvements to existing non-current assets:

1) Capital expenditure is not charged as an expense in the statement of profit or loss, although a
depreciation or amortisation charge will usually be made to write off the capital expenditure
gradually over time. Depreciation and amortisation charges are expenses in the statement of
profit or loss.

2) Capital expenditure on non-current assets results in the recognition of a non-current asset in the
statement of financial position of the business.

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Revenue Expenditure - is expenditure incurred for the purpose of the trade or to maintain
non-current assets. Revenue Expenditure is expenditure which is incurred for either of the following
reasons:

1) For the purpose of the trade of the business. This includes expenditure classified as selling and
distribution expenses, administration expenses and finance charges.

2) To maintain the existing earning capacity of non-current assets.

*Note: Capital Expenditure is expenditure that can be capitalised as a part of the cost of a non-current
assets. Revenue Expenditure cannot be capitalised as a part of the cost of a non-current assets and
must be expensed in the statement of profit or loss.

Examples:
Capital Expenditure - Buildings, Computer equipment, Office equipment, Furniture and fixtures, Intangible
assets (such as a purchased taxi license or a patent), Land (including the cost of upgrading the land),
Machinery(including delivery cost,installation and test costs), Software, Vehicle

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Revenue Expenditure - Salaries and employee wages, Any overhead expense, such as salaries for the
corporate office, which typically fall under selling, general, and administrative expenses (SG&A), Research
and development (R&D), Utilities and Rent, Business travel, Property taxes

*Note: Capital expenditure results in the purchase or improvement of non-current assets, which are
assets that will provide benefits to the business in more than one accounting period, and which are not
acquired with a view to being resold in the normal course of trade. The cost of purchased non-current
assets is not charged in full to the statement of profit or loss of the period in which the purchase occurs.
Instead, the non-current asset is gradually depreciated over a number of accounting periods in
accordance with the accruals concept.

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The accounting treatment of tangible non-current assets is covered by IAS 16 Property, Plant and
Equipment.
‘Property, Plant and Equipment’ are tangible items that:

- are held 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.'

Cost - is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition or construction

Fair Value - is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction

Carrying amount - is the amount at which an asset is recognised after deducting any
accumulated depreciation and impairment losses

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 Components of cost
● Purchase price, including any import duties paid, but excluding any trade discount and sales tax
paid
● Initial estimate of the costs of dismantling and removing the item and restoring the site on
which it is located
● Directly attributable costs of bringing the asset to working condition for its intended use.

Examples of directly attributable costs are:

– the cost of site preparation, eg levelling the floor of the factory so the machine can be
installed;
– initial delivery and handling costs;
– installation and assembly costs;
– professional fees (lawyers, architects, engineers);
– costs of testing whether the asset is working properly, after deducting the net proceeds
from selling samples produced when testing equipment; and
– staff costs arising directly from the construction or acquisition of the asset.

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*Note - Only staff costs arising directly from the construction or acquisition of the asset can be capitalised
as part of the cost of the asset. The costs of training staff to use a new asset cannot be capitalised
because it is not probable that economic benefits will be generated from training the staff, as we can't
guarantee that those staff will stay and use the asset

The following costs will not be part of the cost of property, plant or equipment unless they can be
attributed directly to the asset's acquisition, or bringing it into its working condition:

● Expenses of operations that are incidental to the construction or development of the item
● Administration and other general overhead costs
● Start-up and similar pre-production costs
● Initial operating losses before the asset reaches planned performances
● Staff training costs
● Maintenance contracts purchased with the asset

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Subsequent expenditure:
Subsequent expenditure is added to the carrying amount of the asset, but only when it is probable
that future economic benefits, in excess of the originally assessed standard of performance of the existing
asset, will flow to the enterprise.
The important point here is whether any subsequent expenditure on an asset improves the condition of
the asset beyond the previous performance. The following are examples of such improvements:

● Modification of an item of plant to extend its useful life, including increased capacity
● Upgrade of machine parts to improve the quality of output
● Adoption of a new production process leading to large reductions in operating costs

*Note: 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.

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 Depreciation Accounting
The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting
periods by means of depreciation. Depreciation is both of the following:

● Charged against profit

● Deducted from the value of the non-current asset in the statement of financial position

Two methods of depreciation are specified in your syllabus:

● The straight line method

● The reducing balance method

*Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
*Depreciable amount is the cost of an asset or other amount substituted for historical cost, less
its estimated residual value'.
*Depreciation is not a cash expense

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Useful life
IAS 16 requires the depreciable amount to be allocated on a systematic basis to each accounting period
during the useful life of the asset.
Useful life is either:
● the period over which an asset is expected to be available for use by an entity; or
● the number of production or similar units expected to be obtained from the asset by an entity.'

The following factors should be considered when estimating the useful life of a depreciable asset:
● Expected usage
● Expected physical wear and tear
● Obsolescence
● Legal or other limits on the use of the assets

*Residual value - The 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.'

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 Depreciation Methods

1.Straight Line - The total depreciable amount is charged in equal instalments to each accounting
period over the expected useful life of the asset.

The annual depreciation charge is calculated as:

2.Reducing Balance - The reducing balance method of depreciation calculates the annual
depreciation charge as a fixed percentage of the carrying amount of the asset, as at the end of the previous
accounting period.

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 Revaluation of non-current assets
IAS 16 allows entities to revalue non-current assets to fair value.
When a non-current asset is revalued, depreciation is charged on the revalued amount.

Excess Depreciation - The difference between the new depreciation charge based on the revalued
carrying amount and the old depreciation charge based on the original cost of the asset is known as the
'excess depreciation'. IAS 16 allows entities to transfer an amount equal to the excess depreciation from
the revaluation surplus to retained earnings in the equity section of the statement of financial position, if
they wish to do so.

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 Disposal of non-current assets
When a non-current asset is sold, there is likely to be a profit or loss on disposal. This is the difference
between the net sale price of the asset and its carrying amount at the time of disposal

The following items must appear in the disposal of non-current assets account:

● The value of the asset (at cost, or revalued amount*)

● The accumulated depreciation up to the date of sale
● The sale price of the asset

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 Asset Register
An asset register is used to record all non-current assets and is an internal check on the accuracy of the
nominal ledger.
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.
Data kept in an asset register:
● The internal reference number (for physical identification purposes)
● Manufacturer's serial number (for maintenance purposes)
● Description of asset
● Location of asset
● Department which 'owns' asset
● Purchase date (for calculation of depreciation)
● Cost
● Depreciation method and estimated useful life (for calculation of depreciation)
● Carrying amount

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 Disclosures for non-current assets
(a) An accounting policy note should disclose the measurement bases used for determining the
amounts at which depreciable assets are stated, along with the other accounting policies.

(b) For each class of property, plant and equipment:

● Depreciation methods used
● Useful lives or the depreciation rates used
● Gross amount of depreciable assets and the related accumulated depreciation at the beginning and
end of the period

(c) For revalued 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

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 Double entries for non-current assets
1. Depreciation charge for the year:
Dr Depreciation charge
Cr Accumulated Depreciation

2. Revaluaton Upwards of NCA with accumulated depreciation

Dr Accumulated Depreciation
Dr Cost of NCA
Cr Revaluation Surplus

3. Revaluation Downwards of NCA with accumulated depreciation

Dr Accumulated Depreciation
Dr Revaluation Surplus
Cr Cost of NCA

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 Double entries for non-current assets
1. Transfer of Excess Depreciation
Dr Revaluation Surplus
Cr Retained Earnings

2. Disposal of NCA for cash(if proceeds exceed carrying value)

Dr Cash
Dr Accumulated Depreciation
Cr Cost of NCA
Cr Profit on Disposal

3. Disposal of NCA for cash(if carrying value exceed proceeds)

Dr Cash
Dr Accumulated Depreciation
Dr Loss on Disposal
Cr Cost of NCA

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SAT plaza,
+99450 228 2320 info@honours.academy
+99412 408 2320 www.honours.academy Bashir Safaroglu 133,
Bakı, Azərbaycan
21.05.2021 18