CHAPTER 9 –

LECTURE NOTES
truongthihanhdung@uel.edu.vn

9-1
PLANT ASSETS = FIXED
ASSETS = TANGIBLE ASSETS:
PHYSICAL SUBSTANCE

9-2
 Plant Assets
Plant assets are resources that have
 physical substance (a definite size and
shape),

 are used in the operations of a business,

 are not intended for sale to customers,

 are expected
Referred to provide
to as property, service
plant, and to theplant
equipment; company for a
and equipment;
number of years. and fixed assets.
9-3 LO 1
 PLANT ASSETS

chi phí phát sinh

sau ngày mua tài
sản

1. tính nguyên giá 2. phân bổ nguyên giá vào cpkh hạn kỳ

9-4
10-4
Guidance from IAS 16 about:
Capital expenditure related to PPE (treated as cost of PPE)

Classified as Capital expenditure

and included in cost of PPE

9-5
Guidance from IAS 16 about:
Revenue expenditure related to PPE (treated as Operating Ex)

Classified as Revenue expenditure

and included in Expenses on P&L

9-6
 Items outside of costs
What happen with those costs outside the scope of the historical
cost principle?  We expense them righ away, or we pending them
in prepaid accounts.
Prepare the journal entry to record these costs.

PPE 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000

9-7 LO 1
 Depreciation
Learning
Process of allocating to expense the cost Objective 2
of a plant asset over its useful (service) life Explain the concept
of depreciation and
in a rational and systematic manner. how to compute it.

 Process of cost allocation, not asset valuation.

 Applies to land improvements, buildings, and equipment, not land.

 Depreciable, because the revenue-producing ability of asset will

decline over the asset’s useful life.

9-8 LO 2
 FACTORS IN COMPUTING DEPRECIATION

Illustration 9-6
Three factors in computing depreciation

• HELPFUL HINT
Depreciation expense is reported on the income statement.
Accumulated depreciation is reported on the balance sheet as a
deduction from plant assets.
9-9 LO 2
 DEPRECIATION METHODS
Management selects the method it believes best measures an
asset’s contribution to revenue over its useful life.
Examples include:
(1) Straight-line method
theo hoạt động
(2) Units-of-activity method
(3) Declining-balance method theo số dư giảm dần

9-10 LO 2
 DEPRECIATION METHODS
Illustration: Bob’s Florist purchased a small delivery truck on January 1, 2022.
Cost €13,000
Expected residual value giá trị thanh lý ước tính €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.
Units in miles through useful life:
20 2022: 20,000 units
2023: 10,000 units
2024: 15,000 units
2025: 25,000 units
24
9-11 2026: 30,000 units LO 2
DEPRECIATION METHODS – Additional example

Illustration: Bob’s Florist purchased a small delivery truck on April 1st, 2022.
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.
Units in miles through useful life:
2022: 15,000 units; 2023: 10,000 units
2024: 15,000 units ; 2025: 25,000 units
2026: 30,000 units; 2027: 5,000 units

9-12 LO 2
 Depreciation
COMPONENT DEPRECIATION
 IFRS requires component depreciation for plant assets.

 Requires that any significant parts of a plant asset that have

significantly different estimated useful lives should be
separately depreciated.

9-13 LO 2
 COMPONENT DEPRECIATION
Illustration: Lexure Construction builds an office building for HK$4,000,000. The building is
estimated to have a 40-year useful life, however HK$320,000 of the cost of the building relates to
personal property and HK$600,000 relates to land improvements. Because the personal property has
a depreciable life of 5 years and the land improvements have a depreciable life of 10 years, Lexure
must use component depreciation. Assuming that Lexure uses straight-line depreciation and no
residual value, component depreciation for the first year of the office building is computed as follows.

Illustration 9-16
9-14 Component depreciation computation LO 2
 REVISING PERIODIC DEPRECIATION

 Accounted for in the period of change and future periods (change in estimate).

 No restatement of prior years’ depreciation expense.

Because useful life and salvage value are estimations - they may change during
the usage - we call: change in estimates of useful life and salvage value

 how to account for it? (how to solve it?)  Answer: we apply changes for the
current year and future years (don’t correct the past year). (prospectively
application: dieu chinh phi hoi to) (legally understand: we just apply the changes
for current year and the future year) # Retrospective application (dieu chinh hoi
to): we have to apply changes for the past, the current and the future years)

9-15 LO 2
 REVISING PERIODIC DEPRECIATION
Illustration: Arcadia HS, purchased equipment for €510,000 which was estimated to
have a useful life of 10 years with a residual value of €10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-line basis. In 2022 (year 8), it
is determined that the total estimated life should be 15 years with a residual value of
€5,000 at the end of that time.

Questions:
 What is the journal entry to correct prior years’
No Entry
depreciation expense?
Required
 Calculate the depreciation expense for 2021 and
2022.

9-16 LO 2
 REVISING PERIODIC DEPRECIATION
First, establish NBV
Equipment cost €510,000 (or CA - carrying
Residual value - 10,000 amount) at date of
Depreciable base 500,000 change in estimate.
Useful life (original) 10 years
€ 50,000
Annual depreciation
x 7 years = €350,000

Balance Sheet (Dec. 31, 2021)

Property, Plant, and Equipment
Equipment €510,000
Accumulated depreciation 350,000
Net book value (NBV) €160,000
9-17 LO 2
 REVISING PERIODIC DEPRECIATION
Net book value €160,000
Residual value (new) 5,000
Depreciation
Depreciable base 155,000 Expense calculation
Useful life remaining 8 years for 2022.
Annual depreciation € 19,375

Journal entry for 2022 and future years.

Depreciation Expense 19,375
Accumulated Depreciation 19,375

9-18 LO 2
 Revaluation of Plant Assets
IFRS allows companies to revalue plant assets to fair value at the reporting date.

If revaluation is used,

 it must be applied to all assets in a class of assets.

 assets experiencing rapid price changes must be revalued on an annual

basis.

9-19 LO 2
 Revaluation of Plant Assets
Illustration: Pernice Ltd. applies revaluation to equipment purchased on January 1, 2017, for
HK$1,000,000. The equipment has a useful life of 5 years, and no residual value. Pernice
makes the following entry to record depreciation for 2017, assuming straight-line depreciation.

Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000

At the end of 2017, independent appraisers determine that the asset has a fair value
of HK$850,000. The entry to record the revaluation is as follows.

Accumulated Depreciation—Equipment 200,000

Equipment 150,000
Revaluation Surplus 50,000
9-20
 Revaluation of Plant Assets

Illustration 9-18
As indicated, Statement presentation of
plant assets (equipment)
 HK$850,000 is the new basis of the asset. and revaluation surplus

 Depreciation expense of HK$200,000 in the income statement.

 HK$50,000 in other comprehensive income.

 Assuming no change in the total useful life, depreciation in year 2 will be HK$212,500
(HK$850,000 ÷ 4).

9-21 LO 2
 Revaluation of Plant Assets
Illustration: Assume again that Pernice’s equipment has a carrying amount of HK$800,000
(HK$1,000,000 − HK$200,000). However, at the end of 2017, independent appraisers
determine that the asset has a fair value of HK$775,000, which results in an impairment loss
of HK$25,000 (HK$800,000 − HK$775,000). To record the equipment at fair value and to
record this loss, Pernice makes the following entry.

Accumulated Depreciation—Equipment 200,000

Impairment Loss 25,000
Equipment 225,000

The impairment loss of HK$25,000 reduces net income.

9-22 LO 2
Expenditures During Useful Life (subsequent measurement)
Learning Objective 3
Ordinary Repairs - expenditures to Distinguish between
maintain the operating efficiency and revenue and capital
expenditures, and explain
productive life of the unit.
the entries for each.
 Debit – Maintenance and Repairs Expense.
 Referred to as revenue expenditures.

Additions and Improvements - costs incurred to increase the operating efficiency,

productive capacity, or useful life of a plant asset.
 Debit - the plant asset affected.
 Referred to as capital expenditures.

9-23 LO 3
Plant Asset Disposals
RETIREMENT OF PLANT ASSETS
 Dispose = discard = wont use it anymore - write it off (xoa so) how?  clear all accounts related
to the plant assets by:

Dr Accum Depre

Dr Loss (if any)

Cr Plant assets – at cost

Disposed PPE completely, without any cash receipts from disposal

9-24
Recording cash receipts from sale/disposal of PPE
(fixed assets/tangible assets)
Compare the book value of the asset with the proceeds received from the sale.
 If proceeds exceed the book value, a gain on disposal occurs.
 If proceeds are less than the book value, a loss on disposal occurs.

Dr Accummulated depreciation X
Dr Cash (cash received/cash proceeds) X
Dr Loss (or Cr Gain) on disposal (if any) X
Cr PPE (cost of assets) X
Disposed PPE with cash receipts from disposal

9-25
 RETIREMENT OF PLANT ASSETS
Illustration: Hobart ASA retires its computer printers, which cost €32,000. The
accumulated depreciation on these printers is €32,000. Prepare the entry to
record this retirement.
Accumulated Depreciation—Equipment 32,000
Equipment 32,000

Question: What happens if a fully depreciated plant asset is still useful to the
company?
Answer: An asset that is fully depreciated and continues to be used in the business will be
reported on the balance sheet at its cost along with its accumulated depreciation. There will
be no depreciation expense recorded after the asset is fully depreciated.

9-26
 RETIREMENT OF PLANT ASSETS
Illustration: Sunset A/S discards delivery equipment that cost
€18,000 and has accumulated depreciation of €14,000. The
journal entry is?
Accumulated Depreciation—Equipment 14,000
Loss on Disposal of Plant Assets 4,000
Equipment 18,000

Companies report a loss on disposal in the ―Other income and

expense‖ section of the income statement.

9-27 LO 4
 SALE OF PLANT ASSETS
GAIN ON SALE
Illustration: On July 1, 2022, Wright Company sells office furniture for €16,000 cash. The office
furniture originally cost €60,000. As of January 1, 2022, it had accumulated depreciation of
€41,000. Depreciation for the first six months of 2022 is €8,000. Prepare the journal entry to
record depreciation expense up to the date of sale (July 1).

Depreciation Expense 8,000

Accumulated Depreciation—Equipment 8,000

9-28 LO 4
 SALE OF PLANT ASSETS
Illustration 9-20
Computation of gain
on disposal

Illustration: Wright records the sale on July 1 as follows.

Cash 16,000
Accumulated Depreciation—Equipment 49,000
Equipment 60,000
Gain on Disposal of Plant Assets 5,000

9-29 LO 4
 SALE OF PLANT ASSETS
Illustration: Assume that instead of selling the office furniture for €16,000, Wright sells it
for €9,000 on July 1.

Illustration 9-21
Computation of loss
on disposal

July 1
Cash 9,000
Accumulated Depreciation—Equipment 49,000
Loss on Disposal of Plant Assets 2,000
Equipment 60,000
9-30 LO 4
 EXCHANGING NON-CURRENT ASSETS

Exchanging with commercial substance

• Read lecture note - excel file (do not use guidance of
textbook)
Exchanging without commercial substance
• Read lecture note - excel file (do not use guidance of
textbook)
9-31
 Extractable Natural Resources
Learning
Objective 5
Natural resources consist of standing timber Compute periodic
and resources extracted from the ground, such depletion of
as oil, gas, and minerals. extractable natural
resources.
IFRS defines extractive industries as those businesses involved in finding and
removing natural resources located in or near the earth’s crust.

Standing timber is considered a biological asset under IFRS. In the years before they
are harvested, the recorded value of biological assets is adjusted to fair value each
period.

9-32 LO 5
 Extractable Natural Resources
Acquisition cost of an extractable natural resource is the

 price needed to acquire the resource and

 prepare it for its intended use.

Depletion is the allocation of the cost to expense in a rational and systematic manner over the
resource’s useful life.

 Depletion is to natural resources as depreciation is to plant assets.

 Companies generally use units-of-activity method.

 Depletion generally is a function of the units extracted.

9-33 LO 5
 Extractable Natural Resources
Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million
tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of
coal. Lane computes the depletion expense as follows:

HK$5.00 per ton x 250,000 tons = HK$1,250,000 annual depletion

Illustration 9-22
Computation of
depletion cost per unit

9-34 LO 5
 Extractable Natural Resources
Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10
million tons of coal and no residual value. In the first year, Lane extracts and sells
250,000 tons of coal. Lane records the depletion as follows:

Journal entry:

Inventory (coal) 1,250,000

Accumulated Depletion 1,250,000
(do not book to Dr Depletion Ex)

9-35 LO 5
 Intangible Assets
Learning Objective
Intangible assets are rights, privileges, and competitive 6
Explain the basic
advantages that result from ownership of long-lived assets issues related to
accounting for
that do not possess physical substance. intangible assets.

Limited life or indefinite life.

Common types of intangibles:

 Patents  Goodwill
 Copyrights  Franchises
 Trademarks  Leaseholds
 Trade Names
9-36 LO 6
 Accounting for Intangible Assets

Limited-Life Intangibles:
Companies classify
 Amortize to expense. Amortization Expense as
 Credit asset account. an operating expense in
the income statement.
Indefinite-Life Intangibles:
 No amortization.

Similar to property, plant, and equipment, IFRS permits

revaluation of intangible assets to fair value, except for goodwill.

9-37 LO 6
 Accounting for Intangible Assets
PATENTS
 Exclusive right to manufacture, sell, or otherwise control an invention for a specified
number of years from the date of the grant.

 Capitalize costs of purchasing a patent and amortize over its legal life or its useful life,
whichever is shorter.

 Expense any Research and Development costs in developing a patent.

 Legal fees incurred successfully defending a patent are capitalized to Patents account.

9-38 LO 6
 PATENTS

Illustration: National Labs purchases a patent at a cost of NT$720,000.

National estimates the useful life of the patent to be eight years. National
records the annual amortization for the ended December 31 as follows.

Cost NT$720,000
Useful life ÷ 8 years
Annual expense NT$ 90,000

Dec. 31
Amortization Expense 90,000
Accumulated Amortisation 90,000

9-39 LO 6
 Accounting for Intangible Assets
COPYRIGHTS
 Give the owner the exclusive right to reproduce and sell an artistic or
published work.

 Granted for the life of the creator plus a specified number of years,
commonly 70 years.

 Capitalize costs of acquiring and defending it.

 Amortized to expense over useful life.

9-40 LO 6
 Accounting for Intangible Assets
TRADEMARKS AND TRADE NAMES
 Word, phrase, jingle, or symbol that identifies a particular enterprise or product.
► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac, and Jetta.

 Legal protection for specified number of years, commonly 20 years. Protection

may be renewal indefinitely.

 Capitalize cost of acquisition.

 No amortization.

9-41 LO 6
 Accounting for Intangible Assets
FRANCHISES AND LICENSES
 Contractual arrangement between a franchisor and a franchisee.
► BP (GBR), Subway (USA), and Europcar are franchises.

 Franchise (or license) with a limited-life should be amortized to expense

over its useful life.

 Franchise (or license) with an indefinite life is not amortized.

9-42 LO 6
 Accounting for Intangible Assets
GOODWILL
 Includes exceptional management, desirable location, good customer relations,
skilled employees, high-quality products, etc.

 Only recorded when an entire business is purchased.

 Goodwill is recorded as the excess of cost over the fair value of the net assets
acquired.

 Internally created goodwill should not be capitalized.

 Not amortized.

9-43 LO 6
 External goodwill/ Purchased GW from combination
transactions (giao dich hop nhat kinh doanh)

1/ Appearance: When a company (parents co) buy all shares of other companies
(subsidiaries) and: Considerations made/Cash paid for the transactions > net assets of
the subsidiaries.
For ex: Considerations = $1m. Net assets of the subsidiary A is just $800,000 (Net assets
= Total assets – Total liabilities = Equity).
GW in this case would be recognised = $1m - $800,000= $200,000.
2/ Accounting treatment for External GW:
- No amortisation, b/c GW is indefinite life.
- But, we have to test impairment loss annually (upper course)

9-44
9-45
 NCA AND REVALUATION MODEL
(IAS 16) - 2023

9-46
 FIXED ASSETS’ LIFE
Year – end:
- Cost model - Depreciation
Initial
recognition - Revaluation model - Impairment loss

Subsequent measurement
 POINT OUT
LEGAL REF? -
IAS16.39,40
IAS 16. 39-40
 REVALUATION MODEL -
ADJUSTING FOR
DEPRECIATION IAS16.35
Where the item of property, plant and equipment is depreciable, there are two possible
accounting treatments under paragraph 35 of IAS 16:
1. restate proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount; or
2. eliminate the accumulated depreciation balance against the gross carrying amount of the
asset and then restate the net amount to the fair value of the asset.
WHICH METHOD IS PREFERABLE?
EXAMPLE P35.IAS16