IAS-16 Non- Current Assets

Non- Current Assets: Assets which are intended for use in a business for more than one
accounting period and are not intended for resale.
Non-current assets are of two types
1. Tangible NCA (IAS-16): Assets having physical existence e.g. Building, equipment, machinery
2. Intangible NCA (IAS-38): Assets having no physical existence e.g. Software, copy rights
Recognition Criteria for NCA:
1. It is probable that future economic benefit will flow to the entity
2. Cost can be measured reliably
Initial Measurement: NCA are initially measured at their cost
Components of Cost:
Purchase price
+ import duties
+non-refundable taxes or rebates
+installation charges
+packing charges
+handling charges
+dismantling or site preparation cost
+Transportation cost
+wages specific to installation
+Testing cost
(In a nut shell, all cost incurred in bringing the asset to its present condition and location is to
be added in cost of asset)
Note that Training cost shall never be capitalized
Subsequent Measurement: Subsequent expenditure on NCA shall only be capitalized if it
enhances the benefits of assets e.g. improvement, extension, value addition
DR. NCA cost
CR. Cash/payable
Other expenditure is revenue expenditure and must be expensed in SPL e.g. insurance cost,
repair and maintenance, repainting
DR. Expense
CR. Cash/ payable
Depreciation: is a systematic allocation of depreciable amount of an asset over its useful life.
Depreciation is a non-cash expenditure and it is charged in accordance with the matching
concept.
Matching concept: States that the cost of using a non-current asset is to be matched with the
benefit generated by that asset over its useful life.
*depreciable amount = cost – Residual value
*Residual value/scrap value/salvage value = Estimated selling price of asset at the end of its
useful life but this estimation is made at the time asset is purchased
Methods of charging depreciation:
Depreciation is an estimation technique so management will estimate life of an asset as the
time period with in which they can get benefit from asset known as useful life and spread its
cost over its life to fulfil matching or accrual concept. There are two methods of charging
depreciation

Prepared by: Lamiyah Fawad Khan

IAS-16 Non- Current Assets

Method 1: Straight line Method (SLM): In this method we assume that asset will provide equal
benefit over its useful life. So a fixed amount of depreciation is charged every year
Formula:
Depreciation FTY = Cost – residual value
Useful life
If useful life is not given;
Depreciation FTY = cost x % given in question
Rate of Depreciation = Depreciation FTY/costx100
Rate = 1/useful life

Method 2: Reducing balance method (RBM)/ Diminishing balance method/ WDV method:
It assumes that asset will provide greater benefits in early years of its use and then it will starts
to reduce throughout the life of asset
Formula:
1st year Depreciation FTY = Cost x %
Net book value
In subsequent years Depreciation FTY = (cost – accumulated depreciation) x %
Note that the rate of depreciation in RBM is already adjusted with life and scrap value of asset
so there is no need to use life and scrap in calculation even if it’s given in question. Always use
rate in RBM
Double Entry in Journal:
DR. Depreciation expense xxx (SPL)
CR. Accumulated depreciation xxx (SOFP)
Presentation in Financial statements (Extracts)
SOFP:
Non-current asset:
Cost xxxx
Less: Accumulated depreciation (xxxx)
Carrying amount xxxx
SPL:
Operating expenses:
Depreciation expense xxxx

Policies of charging depreciation in a financial year:

There are two policies allowed by IAS-16.
1. Full year depreciation in the year of purchase and no depreciation in the year of sale
2. Pro-rata or proportionate basis or monthly basis
Note that in silent case we use SLM and pro-rata basis
1. Full year policy:
Charge full depreciation in the year asset is purchased irrespective of the month of purchase
and charge no depreciation in the year of sale irrespective of the month of sale
2. Pro-rata: Calculate months for both purchase and sale to find the time period in which asset
is used
Full year depreciation*months used/12
Disposal of NCA:
When an asset it disposed it must be eliminated from books with its carrying amount

Prepared by: Lamiyah Fawad Khan

IAS-16 Non- Current Assets

Step1: Prepare a disposal account

Step 02: Eliminate cost of asset disposed
DR. Disposal account xxx
CR. Asset account xxx
Step 03: Eliminate accumulated depreciation of asset disposed
DR. Accumulated depreciation xxx
CR. Disposal account xxx
Step 04: Record sales proceeds from selling asset in disposal account
DR. Bank/ sale proceeds xxx
CR. Disposal account xxx
Step 05: Calculate gain or loss from disposal account
If carrying amount > Sale proceeds = Loss on disposal (SPL expense)
If carrying amount < Sale proceeds = Gain on disposal (SPL other income)
Disposal Account
Asset (cost) Asset (accumulated dep.)

Cash/ bank (Sale proceeds)

SPL (profit) SPL (loss)

Disposal of NCA with part exchange:

In this case old asset is provided for in part payment for a new one, remaining balance of new
asset being paid in cash/ cheque
List price – Cash paid = Trade in allowance
 Trade in allowance is the value assigned by other person to our asset
Step 1: Prepare a disposal account
Step 2: Transfer the cost of old asset in disposal account (elimination of cost)
DR. Disposal account xxx
CR. Asset account xxx
Step 03: Transfer accumulated depreciation of old asset in disposal account (elimination of
accumulated depreciation)
DR. Accumulated depreciation xxx
CR. Disposal account xxx
Step 04: Record the part exchange allowance as sales proceed
DR. Trade-in-allowance xxx
CR. Disposal account xxx

Disposal Account
Asset (cost of old asset) old Asset (accumulated dep.)

Cash/ bank (TIA)

SPL (profit) SPL (loss)

Prepared by: Lamiyah Fawad Khan

IAS-16 Non- Current Assets

You can also prepare disposal account as:

Disposal Account
Carrying amount of old asset

Cash/ bank (Sale proceeds)

SPL (profit) SPL (loss)

Revaluation of NCA:
Some non-current assets such as land and building rise in value over time so IAS-16 allows in
subsequent years to either adopt a;
1. Cost Model (cost – accumulated depreciation)
2. Revaluation model (revalued amount – subsequent depreciation)
If a business adopts revaluation model then it has to measure its asset on revalued amount and
to calculate new depreciation in subsequent years
New depreciation formula = Revalued amount – residual value
Remaining useful life
Steps:
1. Compare carrying amount with revalued amount
If Carrying amount < revalued amount = Revaluation gain
If Carrying amount > revalued amount = Revaluation loss
 Revaluation gain is unrealized gain so is not recorded in SPL instead it is recorded in
other comprehensive income again which a revaluation surplus is created
 Double entry
DR. Asset A/c
CR. Revaluation surplus account
2. Remove previously recorded accumulated depreciation from asset account
 Double entry
DR. Accumulated depreciation
CR. Asset A/c
Note that if one class of asset is revalued the whole class of asset must be revalued

T-Accounts for exam Questions:

Asset- Cost account

Opening balance – cost Disposal (cost)

Additions – cost

Revaluation (Cost-CA) Closing balance - cost

Prepared by: Lamiyah Fawad Khan

IAS-16 Non- Current Assets

Asset- Accumulated depreciation

Disposals (accumulated depreciation) Opening balance

Depreciation FTY (working-01)

Closing balance

Carrying amount = Closing cost – Closing accumulated depreciation

Asset- WDV account

Opening balance – WDV Disposal (WDV)

Additions – cost Depreciation FTY (working-01)

Revaluation (Cost-CA) Closing balance - WDV

Working 01: If full year policy

1. Calculate depreciation on opening asset
(Opening assets – assets disposed during the year) X % of depreciation
Note that if RBM take carrying amount and subtract assets disposed from it
2. Calculate depreciation on new assets
(Cost of new assets x % depreciation)
Note that this is same for SLM and RBM
3. No depreciation on disposals because of full year policy
Working 01: If pro-rata policy
1. Calculate depreciation on opening asset
(Opening assets – assets disposed during the year) X % of depreciation
Note that if RBM take carrying amount and subtract carrying amount of assets disposed from it
2. Calculate depreciation on new assets
(Cost of new assets x % depreciation) x months used/12
Note that this is same for SLM and RBM
3. Calculate depreciation on disposals
(Cost of disposals x % depreciation x months used/12)
Note that if RBM use carrying amount

Prepared by: Lamiyah Fawad Khan