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Assets and Depreciation

Chapter 6
October 18, 2018
What is in Accounting Standards
• Definitions
• Recognition criteria: when you record entry and how
• Measurement: At which amount you should record the entry
• Post recognition: What treatment to do after first recording
• Presentation: How to present that item in the financial statements
• Disclosure: Which information to disclose in the financial statements
in respect of that item
• Different types of statements • Is expected to be used, sold,
• Statement of financial position realized in normal operating cycle
• Statement of Profit and loss • Is held primarily for trading
Current and Non-Current

• how the financial statements • Is expected to be realized within

should be presented twelve months from balance sheet
• which items to be grouped or date
disclosed separately • Is cash
• How to classify items between
current and non-current

Definition of
IAS-1 defines
current assets:

All Other Assets are NON-CURRENT ASSETS

Non-current Assets

Types Tangible Intangible

Land Softwares

Building Patents

As per IAS 16, An asset is recognized if
• It is probable that future economic benefits will flow to the
Definitions entity
• And its cost can be measured reliably

• Non-current asset: a tangible assets acquired by a business at cost,

• which can be used for a period of more than one year
• Used to carry out operations in normal course of business
• Examples of which are not non-current assets
• Assets/Items held for sale

• Capital expenditure & Revenue Expenditure

• Expenditure which qualifies as a non-current asset is capital expenditure
• Rest are revenue expenditure
First recording: Cost of asset
• Cost includes all costs necessary to bring the asset to working
condition for its intended use as decided by management
• So it includes:
• Purchase price including all taxes, import duties
• Transportation cost
• Site preparation for fixation of machine
• Installation cost cost
• Professional fee or consultancy
• Estimated cost of dismantling the asset and restoring the site
• Moreover
• Cost of each significant part (if can be separated)
• BNG Transport bought a train for PKR 1 million on January 15, 20X1
and paid through bank. It is considered to have two significant parts
with following cost:
• Engine: PKR 400,000
• Carriages: PKR 600,000
• Required
• Record journal entry
• Present the asset on Statement of financial position
Other costs at the time of purchase
• Non-attributable costs at the time of purchase
• Administrative and other general overheads
• Cost related to introduction of new product or service
• Cost of conducting business in new location or new customer
• Cost of training staff
• A limited bought a special bread making plant on January 1, 20X1 cost in PKR ‘000’
• Purchase price 570
• Import duties 100
• Installation cost 30
• Fuel used in transporting 45
• Administration cost 10
• Staff party to celebrate the new plant 14
• Staff training to use new asset 12
• Testing to ensure plant is fully operational 11
• Proceeds from sale of samples /by-products made during testing 13
• Advertising of special bread to be made by new plant 50
• Initial operating loss 35
• Estimated cost of dismantling cost at the end of life of plant 27
• Required
• Cost to be included at the time of initial recognition
Fixed Assets Register

• Unique identification number • Depreciation for the year

• Date of acquisition • Accumulated depreciation to
• Broader type of asset date
• Asset name • Carrying value / net book value
• Cost of Asset • Date of disposal
• Place of deployment • Authorization of disposal by
• Additions to the asset • Sale proceeds
• Depreciation method • Gain/loss on disposal
Subsequent Costs
• Costs incurred on asset after purchase
• Repairs and maintenance
• A delivery van is painted six months after acquisition for cost of PKR 10,000
• Replacement or renewal of parts
• A new engine was purchased for delivery van which has improved fuel efficiency. Total cost of the engine
was PKR 15,000
• The engine was overhauled for PKR 10,000 which increased useful life of the vehicle by one year
• Major inspections
• If an asset requires “A major inspection as a condition to its continued use” such cost should be
• As per new legislation all public transport buses (Cost PKR 80,000) are required to undergo major
inspection every 2 years costing PKR 20,000 paid by bank. Only passed buses can be put on the route.
• Which costs to capitalize (book as asset and which to expense out)
• Costs that increase useful life of the asset
• Costs that improves performance of the asset
• Depreciation
• Systematic allocation of
• Depreciable amount of an asset
• Over its useful life
• Depreciable amount
• The cost at which the asset is recognized
• Residual value
• Expected disposal value of the asset
• Useful life
• The period over which asset is expected to be used by the entity
Treatment of depreciation
• Journal entry
• Disclosure of carrying value of asset
• Examples:
• A company purchased an equipment on credit for PKR 30,000. It has useful
life of four years. At the end of four years it can be sold for PKR 6,000.
Calculate deprecation and carrying amount of the asset for year 1 & 2.
Disclose the amounts in financial statements.
• How depreciation entry is passed?
• Preparation of T-Accounts
• How the items are disclosed?
Types of depreciation
• Straight line depreciation
• Reducing balance method