Professional Documents
Culture Documents
Contents
Introduction
Section 1 - General principles of asset
valuation
Section 2 – Specific asset valuation
problems
Contents (cont.)
General principles of asset valuation
Expensing assets
Straight-line depreciation
Diminishing balance method
Units of production method
Tax depreciation
Components approach
Excess depreciation as a hidden reserve
Accounting for depreciation
Disposal or retirement of a fixed asset
Contents (cont.)
Specific asset valuation problems
Intangible fixed assets
Research and development
Brand names
Patents
Purchased goodwill
Tangible fixed assets
Land and buildings
Plant and equipment
Leased assets
Investments
Introduction – Fixed assets
Fixed assets (non-current assets) represent
future economic benefits which are expected
to be consumed at a slow pace (generaly
over more than one financial year)
Every fixed asset can be considered an
unexpired expense, and at balance sheet
date a company must review to what extent
the individual asset has been consumed
during the accounting period
Introduction – Fixed assets (cont.)
Two central accounting issues:
1. How do we determine tha appropriate value of
an asset at the point of acquisition?
2. How do we systematically recognise the
expensing of the asset over time?
IAS 16 Property, Plant and Equipment
addresses these questions in general and
more specifically for tangible fixed assets
IASB Framework –
Recognition of an asset
The IASB Framework says that an asset should be recognized if
(a) it is probable that a future economic benefit associated with
the element will flow to the entity, and
(b) the item has a cost or value that can be measured reliably.
Applied to a van, this means that, provided that the van is useful
in the company’s operations, and its purchase value is certain, it
should be treated as an asset. As the van is used, the amount of
future economic benefits is decreasing.
Asset valuation
Fixed assets are initially recorded at
acquisition cost, which includes all
expenditure to get the asset ready for use
Should only include items reflecting economic
benefits which extend over the current accounting
period
Can include internal costs
Subsequent expenditure is added to the cost
only if it will produce economic benefits
beyond its originally assessed performance
IAS 16 – Elements of acquisition cost
15.An item of property, plant and equipment that qualifies for recognition
as an asset shall be measured at its cost.
16. The cost of an item of property, plant and equipment comprises:
(a)its purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and rebates.
(b)any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the manner
intended by management.
(c) the initial estimate of the costs of dismantling and removing the
item and restoring the site on which it is located, the obligation for
which an entity incurs either when the item is acquired or as a
consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.
IAS 16 – Elements of acquisition cost
(cont.)
17. Examples of directly attributable costs are:
(a)costs of employee benefits arising directly from the construction or
acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after
deducting the net proceeds from selling any items produced while
bringing the asset to that location and condition (such as samples
produced when testing equipment); and
(f) professional fees.
Source: IAS 16 - Property, Plant and Equipment
Expensing fixed assets
Fixed assets generally have a finite life – as
they age (technically, commercially), their
acquisition cost will be expensed in order to
match with the revenues produced by using
them (consumption of future economic
benefits)
This is a typical allocation problem
Allocating the original cost of the asset over the
period of its use
Depreciation or amortization = the systematic
expensing of the cost of an asset over the
period which benefits from its use
Depreciation accounting
Depreciable amount = acquisition cost
minus the residual value of the asset
The depreciable amount is allocated on a
systematic basis over its useful life
The depreciation method shall reflect the
pattern in which the asset’s future economic
benefits are expected to be consumed
Example – Purchase of a van (1)
60. The depreciation method used shall reflect the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity.
61. The depreciation method applied to an asset shall be reviewed at
least at each financial year-end, if there has been a significant change
in the expected pattern of consumption of the future economic
benefits embodied in the asset, the method shall be changed to
reflect the changed pattern.
IAS 16 - Depreciation accounting
(cont.)
73. The financial statements shall disclose, for each class of property,
plant and equipment:
(a) the measurement bases used for determining the gross carrying
amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning
and end of the period
Source: IAS 16 - Property, Plant and Equipment
Straight-line depreciation
d= 1- n
R
A
with: d= depreciation rate
n= number of accounting periods
R= residual value
A= acquisition cost
Impact of depreciation method on
annual depreciation expense
Annual
depreciation
expense Diminishing
balance
Straight-line
Time
Impact of depreciation method on
book value of asset
Book value
Time
Example diminishing value depreciation
Suppose that an asset was acquired for €1,050 with an expected
useful life of five years and a scrap value of €50.
The annual rate would be 45.6 per cent.
Straight-line/economic
Year 1 20,000 (5,000) 15,000 3,750
Year 2 20,000 (5,000) 15,000 3,750
Year 3 20,000 (5,000) 15,000 3,750
Year 4 20,000 (5,000) 15,000 3,750
Totals 80,000 (20,000) 60,000 15,000
Units of production method
Depletion method
Fixed asset is expensed according to
physical capacity usage referents
Estimates of resource capacity and
utilization are critical
Components approach
Fixed asset components with different useful
lives or with different benefit consumption
patterns should be recognised separately
Each component will follow proper
depreciation rules
Subsequent expenditure to replace or renew
an asset component will be treated as the
acquisition of a new asset
Depreciation accounts
Balance sheet accounts: the net value of the
asset (carrying amount or book value of the
asset) is preserved through two accounts:
Gross (acquisition) cost
Accumulated depreciation
Income statement account:
Depreciation expense of the current year
Balances and details of these accounts are
used in supplementary disclosures in the
notes to the accounts
Disposal or retirement of a fixed
asset
Derecognition of a fixed asset occurs:
On disposal, or
When future economic benefits are no longer expected
Accounting effect of asset derecognition:
Net book value of asset is eliminated in the balance sheet
A gain or loss on disposal is recognised in the income
statement
Gain or loss on disposal = difference between the net
disposal proceeds and the net book value of the
asset at disposal date
Specific asset valuation problems
Intangible fixed assets
Research and development
Brand names
Patents
Purchased goodwill
Tangible fixed assets
Land and buildings
Plant and equipment
Leased assets
Investments
Investments
Main categories of non-current
assets
Tangible fixed assets (Property, plant
and equipment)
Intangible fixed assets (Intangibles)
Investments (Long-term financial
assets)
Intangible fixed assets
Reflect intangible resources such as
scientific and technical knowledge,
development of new processes or
systems, intellectual property,
privileged customer relationships, etc.
Typical examples: R&D, brand names,
copyrights, computer software, licences,
patents
IAS 38 - Intangibles
An intangible is an identifiable non-
monetary asset without physical
substance
Main characteristics:
They meet the definition of an asset
They lack physical substance