Non-current (fixed) assets and depreciation

Assets and Non-current (fixed) assets

Assets - resource capable of producing economic benefits

Non Current (fixed) assets -

• held for use in profit generating process

• on a continuing basis

• not for sale in ordinary course of business

Classification

• property, plant and equipment, also called tangible non-current (fixed) assets ( you can see them and touch them)

• Intangible, non-current (fixed) assets

• Investments held long term

• Intangible: no physical substance

• patents

• trademarks

• development costs

Valuation - Historical cost and Fair value

Historical cost

• Initially at cost

• Subsequently

• cost less accumulated depreciation = NET BOOK VALUE (NBV)

• Also called depreciated cost

Fair value

• Fair value at date of revaluation

• usually applied to land and building

• revaluation is a choice for the company

• If used, revaluations must be updated regularly

Cost of Non-current (fixed) assets

Purchase price of an asset + the cost of preparing it for use

-Legal costs of acquisition and installation and commissioning costs

Improvements after purchase

Improvement expenditure may extend the assets annual output capacity:

• increasing its economic life

• reducing associated running costs

• Improving the quality of its output

• Costs incurred to improve on the assets original condition, for example:

• extension to a building

• rebuilding shop fittings to attract new type of customer

• these costs should be added to the original cost of the asset and deprecated over the remainder of its useful life

Repairs and Respiration

Any expense incurred with regard to the repair and restoration of fixed asset should be charged to the profit and loss account

for example

Replacing roof damaged in storm

replacing engine in bus

Deprication

Fixed assets are used up. over a period of time through providing goods and services

the purpose of deprivation is to write off of assets over its expected useful life

Deprication is a method of allocating cost

It achieves a matching of costs against the related revenues

In histocial cost (traditional) accounting:

• the Net book value is the result of a calculation.

• original cost - accumulated depreication)

• it is not intended to represent the assets market value

Yearly Deprication - Accumulated depreciation

Each year that the fixed asset is in use, a portion of its cost is deducted from the SF. that portion of cost is ‘matched’ against the revenues of that year. this gives the depreciation charge of the year

the deprivation of fixed assets in each year is added to the depreciation of earlier years to arrive at the accumulated depreciation

Calculation of depreciation

• The cost of the non current (fixed) asset

• the estimated useful life

• The estimated residual value (the value remaining at the end of the useful life)

Total depreciation

Total depreciation of the non-current (fixed) asset is equal to the cost of the non-current (fixed) asset - the estimated residual value

Purpose and methods

The purpose of the depreciation calculation is to spread the total depreciation over the estimated useful life

Methods of depreciation:

-Straight line method

-Reducing balance method

Straight-line method

Cost - expected residual value / expected life

Reducing balance method

those who believe that the non-current fixed asset depreciated faster in the earlier years of its life would calculate the depreciation

formula is

Fixed percentage x net book value at the start of the year