MN-2573 Week 5 Non-Current Assets

Non-Current Assets

  • Definition: Non-current assets are long-term resources owned by a business not meant for immediate sale. They provide value over multiple accounting periods.

  • Categories:

    • Tangible Non-Current Assets: Physical items like properties and machinery.

    • Intangible Non-Current Assets: Non-physical assets such as patents and trademarks.

Agenda

  • Overview of non-current assets

  • Details about tangible non-current assets

  • Discussion on depreciation, disposal and sale of tangible assets

  • Review of relevant International Accounting Standards (IAS):

    • IAS 16 (Property, Plant and Equipment)

    • IAS 40 (Investment Property)

    • IAS 23 (Borrowing Costs)

    • IAS 38 (Intangible Assets) and amortisation.

Definition of Assets

  • Key Characteristics:

    • Must provide future economic benefit.

    • Benefits arise from past transactions/events.

    • The business has control over the resource.

    • Cost/value must be measurable.

Non-Current Assets

  • Usage: Intended for long-term operations and not for regular sales in the ordinary course of business.

  • Types:

    • Tangible: Assets that have physical substance.

    • Intangible: Non-physical assets (e.g., goodwill, patents).

Tangible Non-Current Assets

  • Examples:

    • Land and property

    • Plant and equipment

    • Motor vehicles

    • Fixtures and fittings

  • Depreciation: Tangible non-current assets with finite lives must undergo depreciation and can be categorized under Property, Plant, and Equipment.

Capital and Revenue Expenditure

  • Capital Expenditure: Involves acquiring non-current assets or enhancing their value.

  • Revenue Expenditure: Incurred to maintain existing earning capacity, does not increase the asset's value.

International Accounting Standards (IAS) 16 - Property, Plant and Equipment

  • Initial Measurement: At cost, includes everything necessary to bring the asset to a usable state (e.g., purchase price, dismantling costs).

  • Subsequent Measurement: New expenditure added if it enhances the asset beyond normal performance. Repairs are typically expensed rather than capitalised.

Depreciation of Tangible Non-Current Assets

  • Definition: Economic benefits consumed from the asset due to usage, wear and tear, etc.

  • Calculation of Carrying Amount: Cost of Asset - Accumulated Depreciation = Carrying Amount

  • Impairment Loss: Occurs when the asset's value declines below its carrying amount.

Importance of Depreciation

  • Legal: Complies with IAS 16, which mandates non-current assets depreciate over time.

  • Prudence Convention: Ensures asset values reflect true worth, avoiding overstatement.

  • Matching Principle: Aligns expenses with the associated income.

Methods of Depreciation

  • Straight-Line Method: Allocates equal amounts each year over the asset's useful life.

    • Formula: Annual depreciation = (Cost - Residual Value) / Useful Life

  • Reducing Balance Method: Applies a consistent percentage to the carrying amount yearly.

    • Formula: Annual depreciation = Carrying Amount x Depreciation Rate

Disposal of Tangible Non-Current Assets

  • Recognizes gain or loss on the sale based on comparison of sale proceeds to net book value (Cost - Accumulated Depreciation).

  • Double Entry Accounting:

    • Remove asset cost and accumulated depreciation from records.

    • Record sales proceeds.

    • Reflect any gain or loss in profit/loss statement.

Revaluation of Non-Current Assets

  • Options: Entities can choose asset valuation at cost or fair value.

  • Revaluation Process: Record increases in asset value and adjust for accumulated depreciation.

Investment Property (IAS 40)

  • Definition: Property held to earn rentals or for capital appreciation, not for production or sale in ordinary business.

Borrowing Costs (IAS 23)

  • Definition: Costs incurred for acquiring, constructing, or producing qualifying assets. Must be capitalised if related directly to the asset.

Intangible Assets (IAS 38)

  • Definition: Non-monetary assets without physical substance, identified via legal rights.

  • Examples: Trademarks, software, patents, copyrights.

  • Exclusion of Goodwill: Goodwill is not identifiable but remains an intangible asset.

Amortisation of Intangible Assets

  • Defined as systematic allocation of the cost of an intangible asset over its useful life.

  • Assets with indefinite lives aren’t amortised but tested for impairment annually.

  • Amortisation recorded as an expense in profit/loss statement.

Research and Development Costs

  • Research Phase: All costs written off.

  • Development Phase: Costs may be capitalised if future benefits are deemed probable (criteria includes feasibility, intent to complete, resource availability).

Practical Examples

  • Example evaluations of research and development costs against accounting standards, illustrating capitalisation and expense treatments.