Tangible Non-Current Assets - Chapter Summary

Classifying Assets

• To be classified as an asset on the Statement of Financial Position, it must meet the asset definition:
  • Control of something.
  • Result of a past event.
  • Generates future economic benefit (e.g., income).
• Example:
  • Buying a machine (past event).
  • Control over the machine in the factory.
  • Using the machine to make a product to sell to generate future economic benefits.
• If it doesn't meet the definition, it's expenditure in the Statement of Profit or Loss.
  • Example: Machine repairs. It restores the original capabilities but doesn't enhance the machine beyond its initial state.

Valuing Assets

• Assets are initially recorded at cost on the Statement of Financial Position.
• Cost includes:
  • Purchase price.
  • Directly attributable costs: expenses needed to use the asset for the first time.
    • Delivery costs: if the machine is on the South Coast and needs to be delivered to Scotland.
    • Installation costs: digging out the floor, setting up the machine, wiring it in.
• Training costs:
  • Generally not added to the asset cost.
  • Training the person, not the asset.
  • The person could leave employment so there is no control over that person.

Depreciation

• Depreciation: writing off the asset's cost each year to reflect its usage over time.
• The machine's value in the Statement of Financial Position decreases over its useful life (e.g., five years).
• Depreciation is an expense charged each year to reflect the asset's usage.
• Land is not depreciated due to its unlimited life.

Depreciation Methods

• Straight-line method: same depreciation expense each year.
• Diminishing balance method (reducing balance): larger depreciation expense at the start of the asset’s life and smaller in later years.
  • Rationale: new machines are more efficient, generating more income, which should be matched with higher expenses (depreciation).
  • As the asset gets older, it produces fewer products, resulting in lower income and lower depreciation.

Accounting for Depreciation

• Reduce the asset value by crediting Accumulated Depreciation account (on the Statement of Financial Position), instead of crediting the asset account directly.
• Debit depreciation expense on the Statement of Profit or Loss.
• Net Book Value (NBV) = Cost - Accumulated Depreciation.
• Net Book Value is also known as carrying amount or carrying value.
• The Net Book Value goes on the Statement of Financial Position.

Revaluation

• Instead of depreciating, assets can be revalued to reflect their current market value.
• If you revalue one asset in a class, you must revalue all assets in that class. E.g. If you have six buildings listed as non-current assets, you must revalue all six.
• Reverse accumulated depreciation to bring the asset back to its original cost.
• Increase the asset's value to its new revalued amount.
• Depreciate the asset based on the revalued amount.

Disposals

• Compare sales proceeds with the carrying amount (Net Book Value).
• Calculate profit or loss on disposal, which goes to the Statement of Profit or Loss.
• Profit or Loss on disposal = Sales Proceeds - Carrying Amount.

Double Entry for Disposals

• Debit disposal, credit the cost of the asset (removes the asset).
• Debit accumulated depreciation, credit disposals (removes depreciation).
• Account for the proceeds.
  • If part exchange: Debit non-current asset instead of cash/bank.
• The balancing figure in the disposals account represents the profit or loss.