TANGIBLE NON CURRENT ASSETS
Transcription
TANGIBLE NON CURRENT ASSETS
TANGIBLE NON CURRENT ASSETS Definition Acquisition Measure cost Use within the Depreciate business Accounting treatment Straight line ] Record and accounting Reducing balance] treatment Appreciates in value Revalue Record valuation Dispose of [ Cash disposal ] Record and accounting treatment [ Part exchange] Definition NCA are assets bought for business for continuing use. are those with physical form Intangible Assets you cannot touch because it has no physical form. Tangible Assets Characteristics NCA- • • • • long term in nature Not acquired for resale; used to generate income directly/indirectly for a business Cannot be easily converted to cash NCA summary Non current assets Tangible motor vehicles, Land and building, plant and machinery Usually acquired at cost in accordance with the cost concept Intangible copyrights, patents, mailing lists, trademarks, brand names Only treated as assets when they have been acquired at a measurable cost Acquisition of Non current assets Capital and revenue expenditure Capital expenditure• buys a NCA required for use in the business • Spends money to add to the value of an existing asset • has a limited life the only exception is land. Is long term in nature • Capex is not charged to the income statement • includes all costs of acquiring and installing Entries: Dr Non current asset Cr Bank/Payables Revenue expenditure Incurred: (a) For the purpose of running the business- Includes selling & distribution expenses, admin expenses and finance charges (b) to maintain the existing earning capacity of NCA- Repairs, renewals, repainting (c ) is expensed immediately In summary, When all or part of an asset is used up or consumed, in the operations of the business, an expense is incurred. Capital & Revenue expenditure (cont’d) Expenditure Buying van Capital Cost of rebuilding warehouse wall which had fallen down Revenue Building extension to warehouse Capital Painting extension to the warehouse when it is first built Capital Carriage costs on blocks for new warehouse extension Capital Carriage costs on purchases Revenue Carriage costs on sales Revenue Legal costs of collecting debts Revenue Legal charges on acquiring new premises for office Capital Fire insurance premium Revenue Costs of erecting new machine Capital The costs of adding extra storage capacity to a mainframe computer used by the business Capital Customs duty charged on the plant when imported into the country Capital Profit on the sale of an office building Capital income (net of the costs of sale) Capital income and revenue income Capital incomethe proceeds from the sale of non trading assets Profits / losses from the sale are included in the income statement Revenue incomethe amount earned from a company’s main activities: (a) Sale of trading assets (b) Provision of services (c) Interest and dividends received Why is the distinction between capital and revenue items important? To classify asset as capital increases NCA assets reduces expenses, increases profit and capital. This makes the business look more profitable than it actually is so can mislead the user of financial statements. Illustration 1-4 Determining cost of acquiring NCA (IAS 16) Cost- bringing the asset to its present location and condition - acquire the asset -Bring it into working condition -Purchase price, import duties, inbound freight -Initial estimates of dismantling, removing, site restoration -Directly attributable costs - costs of site preparation - Initial delivery, and handling charges -Installation and assembly costs - related professional fees -Insurance while in transit -Testing before use whether asset is working properly Excluded costs -Advert and promotional costs -Administration and general overheads -Training costs -Initial operating losses -Costs of relocating/re organising part or all of an entities operation -Costs of introducing a new product/service. -Costs incurred while asset is left idle -Insurance when asset is in use Illustrations 5-7 Accounting for assets acquired When an asset is acquired, it is recorded in a NCA register. This register is periodically reconciled to the NCA account in the G/L $ Motor Vehicle- Cost xx Addition xx 31/12/xx xx Entries: Dr NCA MV Cr Cash/payables xx xx Or you can use T a/c if you are more comfortable with it Subsequent expenditure Is added to the carrying amount of the asset, but only when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the enterprise. Such expenditure include: (a)Modification of an item of plant to extend its useful life, including increased capacity (b) Upgrade of machine parts to improve the quality of output (c) Adoption of a new production process leading to large reductions in operating costs Depreciation Accounting A mechanism to reflect the cost of using a NCA NCA will become completely useless in future time. Usually this process occurs gradually, i.e. a portion of the asset is used up in each year of its life until completely used up. As an asset is used, there is wear and tear. This wear and tear could be due to:-Obsolescence (out of date, due to development of improved equipment, changes in style) -Use/wearing out or physical deterioration -Depletion (mines)- due to extraction of minerals from them -Inadequacy- no longer used due to growth and changes in size of business Before we continue, let us deal with some key definitions Useful life Period over which a depreciable NCA is expected to be used by the company. Factors affecting useful life:- -physical wear and tear -Obsolesence Depreciation considers both physical wear and obsolesence; it is the shorter of the 2 periods, thus an asset with an estimated physical life of 10 years that is considered to become obsolete in 5 years has an estimated useful life of 5 years Is reviewed periodically and depreciation rates adjusted, requires judgment based on previous experience Residual value Depreciation is not related to changes in the market value of an asset (consistent with cost concept) In some cases entity expects to be able to sell asset at end of useful life. Amount it expects to sell the asset for RESIDUAL VALUE In summary, it is the amount received when the asset is put out of use by the business or amount coy estimates it can sell asset for at end of useful life. Illustration Asset costing $22,000 is expected to have a residual value of $4,000 at the end of its 10 yr life. Each year, 22,000-4,000 (depreciable cost)/10= $1,800 will be recorded as depreciation expense for the year. Depreciation methods Applied consistently from period to period unless altered circumstances justify a change. When the method is changed, the effect should be quantified and disclosed and the reason for the change should be stated. Change for profitability not allowed. Two methods of depreciation are specified in your syllabus: •straight line method; •reducing balance method Straight line method= The total depreciable amount is charged in equal installments to each accounting period over the expected useful life of the asset = Cost of asset - residual value Expected useful life of the asset OR The % of cost charged off each year is called the depreciation rate. The rate is 1/ no. of years of service life. E.g. if asset is to be depreciated over 5 years, rate is 1/5 = 20% Straight line method (cont’d) What is the depreciation rate of the following assets estimated life?: 2 years ½ = 50%; 4 years ¼ = 25% , e.t.c Illustration A non-current asset costing $100,000 with an estimated life of 5 years and no residual value would be depreciated at the rate of:100,000/5= $20,000 per annum. Illustration 8-11 The reducing balance method If you want a car to go faster, you press on the accelerator. Accelerated depreciation writes off the cost of an asset faster than straight line depreciation. This method allocates a relatively large proportion of the cost of an asset to the early years of the assets useful life with a progressively lower charge in subsequent years and so on - Do not deduct the residual value of the asset - The depreciation charge is a fixed % of NBV at end of previous year. Illustration 11, 15, 16 Accumulated depreciation When assets are converted into expenses with the passage of time, there is a reduction to the asset (Cr) and equal increase in the expense a/c (Dr). For assets, accountants prefer to show the original cost of the asset on the BS at all times, therefore rather than decrease the asset account directly, decreases in the asset amount due to depreciation are accumulated in a separate account called Accumulated depreciation. Subsequently, the total depreciation of NCA builds up as asset ages. Whichever method is used to calculate depreciation, the accounting remains the same: Dr Depreciation expense (IS) X Cr Accumulated depreciation (SFP) X Accumulated depreciation (cont’d) Each year -In the SOFP, the balance in the accumulated depreciation account is shown as a deduction from the original cost of the asset. The net is referred to as the book value or as the carrying value of the equipment Plant Accumulated depreciation CV 10,000 ( 4,000) ______ 6,000