Non Current Assets

accountingclassroom.
com 2008 Student Notes for ACCA F3-Financial Accounting

Topic 8
Non-current Assets
accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Session Objectives
Define non-current assets
Recognise the difference between current and non-
current assets
Explain the difference between capital and revenue
items
Classify expenditure as capital or revenue
expenditure
Prepare ledger entries to record the acquisition and
disposal of non-current assets
Session Objectives
Record profits or losses on disposal of non-current
assets in the income statement including part
exchange transactions
Record the revaluation of a non-current asset in
ledger accounts, the statement of comprehensive
income and in the statement of financial position
Calculate the profit or loss on disposal of a revalued
asset
Illustrate how non-current asset balances and
movements are disclosed in financial statements
Session Objectives
Explain the purpose and function of an asset
register
Understand and explain the purpose of depreciation
Calculate the charge for depreciation using straight
line and reducing balance methods
Identify the circumstances where different methods
of depreciation would be appropriate
Illustrate how depreciation expense and
accumulated depreciation are recorded in ledger
accounts
Session Objectives
Calculate depreciation on a revalued non-current
asset including the transfer of excess depreciation
between the revaluation reserve and retained
earnings
Calculate the adjustments to depreciation necessary
if changes are made in the estimated useful life
and/or residual value of a non-current asset
Record depreciation in the income statement and
statement of financial position
Characteristics of Non-current
Assets
Long term in nature
Not normally acquired for resale
Could be tangible or intangible
Used to generate income directly or
indirectly
Not normally liquid asset
Capital Expenditure
Expenditure on acquisition of Non-
current assets for use in business
Expenditure on increasing the earning
capacity of existing assets.
Expenditure incurred for a long term that
creates an asset with value
Examples: New machineries purchased,
renovation of buildings, purchase of furniture
and fixtures, purchase of computer
equipment and office vehicles
Revenue Expenditure
Expenditure incurred for carrying on the
day-to-day operations of the
organisation.
Expenditure on current assets
Expenses for maintaining the earning
capacity
Examples : Salaries paid to employees,
expenditure on rent incurred, interest
payments, administrative expenses, sales
commissions etc.
Non-current Assets Registers
Records of individual tangible Non-
current assets held by the business.
Function of the Register is to control
Non-current assets and keep a track of
them
Non-current Assets Registers
The details include:
Cost, Date of Purchase
Description of Asset, Serial / reference
number
Location of asset
Depreciation method, Expected useful life
Net book value
Acquisition of Non-current
Assets
Cost of Non-current asset = Amount
incurred to acquire the Non-current asset
and bring it to working condition
Cost includes:
Purchase price + Delivery cost + Legal fees
+ Subsequent expenditure which enhances
the asset
Cost DOES NOT include revenue
expenditure such as repairs or renewals or
repainting cost
Acquisition of Non-current
Assets
Entry to record purchase of asset:
Dr. Non-current asset
(Non-current Asset = Real account: Debit what
comes in)
Cr. Bank / Cash / Creditors
(Bank and Creditors: Personal account: Credit
the giver)
A separate account should be kept for
each category of Non-current asset.
Subsequent Expenditure which
Enhances the Asset
This expenditure can only be recorded
as a part of the cost or capitalised if it
enhances the benefits of the asset.
Example includes: extension to a shop
building. However, repair work does not form
a part of this expenditure.
Depreciation
According to IAS 16, depreciation is
the measure of the cost or revalued
amount of the economic benefits of the
tangible non-current asset that has been
consumed during the period
Causes of Depreciation
Use
Physical wear and tear
Passing of time
Obsolescence through technology and
market changes
Depletion
Methods of Calculating
Depreciation
Straight line method
Reducing balance method
Straight Line Method
Depreciation charge is the same each
year as the assumption is that the
benefit is consumed evenly over the life
of the asset
Useful for assets which provide equal
benefit each year e.g. machinery
Straight Line Method
Depreciation charge = (Cost Residual
value) / Useful economic life
Residual value or scrap value or salvage
value = Estimated disposal value of the
asset. Often this value is zero
Useful economic life = Estimated number
of years during which the business will
use the asset
Reducing Balance Method
Reducing amount of depreciation is
charged each year
Useful for assets which provide more
benefit in the earlier years e.g cars
Depreciation charge = X% x Net Book
Value (NBV)
NBV = original cost accumulated
depreciation
Accounting for Depreciation
Dr Depreciation Expense
Cr Accumulated depreciation
Reduce the balance sheet value of the Non-
current asset by cumulative depreciation to
reflect the wearing out.
Record the depreciation charge as an
expense in the income statement to match
the revenue generated by the Non-current
asset.
Consistency and Subjectivity
When Accounting for
Depreciation
IAS 16 Property, Plant and Equipment
requires the following:
Depreciation method should be reviewed
at each year end and changed if the
method used no longer reflects the
pattern of use of the asset
Residual value and useful economic life
should be reviewed at each year end and
changed if expectations differ from
previous estimates
Disposal of Non-current
Assets
Profit / loss on disposal
An accounting profit or loss will arise on the
disposal of Non-current asset.
If:
Proceeds > NBV (at disposal date) PROFIT
Proceeds < NBV (at disposal date) LOSS
Proceeds = NBV (at disposal date) NEITHER
PROFIT NOR LOSS
Disposal for Cash
Consideration
Step 1: Remove the original cost of the Non-
current asset from the Non-current asset
account
Dr. Disposals (Original cost)
Cr. Non-current assets (Original cost)
Disposal for Cash
Consideration
Step 2: Remove Accumulated depreciation on
the Non-current asset from accumulated
depreciation account.
Dr. Accumulated Depreciation
Cr. Disposals
Step 3: Record the cash proceeds
Dr. Cash (proceeds)
Cr. Disposals (proceeds)
accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
Disposal for Part-Exchange
Agreement
Step 1: Remove the original cost of the Non-
current asset from the Non-current asset
account
Dr. Disposals (Original cost)
Cr. Non-current assets (Original cost)
Step 2: Remove Accumulated depreciation on
the Non-current asset from accumulated
depreciation account.
Dr. Accumulated Depreciation
Cr. Disposals
Disposal for Part-Exchange
Agreement
Step 3: Record the part-exchange
allowance (PEA) as proceeds:
Dr. Non-current assets (Part of cost of new
asset)
Cr. Disposal (Sale proceeds of old asset)
Step 4: Record the cash paid for new
asset
Dr. Non-current assets (Cash)
Cr. Cash (Cash)
Revaluation of Non-current
Assets
Business may need to revalue assets
to present the revalued amounts in the
balance sheet.
The difference between the NBV and
the revalued amount is shown as
revaluation reserve in the balance
sheet
The gain is not recorded in the income
statement as it is unrealised gain
Depreciation of a Revalued
Asset
The charge for depreciation should be
based on the revalued amount and the
remaining useful life of the asset
This charge will be higher than
depreciation prior to the revaluation
Depreciation of a Revalued
Asset
The excess of the new depreciation
charge over the old depreciation charge
should be transferred from the
revaluation reserve to the accumulated
profits
This is done within the capital section of
the balance sheet
Dr. Revaluation reserve
Cr. Accumulated profits

Non Current Assets

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com 2008 Student Notes for ACCA F3-Financial Accounting

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