CHAPTER 10: NONCURRENT ASSETS

10.1 The cost of an asset: basic components

Installation costs and costs required to make it suitable for the purpose
intended needs to be considered as well as historical cost
Note 1 to the financial statements discloses the policy with respect to
interest
Capitalising vs. expensing choice e.g supervisors salaries
o If there has been a betterment of the asset, cost should be
capitalized (added to cost of assets)
o If not, cost should be charged to an expenses e.g. account called
repairs and maintenance expense.

10.2 Depreciation of
and depreciation expense

assets

Property, plant and equipment have value because company intends to

receive economic benefits from using them.
The process of allocating the cost over years of benefit is called
depreciation and annual deduction from revenue is depreciation
expense.
In Australia, depreciation used for physical assets, depletion for
wasting assets, amortization for intangible assets and leases.

Why allocate the cost?

If the whole asset cost was deducted from profit in the period in which
it was acquired, that would make that period s profit relatively low,
and subsequent periods profits relatively high.
Depreciation involves an allocation of cost in order to measure profit. It
is not a system to track value changes in assets or to measure the
current value of those assets in the balance sheet.

Why not depreciate land?

Land is not normally susceptible to physical or economic decline

If theres loss of land, the cost can be reduced to revised value

impairment (or writedown)

When does cost allocation (depreciation expense begin)

Capitalise costs incurred on the asset before service asset is put into
service depreciate those costs
Once the asset has been put into service, further costs involved in
painting, maintenance, repairs and so on are now considered to be
expenses
A cost incurred after asset goes into service significantly changes that
assets economic value capitalised as part of the assets cost
depreciated

Accumulated
depreciation is a
contra asset, entry
has no cash
component
Depreciation has no
cash effect

Depreciation is never exact involves prediction of economic use and

useful life

10.3 Depreciation bases and methods

1.

S
t
r
a
g
h

i
t

line depreciation
o Cost of asset
o Est. useful life
o Est. salvage value recovery
amount when asset is sold at end
of useful life
Depreciation=

Cost est . salvage value

est . useful life(no . of periods)

2. Reducing balance
o Cost of asset
o Accumulated depreciation = total depreciation recorded since
acquisition of asset
o Depreciation rate = % of book value (cost depreciation to date)
Depreciation=( Cost accumulated depreciation ) rate
remaining book value of asset rate

reducing balance =1n

n=estimated life years

s
c

r=required depreciation rate

s=estimated residual value

c=originalcost

3. Units of production depreciation and depletion

Depreciationdeplteion for one unit of use production ( e . g . kilometre )=

Costest . salvage v
est .no of units of use produc

10.5 Gains and losses on noncurrent asset disposals

If the company knew in advance what the proceeds would be and
when the sale would happen, asset would be depreciated down to
proceeds amount by that date. So, if the proceeds equal book value,
there is no gain or loss.
Proceeds < book value = loss: more depreciation is needed
Proceeds > book value = gain: too much depreciation was taken, and
the gain is excess (which caused the lower book value) being
recognised.

10.6 Impairment
and
assets revaluations
In Australia, directors need to ensure that the carrying value of an
asset < recoverable amount. If not, carry amount needs to be reduced
to recoverable amount impairment loss
Recoverable amount = whichever is higher: an assets fair value
costs to sell or value in use.
Value in use = PV of future CF
NCA must be measured using cost model or revaluation model.
In latter case, accumulated depreciation is effective brought forward i.e
expense is recognised earlier than expected

10.7

Cost model: carry value = cost accumulated depreciation

o Carrying value of previously impaired asset > recoverable
amount, company can reverse impairment but cant revalue
above cost accumulated depreciation
Revaluation model: asset whose fair value can be measured reliably is
carried at a revalued amount (fair value at date of revaluation
subsequent accumulated depreciation subsequent accumulated
impairment losses)
o Fair value = amount for which asset could be exchanged
between knowledgeable willing parties in an arms length
transaction
o Assets can be revalued upwards (revaluation increment) or
downwards (decrement) from carrying amounts (book value)
o Amount of increment goes to shareholders equity on BS under
revaluation surplus doesnt affect profit
o Decrement recognised as expenses on income statement
reduce profit
o Assets are revalued every 3 years to ensure carrying amount
does not differ from fair value
o All assets within same class should be valued at same time
except downwards revaluation of NCA (must be take when
carrying amount > recoverable amount)
o If increment reverses revaluation decrement, it would be
recognised as income
o Revaluation decrement reverses preceding increment debited
to revaluation surplus
Intangible assets

Patents, copyrights,
trademarks and legal property

If asset has finite life amortised over period of benefit

Infinite life impairment test to determine if value is to be written
down (reduce profit):
o Brand names
o Franchises, distributorships
o Deferred charges incorporation costs, financing costs, long-term
prepaid expenses
o Development costs, intangible if entity can demonstrate:
- Feasible to complete intangible asset
- Intent to use or sell intangible asset
- Intangible asset will generate future economic benefits
- Adequate technical, financial are available to complete
development
- Costs can be measured reliably
Cost of intangibles
Purchase cost and other expenditures made prior to asset use
Internally generated brands, mastheads, customer lists etc cannot be
capitalized and are expenses
10.8 Goodwill
More is paid for group of assets than assets individual worth
Purchased goodwill is excess of cost of acquisition of another entity
over fair value of identifiable net assets (= assets liabilities) and
contingent liabilities
Internally developed goodwill is never capitalized
Following acquisition of goodwill, entity will test for impairment on
annual basis
10.9 Finance leases
Leases are rental agreements in which one individual (a lessee) pays to
owner of property (lessor) a certain amount in return for right to use
property over predetermined period
Two types: finance leases (all risks and benefits incidental to ownership
are substantially transferred to lessee) and operating leases (least
does not result in economic equivalence of ownership, lease payments
expensed as rent expense)
Finance lease on BS:
o Cost = PV of future lease payments using IR found in lease

agreement, recorded at liability

o Leased asset is amortised

o Liability is reduced as payments are made on lease. Each
payment is divided into principal (deducted from liability) and
interest (interest expense)
o Expenses for using leased assets = amortisation and interest
o Significant capital leases are disclosed in notes to financial
statements. Separate disclosure for lease obligations liability,
terms and related amortisation and interest expenses.
Accrual accounting recognises economic value of asset and disregards
legalities of ownership

10.10
Reporting of NCA and associated
depreciation/amortisation
Corporations Act 2011 and Australian Accounting Standards require
disclosures including:
Depreciation and amortisation expenses
Cost and accumulated depreciation by major classes of assets
(revalued amount shown in place of cost)
Description of enterprise's accounting policies with respect to
depreciation/amortisation
Details of carrying amount for each class of property, plant and
equipment
Statement that assets have not been valued above recoverable
amount
10.11
Managers and NCA
Managers need to make judgments:
What should be included in the cost of an asset, and over what period
should it be depreciated?
When should assets be revalued, and who should do the revaluation?
Should development costs be capitalised or expensed?
Over what period should intangibles be amortised, or are they subject
to an impairment test?
What value should be put on brand names, trademarks and so on?
Decision affect valuation of assets affect performance measures e.g.
return on assets affect profit figure
10.12
Public sector issues
Heritage assets are included in departments assets at nominal value
of $1 justifiable due to unique of cultural attributes of vast majority of
acquisitions which will be retained in perpetuity