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Chapter 4 IAS 16 Property, Plant and Equipment Tangible Non-Current Assets

IAS 16 Property, Plant and Equipment (PPE)

IAS 16 Property, Plant and Equipment prescribe the accounting

treatment for tangible non-current assets. This standard outlines the
initial measurement of assets, the determinations of their carrying value,
the depreciation expense, and any impairment losses to be recognised.

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Tangible Non-Current Assets Initial Measurement of PPE

IAS 16 Property, Plant and Equipment (PPE) Cost of Tangible Non-Current Assets

The principal issues prescribed in the standard are: IAS 16 states that a tangible non-current asset should be initially
recorded at its cost, which includes:
 The initial recognition of assets at acquisition
 Purchase Cost
 The determination of an asset’s carrying amount
 Any Cost directly attributable to bringing the asset to the condition
 The depreciation charges of assets and location necessary to enable it to be used for its intended purpose

 Any impairment losses to be recognised  Estimated cost of dismantling and site restoration

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Initial Measurement of PPE Initial Measurement of PPE

Cost of Tangible Non-Current Assets Directly Attributable Costs

The total cost to be recognised as non-current assets is the following: Directly attributable costs are costs of bringing the asset to the location
and condition necessary for operation. These costs must be classified as
capital expenditure (assets) in the statement of financial position.

Purchase Price (incl. trade discounts)

+ Directly Attributable Cost (see below)

+ Cost of Dismantling and Site Restoration

Cost to be Capitalized

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Initial Measurement of PPE Initial Measurement of PPE

Directly Attributable Costs Directly Attributable Costs

Examples of directly attributable costs are:  Testing cost on whether the asset is functioning properly
 Cost of employee benefits that arise directly from the construction or  Professional fees (For example, consultancy, legal, architect fees and
acquisition of the non-current asset (For example, wages and stamp duties)
salaries)
 Cost of extension to buildings
 Cost of site preparation (For example, laying of new concrete floor in
the factory of new machinery)  Interest on the loan used to finance the acquisition of the asset

 Initial delivery and handling cost A business may construct tangible non-current assets. For example, a
carpentry business makes furniture for its use, or a construction
 Installation and assembly cost business builds its own offices.

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Initial Measurement of PPE Initial Measurement of PPE

Directly Attributable Costs Directly Attributable Costs

In such cases, all the expenditure incurred to get that asset ready for Note that only costs that arise as a result of construction can be
use can be included in its cost. This includes: included. Any general business expenses, such as insurance or
administration, cannot be included. (Such costs are often called general
 raw material costs (such as timber, paint) overheads.)

 labour costs (used in the construction of the asset)

 other directly incurred costs (such as energy used in the construction,
any rent paid for the space used for construction).

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Activity 1 Activity 1
Rhocat Co is in the business of manufacturing carpets. The management
of Rhocat Co has decided to purchase and install a new carpet-weaving
machine. As a result, Rhocat Co incurred several expenditures that need
to be accounted for as part of the cost of the tangible non-current asset.

Match the item of expenditure on the left column to their

corresponding description on the right.

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Activity 1 Answer Initial Measurement of PPE

Categories of Non-Current Assets

A business's tangible non-current assets can include various types of

assets. Each asset type will have its ledger account in the general ledger.

Staff training costs are not included in the cost of an asset. This is because
it is possible for trained staff to immediately leave their job, so the
business does not benefit from the training.
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Initial Measurement of PPE Initial Measurement of PPE

Categories of Non-Current Assets Categories of Non-Current Assets

Categories of tangible non-current assets (Property, Plant and There are several categories into which tangible non-current assets are
Equipment) are: classified, and each class and its accumulated depreciation have its
ledger account.
 Land and Buildings such as building premises
The final total of these ledger accounts will be included in the Statement
 Plant and Machinery such as factory machinery that may be fixed of Financial Position and is classified under Property, Plant and
or mobile Equipment. The final figure for tangible non-current assets will be
 Fixtures and Fittings such as shelving in a shop and shop display presented in the statement of financial position:
unit

 Office Equipment such as computers, printers and cash registers

 Motor Vehicles such as delivery vans and company cars
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Initial Measurement of PPE Double Entry for PPE Acquisition

Categories of Non-Current Assets Once the cost to be capitalised has been calculated, the amount is
posted to the general ledger using Journals.

Accumulated Carrying The double entry to record the acquisition of non-current assets using
Non-Current Assets Cost Depreciation Amount cash is:
Property, Plant and Equipment:
Land and Buildings X (X) XX
Plant and Machinery X (X) XX
Individual Account Category Explanation
Fixtures and Fittings X (X) XX
Office Equipment X (X) XX DR Individual Non-Current Asset Asset NCA (Asset) increased
Motor Vehicles X (X) XX
XX CR Cash/Bank Asset Cash (Asset) decreased

The carrying amount or the carrying amount is the cost of the

non-current asset less the accumulated depreciation. The statement of The amount to be entered into these accounts is the Capitalization Cost.
financial position will reflect each asset category’s carrying amount.
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Double Entry for PPE Acquisition Double Entry for PPE Acquisition
The double entry to record the acquisition of non-current assets on When the business pays the credit supplier the amount owed, the
credit or using a bank loan is as follows: double-entry is:

Individual Account Category Explanation Individual Account Category Explanation

DR Individual Non-Current Asset Asset NCA (Asset) increased DR Trade Payables Liability Payables (Liability)
decreased
CR Trade Payables Liability Payables (Liability) CR Cash/Bank Asset Cash (Asset) decreased
Bank Loan Liability increased
Loan payable (Liability)
increased

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Double Entry for PPE Acquisition Example 1

As the business pays back the outstanding bank loan sum, the double- On 1 January 20X5, BBB Co purchased the following tangible non-
entry is: current assets:

1. A computer for $1,000 with cash

Individual Account Category Explanation The double entry: DR Office Equipment $1,000, CR Bank $1,000.
DR Loan payable (Liability)
Bank Loan Liability 2. A new piece of plant for $5,000 with cash
decreased
CR Bank Asset Cash (Asset) decreased
The double entry: DR Plant and Machinery $5,000, CR Bank $5,000.

3. A new delivery van for $24,000 on credit

The double entry: DR Motor Vehicle $24,000, CR Payables $24,000

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Example 1 Example 1
The impact of these double entries to the individual ledger accounts is DR Motor Vehicle – Cost (Asset) CR
shown in the below t-accounts (ignore opening balances): Payab
01-Jan-X5 $24,000
les

DR Office Equipment – Cost (Asset) CR

DR Bank (Asset) CR
01-Jan-X5 Bank $1,000
01-Jan-X5 Office Equipment - Cost $1,000
01-Jan-X5 Plant and Machinery - Cost $5,000

DR Plant and Machinery – Cost (Asset) CR DR Payables (Liability) CR

01-Jan-X5 Bank $5,000 01-

Motor Vehicle - Cost $24,000
Jan-X5

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Non-Current Assets Depreciation Non-Current Assets Depreciation

What is Depreciation? What is Depreciation?

An asset is a resource used by a business to generate profits. Depreciation is the expense charged to the statement of profit or loss
in each accounting period to reflect how much of the economic
For example, a production machine is an asset that allows a business to benefit associated with a tangible non-current asset has been used up
manufacture goods to be sold to customers, which helps the business in the accounting period.
generate profit. Usage or consumption of the asset leads to depreciation.

As non-current assets are used (consumed), they wear out and devalue
over time, and this consumption needs to be reflected as a cost to the
business on an annual basis. This cost is depreciation.

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Key Point Non-Current Assets Depreciation

What is Depreciation?

 Useful Economic Life

The useful economic life of a non-current asset is the estimated
Key point
period over which the asset will be consumed until it is worn out or
until the business no longer wishes to use it. It is the period over
Depreciation is the spreading of the depreciable amount which an asset will be useful and generate economic benefit for the
of the non-current asset over its useful economic life: business.
(Cost – Residual Value) / Useful Economic Life

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Non-Current Assets Depreciation Non-Current Assets Depreciation

What is Depreciation? What is Depreciation?

 Residual Value The purpose of depreciation is to match the revenue and expense in the
same accounting period in line with the accruals principle of
Non-current assets may be sold before they are completely worn out. accounting.
This can be due to a newer asset model being required or because the
asset is no longer needed. The estimated proceed from selling the Non-current assets generate profits for a business. Depreciation is the
non-current asset is the residual value. cost of the business using the non-current asset. Therefore, the
depreciation cost is included as an expense in the statement of profit or
 Depreciable Amount loss so that the cost of using the asset matches the profits generated
from it. This is an application of the accruals principle.
The depreciable amount is the cost of the non-current asset less any
expected residual value. The depreciable amount of an asset is used
to calculate the depreciation charge each year.

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Activity 2 Activity 2 Answer

For the below statements, answer if they are True or False:
1. True. The consumption of a tangible non-current asset is why
1. Depreciation is a measure of the cost to the business of consuming depreciation is calculated.
the economic benefits associated with a tangible non-current asset for
an accounting period. 2. False. This statement is false because market values are not relevant.
A tangible non-current asset is held for its use in the business and not
2. Depreciation measures how much the market value of a tangible non- for resale.
current asset falls during an accounting period.
3. False. Land owned by a business is never depreciated. This is because
3. All tangible non-current assets need to be depreciated. land is not consumed (unless it is a mine or a quarry, where its
resource may be depleted).

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Exam Guidance Calculating Non-Current Asset Depreciation

Depreciation spreads the depreciable amount of the non-current asset
over its useful economic life. The depreciation cost is recorded in the
statement of profit or loss as an expense.

There are two methods of calculating the depreciation cost in an

Exam advice
accounting period:
Most land cannot be consumed by a business, so it has
 Straight-Line method
an indefinite life. This means there is no depreciation
charged on land.  Reducing Balance method

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Calculating Non-Current Asset Depreciation Calculating Non-Current Asset Depreciation

Straight-Line Method Straight-Line Method

The straight-line method of charging depreciation is where the total In a straight-line method, the depreciation charge is calculated as
depreciable amount is charged in equal instalments over the asset’s follows:
expected useful life.
Depreciation charge per year (Cost of Asset – Residual Value of Asset)
= Estimated Useful Economic Life of Asset

or

Depreciation charge per year = Depreciation Rate (%) x Cost of Asset

At the end of the year, the asset value will decrease by the depreciation
charge. The value after the depreciation charge is known as the
carrying amount.
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Example 2 Example 2
Tareq purchases ten laptops for $1,000 each on 1 January X1. Tareq Answer:
estimates the useful life of the laptops is three years, after which they (Cost $10,000 – RV $3,430)
can be sold for $3,430. Tareq has a financial year-end of 31 December. Depreciation charge = = $2,190
EUL 3 years
Using the straight-line method, what is the ten laptops‘ carrying
value/ carrying amount for each year? Depreciation Charge Table
End of Y1 ($) End of Y2 ($) End of Y3 ($)
Cost of Computer 10,000 10,000 10,000
Depreciation – Y1 (2,190) (2,190) (2,190)

Depreciation – Y2 (2,190) (2,190)

Depreciation – Y3 (2,190)

Accumulated Depreciation (2,190) (4,380) (6,570)

Carrying Value: 7,810 5,620 3,430

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Activity 3 Activity 3 Answer

What are the annual depreciation charges for each of the (Cost $15,000 – RV $0)
1. Depreciation charge = = $5,000
scenarios below? EUL 3 years

1. Tareq purchases a second-hand delivery vehicle for $15,000, which (Cost $22,000 – RV $2,000)
has an estimated useful life of three years and zero residual value. 2. Depreciation charge = = $2,500
EUL 8 years

2. Tareq purchases a new mixing machine for $22,000. This has an

estimated useful life of eight years and a residual value of $2,000. (Cost $3,400 – RV $340)
3. Depreciation charge = = $510
EUL 6 years
3. Tareq purchases new office furniture for $3,400. This has an
estimated useful life of six years and a residual value of $340.

4. Tareq purchases a new printer for $2,500. The depreciation rate for all 4. Depreciation charge = Cost $2,500 x 20% = $500
office equipment is 20%.

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Calculating Non-Current Asset Depreciation Key Point

Reducing Balance Method

In the straight-line method, depreciation charged is expressed as a fixed

percentage of the asset’s cost. In contrast, the reducing balance method Key point
expresses depreciation as a fixed percentage of the asset’s carrying
amount. An asset’s Carrying amount (NBV) is its value after
deducting the accumulated depreciation from the asset's
initial cost.
Carrying amount (NBV) = Cost – Accumulated
Depreciation

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Calculating Non-Current Asset Depreciation Example 3

Reducing Balance Method Tareq purchases ten laptops for $1,000 each on 1 January X1. Tareq
depreciates his office equipment at a rate of 30% using the reducing
The reducing balance method uses a percentage applied to the carrying balance method.
amount of an asset rather than its cost.
What is the ten laptops‘ carrying value/ carrying amount for
each year?
Depreciation Rate (%) x Asset’s Carrying
Depreciation charge per year =
amount

In the reducing balance method, the depreciation percentage is applied

to a reduced figure each year, resulting in a lower depreciation charge
each year.

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Example 3 Activity 4
Answer: 1. Tareq purchases a new delivery truck for $40,000. The reducing
balance rate of depreciation is 25%.
$ What is the depreciation charge in year two?
Cost 10,000
Depreciation (Y1) 30% of $10,000 (3,000)
Carrying amount (end of Y1) 7,000

Depreciation (Y2) 30% of $7,000 (2,100)

Carrying amount (end of Y2) 4,900

Depreciation (Y3) 30% of $4,900 (1,470)

Carrying amount (end of Y3) 3,430

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Activity 4 Activity 4 Answer

2. Tareq purchases a new industrial freezer unit for $14,000. The 1. The correct answer is $7,500.
reducing-balance rate of depreciation is 35%.
What is the carrying amount of the industrial freezer unit after
three years?

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Activity 4 Answer Example 4

2. The correct answer is $3,845. In examples 2 and 3, Tareq depreciates the same ten laptops using
straight-line and reducing balance methods. The table below
demonstrates the depreciation expense and the carrying amount using
the two methods:

Straight Line Method Reducing Balance

($) Method ($)
Cost 10,000 10,000
Depreciation (Y1) (2,190) (3,000)
Carrying amount (end of Y1) 7,810 7,000

Depreciation (Y2) (2,190) (2,100)

Carrying amount (end of Y2) 5,620 4,900

Depreciation (Y3) (2,190) (1,470)

Carrying amount (end of Y3) 3,430 3,430

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Example 4 Example 4
 Year 1 Depreciation – In the first year, the depreciation charge is  Carrying amount at the end of Year 3 - At the end of the computer
higher with the reducing-balance method. This means the carrying equipment's useful life, its carrying amount is the same under both
amount is smaller at the end of the year than with the straight-line methods. Regardless of the method used, the business starts and
method. ends at the same position with the same depreciable amount being
The reducing-balance method assumes that more computer charged over the three years.
equipment is 'consumed' in the first year (more of the benefits
associated with the computer equipment are used up).

 Year 3 Depreciation – In the final year, the reducing-balance method

results in a lower depreciation charge than the straight-line method.
This is because the reducing-balance method assumes that fewer of
the benefits of the computer equipment is consumed in the later
years.

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Calculating Non-Current Asset Depreciation Calculating Non-Current Asset Depreciation

Which Depreciation Method to Use? Which Depreciation Method to Use?

A business selects the depreciation method based on how they expect to  If the business expects greater benefits in earlier years, they use
use the asset’s economic benefits. the reducing balance method. This is when an asset becomes
increasingly less productive for each year of use.
 If the business expects equal benefits each year, the straight-line
method is used. For example, a business owns a manufacturing machine. It is expected
that the machine will produce more output in the early years of its
For example, a business owns a furniture piece. Since the furniture is useful life, which decreases over the years. Since greater benefits are
not expected to vary its benefit contributions to the business expected in its earlier years, the machine should apply the reducing
throughout its useful life, the straight-line depreciation method should balance depreciation method.
be applied.

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Activity 5 Activity 5
Determine the most appropriate method of depreciation for each Determine the most appropriate method of depreciation for each
situation: the straight-line method or the reducing balance situation: the straight-line method or the reducing balance
method method

1. Kayla has purchased a radio for her staff. In the earlier years, she 3. Burton has bought a lawnmower for his gardening company. He
expects it will motivate them to work faster, but its effect to diminish expects to get equal benefits from it each year it is used.
over time.
4. Burton buys a used delivery van which he expects to travel the same
2. Kayla buys a brand-new delivery van. The van is expected to be used distance yearly.
most in the early years when it has low mileage and will be used less
as its mileage increases.

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Activity 5 Calculating Non-Current Asset Depreciation

Pro Rata Depreciation
1. Greater benefits in earlier years – Reducing Line method
A business may purchase an asset at any point during a financial year.
2. Brand new van – Reducing Line method In such cases, is it appropriate to calculate a full year's depreciation
charge? The answer to this question varies from business to business.
3. Equal yearly benefits – Straight Line method
A business will have a policy stating whether it uses the full-year or
4. Second-hand van – Straight Line method pro–rata option.

 Full-Year Depreciation Policy – A full year's depreciation charge is

calculated in the year an asset is purchased. A zero-depreciation
charge is applied in the year the asset is disposed of.

 Pro-Rata Depreciation Policy – The depreciation charge is calculated

pro rata in the year an asset is purchased and when it is disposed of.
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Example 5 Example 5
Tareq's business prepares financial statements to 30 June each year and Tareq has a policy of depreciating its non-current assets on a pro-rata
the current financial year end is 30 June 20X5. The following tangible basis. The financial period is from 1 July 20X4 to 30 June 20X5. The
non-current assets were purchased partway through the year: depreciation charge for the financial period ending 30 June 20X5 is:

1. Delivery Vehicle

The delivery vehicle was purchased on 1 March 20X5. Tareq has

owned the non-current asset for 4 months (1 March X5 to 30 June
X5).

Therefore, the delivery vehicle’s depreciation charge for the year is

($15,000 ÷ 3 years) = $5,000 x 4/12 months = $1,667

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Example 5 Example 5
2. Office Furniture 3. Industrial Freezer Unit

The office furniture was purchased on 1 October 20X4. Tareq has The freezer unit was purchased on 1 August 20X4. Tareq has owned
owned the non-current asset for 9 months (1 October X4 to 30 June the non-current asset for 11 months (1 August X4 to 30 June X5).
X5).
Therefore, the freezer’s depreciation charge for the year is $14,000 x
Therefore, the office furniture’s depreciation charge for the year is 35% = $4,900 x 11/12 months = $4,492
[($3,400 - $340) ÷ 6 years] = $510 x 9/12 months = $383

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Calculating Non-Current Asset Depreciation Example 6

Changes in Depreciation Method, Useful Life or Residual Value Tareq purchased a delivery truck on 1 July 20X4 for $40,000, which had
an estimated useful life of eight years, a residual value of $4,000 and
It is a requirement of IAS 16 that the depreciation method used for an was initially depreciated at a rate of 25% a year using the reducing-
asset is reviewed regularly. If the way that the asset generates balance method.
economic benefit alters, then the method to calculate depreciation
should be changed accordingly. Tareq decided that from 1 July 20X5 onwards, the delivery truck would
generate equal economic benefits each year.
At the date of the change in depreciation method, the asset is
depreciated using the carrying amount of the asset and its remaining
useful life.

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Example 6 Example 6
The impact of the change in depreciation method includes: 2. Carrying Value at the date of the change

1. Change in depreciation method The carrying amount of the delivery truck on 1 July 20X5 (after one
year of reducing-line balance depreciation at the rate of 25%) is:
Future depreciation charges associated with the delivery truck are
based on the asset’s carrying amount at the date of the change, and
the truck will be depreciated under the new method.

In this example, the change date is 1 July 20X5, and the new method
is straight-line depreciation.

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Example 6 Calculating Non-Current Asset Depreciation

3. Establish the Remaining Useful Life and Residual Value Changes in Depreciation Method, Useful Life or Residual Value

At the date of purchase (1 July 20X4), Tareq had estimated that the The useful life (UL) or residual value (RV) of a non-current asset may
truck’s useful life was eight years. change during the lifetime of an asset. Such a scenario may occur as the
asset’s useful life and residual value are estimated at the acquisition
Therefore, the remaining useful life is seven years on 1 July 20X5 point. Therefore, these may change over time.
(one year later). The residual value is unchanged at $4,000.
Dealing with useful life or residual value changes is similar to
4. Calculate the depreciation charge based on the new method depreciation method changes. The asset’s carrying amount at the
change date is depreciated over the revised useful life and residual value.
The depreciation charge is ($30,000 – $4,000) ÷ 7 years = $3,714

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Example 7 Example 7
Tareq purchased a mixing machine on 1 July 20X4 for $22,000. At that At the date of change (1 July 20X7), Tareq needs to establish the
date, he estimated that the residual value was $2,000 and the useful life following:
was eight years. The machine is depreciated using the straight-line
method. 1. Carrying Value

As a result of new technologies being introduced for mixing machines, Cost = $22,000
on 1 July 20X7, Tareq re-assessed the useful life of the mixing machine
down to six years and the residual value down to $1,000. Accumulated depreciation = [($22,000 – $2,000) ÷ 8 yrs] x 3 years
= $7,500

Carrying Value = $22,000 - $7,500 = $14,500

2. Revised Useful Life

The revised useful life on 1 July 20X7 is 6 – 3 years = 3 years

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Example 7 Double Entry for NCA Depreciation

3. Revised residual value Once the depreciation charge for the year is calculated, it is posted to
The revised residual value is $2,000 - $1,000 = $1,000 the general ledgers using Journals. The depreciation charge is reported
as an expense in the Statement of Profit or Loss and reduces the asset
On 30 June 20X8, the depreciation charge for the missing machine is: carrying value in the Statement of Financial Position.
($14,500 – $1,000) ÷ 3 years = $4,500

Individual Account Category Explanation

DR Depreciation Expense Depreciation (Expense) increased

Acc. depreciation reduces the value

CR NCA – Acc. Depreciation Asset
of NCA

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Example 8 Example 8
In the year ended 31 June X5, Tareq purchased two new motor vehicles Tareq has calculated the total depreciation charge for the motor vehicles
in the year: for the year as $34,890. The double entry for the depreciation charge is

 a second-hand delivery vehicle for $15,000

 and a new delivery truck for $40,000 DR Depreciation $34,890
These acquisitions have been posted to the Motor Vehicle - Cost account.
The Motor Vehicle Cost account’s opening figure is $264,000. The Motor CR Motor Vehicle – Acc. Depreciation $34,890
Vehicle Accumulated Depreciation account’s opening figure is $132,640.

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Example 8 Example 8
The impact of the acquisition and depreciation on the individual ledger
accounts is shown in the below t-accounts: DR Motor Vehicle – Accumulated Depreciation CR
01-July-X4 Balance b/d $132,640
Balance Depreciation
30-June-X5 $167,530 30-June-X5 $34,890
DR Motor Vehicle – Cost CR c/d expense
01-July-X4 Balance b/d $264,000
2nd hand Delivery $167,530 $167,530
30-June-X5 $15,000
truck 01-July-X5 Balance b/d $167,530
New delivery
30-June-X5 $40,000 30-June-X5 Balance c/d $319,000
truck
$319,000 $319,000 DR Depreciation (Expense) CR
01-July-X5 Balance b/d $319,000 30-June-X5 Motor Vehicle – Acc. Depreciation $34,890

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Example 8 Activity 6
At the end of the year, there is a balance of $319,000 on the Motor Hanna owns a business that manufactures clothing for children. She
Vehicles Cost account and $167,530 on the Motor Vehicles Accumulated employs 15 people and operates from a rented workshop. She designs
Depreciation account. all the apparel and sews garments when she needs to. She has a
financial year-end of 30 September.
This gives a carrying amount (or carrying amount) of $151,470 at the
end of the year, which will be the balance for motor vehicles that will During the year ended 30 September 20X6, she purchased the following
appear in the statement of financial position. tangible non-current assets:

- New sewing machines for $16,900 on 1 May 20X6

- Delivery van for $24,000 on 1 October 20X5
- Computer equipment for $3,800 on 1 December 20X5

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Activity 6 Activity 6
On 1 October 20X5, the balances on her tangible non-current asset All plant and equipment (which includes computer and office equipment)
ledger accounts were: are depreciated at a rate of 20% a year on a straight-line basis, and the
residual value is assumed to be zero.
 Plant and equipment – Cost $129,780
The motor vehicles are depreciated on a reducing-balance basis at 25%
 Plant and equipment – Accumulated Depreciation $47,900 yearly. Hanna's policy is to depreciate assets on a pro-rata basis in the
year of purchase.
 Motor vehicles – Cost $24,900
 Motor vehicles – Accumulated Depreciation $14,396

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Activity 6 Activity 6
1. What is the depreciation charge for the year ended 30 2. What is the depreciation charge for the year ended 30
September 20X6 in respect of each of the assets purchased by September 20X6 for the assets owned by Hanna's business at
Hanna in the year? the start of the year?

a) New sewing machine a) Plant and Equipment

b) Delivery van b) Motor Vehicle

c) Computer equipment 3. What is the total depreciation charge for the year?

4. What is the double entry to post the depreciation charge to

the ledger accounts?

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Activity 6 Activity 6 Answer

5. What amounts will be included in the financial statements of 1. The depreciation charge of the items purchased by Hana during the
Hanna's business for the year ended 30 September 20x6 in year ended 30 September 20X6 are:
respect of the non-current assets?
a) This will be part of plant and equipment and should be depreciated
straight line at 20% yearly. The asset was purchased on 1 May
20X6; therefore, only five months of depreciation should be
included.

The depreciation charge for the sewing machines is $1,408

($16,900 × 20% × 5/12 months).

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Activity 6 Answer Activity 6 Answer

b) This will be part of motor vehicles and should be depreciated at 2. The depreciation charge for the items owned by Hanna in the year
25% a year, reducing balance. The asset was purchased on 1 ended 30 September 20X6 are:
October 20X5, so one year's depreciation is needed.
a) Plant and equipment are depreciated at a rate of 20% straight line
The depreciation charge for the delivery van is $6,000 ($24,000 × yearly. The balance on the cost account at the start of the year is
25%). $129,780; therefore, the depreciation charge for these assets is
$25,956 ($129,780 × 20%).
c) This will be part of plant and equipment and should be
depreciated straight line at 20% a year. The asset was purchased b) Motor vehicles are depreciated at 25% a year, reducing balance.
on 1 December 20X5; therefore, 10 months' depreciation should Because it's reducing balance, the motor vehicle’s carrying amount
be included. needs to be established. The carrying value is $10,504 (Cost
$24,900 – AD $14,396).
The depreciation charge for the computer equipment is $633
($3,800 × 20% × 10/12 months). The depreciation charge for the year on motor vehicles owned at
the start of the year is $2,626 ($10,504 × 25%).
85 86

Activity 6 Answer Activity 6 Answer

3. The total depreciation charge for the year is $36,623. 4. The double entry for the depreciation charge is:

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Activity 6 Answer Activity 6 Answer

5. The Statement of Profit or Loss will report a depreciation charge of Plant and Equipment Cost = b/d $129,780 + Sewing machine $16,900
$36,623. + Computer equipment $3,800 = $150,480

The Statement of Financial Position will have the following balances: Plant and Equipment Acc. Depreciation = b/d $47,900 + charge for the
year $27,997 = $75,897

Motor vehicles Cost = b/d $24,900 + Van $24,000 = $48,900

Motor vehicles Acc. Depreciation = b/d $14,396 + charge for the year
$8,626 = $23,022

89 90

Non-Current Assets Disposal Non-Current Assets Disposal

Disposal of Non-Current Asset Disposal of Non-Current Asset

A business purchases tangible non-current assets to generate profits A business may also decide to sell or dispose of an asset before it has
over several years. These assets will remain with the business until they reached the end of its useful economic life. Examples of such situations
can no longer be used and have been fully depreciated. include:

 A newer and more efficient model of an asset (such as a computer) is

available

 An asset has become redundant. the asset no longer undertakes the

activity that it was used for

 The asset is broken but can be sold for its scrap value.

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Non-Current Assets Disposal Non-Current Assets Disposal

Disposal of Non-Current Asset Disposal of Non-Current Asset

The four elements to consider when disposing of a non-current asset 2. Accumulated Depreciation of the Asset
are:
When disposing of a non-current asset, all aspects of the asset’s
1. Cost of the Asset balances are removed from the general ledgers. The asset’s
accumulated depreciation must be removed from the relevant Non-
When an asset is sold, the business no longer has the asset to use in Current Asset – Accumulated Depreciation account.
the business. This means the asset’s original cost must be removed
from the relevant Non-Current Asset – Cost account. The asset is removed from the statement of financial position
altogether.

93 94

Non-Current Assets Disposal Accounting for NCA Disposal

Disposal of Non-Current Asset Calculating the Gain or Loss on Disposal

3. Sale Proceeds The profit or loss on disposal of a tangible non-current asset is

calculated as:
For non-current assets with residual values, the sales proceeds
received from the business by disposing of such assets will affect the
Profit/
Cash/Bank ledger account. Sales Proceeds Carrying Value
- = (Loss) on
(less any costs of sale) (Cost less accumulated depreciation)
Disposal
4. Profit or Loss on Disposal

The difference between the sales proceeds and the carrying amount  If the sales proceeds exceed the carrying value = profit on disposal
of an asset (Cost – Accumulated Depreciation) determines whether
the sale generates a profit or a loss on disposal.  if the sales proceeds are less than the carrying value = loss on
disposal

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Example 9 Example 9
Salma is a building contractor who runs her own business. The business Sales Proceeds = $400
owns tangible non-current assets such as diggers, power tools, vans, Carrying Value = $2,500 – $1,750 = $750
and computers. Salma prepares financial statements to 31 December
each year. Since the sales proceeds are less than the carrying value ($400 – $750)
of $350, Salma made a loss of disposal of $350.
In the year ended 31 December 20X5, Salma disposed of a power saw.

 It originally cost $2,500 a few years ago

 The accumulated depreciation is $1,750
 It is sold for $400
Did Salma make a profit or loss on selling the power saw?

97 98

Activity 7 Activity 7 Answer

What is the profit or loss on disposal of the items sold by Salma 1. Purchase Cost = $1,000
below? Acc. Depreciation = $1,000 x 8/10 years = $800
Carrying Value = $1,000 – $800 = $200
1. Salma sold some office equipment for $250, which had originally cost
$1,000 eight years ago. The estimated useful life of the office
Profit/(Loss) on Disposal = SP $250 – CV $200 = $50 profit
equipment was ten years. The office equipment is depreciated using
the straight-line method. 2. Carrying Value = $45,000 x 75%^5 = $10,679
2. Salma sold a digger for $10,000 on 30 June 20X5. It had initially cost Profit/(Loss) on Disposal = $10,000 – $10,679 = ($679) loss
$45,000 on 1 January 20X0 and was being depreciated using the
reducing-balance method at a rate of 25% a year. Salma's policy is to
charge a full year's depreciation in the year of purchase and none in
the year of disposal.

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Non-Current Assets Disposal Non-Current Assets Disposal

Double Entry for NCA Disposal Double Entry for NCA Disposal

There are four steps to follow in recording the disposal of non-current 1. Remove Asset from the Cost Account
assets. The double-entry steps revolve around the Disposal Account.
First, the business removes the asset’s cost from the Non-Current Asset
The steps to record the non-current asset disposal are: – Cost account by transferring it to the disposal account.

1. Remove asset from the Cost account Individual Account Category Explanation

2. Remove asset from the Accumulated Depreciation account DR Disposal Control Offset to Disposal Account

3. Record sale proceeds CR Non-Current Asset - Cost Asset The asset is being removed

4. Record profit or loss on disposal

101 102

Non-Current Assets Disposal Non-Current Assets Disposal

Double Entry for NCA Disposal Double Entry for NCA Disposal

2. Remove Asset from the Accumulated Depreciation Account 3. Record Sales Proceeds

Next, the accumulated depreciation is removed from the Asset – The sales proceeds received are recorded in the Disposal and Cash/Bank
Accumulated Depreciation account by transferring the amount to the accounts. If the disposal of the asset generates no sales proceeds, this
Disposal account. entry is omitted.

Individual Account Category Explanation Individual Account Category Explanation

DR Non-Current Asset – Asset The accumulated DR Bank Asset Bank (Asset) has increased
Accumulated depreciation of the asset is
Depreciation removed CR Disposal Control Offset to Disposal Account
CR Disposal Control Offset to Disposal Account

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Non-Current Assets Disposal Non-Current Assets Disposal

Double Entry for NCA Disposal Double Entry for NCA Disposal

4. Record Profit or Loss on Disposal If the sales proceeds exceed the carrying amount (profit on disposal,)
the double entry is:
Finally, the Disposal account is closed off. The balance c/d is the profit or
loss on disposal and is recorded as an income or expense in the
Statement of Profit or Loss. Individual Account Category Explanation

DR Disposal Control Offset to Disposal Account

CR Profit on Disposal Income (SPL) Profit (Income) has increased

105 106

Non-Current Assets Disposal Non-Current Assets Disposal

Double Entry for NCA Disposal Double Entry for NCA Disposal

If the sales proceeds are less than the carrying amount (loss on The Disposal account is created for each non-current asset disposal. The
disposal), the double entry is: entries that are included in the Disposal account are summarised as
follows:
Individual Account Category Explanation
DR Disposal Account CR
DR Loss on Disposal Expense Loss (Expense) has increased Non-Current Asset – Cost X Non-Current Asset - Acc. Depreciation X
(SPL)
Profit on Disposal (if Profit) X Bank (Sales Proceeds) X
CR Disposal Control Offset to Disposal Account
Loss on Disposal (if Loss) X
X X

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Example 10 Example 10
Salma is selling a power saw. The information about the non-current To record the disposal of a non-current asset, the below steps are
asset is as below: followed:

- It originally cost $2,500 a few years ago 1. Remove asset from the Cost account

- The accumulated depreciation is $1,750

DR Disposal $2,500
- It is sold for $400
CR Plant and Equipment - Cost $2,500
- A loss of $350 was made on the disposal

109 110

Example 10 Example 10
2. Remove asset from the Accumulated Depreciation account 4. Record profit or loss on disposal

DR Loss on Disposal $350

DR Plant & Equipment – Acc. Depreciation $1,750
CR Disposal $350
CR Disposal $1,750

The impact of the disposal on the Individual Ledger Accounts is shown in

the below T-Accounts:
3. Record sales proceeds DR Disposal CR

DR Bank $400 Plant & Equipment - Cost $2,500 Plant & Equipment - Acc. Depr $1,750

CR Disposal $400 Sale Proceeds (Bank) $400

Loss on Disposal (balancing figure) $350
$2,500 $2,500
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Example 11 Example 11
On 31 December 20X2, Salma scrapped an old broken laptop. She Answer:
bought the item for the business three years ago at the cost of $800,
and he expected the business would be able to sell it for $100 after five Sales Proceeds = $0 since scrapped
years. This asset was depreciated using the straight-line method.
Annual depreciation charge = ($800 – $100)/ 5 years = $140
Calculate the profit or loss on the disposal of the cash register. Accumulated depreciation = $140 x 5 years = $420
Compute the effect of disposal on the individual ledger accounts. Carrying amount at end of Y3 = $800 – $420 = $380

Since the sales proceeds ($0) are less than the carrying amount ($380),
Salma made a loss on disposal of $380.

113 114

Example 11 Example 11
Answer: Answer:

To record the disposal of a non-current asset, the below steps are 2. Remove asset from the Accumulated Depreciation account
followed:

1. Remove asset from the Cost account DR Office Equipment – Acc. Depreciation $420

CR Disposal $420
DR Disposal $800

CR Office Equipment - Cost $800

3. Record sales proceeds
- Since the cash register is scrapped, no entry is needed.

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Example 11 Example 11
Answer: Answer:

4. Record Profit or Loss on Disposal The impact of the disposal on the individual ledger accounts is shown in
the below T-Accounts:
DR Loss on Disposal $380

CR Disposal $380 DR Disposal Account CR

Office Equipment - Cost $800 Office Equipment - Acc. Depr $420

Sale Proceeds (Bank) -
Loss on Disposal (balancing figure) $380
$800 $800

117 118

Example 12 (Part-Exchange) Example 12 (Part-Exchange)

At the start of 20X3, Salma decides to upgrade her old delivery van. The Answer:
old van had initially cost $10,420 and had accumulated depreciation of
$5,285 at the end of 20X2, bringing its carrying amount to $5,135. Record disposal of the old delivery van:

The cost of the new van is $18,000, and the supplier has agreed to Since the sales proceeds ($4,000) are less than the carrying amount
accept the old van in part exchange on top of an additional $14,000 ($5,135) of the delivery van, Salma has made a loss on disposal of
cash payment. $1,135

The old van is being sold for ($18,000 - $14,000) $4,000. To record the disposal of a non-current asset, the below steps are
followed:
Record the disposal of the old van and the acquisition of the new
van.

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Example 12 (Part-Exchange) Example 12 (Part-Exchange)

Answer: Answer:

1. Remove asset from the Cost account: 3. Record sales proceeds:

The old van is sold not for cash but exchanged for a new van (NCA)
DR Disposal $10,420
DR Motor Vehicle – Cost (new van) $4,000
CR Motor Vehicle - Cost $10,420
CR Disposal $4,000

2. Remove asset from the Accumulated Depreciation account: 4. Record profit or loss on disposal:
DR Motor Vehicle – Acc. Depreciation $5,285 DR Loss on Disposal $1,135
CR Disposal $5,285 CR Disposal $1,135

121 122

Example 12 (Part-Exchange) Example 12 (Part-Exchange)

Record acquisition of the new delivery van: The impact of the disposal on the individual ledger accounts is shown in
the below T-Accounts:
At this stage, only the cash payment of $14,000 to acquire the non-
current asset is recorded. The impact of the $4,000 part exchange is
already considered in Step 3 of the recording disposal of the old van. DR Disposal Account CR
Motor Vehicles - Cost $10,420 Motor Vehicles - Acc. Depr $5,285
Motor Vehicle – Cost (part exchange) $4,000
Cr. Motor Vehicle - Cost $14,000
Loss on Disposal (if Loss) $1,135
Cr. Bank Account $14,000 $10,420 $10,420

Together with the earlier part exchange entry (DR Motor Vehicle – Cost
$4,000), the Motor Vehicle – Cost account will reflect the actual cost of
the new delivery van: ($4,000 + $14,000) = $18,000

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Example 12 (Part-Exchange) Example 12 (Part-Exchange)

DR Motor Vehicles - Cost CR DR Bank Account (Asset) CR

Motor Vehicle – New

Disposal (part exchange) $4,000 Motor Vehicles - Disposal $10,420 $14,000
Delivery Van
Bank $14,000

DR Loss on Disposal (Expense) CR

DR Motor Vehicles – Acc. Depreciation CR
Loss on Disposal $1,135
Motor Vehicles - Disposal $5,285

125 126

Activity 8 Activity 8
Burton owns a business that operates a few shops that sell home During the year ended 30 September 20X4, the following assets were
furnishings. The balances on the tangible non-current asset accounts at purchased for cash:
the start of the year on 1 October 20X3 were:
- A new security alarm system for $15,000

- A new delivery van for $20,000

During the year ended 30 September 20X4, the following assets were
sold for cash:

- A shelving unit for $1,000 that had initially cost $2,000 on 1 October
20X0

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Activity 8 Activity 8
During the year ended 30 September 20X4, an old electronic till was Question:
part exchanged for a new one. The new till cost $2,500, which was
made up of $2,000 cash and $500 for the old till. The old till had initially 1. What is the profit or loss on disposal for the asset sold for
cost $1,750 and had accumulated depreciation of $750. cash?

Burton depreciates shop fixtures and equipment at 20% straight line 2. What are the balances on the Fixtures and Equipment – Cost
and motor vehicles at 25%, reducing balance. A whole year's and Motor Vehicles – Cost accounts at 30 September 20X4?
depreciation is recorded in the year of purchase but none in the year of
sale. 3. What is the balance on the accumulated depreciation accounts
after accounting for disposals in the year but before the
depreciation charge for the year is recorded?

129 130

Activity 8 Activity 8 Answer

Question: 1. The profit on disposal for the asset sold for cash is $200.

4. What is the depreciation expense for the year ended 30

September 20X4?

5. What is the profit or loss on the disposal of the old electronic

till?

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Activity 8 Answer Activity 8 Answer

2. The Fixtures and Equipment Cost account balance is $139,650; the 3. The Fixtures and Equipment Accumulated Depreciation account
Motor Vehicles Cost account balance is $56,000. balance is $41,650; the Motor Vehicles Accumulated Depreciation
account balance is $21,500.

133 134

Activity 8 Answer Non-Current Assets Revaluation

4. The policy is to record a full year's depreciation in the year of Subsequent Measurement
purchase and none in the year of disposal. The depreciation charge
for: All property, plant and equipment are initially measured at cost. The
cost of an asset is its purchase price and other expenses necessary to
Fixtures and Equipment is $139,650 × 20% = $27,930 bring the asset to working condition for its intended use. These non-
Motor Vehicles is ($56,000 − $21,500) × 25% = $8,625 current assets are depreciated, and their carrying amount is reflected in
the statement of financial position.
5. The till was effectively sold for $500. When it was exchanged, it had a
carrying amount of $1,000 ($1,750 − $750). However, there may be assets whose market value (the price at which
the asset can be sold in an open market) is considerably higher than
This asset has a loss on disposal of $500 ($500 − $1,000). their carrying value. The financial statement will not correctly represent
the economic substance of the assets.

Therefore, an asset may be subsequently revalued.

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Subsequent Measurement Subsequent Measurement

IAS 16 and Revaluation The Revaluation Model

IAS 16 permits the value of property, plant and equipment to be When a business opts for the revaluation model of its assets, the
measured after the initial recognition. following must apply:

The two accounting policy permitted in the subsequent measurement is:  Class of Assets
1. Depreciated Cost Model – the asset’s original purchase cost of the All assets of the same class must be revalued. For example, all
asset is depreciated over its useful life buildings are revalued, or all motor vehicles are revalued. This means
that a business cannot choose only those assets that have increased
2. Revaluation Model – the asset is carried at a revalued amount based in value.
on its fair value. The revaluation exercise is carried out regularly to
keep the carrying amount in line with fair value. Following a
revaluation, the revalued amount of the asset is depreciated over its
remaining useful life.
137 138

Subsequent Measurement Subsequent Measurement

The Revaluation Model The Revaluation Model

 Consistent Application  Fair Value can be Measured Reliably

The revaluation policy has to be applied consistently. This means that The carrying value of an asset is revalued to the fair value only if the
a business cannot revalue one year and then revert to the original fair value can be measured reliably. It must be the actual market
cost of the asset the next. It needs to be consistent; otherwise, a value of the asset and can be sold for the price in an open market.
business could revalue when market values have increased and revert
to the original cost when market values have fallen.

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Subsequent Measurement Double Entry for NCA Revaluation

The Revaluation Model Five adjustments are relevant to property, plant and equipment
revaluation. These adjustments are:
 Accounting for Revaluation
 Upward Revaluation of Assets
Typically when assets are first revalued, this will usually be an upward
revaluation where the market value of the assets is higher than the  Revised Depreciation Charge
cost. This results in the assets being stated at a revalued amount.
These assets still need to be depreciated. The revised depreciation is  Excess Depreciation Transfer
calculated as the revalued amount divided by the asset’s remaining
useful life.  Upwards or Downwards Revaluation for assets previously revalued
 Disposal of Revalued Assets

141 142

Double Entry for NCA Revaluation Double Entry for NCA Revaluation
Upward Revaluation of Assets Upward Revaluation of Assets

When the business revalues its assets, the double entry to be posted is: The balance on the revaluation surplus at the year-end will appear in the
statement of financial position as part of capital and reserves. Any
revaluation surplus that arises during the year will be shown as part of
Individual Account Category Explanation other comprehensive income in the statement of profit or loss and other
DR NCA – Cost Asset Increase asset to its revalued comprehensive income.
amount
DR NCA – Acc. Depreciation Asset Remove the total acc. depreciation
CR Revaluation Surplus Equity Record the revaluation adjustment in
the equity account

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Double Entry for NCA Revaluation Double Entry for NCA Revaluation
Revised Depreciation Charge Excess Depreciation Transfer

After an asset has been revalued, it still needs to be depreciated. IAS 16 allows excess depreciation to be transferred within the capital
accounts that appear in the statement of financial position. The transfer
The revised depreciation charge is calculated as = Revalued amount ÷ will be from the Revaluation Surplus account to the Retained Earnings
Remaining useful life account (which is the account that includes the accumulated profits and
losses of the business).
The double entry to record the revised depreciation is similar to any
depreciation charge: It is up to the business to adopt this transfer adjustment; it is not
mandatory.
Individual Account Category Explanation
DR Depreciation Expense Expense Depreciation (Expense) increased
The excess depreciation is the difference between the revised
Accumulated Depreciation reduces depreciation charge and the original depreciation charge had there been
CR NCA – Acc. Depreciation Asset the value of the non-current asset no revaluation.
(Asset)

145 146

Double Entry for NCA Revaluation Example 13

Excess Depreciation Transfer Hassan owns a business that operates a hotel. The business owns the
hotel building, and on 31 December 20X2, its carrying amount based on
The double entry to transfer the excess depreciation is: cost is:

Individual Account Category Explanation

Reduces the revaluation surplus account
DR Revaluation Surplus Capital that is created when the asset is
revalued.
Retained earnings (capital) increased The hotel building is depreciated on a straight-line basis over 40 years.
CR Retained Earnings Capital
The building has been depreciated for nine years. On 1 January 20X3,
Hassan decided to revalue his hotel building. The hotel has a market
This is simply a transfer between the equity accounts and has no impact value of $600,000 on that date.
on the profit for the year, as reported in the statement of profit or loss.
Hassan has a policy of transferring excess depreciation to retained
earnings.
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Example 13 Example 13
1. Calculate the amount of revaluation adjustment The double entry to record the revaluation upwards is:

DR Property – Cost $100,000

DR Property – Acc. Depreciation $112,500

CR Revaluation Surplus $212,500

From the revaluation adjustment of $212,500, $112,500 relates to

accumulated depreciation, and $100,000 relates to cost.

149 150

Example 13 Example 13
2. Revised Depreciation 3. Transfer Excess Depreciation

Hassan's hotel building has been revalued to $600,000. The total Revised Depreciation = $19,355
useful life is 40 years, and nine years' worth of depreciation has
already been charged. Original Depreciation = $500,000 ÷ 40 years = $12,500

The excess depreciation = $19,355 – $12,500 = $6,855

The revised depreciation charge is $600,000 ÷ (40 – 9 = 31 years) =
$19,355 The double entry to transfer the excess depreciation is:

The double entry to record the revised depreciation yearly is: DR Revaluation Surplus $6,855

DR Depreciation Expense $19,355 CR Retained Earnings $6,855

CR Property – Acc. Depreciation $19,355

The balance in Hassan’s revaluation surplus account is now = CR
$212,500 + DR $6,855 = CR $205,645.
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Double Entry for NCA Revaluation Double Entry for NCA Revaluation
Upwards/Downwards Revaluation on previously Revalued Assets Upwards/Downwards Revaluation on previously Revalued Assets

Under the revaluation model, assets must be revalued regularly to Individual Account Category Explanation
ensure that the asset’s carrying value is not materially different from its
fair value. DR Revaluation Surplus Capital Reduce the revaluation surplus by the
revaluation adjustment
If the asset is revalued upwards, then the steps to undertake are as
Point 1 (Upward Revaluation of Assets). DR NCA – Acc. Depreciation Asset Remove the total acc. depreciation
CR NCA – Cost Asset Reduce asset to its revalued amount
If the asset is revalued downwards, the revaluation adjustment is
calculated by comparing the carrying value and the revaluation amount.
The double entry to adjust for the downward revaluation of a previously The revaluation adjustment is debited to the revaluation surplus up to
revalued asset is: the initial revaluation surplus credit. If the downward revaluation
exceeds the amount previously credited, the excess is expensed off to
profit or loss.
153 154

Example 14 Example 14
Continuation from Example 13 previously. The double entry to record the downward revaluation is:

On 31 December 20X6, Hassan’s building was valued at $510,000.

Hassan’s building will have been straight-line depreciated for four years
from the initial revaluation (20X3, 20X4, 20X5 and 20X6). Therefore,
the accumulated depreciation on 31 December 20X6 is $19,355 x 4
years = $77,420.

The carrying value is $600,000 – $77,420 = $522,580.

The balance in the revaluation surplus account is now CR $205,645 +
The revaluation adjustment is as follows: DR 12,580 = CR 193,065.

Cost = $600,000 - $510,000 = $90,000

Acc. Depreciation = $77,420
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Example 14 Example 14
What if the building needs to be reduced to $250,000 instead? DR Revaluation Surplus $205,645
DR Profit or Loss $66,935
The revaluation adjustment is: $522,580 – $250,000 = $272,580 DR Building – Acc. Depreciation $77,420
CR Building – Cost $350,000
Cost portion = $600,000 - $250,000 = $350,000
Acc. Depreciation portion = $77,420 The balance in the revaluation surplus account is now CR $205,645 +
DR $205,645 = 0
We have identified earlier that the balance in Hassan’s revaluation
surplus account is CR $205,645. Therefore, the excess of 66,935
($272,580 – $205,645) is debited to expenses in profit or loss.

157 158

Double Entry for NCA Revaluation Example 15

Disposals of Revalued Assets Continuation from Example 13 previously. (no downward revaluation)

The disposal of a revalued asset is accounted for in the same manner as Hassan sold the building for $504,825 on 31 December 20X7.
a typical asset mentioned in Section 3.2.2. The only difference is that
any balance that remains in the revaluation surplus account is At the point of the sale (31 Dec X7), these are the account balances of
transferred to the retained earnings as the gain in revaluation can now the building:
be realised with the sale of the asset.
- Building: Cost = $600,000

- Building: Acc. Depreciation = $19,355 x 5 years = $96,775

- Carrying Value = $600,000 – $96,775 = $503,225

- Revaluation Surplus = Initial $212,500 – excess depr ($6,855 x 5 yrs)

= $178,255

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Example 15 Example 15
The Disposal account is as follows after all the relevant journal entries The balance of $178,255 in the revaluation surplus account is also
relating to the sale of the building have been posted: transferred to the retained earning account now that the sale is realised.

DR Disposal CR The double entry for the transfer is: DR Revaluation Surplus $178,255
and CR Retained Earnings $178,255.
Building - Cost $600,000 Building - Acc. Depr $96,775

Profit on Disposal (balancing fig) $1,600 Sale Proceeds (Bank) $504,825

$601,600 $601,600

161 162

Non-Current Asset Register and Disclosures Non-Current Asset Register

Purpose and Function of Non-Current Asset Register

The acquisition, depreciation and disposal of tangible non-current assets

recorded in the general ledger accounts show the transaction balance of
each asset category. It does not retain any detail about individual assets
Definition
once it is closed off at the end of the year.
The Non-Current Asset Register is a memorandum
A business keeps track of individual assets’ cost, carrying amount,
depreciation and disposal using a separate record known as the non- document where each asset is listed, which will include
current asset register. information on all the activities relating to the asset.

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Non-Current Asset Register and Disclosures Non-Current Asset Register and Disclosures
Purpose and Function of Non-Current Asset Register Purpose and Function of Non-Current Asset Register

The non-current asset register has information on each asset: The non-current asset register is useful for a business as it is used to
verify the existence of assets within a business. The business can
 Date of Purchase perform an asset count at each location according to the non-current
 Description asset register.
 Location
 Useful Economic Life
 Depreciation Method
 Depreciation Amount
 Carrying amount
 Ultimate Disposal proceeds

165 166

Example 16 Example 16
Below is the non-current asset register maintained of all the non-current  The asset number is an internal reference number given to each asset.
assets owned. These will be allocated in sequential order.

 The location reference is useful as it informs the company of where

Asset Location Description Date of Cost ($) Accumulated Carrying Disposal each asset is located.
No. Purchase Depreciation amount
3460 Shop 1 Computer 1 Feb 20X2 540 180 360
 The description can be as detailed as required. The supplier name can
also be noted under the description.
3461 Shop 1 Printer 1 Feb 20X2 150 50 100
3462 Shop 3 Display Unit 1 June 20X2 2,000 200 1,800
 The date of purchase is indicated to identify the assets‘ ages.
3463 Shop 2 Delivery 1 June 20X2 15,000 1,500 13,500
Vehicle
 The asset’s cost is recorded in the general ledger T-account (it will
usually be net of sales tax).

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Example 16 Non-Current Asset Register and Disclosures

 The accumulated depreciation and carrying amount is calculated and Purpose and Function of Non-Current Asset Register
entered into the Non-Current Asset Register
Since the same information concerning the non-current asset is recorded
 Any details of the disposal of assets are recorded in the Non-Current in the general ledger and the asset register, the two balances should
Asset Register, including sales proceeds and date of disposal. agree. Therefore, the asset register also acts as a source of supporting
Information on whole or part exchanges will also be detailed in the documentation to verify the accuracy of balances in the ledger accounts.
disposal column of the Asset Register.
Differences between the two reports should not occur in a computerised
system, as the same information automatically updates the ledgers and
the asset register simultaneously with the input of non-current assets
transactions.

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Non-Current Asset Register and Disclosures Property, Plant and Equipment Disclosure
Purpose and Function of Non-Current Asset Register Disclosure Requirements

However, businesses with manual systems may encounter differences The following information is required to be disclosed in the financial
between these balances due to entry omissions of purchase costs or statements for each class of property, plant and equipment:
depreciation charges from one of the reports.
 Measurement bases used for determining gross carrying amount.
Discrepancies involving omissions or errors should be corrected by
posting entries into the omitted or erroneous report.  Depreciation methods used.
 Useful lives or the depreciation rates used.
 Gross carrying amount and accumulated depreciation at the period’s
beginning and end. (Comparatives are not required.)

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Property, Plant and Equipment Disclosure Example 17

Disclosure Requirements A single figure is included in a company’s SOFP for its Property, Plant and
Equipment figure. This could consist of several types of assets and many
 A reconciliation of the carrying amount at the beginning and the end different transactions. IAS 16, Property, Plant and Equipment, requires
of a period showing:
detailed disclosures, including the depreciation method and the useful
life estimates.
— Additions
Below is an example of the detailed disclosure note for the Property,
— Disposals
Plant and Equipment figure in the Statement of Financial Position.
— increases or decreases resulting from revaluations
— depreciation
— other movements

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Example 17 Example 17
 Class of Asset – The tangible non-current assets owned will be
grouped based on their type or class. One column per class is then set
up together with a total column. Typical examples of these asset
groups are

— Land and Buildings

— Motor Vehicles
— Fixtures and Fittings
— Computer Equipment

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Example 17 Example 17
 Sections of the Note – The note contains three main areas:  Disposals – The disposal of an asset will be recorded in the
cost/valuation section and the accumulated depreciation section in the
—Cost or valuation disclosure notes. The cost or valuation of the asset sold is deducted
from the balance for this section and the same for its related
—Accumulated depreciation accumulated depreciation.

—Carrying amount of each class of asset  Revaluations – The revaluation will increase the asset’s cost to the
revalued amount in the cost or valuation section. The revaluation will
 Carrying Amount at the start of the period – Cost/valuation and remove the accumulated depreciation up to the date of the revaluation
accumulated depreciation at the beginning of the period are entered from the accumulated depreciation section.
for each class to calculate the opening carrying amount.
 Charge for the year – After all additions, disposals and revaluations
 Additions – All additions to each class of asset are recorded in the have been adjusted, the depreciation charge for the year is calculated
cost or valuation section. and added to the accumulated depreciation section.

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Example 17 Example 18
 Carrying amount at the end of the period – The cost/valuation On 1 January 20X8, Prajun Co had the following tangible non-current
and accumulated depreciation balances at period-end are calculated, assets: buildings cost $200,000, motor vehicles cost $30,000, and office
allowing the carrying amount to be disclosed and ready for inclusion in equipment cost $10,000. A whole year's depreciation charge is made in
the SOFP. the year of acquisition and none in the year of sale. The depreciation
policy for each category of asset is as follows:

 Buildings: straight line over 50 years

 Motor vehicles: straight line over five years
 Office equipment: 20% reducing balance

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Example 18 Example 18
On 1 January 20X8, Prajun Co sold, for sale proceeds of $1,000, one of
the motor vehicles that had originally cost $10,000 and had accumulated
depreciation to the date of sale of $8,000.

On 31 December 20X8, office equipment was purchased for $5,000.

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Summary Summary

 An item of property, plant and equipment is recognised when:  All assets (except land with an unlimited useful life) are depreciated on a
systematic basis over their useful lives:
— it is probable that future economic benefits will flow from it; and
— its cost can be measured reliably. — base is cost less estimated residual value (or revalued amount);
— method should reflect the consumption of economic benefits; and
 Initial measurement is at cost.
— useful life should be reviewed periodically (and any change reflected in the
 Subsequent measurement is at: current period and prospectively).
— depreciated (amortised) cost – cost model; or
 Significant costs to be incurred at the end of an asset's useful life are reflected
— up-to-date fair value – revaluation model. by:
— reducing the estimated residual value; or
— charging the amount as an expense over the life of the asset (e.g. if a
decommissioning cost is capitalised).
 The entire class to which revalued assets belong must be revalued.
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Summary Summary

 Revaluation surpluses are recognised in other comprehensive income and  Required disclosures include:
accumulated in equity (unless reversing a previous charge to profit or loss).
— reconciliation of movements;
 Decreases in valuation are charged to profit or loss (unless reversing gains — items pledged as security;
previously recognised in other comprehensive income).
 When a revalued asset is sold/disposed of, any remaining revaluation surplus is — capital commitments;
transferred directly to retained earnings (via the statement of changes in equity, — if assets are revalued, historical cost amounts; and
not through profit or loss).
— change in revaluation surplus, if any.
 Gain/loss on retirement/disposal is calculated referring to the carrying amount.  Non-current assets are assets expected to be used during more than one
accounting period.
 Tangible non-current assets are recorded and maintained in the ledger at
original cost until they are disposed.

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Summary Summary

 Most tangible non-currents assets wear out with time and use, so their capital  Depreciation using the reducing balance method is calculated as: Carrying
costs are spread and expensed to profit or loss (as depreciation) over their amount × annual depreciation rate (%)
useful lives.
 D/E Annual depreciation charge, however calculated, is:
 Depreciation is the systematic allocation of an asset's depreciable amount over Dr Depreciation expense a/c $x
its useful life.
Cr Accumulated depreciation a/c $x
 Depreciable amount is cost (or revalued amount) less residual value.
 An asset's cost is the amount of cash paid to acquire (or construct) it.  When an asset is disposed of, original cost and accumulated depreciation are
transferred to a disposals a/c. Profit or loss on a disposal is the difference
 Depreciation may be calculated by a number of methods; the straight-line between carrying amount and sale proceeds (if any).
method with no residual value is the easiest.
 Gains arising on revaluation are unrealised and are not recognised in profit or
 Straight-line depreciation is calculated as: (Cost – Residual value)/(Useful life) loss. They are included in other comprehensive income.
 The reducing balance method provides a progressively decreasing depreciation
charge over the life of the asset.

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Summary

 A full year's depreciation may be charged in the year of acquisition (with no

charge in the year of disposal). Alternatively, depreciation may be charged on a
pro rata basis for each month of use.
— The fixed asset register provides a detailed log of all non-current tangible
assets.

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