Non-Current Assets

Lecture Slides #3
Non-Current Assets
Learning Outcomes:

By the end of this session, you should be able to:

 Define non-current assets and depreciation.

 Identify factors that may have an effect on the useful life of assets.
 Apply different methods of depreciation.
 Calculate profit or loss on disposal of assets.
 Prepare journal entries to record purchases, depreciation and disposal.
 Disclose non-current assets in the financial statement.
 Introduction
According to the International Accounting Standards (IAS 16), property, plant and
equipment (PPE) are considered to be assets.

NATURE

 Property, plant and equipment are tangible assets that:

- Are held for use in the production or supply of goods or services, for rental to
others or for administration purposes; and
- Are expected to be used during more than one period.

 The carrying amount refers to the amount at which an asset is recognised after
deducting accumulated depreciation and accumulated impairment losses, i.e. its
net book value.
What is an asset?

 An asset is defined as:

 Resource controlled

 Past event

 Future economic benefits flowing inward.

 Assets can be divided into non-current assets, financial

assets and current assets.
 Recognition of an asset
 A purchase will be recognised as an asset only if:
 It is probable that future economic benefits associated
with the item will flow to the business.

 The cost of the item can be measured reliably.

 Types of non-current assets
 Non-current assets can be split into:
 Tangible assets
 This is an asset with physical substance, including
machinery and vehicles.

 Intangible assets
 This is an identifiable asset without physical substance. This
includes goodwill, patents and trademarks.
 Determining the cost of a non-current
asset
Components of cost
The cost of an asset comprises:
 The Purchase Price less trade discounts and rebates

 Import duties and non-refundable purchase taxes

 Any costs that are directly attributable to bringing the asset to the location and
condition necessary for the asset to be used as intended, for example:
 Site preparation costs :

- Initial delivery and handling costs

- Installation and assembly costs
- Professional fees
 Costs of testing whether the asset is functioning properly (after deducting the
sales proceeds of any samples produced during testing)
 The initial costs of dismantling and removing the item and restoring the site, if
such an obligation is placed on the entity (legally or constructively)
VAT effect on plant, property and
equipment purchases and disposals

 When the business buys goods from a registered

vendor, they will be able to claim back the VAT only in
the case of them being a registered VAT vendor.

 If the asset is subsequently sold, the business will have

to charge VAT on the disposal price which will have to be
paid over to ERS.
 Determining the cost of a non-current asset
Example 1
 The Fresh Vegetable Company bought a delivery truck
from XYZ Trucks on credit to deliver vegetables to its
different branches.
 The truck cost E350,000 and interest for the whole year
was E50,000.
 A cooling system that cost E4,000 was installed to keep
the vegetables cool, and to ensure speedy delivery, a two-
way radio, which cost E10,000 was installed.
 The company’s name was written on the sides of the
truck at a cost of E2,000 and to fill the truck with petrol
that cost E400.

 What is the cost of the truck?

The cost of the asset
Particulars E
Cost of truck 350,000

Installation of a cooling system 4,000

Installation of a two-way radio 10,000

Sign writing 2,000

COST PRICE OF THE TRUCK 366,000

Note that the interest and cost of petrol are operating costs
and are not capitalised as a cost of the asset, hence they will
be accounted for as expenses for the period.
Example 2

 Osama Ltd purchased plant and machinery at an

invoiced price of E5,000,000. Other payments include
value added tax of 5% on cost as well as freight charges
of E1,000,000. The machine is to be remodified at a cost
of E800,000 to enable it be used. The installation cost of
the machine if E500,000.

Required:
 Calculate the purchase price to be charged in the plant
and machinery account.
 Determining the useful life of
an asset
 The useful life is the period over which a depreciable asset
(that loses value as it is used) is expected to be used by the
business.
 The useful life of an asset may be affected by numerous
factors, including:
 The perceived status of owning modern assets

 The nature of the asset

 Technological changes
 Depreciation of assets
 Depreciation refers to the expense of using an asset (PPE)
 PPE (except for land and buildings) depreciate

 To determine depreciation however, the selling price of the

asset at the end of its useful life must be estimated
 The selling price will be determined using such concepts
as residual value, scrap value, disposal value, break-up
value and resale value
 Once these values are known the depreciable amount can
be determined
 The depreciable amount is the amount from which
depreciation is calculated
Depreciable amount = Capitalised costs – residual value
Subsequent costs incurred on PPE
after purchase
 Such costs are capitalised only when it is probable that
future economic benefits associated with the asset will
flow into the business.

 Otherwise costs such as maintenance, repairs will be

expensed against profits
 Depreciation methods
 Three common methods for allocating
depreciation:

1. The straight-line method

2. The diminishing-balance method
3. The units of production method

 Each business must choose methods that suit

its accounting policy and must use the same
methods constantly every year.
 The straight-line method
 The useful life of the asset is the deciding factor for
calculating the amount of depreciation that we write off
every year.

 Formula
Depreciation = (Cost – Scrap value)/Useful life

 The depreciation amount will be the same through-out the

useful life of the asset
 Sometimes a fixed percentage on the cost of the asset
may be used in depreciating the asset over its useful life
 Example 3 – Depreciation charge (Straight
line method)

Vehicle
 Cost E120,000

 Expected useful life 10 years

 Expected residual value after its useful life E15,000

 Depreciation = E120 000 - 15000

10
 = 105,000/10

 = E10,500

The vehicle will depreciate by E10,500 for the next ten years
 The diminishing-balance
method
 Also known as the reducing balance method.

 The diminishing-balance method allows us to write off larger

amounts of depreciation in the earlier years than in the later
years of the asset’s lifetime.

 Depreciation is calculated on the value after depreciation

(Netbook value or Carrying amount)

 Formula
Depreciation = (Cost – accumulated depreciation) x
deprecation percentage
 Example – Depreciation charge
(Diminishing method)
Vehicle
 Cost E120,000

 Expected useful life 10 years

 In the first year of determining depreciation:

 E120 000 – 0
 10
 E12 000

 In the second year, depreciation will be;

 Depreciation = (Cost – accumulated depreciation) x10%
 = (120,000 – 12,000) x10%
 In the third year 10,800 and 12,000 will be deducted from
the cost to get the carrying amount and the 10% rate will
be applied to get the depreciation charge for the year.
 The units of production method

 Certain assets service or production potential is affected by

the amount of units produced.
 Depreciation will therefore be based on the amount of unit
capacity.

Formula
 Depreciation =

(Cost / total unit capacity) x units produced.

 De-recognition of assets

 The carrying amount of a non-current asset shall be de-

recognised:
 On disposal

 When no future economic benefits are expected from its

use or disposal i.e it is fully depreciated and does not
have a residual/scrap value
De-recognition of assets on disposal
 Asset disposal can be done using five steps:

1. Remove the cost of the asset being sold (from asset

account).
2. Calculate the depreciation of the asset being sold to the
date of sale.
3. Remove accumulated depreciation (include current year
depreciation) from accumulated dep. a/c
4. Account for the consideration received (in the asset
disposal a/c).
5. Calculate profit or loss (balance of the disposal a/c).
 Disclosure in the financial statements
 Minimum information should be disclosed in the financial
statements (as notes). This includes:

 Valuation bases used

 Depreciation method used
 Total depreciation charged
 Gross amount of depreciable assets
 Useful lives or depreciation rate used
How to calculate profit/loss on
disposal
EITHER

OR

See next slide

 Disposal Account
DR CR

E'000 E'000
Cost XX Disposal proceeds XX
Accumulated
depreciation XX
Profit
Loss on disposal XX on disposal XX
XXXX XXXX