ACC100 Introduction to Accounting
Week 7 Non-Current Assets: Acquisition and Depreciation Chapter 14 Non-Current Assets: Acquisition and depreciation Study Group Australia Pty Limited, SGA1286-F2/10/12 2
Learning Outcomes On completion of this session, you should be able to: ability to differentiate between different classes of non-current assets (NCA) ability to account for the initial acquisition of NCAs. ability to account for NCA s over time particularly in relation to depreciation. Study Group Australia Pty Limited, SGA1286-F2/10/12 3
Accounting Principles This week we look at particular rules concerning a category of assets Non- Current Assets (NCA). Particular issues will be looked at: 1. What are non-current assets? 2. How do we account for them initially and subsequently over time?
Non-current Assets 1. Be able to differentiate between different classes of NCA s particularly property, plant and equipment (PPE). 2. Be able to account for the initial acquisition of NCA s what costs to include? 3. Be able to account for NCA s after initial acquisition: - depreciation - overhauls Chapter 14 - revaluation - disposal Chapter 15
What Is Property, Plant And Equipment? AASB116 Property, Plant and Equipment Any asset with physical substance that is expected to be used over more than 1 year. Future economic benefit of property, plant and equipment will be received over 2 or more accounting periods. Therefore depreciable amount must be allocated in a systematic manner over useful life to measure depreciation. 6
Determining Cost Of Property, Plant And Equipment (refer AASB116) Must be accounted for at cost The amount of cash or the fair value of other consideration given to acquire an asset. Cost includes Purchase price, including import duties and non refundable purchase taxes ( GST excluded as it is refundable) Any directly attributable costs required to bring the asset to the location and condition necessary for it to be used Estimate of costs of dismantling, removing and restoring. 7
Determining Cost Of Property, Plant And Equipment (refer AASB116) Fair value is the amount for which the asset can be exchanged between a knowledgeable, willing seller and a knowledgeable willing buyer in an arm s length transaction. This may be relevant where an asset is donated and there isn t a purchase price. 8
Determining Cost Of Property, Plant And Equipment continued Example List price of machine $22 000 Less: trade discount (10% of $22 000) (2 200) Net price 19 800 Less: GST (1/11) 1 800 Purchase price 18 000 Freight inwards (net of GST) 820 Installation costs (net of GST) 675 Cost of acquisition $19 495 9
Determining Cost Of Property, Plant And Equipment Other Issues Cost recognised should be reasonable and necessary Buildings and building improvements separated from land and depreciated Borrowing costs are an expense (unless a qualifying asset) - Qualifying assets have specific requirements as they take a substantial period of time to get ready for intended use or sale, usually > 1 year. 10
Apportioning The Cost Of Lump-sum Acquisitions Purchase of many assets at once: Total cost must be apportioned over the identifiable assets Each asset recorded at individual cost Cost allocated on basis of fair value. Why allocate cost? Reported in different accounts Land not subject to depreciation Office furniture and building have different economic lives, different rates of depreciation 11
Apportioning The Cost Of Lump-sum Acquisitions Example Purchased a small office building to accommodate expanding business Purchase included land, office building and office equipment Total price of $800 000 (plus GST) Estimated fair value of assets are: - Land $ 595 000 - Building $170 000 - Equipment $ 85 000 12
Apportioning The Cost Of Lump-sum Acquisitions Cost allocated to specific asset = Fair value of specific asset x Total cost Total fair value Asset Estimated fair value % Allocation of total Est. Life Land $595 000 70 $560 000 Indefinite Building 170 000 20 160 000 30 years Equipment 85 000 10 80 000 8 years Totals $850 000 100 $800 000 13
Apportioning The Cost Of Lump-sum Acquisitions Journal entry to record acquisition Jan 2 Buildings 560 000 Land 160 000 Office Equipment 80 000 Cash at Bank 800 000 Acquisition of property and equipment 14
Depreciation Nature of depreciation- to recognise and account for Expected usage Expected wear and tear Technical and commercial obsolescence Legal or similar limits Cost of the asset needs to be apportioned over expected useful life. 15
Determining The Amount Of Depreciation Depreciation is calculated by expensing (writing off) the depreciable amount over the useful life of the asset. Depreciable amount is cost less residual value. Cost has been dealt with in previous slides Residual value is the estimated amount that an entity could obtain from disposal of the asset at the end of its useful life (after deducting the estimated costs of disposal) Useful life is defined as The period over which an asset is expected to be available for use by an entity, or The number of production or similar units expected to be obtained from the asset by an entity. 16
Depreciation Methods Straight-line method Allocates an equal amount of depreciation to each full accounting period in an asset s useful life. Method should be applied to assets which earn revenue evenly over their useful lives (matching principle). Annual depreciation = depreciable amount useful life 17
Depreciation Methods Example Machinery Cost $33 000 Residual $ 3 000 Estimated useful life of 4 years Annual depreciation = $33 000 - $3000 4 years = $7 500 18
Depreciation journal entry The following entry is posted each year Jun 30 Depreciation Expense Machinery 7 500 Accumulated Depreciation Machinery 7 500 Depreciation expense for the year Accumulated depreciation is a contra asset account, shown as a deduction from the underlying asset account on the Balance sheet 19
Depreciation Methods Diminishing-balance method Results in decreasing depreciation charge over the useful life of the asset. Method should be applied to assets that are more productive in early years and earn more revenue then (matching principle). Rate 1 n r c n = useful life in years r = residual value (in $) c = original cost or gross revalued amt (in $) 20
Depreciation Methods Example Machinery (different method) Cost $33 000 Residual $ 3 000 Estimated useful life of 4 years Year Depreciation rate = 1 4 (3000/33 000) = 45% (approx) Carrying amt at beg of yr Rate Annual depreciation exp Carrying amt at end of yr 1 $33 000 x 45% $14 850 $18 150 2 18 150 x 45% 8 168 9 982 3 9 982 x 45% 4 492 5 490 4 5 490 2 490 3 000 21
Depreciation Methods The textbook lists 2 other depreciation methods. Sum-of-years-digits. Units of production. The first of these is rarely used and we will not consider it in this course. The second is beyond the scope of this course as it relates to manufacturing industries only. 22
Comparison Of Depreciation Methods Different annual charges Same total charge Generate revenue evenly straight line Wear out with use units of production Generate more revenue in early years reducing balance Method chosen should reflect use (therefore matches revenue and expense) 23
Depreciation Other Issues Revision of depreciation rates and methods Depreciation is an estimate Residual values and useful lives should be reviewed/assessed at least at the end of each annual reporting period Depreciation charges adjusted prospectively. Remaining depreciable amount spread over remaining useful life. Accumulated depreciation does not represent cash. It is a contra asset account. 24
Summary On completion of this session, you should now be able to: Be able to differentiate between different classes of non-current assets (NCA) Be able to account for the initial acquisition of NCAs. Be able to account for NCAs over time particularly in relation to depreciation Study Group Australia Pty Limited, SGA1286-F2/10/12 25