Accounting Building Business Skills Paul D. Kimmel Chapter Eight: Reporting and Analysing Non-current assets PowerPoint presentation by Christine Langridge Swinburne University of Technology, Lilydale 2003 John Wiley & Sons Australia, Ltd Learning Objectives Describe how historical cost applies to property, plant & equipment assets. Explain the concept of depreciation. Calculate depreciation using various methods and contrast the expense patterns of the methods. Account for subsequent expenditures and asset impairments. Account for revaluation of non-current assets. Account for the disposal of property, plant & equipment assets. 2 Learning Objectives Describe the use of an asset register. Identify basic issues related to reporting intangible assets. Explain the nature of, and be able to account for, self-generating & regenerating assets. Account for the acquisition and depletion of natural resources. Indicate how non-current assets are reported in the Statement of Financial Position & explain methods of evaluating use of non-current assets. 3 1
Property, plant & equipment Physical assets used in the business to provide future economic benefits for a number of years Economic benefit derived from the use of the asset must be recognised (depreciation) 4 Cost of property, plant & equipment initially recorded at historical cost all expenditure necessary to acquire the asset and make it ready for use example: purchase price, freight costs paid, installation costs (capital expenses) excludes non-capital expenditures which are expensed immediately 5 Cost of property, plant & equipment Cost of property includes: purchase price, settlement costs, stamp duty, accrued property & land taxes Example: 6 2
Cost of property, plant & equipment Cost of plant & equipment Includes: purchase price, freight charges, insurance during transit, installation costs Excludes: annual charges e.g. vehicle registration & insurance Example: 7 To lease or buy? Leasing: use of asset given to lessee by lessor for a given period of time at an agreed price advantages: reduced risk of obsolescence little or no deposit shared tax advantage assets & liabilities are not reported 8 Accounting for property, plant & equipment Depreciation: the allocation of the cost of the asset over its useful life Cost less accumulated depreciation equals carrying amount 9 3
Depreciation Factors contributing to decline in value of an asset Wear and tear through physical use of asset Technical obsolescence Commercial obsolescence 10 Depreciation Factors in calculating depreciation 11 Depreciation methods Straight line Reducing balance Units of production Example data: Cost $13,000 expected residual value $1,000 estimated useful life (in years) 5 estimated useful life (kms) 100,000 12 4
Straight-line depreciation Depreciation expense same each year as benefits are consumed at same rate each year Calculation: cost of asset residual value useful life of the asset Example: Bill Pizza: annual depreciation ($13,000 - $1,000) / 5 = $2,400 13 Straight-line depreciation 14 Straight-line depreciation Recording the transactions 15 5
Reducing balance method Depreciation expense decreases each year as greater benefits consumed earlier in assets life Calculation: n depreciation rate = 1 r c 16 Reducing balance method Bill s Pizza Calculation depreciation rate = 1 5 $1000 $13000 = 1 0.5987 = 40% (approximately) 17 Reducing balance method Bill s Pizza 18 6
Units of Production method Useful life expressed in terms of total units of production or use expected from asset Calculation: depreciable cost of asset useful life of the asset = depreciation cost per unit depreciation expense: depreciation cost per unit x yearly units of production 19 Units of Production method Bill s Pizza Calculation depreciation: depreciation per unit: $12,000/100,000 units = $0.12 per unit Depreciation expense: $0.12 x 15,000 units = $1,800 20 Units of Production method Bill s Pizza 21 7
Comparison of methods 22 Patterns of depreciation 23 Subsequent expenditure Ordinary repairs: expenses in maintaining operating efficiency of the asset expensed in Statement of Financial Performance Additions and improvements: costs incurred to increase operating efficiency expenditure capitalised and depreciated over asset s remaining useful life 24 8
Impairments Non-current assets to be written down to its recoverable amount when carrying amount greater than than its recoverable amount Recoverable amount is net amount that is expected to be recovered from inflows and outflows from use of the asset and its disposal 25 Revaluation Reassessment of the value of a non-current asset Recording the revaluation: 26 Disposal of PPE assets 27 9
Sale of PPE assets Example: Wright Ltd. Sale of asset on 1 July Sale price $160,000 cash Cost $60,000 accumulated depreciation 1 January 2004 $41,000 Depreciation 1 January 1 July $8,000 28 Sale of PPE assets Recording depreciation: 29 Sale of PPE assets Calculation of gain on disposal 30 10
Sale of PPE assets Recording the sale of the asset Journal entry 31 Sale of PPE assets Recording the sale of the asset alternative method 32 Sale of PPE assets loss on sale Example: Wright Ltd. Sale price $9,000 instead of $16,000 Calculation of gain on disposal 33 11
Sale of PPE assets loss on sale Recording the loss on sale of the asset Journal entry 34 Sale of PPE assets loss on sale Recording the loss on sale of the asset alternative method 35 Property, plant & equipment records detailed asset register maintained as an internal control procedure to protect and efficiently manage property, plant & equipment Subsidiary ledger maintained to keep details of individual assets 36 12
Intangible assets non-monetary assets that have no physical presence Classified as either: identifiable unidentifiable 37 Intangible assets amortisation Identifiable assets are assumed to have a limited life and are amortised Patent amortised over legal or useful life, whichever is shorter Example: National Libs purchased patent for $60,000 legal life of a patent is 16 years Useful life estimated at 8 years 38 Intangible assets amortisation Example: annual amortisation expense: $60,000/8 = $7,500 Journal entry 39 13
Types of intangible assets patents research and development costs copyright trademarks and brand names franchises and licences goodwill 40 Other Non-current assets Self-generating & regenerating assets non-human living assets Examples Trees held as part of a forestry operation, animals held as part of a livestock operation, orchards, vineyards, fishery holdings measured at net market value 41 Natural resources Search & extraction from the ground of natural substances, e.g. minerals, oils, natural gas Capitalisation of pre-production costs not permitted until a resource is extracted Once production has begun pre-production costs are charged to inventory by amortisation 42 14
Natural resources amortisation Example: Wallace Tin Mine Capitalised pre production costs $150M Residual value $10M Mine contains 7M tonnes of ore Current year s production 2M tonnes Direct production costs $10M Depletable amount $140M ($150M - $140M) 43 Natural resources amortisation Formula and calculation of depletion 44 Natural resources amortisation Journal entry to record depletion: 45 15
Analysis and interpretation average useful life of PPE assets average cost of PPE assets depreciation expense Example: Colorado Group Ltd. ($55,288 + $51,152)/2 $9,035 = 5.89 years 46 Analysis and interpretation Average age of PPE assets accumulated depreciation depreciation expense 47 Analysis and interpretation Asset turnover ratio: $ sales generated for each $ invested in assets net sales average total assets 48 16