Chapter 8

Reporting and analysing

non-current assets

©2016 John Wiley & Sons Australia, Ltd

 Learning objectives

After studying this presentation, you should be able to:

1. Explain the business context of non-current assets and
the need for decision making for non-current assets.
2. Describe how the cost principle applies to property,
plant and equipment assets.
3. Explain the concept of depreciation.
4. Calculate depreciation using various methods and
contrast the expense patterns of the methods.
5. Account for subsequent expenditures.
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 Learning objectives

6. Account for asset impairments.

7. Account for the revaluation of property, plant and
equipment assets.
8. Account for the disposal of property, plant and
equipment assets.
9. Describe the use of an asset register.
10. Identify the basic issues related to reporting
intangible assets.
11. Describe the common types of intangible assets.
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 Learning objectives

12. Explain the nature and measurement of agricultural

assets.
13. Account for the acquisition and depletion of natural
resources.
14. Indicate how non-current assets are reported in the
statement of financial position, and explain the
methods of evaluating the use of non-current assets.
Business context and decision making
 Property, plant and equipment

• Property, plant and equipment (PPE) are physical

assets used in the business to provide future
economic benefits for a number of years.
• According to AASB 116/IAS 16, economic benefits
derived from the use of an asset must be
recognised on a systematic basis over the asset’s
useful life.
• This decline is recognised as depreciation expense
in the income statement.

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 Property, plant and equipment

• Two classes of PPE assets:

– Property:
• includes land and buildings.
– Plant and equipment:
• includes cash registers, computers, office
furniture, factory machinery, motor vehicles.

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 Determining the cost of PPE

• PPE assets are initially recorded at cost in

accordance with AASB 116, para 6:
– The amount of cash or cash equivalents paid
or the fair value of the other consideration
given to acquire the asset.
• Fair value is the amount for which an asset could
be exchanged between knowledgeable willing
partners in an arm’s-length transaction.

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 Determining the cost of PPE

• The cost of an asset:

– Consists of the fair value of all expenditure
necessary to acquire the asset and make it
ready for use:
e.g. purchase price, freight costs paid,
installation costs (capital expenses).
– Excludes non-capital expenditures which are
expensed immediately.

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 Determining the cost of PPE

• Property:
– Cost of land includes:
• purchase price
• settlement costs (e.g. solicitor’s fees)
• stamp duty
• accrued property taxes assumed by purchaser.
 Determining the cost of PPE

• Plant and equipment:

– Cost includes:
• purchase price
• freight charges
• insurance during transit
• installation costs.
 Determining the cost of PPE

To buy or lease? Advantages of leasing:

• In a lease, a party that • Reduced risk of
owns an asset (the obsolescence.
lessor) agrees to allow • Little or no deposit.
another party (the
• Shared tax advantage.
lessee) to use the asset
for an agreed given • Assets and liabilities are
period of time at an not reported.
agreed price.

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 Depreciation

• Depreciation is the process of allocating to

expense the cost of a PPE asset over its useful
(service) life in a rational and systematic manner.
• Carrying amount equals cost less accumulated
depreciation.

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 Depreciation

• AASB 116/IAS 16 outlines 4 factors that

contribute to the decline in value of a depreciable
asset:
1.Usage of the asset.
2.Wear and tear through physical use of the
asset.
3.Technical and commercial obsolescence.
4.Legal life.

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 Depreciation

• Factors in calculating depreciation:

– Cost:
• All expenditures necessary to acquire the asset
and make it ready for intended use.
– Useful life:
• Estimate of the expected life based on
intended use, need for repair, vulnerability to
obsolescence and legal life.
– Residual value:
• Estimate of the asset’s value at the end of its
useful life.
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 Depreciation methods

• Depreciation methods:
– straight-line
– diminishing-balance
– units-of-production.
• Example:
– Delivery truck purchased by Bill’s Pizzas.
 Depreciation methods

1. Straight-line method:
• Depreciation expense same each year as benefits are
consumed at same rate each year.
• Calculation for annual charge:
cost of asset – residual value
useful life of the asset
• Bill’s Pizzas example:
– Annual depreciation:
• ($13 000 - $1 000) / 5 = $2 400

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 Depreciation methods

• Straight-line depreciation schedule:

 Depreciation methods

• Journal entry to record depreciation expense:

 Depreciation methods

2. Diminishing-balance method:
• Depreciation expense decreases each year as
greater benefits are consumed earlier in assets life.
• Calculation: n
Depreciation rate = 1 – r
c
or
1 – (r / c)1/n

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 Depreciation methods

• Bill’s Pizzas example:

Annual depreciation rate
= 1 – ($1000/$13 000)1/5
= 1 – 0.5987
= 40% (approximately)

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 Depreciation methods

• Diminishing-balance depreciation schedule:

 Depreciation methods

3. Units-of-production method:
• Useful life is expressed in terms of total units of
production or use expected from the asset.
• Calculation of depreciation cost per unit:
depreciable cost of asset
useful life of the asset
• Depreciation expense:
depreciation cost x yearly units of
per unit production

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 Depreciation methods

• Bill’s Pizzas example:

– Depreciation per unit:
= $12 000/100 000 units
= $0.12 per unit
– Depreciation expense:
= $0.12 x 15 000 units
= $1 800

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 Depreciation methods

• Units-of-production depreciation schedule:

 Depreciation methods

• Comparison of depreciation methods:

 Depreciation methods

• Patterns of depreciation:
 Subsequent expenditure and
impairments

• During the useful life of an asset, a firm may incur

costs for:
a. Ordinary repairs:
– Expenses in maintaining operating efficiency of the
asset.
– Expensed in statement of profit or loss.
b. Additions and improvements:
– Costs incurred to increase operating efficiency
– Expenditure capitalised and depreciated over
asset’s remaining useful life.
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 Impairments

• All PPE items must be tested for impairment in

accordance with AASB 136/IAS 36.
• An impairment loss is the amount by which the
carrying amount of an asset (or a cash-generating
unit) exceeds its recoverable amount.
• The recoverable amount is the higher of its fair value
less costs to sell and its value in use.

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 Impairments

• Value in use is the present value of net cash flows

expected to be derived from using the asset.
• A cash-generating unit is the smallest identifiable
group of assets that generates cash inflows.

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 Impairments

• Accounting for impairments

– To apply the impairment test:
• Calculate fair value less costs to sell and value
in use.
• The higher of these two values must be
compared with the carrying amount.
• Impairment loss is only recognised if
recoverable amount is lower.

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 Impairments

• Example:
 Impairments

• Reversal of impairments:
– These are permitted so long as new carrying
value is no greater than it would have been
had no impairment loss been recognised in
previous years.

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 Revaluation

• Revaluation:
– This is a reassessment of the fair value of a non-
current asset at a particular date.
– AASB 116 requires each class of PPE to be
measured either on cost basis or revalued basis.

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 Revaluation

• To record the revaluation journal entries:

a. Record depreciation to date of asset
revaluation.
b. Transfer balance of Accumulated Depreciation
account to asset account to give asset’s carrying
amount.
c. Record the revaluation.

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 Revaluation

• Example:
– A firm decides to record equipment at its fair
value of $45 000. The equipment was originally
purchased for $75 000 and now has a book value
of $50 000.
 Revaluation

• If initial revaluations reverse in a subsequent period

revaluation increment (decrement) should be offset
against previous revaluation decrement (increment) to the
extent of the amount of the previous revaluation.
• Example: where land had previously been revalued
upwards by $50,000 to $200,000 and is now valued at
$120,000.
 Revaluation

• Impairment testing applies to assets held on the

revalued basis.
• If impairment is indicated, whole class of assets
need not be adjusted.
• The asset which is impaired is written down and it is
treated as a revaluation decrement.

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Disposals of PPE assets
 Sale of PPE assets

• Gain or losses on sale occur when the carrying

amount of the asset is different than the sales
amount.
• Gains or losses on sale are therefore common.

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 Sale of PPE assets

• Gain on Sale example:

– Wright Ltd sells office furniture on
1 July 2015 for $16 000 cash.
– Original cost was $60 000.
– Accumulated depreciation to
1 January 2015 is $41 000.
– Depreciation expense for first 6 months of 2015 is
$8000.
 Sale of PPE assets

• Recording depreciation:

• Calculation of gain on disposal:

 Sale of PPE assets

• Recording the sale of the asset:

 Sale of PPE assets

Loss on sale - example:

– Assume that the office furniture was sold for
$9000 rather than $16 000.
– Calculation of loss on disposal.
 Sale of PPE assets

• Recording the loss on sale of the asset:

 PPE records

• A detailed asset register maintained as an internal

control procedure to protect and efficiently
manage the PPE.
• Subsidiary ledgers are maintained to keep details of
individual assets.

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 Intangible assets

• Intangible assets are defined in AASB 138 as

identifiable non-monetary assets that have no
physical substance.
• Examples include:
– Patents (e.g. Apple iPod)
– Franchises (e.g. Domino’s Pizza)
– Trademarks (e.g. swoosh of Nike).

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 Accounting for intangible assets

• Intangible assets can be separated into:

a. Identifiable:
• Must be capable of being separated or
divided from an entity (whether sold,
licensed, rented or exchanged) or must arise
from contractual or other legal rights.
b. Unidentifiable:
• Cannot be separated from the entity itself.
• Collectively referred to as goodwill.
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 Accounting for intangible assets

• Amortisation:
– This is the term used to describe the allocation
of the cost of an intangible asset to expense.
– Intangible assets are assumed to have a limited
life and are amortised.
– Patents are amortised over legal or useful life,
whichever is shorter.

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 Accounting for intangible assets

• Example:
– Patent costs $60 000 and has an estimated useful
life of 8 years.
– Annual amortisation expense:
$60 000 ÷ 8 = $7500
– Recording annual amortisation.
 Types of intangible assets

1. Patents:
– Exclusive right granted by IP Australia enabling
recipient to manufacture, sell or otherwise
control an invention.
2. Research and development costs:
– Expenditures that may lead to patents,
copyrights, new processes and new products.

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 Types of intangible assets

3. Copyright:
– Gives the owner exclusive right to reproduce
and sell an artistic or published work.
4. Trademarks and brand names:
– Words, phrases, jingles or symbols that
distinguish or identify a particular business or
product.

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 Types of intangible assets

5. Franchises and licences:

– A contractual arrangement under the
franchisee is granted certain rights.
6. Goodwill:
– Represents all favourable attributes that
relate to an entity and is defined as future
benefits from unidentifiable assets.

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 Agricultural assets

• AASB 141/IAS 41 prescribes the accounting

treatment and disclosures relating to agricultural
activity.
• An agricultural activity is the management by an
entity of the biological transformation of biological
assets for sale, into agricultural produce or into
biological assets.
• A biological asset is a living animal or plant.

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 Agricultural assets

• Biological assets must be recognised:

– when the assets can be reliably measured,
– it is probable future economic benefits will
eventuate, and
– fair value or cost can be reliably measured.
• When harvested, biological assets become
agricultural produce and are treated as inventory.

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 Natural resources

• Entities in extractive industries are involved in the

search and extraction from the ground of natural
substances e.g. minerals, oils, natural gas.
• Pre-production costs capitalised and written-
off/depleted to cost inventory.
• Once production has begun, pre-production costs
are charged to inventory by amortisation.
• Value of mineral and oil reserves not shown on face
of statement of financial position.

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 Natural resources

• Amortisation (depletion) is the periodic allocation

of the cost of natural resources to reflect the units
removed.
• Example:
– Wallace Tin Mine contains 7M tonnes of ore
– Capitalised pre-production costs $150M
– Residual value $10M
– Current year’s production 2M tonnes
– Direct production costs $120M
– Depletable amount $140M ($150M – $10M)
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Natural resources
 Natural resources

• Journal entry to record depletion:

Reporting non-current assets in the financial
statements

• See AASB 101/IAS 1 gives minimum classification

which must be shown on statement of financial
position:
– under ‘non-current assets’:
• property, plant and equipment
• intangibles.
• Also requirements for extensive note disclosures
of accounting policies and break-up of
summarised accounts into separate categories.
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 Analysis and decision making

1. Average useful life of PPE assets:

• Example:
 Analysis and decision making

2. Average age of PPE assets:

• Example:
 Analysis and decision making

3. Asset turnover:

• Example:
 Decision toolkit

• Bruce Pharmaceuticals Ltd (page 510 – 511 of the

text).
• Work through on your own and check your results
with the suggested solution provided.

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 Demonstration problems

• DuPage Ltd (page 514 – 515 of the text).

• Skyline Limousine Ltd (page 515 of the text).
• Work through on your own and check your results
with the suggested solution provided.

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