Tangible Non-Current Assets

Non Current Assets

The assets which are used by the company for generating future economic benefits for a period of more than
12 months

Property, Plant And Equipment (PPE)

Tangible assets held for:
● The purpose of:
◦ Sale of goods and services
◦ Rental to others; or
◦ Administrative purpose
● More than 12 months

Capital and Revenue Expenditure

● The expenditure whose economic benefits are availed over a period of more than 12 months are called
Capital Expenditure . These are not charged as an expense in the statement of profit and loss. Instead
these expenditures are taken into the statement of financial position and are depreciated or amortized
over their useful life. The are usually incurred to acquire non-current assets.
● The expenditure whose economic benefits are availed over a period of less than 12 months are called
Revenue Expenditure . These expenses are charged into the statement of profit and loss in the year in
which they are incurred

Recognition Criteria Of PPE

The recognition of property plant and equipment depends upon two conditions:
● Future economic benefits from the asset are probable
● Cost of the asset can be measured reliably
Initially the asset under IAS-16 is measured at cost

Cost
The amount of cash and cash equivalent paid or fair value of the other consideration given to acquire an asset
at the time of acquisition or construction

Fair Value
It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.

Components Of Cost
The elements that make up the cost of an asset under IAS 16 are:
● Purchase price, including any import duties paid, but excluding any trade discount and sales tax paid
● Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located
● Directly attributable costs of bringing the asset to working condition for its intended use, e.g.:
◦ The cost of site preparation, e.g. levelling the floor of the factory so the machine can be installed
◦ Initial delivery and handling costs
◦ Installation and assembly costs

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 ◦ Professional fees (lawyers, architects, engineers)
◦ Costs of testing whether the asset is working properly, after deducting the net proceeds from selling
samples produced when testing equipment
◦ Staff costs arising directly from the construction or acquisition of the asset
● Entity's obligation to dismantle the asset at the end of its useful life
The following costs will not be part of the cost of property, plant or equipment unless they can be attributed
directly to the asset's acquisition, or bringing it into its working condition
● Expenses of operations that are incidental to the construction or development of the item
● Administration and other general overhead costs
● Start-up and similar pre-production costs
● Initial operating losses before the asset reaches planned performances
● Staff training costs
● Maintenance contracts purchased with the asset
All of these will be recognized as an expense rather than as part of the cost of the asset.

Depreciation
The systematic allocation of the depreciable amount of an asset over its useful life. The cost of a non-current
asset, less its estimated residual value, is allocated fairly between accounting periods by means of
depreciation
Explanation
The need for depreciating the non-current asset for its useful life is because of the accrual concept. The non-
current assets are purchased to obtain its benefits for several years after (such as building). So if the benefit of
an asset is being received for several years, it is only proper to recognize its cost in the same manner i.e. over
the years in which its benefits are being taken

Depreciable Assets
The assets which are:
● Expected to be used during more than one accounting period
● Held by an enterprise for use in the production or supply of goods and service, for rental to others, or for
administrative purposes

Accumulated Depreciation
It is the sum of depreciation expense charged since the purchase of asset till date

Depreciable Amount
It is the historical cost or other amount substituted for historical cost in the financial statements, less the
estimated residual value

Residual Value

The expected disposal value of the asset (after deducting disposal costs) at the end of its expected useful life.
Useful life
The period over which the asset is expected to be used by the business entity

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Methods Of Calculating Depreciation
There are several methods for calculating depreciation expense based on the pattern of consumption of
economic benefits from the assets.
1) Straight Line Method
This method recognizes equal periodic depreciation charges over the useful life of an asset, thereby making
depreciation a function solely of time without regard to asset productivity, efficiency, or usage. Formula is as
follows:
Cost - Residual Value
Depreciation Expense =
Useful Life
Where the residual value is not given, depreciable cost and cost are the same amounts.
Illustration:

A piece of equipment was purchased by ABC Company at a cost of $50,000 on January 1, 2019. The
equipment has a useful life of 5 years and is expected to be sold for $500 at the end of its useful life. The asset
is depreciated using straight line method . What will be the depreciation expense for the piece of equipment?
It will be as follows:

5,000 - 500
Depreciation Expense =
5
= 9,000
Hence the depreciation expense for the equipment for its useful life will be $9,000 every year.
It can be seen that the depreciation expense under straight line method is always same for its useful life

2) Reducing Balance Method

Where the annual depreciation charge is a fixed percentage of the carrying amount of the asset at the start of
the period. Formula is as follows:
Depreciation Expense = Carrying amount x Rate of depreciation
The carrying amount (also called book value) is calculated as the cost of the asset less accumulated
depreciation
The rate of depreciation under reducing balance method can be calculated as follows
𝑛 Residual value of the asset
Rate of depreciation = 1 −
Cost of the asset
where 'n' is the expected useful life in years
Illustration
A piece of equipment was purchased by ABC Company at a cost of $50,000 on January 1, 2019. The
equipment is depreciated with a rate of 10% and is expected to be sold for $500 at the end of its useful life.
The asset is depreciated using reducing balance method . What will be the depreciation expense for the piece
of equipment?
It will be as follows:
Depreciation expense for 2019 = 5,000 x 10%
= 500
Since there was no accumulated depreciation for the asset the depreciation was charged on the cost of the
asset. However in the year 2020, the depreciation will be calculated at cost less accumulated depreciation i.e.
5,000-500
Depreciation expense for 2020 = (5,000-500) x 10%
= 450

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Similarly in the year 2021, the carrying amount of the asset will be $5,000-$950 = $4050 and hence the
depreciation expense will be
Depreciation expense for 2021 = (5,000-450) x 10%
= 405

Assets acquired part-way through an accounting period

A business can purchase new non-current assets at any time during the course of an accounting period. It is
reasonable to charge an amount for depreciation only from the date that the business has owned the asset,
which might be part-way through an accounting period.
Illustration
ABC Company acquired a building on 1 July 2019 for $100,000 with a residual value of &10,000 and a useful
life of 10 years. What will be the depreciation for year ended 31 December 2019 and 2020.
It will be as follows
100,000 - 10,000 6
Depreciation expense for 2019 = x
10 12
= 4,500
Since the asset was available for only 6 months during the year 2019, it is only appropriate to charge the
depreciation expense for those six months only
However in the year 2020, the depreciation expense will be calculated for the entire year as:
100,000 - 10,000
Depreciation expense for 2020 =
10
= 9,000

Accounting For Depreciation

The double entry for recording the depreciation expense is as follows:
Depreciation Expense xxx
Accumulated depreciation xxx

The balance on the depreciation expense account is taken to the statement of comprehensive income as an
expense for the period.
The accumulated depreciation account contains all of the depreciation recognized to date. When the final
statement of financial position is prepared it is deducted from the cost of the assets. The non-current asset
figure in the statement of financial position is made up of two figures, the cost less accumulated depreciation.
$
Cost of the asset xxx
Accumulated Depreciation (x x x)
Carrying Amount xxx

Ledger Accounts for Non-Current Assets and Accumulated Depreciation

There are separate accounts in the general ledger for each category of non-current assets (for example, an
account for land and buildings, an account for plant and machinery, an account for office equipment, an
account for motor vehicles, and so on) and the accumulated depreciation for each of these categories of non-
current assets.

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Illustration
XYZ Company purchased a vehicle on 1 January 2019 for $100,000 with a useful life of 3 years. The asset is
depreciated using straight line method.
The accounts will be as follows:

Vehicle
1-Jan-19 Opening Balance 0
1-Jan-19 Cash 90,000 31-Dec-19 Closing Balance 90,000
90,000 90,000

1-Jan-20 Opening Balance 90,000

31-Dec-20 Closing Balance 90,000
90,000 90,000

1-Jan-21 Opening Balance 90,000

31-Dec-21 Closing Balance 90,000
90,000 90,000

Accumulated Depreciation
1-Jan-19 Opening Balance 0
31-Dec-19 Closing Balance 30,000 31-Dec-19 Depreciation 30,000
30,000 30,000

1-Jan-20 Opening Balance 0

31-Dec-20 Closing Balance 30,000 31-Dec-20 Depreciation 30,000
30,000 30,000

1-Jan-21 Opening Balance 0

31-Dec-21 Closing Balance 30,000 31-Dec-21 Depreciation 30,000
30,000 30,000

Derecognition
Property, plant and equipment are eventually disposed of:
● by sale; or
● if they have no sale value, through disposal as scrap
Disposal can occur at any time, and need not be at the end of the asset’s expected useful life. The effect of a
disposal on the statement of financial position (or accounting equation) is that the asset is no longer in the
statement of financial position and the accumulated depreciation on the asset in no longer in the statement
of financial position
The asset can be sold either for cash or consideration other than cash (consideration in kind)
When the asset is disposed off, it will either be sold for profit (called gain on disposal ) or a loss(called loss on
disposal ).

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 $
Sale proceeds on disposal xxx
Disposal Costs (x x x)
Net disposal Cost xxx
Cost of asset xxx
Accumulated depreciation xxx
Carrying amount of asset xxx
Gain/(Loss) on disposal x x/(x x)
Step Wise Accounting For Disposal
1) Transfer the cost of the non-current asset from the asset account to the disposal account:
Disposal Account xxx
Non-current Asset xxx
2) Transfer the accumulated depreciation on the asset from the accumulated depreciation account to the
disposal account:
Accumulated Depreciation xxx
Disposal Account xxx
The carrying amount of the asset is now in the disposal account
3) Record the disposal costs, if any, in the disposal account.
Disposal Account (disposal Expenses) xxx
Bank/Payable xxx
4) Record the sale proceeds in the disposal account
Bank/Receivable xxx
Disposal account (sale proceeds) xxx
5) The balance on the disposal account is the gain or loss on disposal. This is transferred to the statement of
comprehensive income
If the asset is sold for a gain
Disposal Account xxx
Gain on Disposal (P&L) xxx
If the asset is sold for a loss
Loss on disposal (P&L) xxx
Disposal Account xxx
A draft disposal account is as follows
Disposal
Non current asset xxx Accumulated Depreciation xxx
Disposal Expenses xxx Sales Value xxx
Gain on disposal (Transfer to P&L) xxx Loss on Disposal (Transfer P&L) xxx
xxx xxx

Combined Entry For Disposal Of Non Current Assets

● If The Asset Is Sold For Gain
Accumulated Depreciation xxx
Bank/Receivable xxx
Gain on disposal xxx
Non current assets - Cost xxx

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● If The Asset Is Sold For Loss
Accumulated Depreciation xxx
Bank/Receivable xxx
Loss on disposal xxx
Non current assets - Cost xxx

Policies For Depreciation

IAS-16 allows for depreciation to be charged on any one of the following two policies:
1) Proportionate Year Policy of Depreciation
Under this policy, the depreciation is charged from the date the asset was acquired till the date the asset
was disposed.
If the asset was purchased in 1 March 2019, the depreciation for year 2019 will be charged for the 9
months the asset was available to the company. Similarly if the asset was disposed off in 30 June 2023, the
depreciation expense for the year 2023 will be charged for the 6 months the asset was available to the
company
2) Full Year Policy
Under full year policy, full year depreciation is charged in the year in which the asset was acquired but no
depreciation is charged in the year the asset was disposed off.

Types Of Consideration
An asset may be purchased on
● Consideration in cash
● Consideration in kind
● Consideration in cash and in kind

Consideration in Cash
If the asset is purchased by paying cash to the supplier, the cost of the asset will be equal to the amount of
cash paid. The entry will be as follows:
Non current Asset xxx
Cash/Bank xxx

Consideration In Kind
An new asset may be acquired by the way of exchange/barter of an old asset i.e. a used asset may be given to
the supplier for acquiring the new asset.
In this case, the fair value of the new asset is considered as its cost:
Illustration
An asset was purchased which had a fair value of $5,000, by giving an asset which the company had been
using for a few years. The asset was purchased at a cost of $7,000 and a total depreciation of $2,500 had
been charged till the date of exchange. The double entry will be:
Non current Asset (New) 5,000
Accumulated Depreciation (Old Asset) 2,500
Gain on Disposal (Balancing) 500
Non current Asset (Old Asset) 7,000
However if the fair value of the new asset is not available, the carrying value of the asset being disposed is
considered as the cost of the new asset. In this case no gain or loss on disposal arises. The double entry will be
as follows:

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 Non current Asset (New) 5,000
Accumulated Depreciation (Old Asset) 2,500
Non current Asset (Old Asset) 7,000

Consideration In Cash And In Kind

An asset may be purchased by paying cash to the supplier as well as providing an old asset which was being
used by the buyer. In such case:
● The cost of the asset may be:
◦ The fair value of the new asset; or
◦ Sum of cash paid and the carrying amount of asset provided
● The seller might consider the carrying value of the asset as different from what it actually is. The amount
set by the seller is known as trade in allowance.
Illustration
ABC Ltd acquired a new asset which had a fair value of $5,000 by paying cash $2,000 and providing a used
asset which was purchased at a cost of $6,000 and was depreciated by $3,500.
$
Fair value of new asset 5,000
Consideration paid
Cash 2,000
Carrying Value of asset 2,500
(4,500)
Gain on Disposal 500
The double entry will be as follows
Non current asset (New Asset) 5,000
Accumulated Depreciation (Old Asset) 3,500
Gain on disposal 500
Cash 2,000
Non Current asset (Old Asset) 6,000

Accounting Models For Property, Plant and Equipment

IAS 16 allows a business to choose one of two measurement models as its accounting policy for property,
plant and equipment after acquisition.
1) Cost Model
Under cost model, the asset is carried at its historical cost (the cost at which the asset was purchased) less
any accumulated depreciation and less any impairment losses. The depreciation for the year is charged on
the historical cost over its entire useful life.

2) Revaluation Model
Under revaluation model, When a non-current asset is revalued, its ‘carrying amount’ in the
statement of financial position is adjusted from carrying amount to its fair value (normally current
market value) at the date of the revaluation.

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Accounting For Revaluation Model
When an asset is revalued, either;
● Its fair value becomes more than its carrying amount, termed as revaluation upward
● Its fair value becomes less than its carrying amount, termed as revaluation downward
Revaluation Upward

When the market value of the asset becomes greater than its carrying amount, the gain is recognized in the
other comprehensive income and is accumulated in equity under the heading of revaluation surplus
Illustration
A building was purchased by DEF Company on 1 January 2019 at a cost of $500,000. The asset has a useful life
of 20 years and is depreciated using straight line method. On 31 December 2020, the asset was revalued to
$600,000
The entries will be as follows
Building 500,000
1-Jan-19
Cash 500,000
Depreciation Expense 25,000
31-Dec-19
Accumulated Depreciation 25,000
Depreciation Expense 25,000
31-Dec-20
Accumulated Depreciation 25,000
Accumulated Depreciation 50,000
31-Dec-20
Building 50,000
Building 150,000
31-Dec-20
Revaluation surplus 150,000
Hence, when the asset is revalued upward, the accumulated depreciation is reversed to bring the asset at its
carrying value. The difference between carrying amount and fair value of the asset is debited into the asset
account and credited into an unrealized income account i.e. revaluation surplus
Incremental Depreciation
When an asset is revalued upward, Its depreciation charge for the year increases as a consequence of which
the profit decreases. To mitigate this drawback, IAS 16 allows entities to transfer an amount equal to the
excess depreciation from the revaluation surplus to retained earnings in the equity section of the statement
of financial position,
Illustration
ABC Ltd acquired a building on 1 Jan 2019 for $100,000 with a useful life of 10 years. On 31 Dec 2019, the
building was revalued upward to $150,000 and its useful life was estimated at 5 years.
The entries will be as follows
Building 100,000
1-Jan-19
Cash 100,000
Depreciation Expense 10,000
31-Dec-19
Accumulated Depreciation 10,000
Accumulated Depreciation 10,000
31-Dec-19
Building 10,000
Building 60,000
31-Dec-19
Revaluation surplus 60,000
After revaluation, the depreciation expense will increase in the year 2020 and this increase will be transferred
from revaluation surplus to the retained earnings
Depreciation Expense (150,000/5) 30,000
31-Dec-20
Accumulated Depreciation 30,000

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 Revaluation Surplus (30,000-10,000) 20,000
31-Dec-20
Retained Earnings 20,000

Revaluation Downward
When the market value of the asset becomes lower than its carrying amount, the loss is recognized in the
profit and loss statement as a revaluation loss
Illustration
A building was purchased by DEF Company on 1 January 2019 at a cost of $500,000. The asset has a useful life
of 20 years and is depreciated using straight line method. On 31 December 2020, the asset was revalued to
$400,000
The entries will be as follows
Building 500,000
1-Jan-19
Cash 500,000
Depreciation Expense 25,000
31-Dec-19
Accumulated Depreciation 25,000
Depreciation Expense 25,000
31-Dec-20
Accumulated Depreciation 25,000
Accumulated Depreciation 50,000
31-Dec-20
Building 50,000
Revaluation Loss - P&L 50,000
31-Dec-20
Building 50,000
Hence, when the asset is revalued downward, the accumulated depreciation is reversed to bring the asset at
its carrying value. The difference between carrying amount and fair value of the asset is credited into the
asset account and debited as an expense namely revaluation loss

Subsequent Revaluation
Asset carried at a revaluation loss is revalued upward
If an asset, which was revalued downward in previous years, as a result of which revaluation loss was booked
in the P&L, is later revalued upward, the revaluation increase is recognized in the statement of comprehensive
income to the extent of the previously recognized expense.
The part of any increase above the previously recognized expense is recognized in the usual way, directly in
other comprehensive income.
Illustration
ABC Ltd owns a plant which was revalued to $400,000 in the previous year and as a result of this a revaluation
loss of $55,000 was recorded in the year ended December 2020. By the end of year 2021, the fair value of the
plant had become $490,000. The plant has a useful life of 10 years and is depreciated using straight line
method
The entries in the year 2021 will be as follows:
Depreciation Expense 40,000
31-Dec-21
Accumulated Depreciation 40,000
Accumulated Depreciation 40,000
31-Dec-21
Plant 40,000
Plant 130,000
31-Dec-21 Revaluation income - P&L 55,000
Revaluation surplus 75,000

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Asset carried at a revaluation surplus is revalued downward
If an asset, which was revalued upward in previous years, as a result of which a revaluation surplus was
created in the balance sheet, is later revalued downward, the revaluation decrease is recognized in other
comprehensive income to the extent of the previously recognized surplus.
That part of any decrease above the previously recognized surplus is recognized in the statement of
comprehensive income the usual way.
Illustration
ABC Ltd owns a plant which was revalued to $400,000 in the previous year and as a result of this a revaluation
surplus $45,000 was recorded in the year ended December 2020. By the end of year 2021, the fir value of the
plant had become $310,000. The plant has a useful life of 10 years and is depreciated using straight line
method
The entries in the year 2021 will be as follows:
Depreciation Expense 40,000
31-Dec-21
Accumulated Depreciation 40,000
Accumulated Depreciation 40,000
31-Dec-21
Plant 40,000
Revaluation surplus - Reversal 45,000
31-Dec-21 Revaluation loss - P&L 5,000
Plant 50,000

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