FINANCIAL ACCOUNTING 1- CHAPTER 4

CHAPTER 4

NON-CURRENT ASSETS

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1. Definition
IAS 16: PPE
Property, plant and equipment are tangible assets that:
– Are held by an entity for use in the production or supply of goods or services, for rental to others,
or for administrative purposes
– Are expected to be used during more than one period

Two criteria.
(a) It is probable that future economic benefits associated with the asset will flow to the entity.
(b) The cost of the asset to the entity can be measured reliably
PRACTICE
1 Which one of the following statements correctly defines non-current assets?
A Assets that are held for use in the production of goods or services and are expected to be used during
more than one accounting period
B Assets which are intended to be used by the business on a continuing basis, including both
tangible and intangible assets that do not meet the IASB definition of a current asset
C Non-monetary assets without physical substance that are controlled by the entity and from which
future benefits are expected to flow
D Assets in the form of materials or supplies to be consumed in the production process

2 Which one of the following assets may be classified as a non-current asset in the accounts of a
business?
A A tax refund due next year
B A motor vehicle held for resale
C A computer used in the office
D Cleaning products used to clean the office floors

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2. Initial measurement
IAS 16 lists the components that make up the cost of an item of property, plant and equipment :
 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, eg:
– The cost of site preparation, eg levelling the floor of the factory so the machine can be
installed
– Initial delivery and handling costs
– Installation and assembly costs
– 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

Entry:
Dr
Cr

Note :
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 recognised as an expense rather than as part of the cost of the asset
PRACTICE

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3. Subsequent Expenditure
Subsequent expenditure is added to the carrying amount of the asset
When: improves the condition of the asset beyond the previous performance:
(a)Modification of an item of plant to extend its useful life, including increased capacity
(b) Upgrade of machine parts to improve the quality of output
(c) Adoption of a new production process leading to large reductions in operating costs
Sau khi ghi tăng PPE, nếu psinh các chi phí liên quan thì:
- Cost  P/L: bảo dưỡng, sửa chữa
Dr expense/Cr cash, A.P
- Cost  ADDED to the PPE only if:
+tăng thời gian sử dụng hữu ích của PPE useful life
+nâng cấp, cải tiến về bản chất của PPE  increased capacity/ improve the quality of output
+áp dụng được quy trình sản xuất mới  tiết kiệm chi phí sản xuất reductions in operating
costs
 DR PPE/ Cr cash, A.P

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4. Depreciation
Concepts:
Depreciation is the allocation of the depreciable amount (giá trị phải khấu hao) of an asset over its
estimated useful life (thời gian sử dụng hữu ích ước tính).
Depreciation for the accounting period is charged to net profit or loss for the period either directly or
indirectly.
Machine  acquire 1.1.2020.
Cost: NGia: 1.000
estimated useful life: 5years/ yrs
31.12.2020 Cost of machine: 1.000, Acc Depn: 180  gia tri con lai: carrying amount: 1000-180 =820
31.12.2021 Cost of machine: 1.000, Acc Depn: 180 + 180 = 360  C.A = 1000 – 360 = 640
31.12.2022 Cost of machine: 1.000, Acc Depn: 180 + 180+180 = 540  C.A = 1000 – 540 = 460
31.12.2023 Cost of machine: 1.000, Acc Depn: 180 + 180+180 +180 = 720 C.A = 1000 – 720 = 280
31.12.2024 Cost of machine: 1.000, Acc Depn: 180 + 180+180 +180 +180 = 900 C.A = 100
(estimate scrap value)
1.1.2025, scrap value, residual value, proceed value: estimate: 100
 depreciable amount = 1 000 - 100 = 900 in 5yrs
Dr depreciation expense: 180
Cr accumulate depreciation: 180
Method of depreciation:
1.Straight line method(khau hao theo pp duong thang)
Depreciation exp = depreciable amount : expected useful life
depreciable amount = cost – estimated scrap value (NG – gia tri thanh ly uoc tinh)
expected useful life la thoi gian su dung huu ich( 5nam) hoac tong so san pham uoc tinh san xuat
duoc (1trieu san pham)
900 : 5 = 180
2. Reducing balance (khau hao theo so du giam dan)
Depn exp = opening balance of PPE x %
1.1.2020 Cost of machine: 1.000, Reducing balance: 30%
31.12.2020 Cost of machine: 1.000, Depn exp = 1000 x 30% =300 Acc Depn: 300  gia tri con lai:
carrying amount: 1000-300 =700
31.12.2021 Cost of machine: 1.000, Depn exp = 700 x 30% =210 Acc Depn: 300 + 210 = 510  gia
tri con lai: carrying amount: 1000-510 =490
31.12.2022 Cost of machine: 1.000, Depn exp = 490 x 30% =167 Acc Depn: 300 + 210 +147= 657
 gia tri con lai: carrying amount: 1000-657 =343

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? giá trị của machine ngày càng giảm

??có đc lợi ích từ machine for 5yrs  chi phi lquan may ghi nhan ntn
Matching concepts
allocate: depreciable amount in 5years  depreciation: khau hao tscd
 Depreciable assets are assets which:
– Are expected to be used during more than one accounting period
– Have a limited useful life
– Are held by an enterprise for use in the production or supply of goods and service, for rental to
others, or for administrative purposes
 Depreciable amount of a depreciable asset is the historical cost or other amount substituted for
historical cost in the financial statements, less the estimated residual value

Useful life is either:

 The period over which a depreciable asset is expected to be used by the enterprise; or
 The number of production or similar units expected to be obtained from the asset by the
enterprise

The residual value is the net amount which the entity expects to obtain for an asset at the end of its
useful life after deducting the expected costs of disposal

Ledger Entry:
DEBIT Depreciation expense (statement of profit or loss) : the depreciation charge for the period.
CREDIT Accumulated depreciation account (statement of financial position) the depreciation
charge for the period.
Trial Balance:

Depreciation Methods
a.straght line method
For examAple, if a non-current asset costing $40,000 has an expected life of 4 years and an
estimated residual value of nil, it might be depreciated by $10,000 per annum

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Note:
Assets acquired part-way through an accounting period
A business which has an accounting year that runs from 1 January to 31 December purchases a new
non-current asset on 1 April 20X1, at a cost of $24,000. The expected life of the asset is 4 years, and its
residual value is nil. What should the depreciation charge for 20X1 be?
Solution

b.Reducing balance
reducing balance method of depreciation calculates the annual depreciation charge as a fixed
percentage of the carrying amount of the asset, as at the end of the previous accounting period

EXAMPLE:
a business purchases a non-current asset at a cost of $10,000. Its estimated residual value is $2,160,
40% of reducing amount of assets:

c.Change in method of depreciation

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the chosen method of depreciation should be applied

consistently from year to year. However, IAS 16 requires that the depreciation method should be
reviewed periodically.
If there has been a significant change in the expected pattern of economic benefits from those
assets, the method should be changed to suit this new pattern. When such a change in depreciation
method takes place, the remaining carrying amount is depreciated under the new method, ie only
current and future periods are affected; the change is not retrospective.

EXAMPLE
Jakob Co purchased an asset for $100,000 on 1.1.X1. It had an estimated useful life of 5 years and
it was depreciated using the reducing balance method at a rate of 40%. On 1.1.X3 it was decided to
change the method to straight line

d.Change in Expected useful life or Residual value of an asset

A business purchased a non-current asset costing $12,000 with an estimated life of four years and
no residual value. If it used the straight line method of depreciation,
Year 1: Depn: 25% of $12,000 = $3,000
Year 2: Depn: 25% of $12,000 = $3,000
If the remaining life of the asset is now revised to five more years, the remaining amount to be
depreciated (here $6,000) should be spread over the remaining life, giving an annual depreciation
charge for the final five years of

PRACTICE

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6. Disposal thanh ly, nhuong ban PPE

Capital gain (profit on disposal)
Capital loss (loss on disposal)
A business purchased a machine on 1 July 20X1 at a cost of $35,000. The machine had an
estimated residual value of $3,000 and a life of 8 years. The machine was sold for $18,600 on 31
December 20X4, the last day of the accounting year of the business. To make the sale, the business had
to incur dismantling costs and costs of transporting the machine to the buyer's premises. These
amounted to $1,200

35 000 – 3000 = 32 000 in 8yrs 4 000

The ledger accounting entries for disposal asPPE
(i)
DEBIT Disposal of non-current asset account: 35 000
CREDIT Non-current asset account : cost of PPE: 35 000

(ii) trong ky da ghi nhan

Dr depreciation expense: 14 000  P/L
Cr accumulate depreciation: 14 000
Khi thanh ly
DEBIT Accumulated depreciation account: 14 000
CREDIT Disposal of non-current asset account 14 000
with the accumulated depreciation on the asset as at the date of sale.

(iii)
DEBIT Receivable account or cash book: 17 400
CREDIT Disposal of non-current asset account: 17 400

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3. REVALUATION OF NON CURRENT ASSET

Initial recognition: at Cost (nguyen gia tai san co dinh)

Subsequent measurement (Sau ghi nhan ban dau

Method 1: Cost basis (Phuong phap gia goc)

SOFP (UNDER COST METHOD)

Carrying amount = cost – acc.depn

SOCI:

Computer equipment for office

Dr Depn Exp  SOCI ( Administration exp  giam Profit)

Cr Acc Depn  SOFP

Method 2: the revaluation of non-current assets/ fair value: Phuong phap gia tri hop ly/ Phuong
phap danh gia lai/ revalue

When Ira Vann commenced trading as a car hire dealer on 1 January 20X1, he purchased business

premises at a cost of $50,000.

For the purpose of accounting for depreciation, he decided the following.

(a) The land part of the business premises was worth $20,000; this would not be depreciated.

(b) The building part of the business premises was worth the remaining $30,000. This would be

depreciated by the straight line method to a nil residual value over 30 years.--> depn exp = 1,000$

After 5 years of trading, on 1 January 20X6 Ira decides that his business premises are now worth

$150,000, divided into:

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He estimates that the building still has a further 25 years' useful life remaining.

Before the revaluation, the annual depreciation charge is $1,000 (P/L) per annum on the building.
This charge is made in each of the first five years of the asset's life.
The carrying amount of the asset will decline by $1,000 per annum, to:
(i) $49,000 as at 31.12.X1 SOFP
(ii) $48,000 as at 31.12.X2
(iii) $47,000 as at 31.12.X3
(iv) $46,000 as at 31.12.X4
(v) $45,000 as at 31.12.X5 ( 20,000 LAND/ 25,000 BUILDING) Cost method

150,000 ( 75,000 LAND/ 75,000 BUILDING) FAIR VALUE/ GTRI HOP LY

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(b) When the revaluation takes place, the amount of the revaluation is:

The asset will be revalued by $105,000 to $150,000  REVALUATION SURPLUS (THANG DU DO

DANH GIA LAI) >< REVALUATION LOSS/ DEFICIT

1.1.20X6,
BUILDING CA: 25,000  75,000
LAND CA: 20.000  75,000

DR BUILDING: 50,000  FROM 1.1.20X6 : 75,000: 25 = 3,000 /yr

CR REVALUATION SUPLUS : 50,000

DR LAND: 55,000 NO DEPN

CR REVALUATION SUPLUS: 55.000
TOTAL REVALUAITON SURPLUS: 105.000
31.12.20X6,
CA: LAND = 75,000
CA: BUILDING : 75,000 – ACC DEPN = 72,000 NBV
31.12.20X6, FAIR VALUE OF
LAND: 70,000 SOFP
BUILDING: 60,000 SOFP

DR REVALUATION SURPLUS: 17,000

CR LAND: 5,000
CR BUILDING: 12,000

1.1.X7  31.12 X7 : 60.000 : 24 =

31.12.X7 , CA OF LAND, BUILDING
SOFP : FAIR VALUE OF LAND, BUILDING
DIFF  REVALUATION SURPLUS ( FV > CA) DR PPE/ CR REVALUATION SURPLUS
 REVALUATION LOSS (FV < CA)
 DR revaluation surplus (neu con)

Or DR revluation loss (exp)  PL

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PRACTICE

1.A company bought a property four years ago on 1 January for $ 170,000. Since then property prices have
risen substantially and the property has been revalued at $210,000.

The property was estimated as having a useful life of 20 years when it was purchased.

What is the balance on the revaluation surplus reported in the statement of financial position?

2. What are the correct ledger entries to record an acquisition of a non-current asset on credit?

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7. The asset register

Data kept in an asset register about each non-current asset usually include the following.
 The internal reference number (for physical identification purposes)
 Manufacturer's serial number (for maintenance purposes)
 Description of asset
 Location of asset
 Department which 'owns' asset
 Purchase date (for calculation of depreciation)
 Cost
 Depreciation method and estimated useful life (for calculation of depreciation)
 Carrying amount

Internal Control:
Assets at cost (from the non-current asset cost ledger account) X
Accumulated depreciation (from the ledger account) (X)
Total of carrying amounts listed in the asset register X

Any difference should be investigated and corrected, for instance because:

 Assets have been stolen, damaged or scrapped (for nil proceeds)
 Assets are obsolete
 There are new assets, not yet recorded in the register
 There have been enhancements not yet recorded in the register
 There are errors in the register

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8. Intangible non-current assets

Definitions are given by IAS 38.
 An intangible asset is an identifiable non-monetary asset without physical substance. The asset must
be:
– Controlled by the entity as a result of events in the past
– Something from which the entity expects future economic benefits to flow
 Research is original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
– Activities aimed at obtaining new knowledge
– The search for applications of research findings or other knowledge
– The search for product or process alternatives
– The formulation and design of possible new or improved product or process alternatives
 Development is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services prior to the commencement of commercial production or use
– The design, construction and testing of pre-production prototypes and models
– The design of tools, jigs, moulds and dies involving new technology
– The design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production
– The design, construction and testing of a chosen alternative for new/improved materials

Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its
useful life. Amortisation period and amortisation method should be reviewed at each financial year
end.
 Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value.
 Useful life is:
(a) The period over which an asset is expected to be available for use by an entity; or
(b) The number of production or similar units expected to be obtained from the asset by an
entity

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