Session Objectives

Topic 8
Non-current Assets

Define non-current assets Recognise the difference between current and noncurrent assets Explain the difference between capital and revenue items Classify expenditure as capital or revenue expenditure Prepare ledger entries to record the acquisition and disposal of non-current assets

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Session Objectives
Record profits or losses on disposal of non-current assets in the income statement including part exchange transactions Record the revaluation of a non-current asset in ledger accounts, the statement of comprehensive income and in the statement of financial position Calculate the profit or loss on disposal of a revalued asset Illustrate how non-current asset balances and movements are disclosed in financial statements

Session Objectives
Explain the purpose and function of an asset register Understand and explain the purpose of depreciation Calculate the charge for depreciation using straight line and reducing balance methods Identify the circumstances where different methods of depreciation would be appropriate Illustrate how depreciation expense and accumulated depreciation are recorded in ledger accounts

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Session Objectives
Calculate depreciation on a revalued non-current asset including the transfer of excess depreciation between the revaluation reserve and retained earnings Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset Record depreciation in the income statement and statement of financial position

Characteristics of Non-current Assets

Long term in nature Not normally acquired for resale Could be tangible or intangible Used to generate income directly or indirectly Not normally liquid asset

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Capital Expenditure
Expenditure on acquisition of Noncurrent assets for use in business Expenditure on increasing the earning capacity of existing assets. Expenditure incurred for a long term that creates an asset with value
Examples: New machineries purchased, renovation of buildings, purchase of furniture and fixtures, purchase of computer equipment and office vehicles
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Revenue Expenditure
Expenditure incurred for carrying on the day-to-day operations of the organisation. Expenditure on current assets Expenses for maintaining the earning capacity
Examples : Salaries paid to employees, expenditure on rent incurred, interest payments, administrative expenses, sales commissions etc.
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Non-current Assets Registers

Records of individual tangible Noncurrent assets held by the business. Function of the Register is to control Non-current assets and keep a track of them

Non-current Assets Registers

The details include:
Cost, Date of Purchase Description of Asset, Serial / reference number Location of asset Depreciation method, Expected useful life Net book value

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Acquisition of Non-current Assets

Cost of Non-current asset = Amount incurred to acquire the Non-current asset and bring it to working condition
Cost includes: Purchase price + Delivery cost + Legal fees + Subsequent expenditure which enhances the asset Cost DOES NOT include revenue expenditure such as repairs or renewals or repainting cost
accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Acquisition of Non-current Assets

Entry to record purchase of asset:
Dr. Non-current asset (Non-current Asset = Real account: Debit what comes in) Cr. Bank / Cash / Creditors (Bank and Creditors: Personal account: Credit the giver)

A separate account should be kept for each category of Non-current asset.

accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Subsequent Expenditure which Enhances the Asset

This expenditure can only be recorded as a part of the cost or capitalised if it enhances the benefits of the asset.
Example includes: extension to a shop building. However, repair work does not form a part of this expenditure.

Depreciation
According to IAS 16, depreciation is the measure of the cost or revalued amount of the economic benefits of the tangible non-current asset that has been consumed during the period

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Causes of Depreciation
Use Physical wear and tear Passing of time Obsolescence through technology and market changes Depletion

Methods of Calculating Depreciation

Straight line method Reducing balance method

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Straight Line Method

Depreciation charge is the same each year as the assumption is that the benefit is consumed evenly over the life of the asset Useful for assets which provide equal benefit each year e.g. machinery

Straight Line Method

Depreciation charge = (Cost Residual value) / Useful economic life Residual value or scrap value or salvage value = Estimated disposal value of the asset. Often this value is zero Useful economic life = Estimated number of years during which the business will use the asset

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Reducing Balance Method

Reducing amount of depreciation is charged each year Useful for assets which provide more benefit in the earlier years e.g cars Depreciation charge = X% x Net Book Value (NBV) NBV = original cost accumulated depreciation

Accounting for Depreciation

Dr Depreciation Expense Cr Accumulated depreciation
Reduce the balance sheet value of the Noncurrent asset by cumulative depreciation to reflect the wearing out. Record the depreciation charge as an expense in the income statement to match the revenue generated by the Non-current asset.
accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Consistency and Subjectivity When Accounting for Depreciation

IAS 16 Property, Plant and Equipment requires the following: Depreciation method should be reviewed at each year end and changed if the method used no longer reflects the pattern of use of the asset Residual value and useful economic life should be reviewed at each year end and changed if expectations differ from previous estimates

Disposal of Non-current Assets

Profit / loss on disposal
An accounting profit or loss will arise on the disposal of Non-current asset. If:
Proceeds > NBV (at disposal date) Proceeds < NBV (at disposal date) Proceeds = NBV (at disposal date) PROFIT NOR LOSS PROFIT LOSS NEITHER

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Disposal for Cash Consideration

Step 1: Remove the original cost of the Noncurrent asset from the Non-current asset account Dr. Disposals (Original cost) Cr. Non-current assets (Original cost)

Disposal for Cash Consideration

Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account. Dr. Accumulated Depreciation Cr. Disposals Step 3: Record the cash proceeds Dr. Cash (proceeds) Cr. Disposals (proceeds)

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Student Notes for ACCA F3-Financial Accounting

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Student Notes for ACCA F3-Financial Accounting

Disposal for Part-Exchange Agreement

Step 1: Remove the original cost of the Noncurrent asset from the Non-current asset account Dr. Disposals (Original cost) Cr. Non-current assets (Original cost) Step 2: Remove Accumulated depreciation on the Non-current asset from accumulated depreciation account. Dr. Accumulated Depreciation Cr. Disposals
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Disposal for Part-Exchange Agreement

Step 3: Record the part-exchange allowance (PEA) as proceeds:
Dr. Non-current assets (Part of cost of new asset) Cr. Disposal (Sale proceeds of old asset)

Step 4: Record the cash paid for new asset

Dr. Non-current assets (Cash) Cr. Cash (Cash)
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Revaluation of Non-current Assets

Business may need to revalue assets to present the revalued amounts in the balance sheet. The difference between the NBV and the revalued amount is shown as revaluation reserve in the balance sheet The gain is not recorded in the income statement as it is unrealised gain
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Depreciation of a Revalued Asset

The charge for depreciation should be based on the revalued amount and the remaining useful life of the asset This charge will be higher than depreciation prior to the revaluation

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Student Notes for ACCA F3-Financial Accounting

Depreciation of a Revalued Asset

The excess of the new depreciation charge over the old depreciation charge should be transferred from the revaluation reserve to the accumulated profits This is done within the capital section of the balance sheet
Dr. Revaluation reserve Cr. Accumulated profits
accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting