CH 4

Non Current
Assets

IAS 16: Property,

Plant and Equipment
Depreciation
Accounting
IAS 20: Government
Grants
IAS 40: Investment
Properties
IAS 23: Borrowing
Costs
Ali Nyondo (MBA, FCCA, CPA(M),
B.Sc)

1. PPE: Some Definitions

Property,plant
plantand
andequipment
equipmentare
aretangible
tangibleassets:
assets:
Property,

Held for use in production, or supply of goods or services,

Held
for use in production, or supply of goods or services,
for rental to others or for admin purposes.
for rental to others or for admin purposes.
Are expected to be used during more than one period.
Are
expected to be used during more than one period.

Cost:Amount
Amountofofcash
cashororcash
cashequivalents
equivalentspaid
paidtoto
Cost:
acquireananasset.
asset.
acquire

Residualvalue:
value:Net
Netamount
amountananentity
entityexpects
expectstoto
Residual
obtainfor
forananasset
assetatatthe
theend
endofofitsitsuseful
usefullife.
life.
obtain

Defns continues
Entity specific value: Present value of cash
flows an entity expects to arise from continuing
use of an asset and from its disposal.
Fair value: Amount an asset could be
exchanges btn willing parties, at arms length
transaction.
Carrying amount: NBV of an asset.
Impairment loss: An amount by which the
carrying amount of an asset exceeds its
recoverable amount.

Recognition
Recognise as an asset when:
It is probable that future economic
benefits associated with the asset will
flow to the entity
The cost of the asset to the entity can
be measured reliably.

Separate items
For very large and specialized items,
an asset should be broken down into
its parts

Initial recognition
Initially measured at cost.

Components of cost
Purchase price
Taxes
Other direct costs
Initial estimates of the unavoidable
cost of dismantling and removing
the asset and restoring the location
on which it is located.

Measurement subsequent to initial

recognition
Two choices:
a) Cost model
b) Revaluation model

Revaluations
Example1: Revaluation surplus
BC has an item of land carried in its
books at $13,000. Two years ago, a
slump in land values led the company to
reduce the carrying value from $15,000.
This was taken as an expense in the
income statement. There has been a
surge in the land prices in the current
year and the land is now at $20,000.

Example 2: Revaluation
decrease
.the original cost was $15,000,
revalued upwards to $20,000 two
years ago. The value has now fallen
to $13,000.

Example 3: Revaluation and

depreciation
C company bought an asset for
$10,000 at the beginning of 20x6. It
had a useful life of five years. On 1
January 20x8 the asset was revalued
to $12,000. The expected useful life
has remained unchanged. Account
for the revaluation and state the
treatment for depreciation from 20x8
onwards.

Review of useful life

Review of useful life of PPE should be
carried out at least at each financial
year.
Ex: B co acquired a non current asset on
1 Jan 20x2 for $80,000. It had no
residual value and a useful life of 10
years. On 1 Jan 20x5, the remaining
useful life was reviewed and revised to 4
years. What will be the depreciation
charge for 20x5?

Complex assets
Are assets made up of separate
components.
Each component is separately
depreciated over their useful life.

Example on complex asset

Cost $;000 Useful life
Fuselage
20,000
20 years
Undercarriage
5,000
500
landings
Engine
8,000
1,600 flying
hrs
Depreciation at the end of first year , in which
150 flights totaling 400 hours were made
would then be..

Disclosure
Disclose the following:
Measurement base
Depreciation method
Useful lives
Gross carrying amount
Reconciliation of carrying amount at the
beginning and end of the period.

2. Depreciation accounting
Some definitions:
Depreciation: Systematic allocation of
the depreciable amount of an asset over
its estimated useful life.
Useful life: Period over which a
depreciable asset is expected to be used
by the entity.
Depreciable amount: Cost less
estimated residual value.

Depreciation
The depreciable amount of a
depreciable asset should be
allocated on a systematic basis to
each accounting period during the
useful life of an asset.

Useful life
The following factors are taken into
account when estimating the useful
life:
Expected physical wear and tear
Obsolescence
Limits on use of the assets

Residual value
Likely to be immaterial
If significant (material), estimate the
value at date of purchase.

Depreciation method
Should be consistent.
If changes made, quantify the effect,
disclose it, and give reason for
change.

Disclosure
Disclose:

Depreciation method
Useful lives
Total depreciation
Gross amount

Question
A lorry bought for a business cost $17,000.
It is expected to last for five years and then
be sold for scrap for $2,000. Usage over
the five years is expected to be:
Year 1 200 days Year 4 150 days
Year 2 100 days Year 5 40 days
Year 3 100 days
Work out depreciation under:
(a)Straight line (b) Reducing balance rate of 35%
(c) Machine hour method (d)Sum of digits

Further example
To project and work out in groups
example on page 71 (2012 F7
manual)

3. IAS 20: Government

grants
Do not recognise a government grant
until:
The entity will comply with conditions
The entity will actually receive the grant.

Accounting Treatment
Recognize over the relevant periods
to match them with related costs, on
a systematic basis
.DO NOT CREDIT DIRECTLY TO EQUITY.
.DO NOT RECOGNISE ON CASH
RECEIPT BASIS.

IAS 20 Example 1
ABC ltd receives a government grant
representing 50% of the cost of
depreciating asset which costs
$40,000. How will the grant be
recognised if ABC depreciated the
asset:
(a) Over 4 years straight line
(b) 40% reducing balance

Grants related to assets

TWO ALTERNATIVES:
1. Set up a grant as deferred income
2. Deduct the grant in arriving at the
carrying amount of the asset.

IAS 20 Example 2
A company receives a 20% grant towards the
cost of machinery, which cost $100,000. The
machinery has an expected life of four years and
a nil residual value. The expected profit of a
company , before accounting for depreciation or
grant, amount to $50,000 per annum in each
year of machineries life.
Extract statements by
(a) deducting the grant from cost
(b) treating the grant as deferred income.

Presentation of grants related to

income
Present as a separate credit or under
a general heading, eg, other income.
Deduct from the related expense.

4. IAS 40: INVESTMENT

PROPERTY
Investment property: Is property
(land or buildings) held
To earn rentals or
For capital appreciation or
both of the above.

More definitions
Owner occupied property: Property
held by the owner for use in the
production or supply of goods.
Fair value: the amount for which an
asset could be exchanged between
knowledgeable willing parties in an
arms length transaction.
Cost: Amount of cash paid or fair
value of consideration given.

Examples of investment
properties
Land held for long term capital
appreciation
A building owned by an entity and
leased out on short term lease
Building owned by the parent leased
to a subsidiary (not inv property in
group accounts).
Property being developed for future
use as an investment property.

Initial and subsequent

measurement
Initially, measure at cost
Subsequently, choose between:
Fair value model
Cost model

Fair value model

After initial recognition, an entity that
chooses fair value model should
measure all of its investment
property at fair value.

Cost model
This is the IAS 16 cost model
Disclose the fair value of investment
property.

Changing models
Do not changeunless the change
will result in a more appropriate
presentation.

Transfers
Should be made only when there is
change in use..
When change is from investment
property to owner occupation, fair
value at date of change should be
the property cost for subsequent
accounting.
When it is the other way.

Example, transfer to investment

property
ABC owns a building which it has been using
as head office. On 30 June 20x9, it moved its
head office to one of its production centers
and is now letting out its head office.
Company policy is to use its fair value model.
The building had an original cost of $250,000
on 1 January 20x0 and was depreciated over
50 years. At 31 Dec 20x9, its fair value was
judged to be $350,000. How will this appear
in the financial statements of 31 Dec 20x9?

Disclosures
Model used (Fair value or cost model)
Criteria for classification as
investment prop.
Assumptions in determining fair
value
Use of independent professional
valuer (encouraged, but not
required)
Rental income and expenses
Any restrictions or obligations

Additional disclosures
For fair value model
Disclose a reconciliation of the carrying
amount of the investment property at the
beginning and end of period.
For cost model
Disclose the fair value of the investment property.

5. IAS 23: BORROWING

COSTS
Borrowing cost: Interest and other
costs incurred when you borrow
money.
Qualifying asset: An asset which
necessarily takes a long time to be
completed for use or sale.

Examples of borrowing costs

Interest on bank overdrafts and
borrowings
Amortisation of discounts or
premiums relating to borrowings
Finance charges in respect of finance
leases

Examples of qualifying
assets
Inventories that require a long period
of time to bring them to saleable
condition.
Manufacturing plants
Power generation facilities
Investment properties.

Capitalisation
Borrowing costs must be capitalised

Example
See example on capitalisation;
See another example on construction

Disclosure
Amount of borrowing costs
capitalized
Capitalization rate used to determine
the amount of borrowing costs
eligible for capitalization.