Professional Documents
Culture Documents
3 Non-Current Assets Topic
3 Non-Current Assets Topic
Non-current assets
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Recognition
- Revaluation reserve
Measurement
- Initial measurement - Depreciation expenses
- Impairment losses
- Subsequent measurement
• Costs that are directly attributable to bringing the asset to necessary location and condition
• Purchase price+ Import duties + Non-refundable purchase taxes - Trade discount
Employee benefit costs
Site preparation
Initial delivery & handling costs
Installation & assembly costs
Professional fees
Costs of testing
PV of future clean-up costs/cost of dismantling / removing the asset and restoring the site
Estimated costs of dismantling and removing the asset
Initial Measurement
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Subsequent expenditure
Capitalized expenditure
Subsequent expenditure on property, plant and equipment should only be capitalized if:
• It enhances the economic benefits provided by the asset
• it relates to an overhaul or required major inspection of the asset – the costs associated with this should
be capitalized and depreciated over the time until the next overhaul or safety inspection
• it is replacing a component of a complex asset. This can only be capitalized if the original component has
been written off
Maintenance work
I. When major planned maintenance work is to be undertaken, the cost should be capitalized. The overhaul
will be capitalized as a new asset which will then be depreciated over the period to the next overhaul.
II.For unplanned maintenance work which happens in advance, work was required earlier than expected.
Then any remaining NBV of the overhaul cost should be expensed immediately.
Subsequent Measurement
Cost model
• Cost-accumulated depreciation-impairment loss.
• The residual value, the useful life and depreciation method should be reviewed at least each year
• Separate into depreciable parts (overhaul & complex asset)
• Any adjustment are accounted for as a change in accounting estimate – only reflect current and future P&L
• Land does not depreciate.
Revaluation model
• Upward revaluation to OCI/Revaluation surplus (other components of equity)
• Downward revaluation:
E.g. 1st +100; 2nd -120 the same asset
1st to OCI
then in P/L
• If an item is revalued, the entire class of assets must be revalued
• Sufficient regularity that carrying amount does not differ materially from FV at end of reporting period
• Any excess depreciation can be transferred from revaluation reserve to retained earnings annually.
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Disposal
Disposal proceeds A
Carrying value B
Profit or loss on disposal C=A-B
Illustration - PPE
Cap bought a building on 2011.1.1. the purchase price was $2.9m, associated legal fees were $0.1m
and general administrative costs allocated to the purchase were $0.2m. Cap also paid sales tax of
$0.5m, which was recovered from the tax authorities.
The building was attributed a useful life of 50 years. It was revalued to $4.6m on 2014.12.31 and was
sold for $5m on 2015.12.31.
Cap purchased a machine on 2013.1.1 for $100,000 and attributed it with a useful life of 10 years. On
2015.1.1, Cap reduced the estimated remaining useful life to 4 years.
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The building
•On 2011.1.1, the building was initially recognized at $3m ($2.9m purchase cost+$0.1m legal fees)
•Depreciation expense in year of 2011-2014 is $3m/50= $ 0.06m
•The CV just before revaluation is $3m-4*0.06m=$2.76m
•Revaluation at 2014.12.31 Dr. PPE $4.6m- $3m= $1.6m
Dr. Accumulated depreciation $ 0.24m
Cr. Revaluation gain (OCI) $1.84m
•In the year ended 2015.12.31, the depreciation charge would have been $0.1m ($4.6m/46), the CV is
$4.6m-$0.1m=$4.5m
•A profit on disposal of $0.5m ($5m-$4.5m) is recognized in P/L
•The revaluation gains previously recognized within OCI and held with equity are not reclassified to
profit or loss on the disposal.
•Cap could do a transfer within equity as
Dr. Revaluation reserve(OCE) $1.84m
Cr. Retained earnings $1.84m
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The machine
On 2013.1.1, the machine was recognized at $100,000
On 2015.1.1, Cap changes its useful life estimates, which is a change in accounting estimate and
therefore dealt with prospectively
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2015 Sep/Dec Q3
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2015 Sep/Dec Q3
It is not acceptable to accrue the costs of the overhaul. The entity does not have a constructive obligation to
undertake the overhaul.
Under IFRS, costs related to major inspection and overhaul are recognized as part of the carrying amount of
property, plant and equipment if they meet the asset recognition criteria in IAS 16 Property, Plant and
Equipment.
The major overhaul component will then be d epreciated on a straight-line basis over its useful life (i.e. over
the period to the next overhaul) and any remaining carrying amount will be derecognized when the next
overhaul is performed.
Costs of the day-to-day servicing of the asset (i.e. routine maintenance) are expensed as incurred. Therefore
the cost of the overhaul should have been identified as a separate component of the refinery at initial
recognition and depreciated over a period of two years.
This will result in the same amount of expense being recognized in profit or loss over the same period as the
proposal to create a provision.
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Answer
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Other points
Impact on financial statements
Upwards revaluation has increased equity in the statement of financial position. This
reduces its ROCE and gearing.
Pay attention to cash flows arising from transactions on PPE.
Disclosure requirements
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Definition
Government grants are transfers of resources to an entity in return for past compliance with
certain conditions relating to its operating activities. They exclude assistance that cannot be
valued and normal trade with government.
Include:
• revenue grants, e.g. money towards wages
• capital grants, e.g. money towards purchase of non-current assets.
General principles
Grants should not be recognized until the conditions for the receipt have been complied
with and there is reasonable assurance that the grant will be received.
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Accounting treatment-receive
Capital Grant 2. Recognized as deferred income and amortized to P/L over Dr. Bank
the life of asset. (Offsetting the higher dep. Charge on the Cr. Deferred income
original cost) Dr. Deferred income
Cr. Other income
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Accounting treatment-repay
On 1 June 20X1, Clock received written confirmation from a local government agency that it would
receive a $1m grant towards the purchase price of a new office building. The grant becomes
receivable on the date that Clock transfers the $10m purchase price to the vendor.
On 1 October 20X1 Clock paid $10m in cash for its new office building, which is estimated to have a
useful life of 50 years. By 1 December 20X1, the building was ready for use. Clock received the
government grant on 1 January 20X2.
Discuss the possible accounting treatments of the above in the financial statements for the year
ended 31 December 20X1.
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On 1 January 20X2
Dr Cash $1m 21
Answer Cr Grant receivable (asset) $1m
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Definition
Borrowing of funds to be capitalized as a part of cost of a “qualifying asset” where assets are self-
constructed over a substantial period of time.
Qualifying asset - An asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
Borrowing costs must be added to the cost of an asset, if the asset is one that takes a substantial
time to get ready. (capitalization)
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Recognition
Measurement
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On 1 January 20X1, HiRise obtained planning permission to build a new office building. Construction
commenced on 1 March 20X1. To help fund the cost of this building, a loan for $5m was taken out from the
bank on 1 April 20X1. The interest rate on the loan was 10% per annum.
Construction of the building ceased during the month of July due to an unexpected shortage of labor and
materials. By 31 December 20X1, the building was not complete. Costs incurred to date totaled $12m
(excluding interest on the loan).
Discuss the accounting treatment of the above in the financial statements of HiRise for the year ended 31
December 20X1.
I. Borrowing of funds to be capitalized as a part of cost of a “qualifying asset” where assets are self-
constructed over a substantial period of time.
II. Capitalization of borrowing costs should commence on 1 April 20X1, but it should cease for the month of
July because active development was suspended.
III. In total, 8 months’ borrowing costs should be capitalized and added to the building cost in the year 20X1.
The total capitalized costs = $5m*10%*8/12=$333,333
IV. The carrying amount of the building at year end is $12,333,333. 26
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Definition
Property (land or building – or part of a building – or both) held to earn rentals or for capital
appreciation or both.
Measurement
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Change in use
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Definition
Recognition
Identifiable
Identifiable
The skill of employees, arising out of the benefits of training costs, are most unlikely to be recognisable
as an intangible asset, because an entity does not control the future actions of its staff.
Similarly, market share and customer loyalty cannot normally be intangible assets, since an entity
cannot control the actions of its customers
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Recognition
- Purchased separately Capitalized at cost. Include directly
attributable costs
- Acquired in business combination Capitalized at FV at date of
Acquired (Goodwill) acquisition
separately - Exchanges of assets Cost = normally FV of asset given up
The directors have produced cash flow projections for the Our Sports series over the next five years.
Based on these projections, they have prudently valued the Our Sports brand at $20 million and wish
to recognise this in the statement of financial position as at 30 September 20X3.
On 30 September 20X3, Innovate also paid $1 million for the rights to the ‘Pets & Me’ videogame
series after the original developer went into administration.
Required: Discuss the accounting treatment of the above in the financial statements of Innovate for
the year ended 30 September 20X3
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II.However, the asset has been internally generated and therefore the cost of the asset cannot be
measured reliably.
III.So the Our Sports brand cannot be recognized in the financial statements.
III.In subsequent periods, the Pets & Me brand will be amortized over its expected useful economic life.
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Answer
R&D
Research cost
written off as an expense as they are incurred
Development
be recognized as an asset only if they meet certain criteria*:
Probable future economic benefits from the asset, whether through sale or internal cost savings.
Intention to complete the intangible asset and use or sell it
Resources available to complete the development and to use or sell the intangible asset
Ability to use or sell the intangible asset
Technical feasibility of completing the intangible asset so that it will be available for use or sale
Expenses attributable to the intangible asset during its development can be measured.
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R&D
All expenditure related to an intangible which does not meet the criteria for recognition
should be expensed as incurred.
Examples of such expenditure:
• Start up costs
• Advertising costs/Marketing cost
• Training costs
• Business relocation costs
• Prepaid costs for services, for example advertising or marketing costs for campaigns
that have been prepared but not launched, can still be recognized as a prepayment
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TYU – R&D
During the year ended 31 December 20X1, Scone spent $2 million on researching and developing a
new product. The entity has recognised all $2 million as an intangible asset. A breakdown of the
expenditure is provided below:
$m
Research into materials 0.5
Market research 0.4
Employee training 0.2
Development activities 0.9
The expenditure on development activities was incurred evenly over the year. It was not until 1 May
20X1 that market research indicated that the product was likely to be profitable. At the reporting
date, the product development was not yet complete.
Required: Discuss the accounting treatment of the research and development expenditure in the
year ended 31 December 20X1. 40
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• Expenditure on research, market research and employee training cannot be capitalized and so must
be written off to profit or loss.
• As for development activities, $0.9*4/12=$0.3 million was incurred before the product was known
to be commercially viable. This amount must also be written off to profit or loss.
• In total, $0.5+$0.4+$0.2+$0.3=$1.4 million must be written off from intangible assets to profit or
loss:
Dr Profit or loss $1.4m
Cr Intangible assets $1.4m
• The intangible assets recognised on the statement of financial position will be $0.6million ($2-$1.4).
No amortization will be charged because the product is not yet complete.
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Answer
Measurement
Cost model
Cost - accumulated amortization - impairment
Finite useful life
Amortize on systematic basis over its useful life
Initial Subsequent
Begins when available for use/commercial production
(economic benefit)
Cost model
At cost Residual value normally assumed = 0
• Finite (amortize with zero
residual value) Review useful life and method at least each financial year-
• Infinite (no amortization) end
Revaluation model
Indefinite useful life
• To FV* only if active market
NOT amortised
Review indefinite useful life assessment each period
Impairment tests at least annually
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Measurement
Revaluation model
• Quoted market price in an active market provide the most
reliable estimate of the FV of an intangible asset
Initial Subsequent • No active market, on the basis of the best information
available /similar asset/ estimating techniques
Cost model • Features of an active market are that:
At cost
• Finite (amortize with zero the items traded within the market are homogeneous
residual value)
• Infinite (no amortization) willing buyers and sellers can be found at any time
Revaluation model prices are available to the public.
• To FV* only if active market No active market: cost model
Revalue whole class at the same time
Revalue regularly such that BV not materially different to FV
Amortisation
Acceptable methods of amortization
There is a rebuttable presumption that amortization methods that are based on revenue
generated by an activity that includes the use of an intangible asset are inappropriate.
The revenue generated by an activity that includes the use of an asset generally reflects factors
other than the consumption of the economic benefits of the intangible asset. For example,
revenue is affected by other inputs and process, selling activities and changes in sales volumes and
prices. The price component of revenue may be affected by inflation ,which has no bearing upon the
way in which an asset is consumed.
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Amortisation
Acceptable methods of amortization
The presumption may be rebutted under the following conditions:
(a) Where the intangible asset is expressed as a measure of revenue, that is predominant limiting factor that is
inherent in an intangible asset is the achievement of a revenue threshold; or
(b) When it can be demonstrated that revenue and the consumption of the economic benefits of the intangible
asset are highly correlated.
An example of (a) might be to operate a toll road, if this rights were based on a fixed total amount of revenue to be
generated from cumulative tolls charged. A contract could, for example allow operation of the toll road until the
cumulative amount of tolls generated from operating the road reaches $100 million. Revenue would in this case be
established as the predominant limiting factor in the contract for the use of the intangible asset, so the revenue that
is to be generated might be an appropriate basis for amortising the intangible asset, provided that the contract
specifies a fixed total amount of revenue to be generated on which amortization is to be determined.
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Definition
Recoverable Carrying
Amount Value
FV -
Value in use
Cost to sell
Amount obtainable from the sale of an asset in an PV of estimated future cash flows expected to arise from the
arm’s length transaction less costs of disposal continuing use of an asset and its disposal at the end of its
useful life 48
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When impairment?
The entity should look for evidence of impairment at the end of each period and conduct an
impairment review on any asset where there is evidence of impairment. (indicators of impairment)
External
– significant fall in market value
– significant external adverse effect on the business in technological, market, legal, economic,
environment
– increase in market interest rates that reduce the value in use
Internal
– obsolescence/ damage
– The asset is not used as much in the business
– performance of asset worse than expected
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Methods
Measuring fair value less costs to sell
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Methods
Measuring value in use
Cash flow projections should be based on reasonable and supportable assumptions, the
most recent budgets and forecasts;
Management should assess the reasonableness of its assumptions by examining the causes
of differences between past CF projections and actual CFs.
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Methods
Unable to determine value in use and net selling price
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Accounting treatment
• The recoverable amount should be calculated
• The asset is to be written down to recoverable amount
• The impairment loss should be charged to P/L as an expense
• Adjust depreciation based on impaired figures for future periods
If the impairment reserves a previous gain, taken to the revaluation reserve firstly
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TYU Impairment
On 2011.12.31, an entity noticed that one of its items of plant and machinery is often left idle. On
this date, the asset had a carrying amount of $500 and a fair value of $325. The estimated costs
required to dispose of the asset are $25.
If the asset is not sold, the entity estimates that it would generate cash inflows of $200 in each of the
next two years. The discount rate that reflect the risks specific to the asset is 10%.
Required:
(a) Discuss the accounting treatment of the above in the financial statements for the year ended
31 December 2011.
(b) How would the answer to part(a) be different if there was a balance of $10 in other
components of equity relating to the prior revaluation of this specific asset?
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Answer
(a)
Dr. Profit or loss $153
Cr. PPE $153
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Answer
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Special cases
Annual impairment tests, irrespective of whether there are indications of impairment, are required for:
Goodwill acquired in a business combination
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Impairment order
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TYU CGU
There was an explosion in a factory. The carrying amounts of its assets were as follows:
$000
Goodwill 100
Patents 200
Machines 300
Computers 500
Buildings 1,500
2,600
The factory operates as a cash-generating unit. An impairment review reveals a net selling price of
$1.2 million for the factory and value in use of $1.95 million. Half of the machines have been blown
to pieces but the other half can be sold for at least their carrying amount. The patents have been
superseded and are now considered worthless.
Required: Discuss, with calculations, how any impairment loss will be accounted for.
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Answer
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Internal indicators
I. Favorable changes in the use of the asset.
II. Improvements in the asset’s economic performance.
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If the reversal relates to a CGU, the reversal is allocated to the assets of the unit on a pro rata
basis according to their carrying value.
The carrying amount of an asset must not be increased above the lower of
Its recoverable amount;
Its depreciated carrying amount had no impairment loss originally been recognized.
The depreciation charge for future periods should be revised to reflect the changed carrying64
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TYU Reversal
Boxer purchased a non-current asset on 1 January 20X1 at a cost of $30,000. At that date, the asset
had an estimated useful life of ten years. Boxer does not revalue this type of asset, but accounts for it
on the basis of depreciated historical cost. At 31 December 20X2, the asset was subject to an
impairment review and had a recoverable amount of $16,000.
At 31 December 20X5, the circumstances which caused the original impairment to be recognized
have reversed and are no longer applicable, with the result that recoverable amount is now $40,000.
Explain, with supporting computations, the impact on the financial statements of the two
impairment reviews.
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Answer
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Conclusion
I. The asset will be increased by $5,000.
II. $5,000 income will be recognized in profit or loss.
III. The whole $8,000 original impairment cannot be reversed. The carrying value of the
asset (10,000) cannot be increased above the lower of
a. Its recoverable amount(40,000);
b. The CV amount (depreciated historical cost, based upon the original cost and
estimated useful life of the asset) (15,000)
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Answer
The property, plant and equipment was originally purchased for $400,000 on 1 January 20X1 and was
attributed a useful economic life of 8 years.
At 31 December 20X3, the circumstances which caused the original impairment have reversed and are
no longer applicable. The recoverable amount of the cash generating unit is now $420,000.
Explain, with supporting computations, the impact of the impairment reversal on the financial
statements for the year ended 31 December 20X3.
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Conclusion
The carrying amount of PPE can be increased from $150,000 to $250,000. This will give rise
to a gain of $100,000 in profit or loss.
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Answer
Changing in value
of asset
Increase Decrease
Previous
Previous To p/l
To RR increase
decrease
Any excess Cr to
Up to↑amount RR ↓amount of bal. in
of CV RR/OCI. Any excess Dr to p/l
(if revaluation
↑ in p/l model) ↓Asset cost
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Disclosure requirements
IFRS 5
Non-current assets held for sale and
discontinued operations
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02 Discontinued operations
Presentation on FS
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Definition
An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use.
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Must be available for immediate sale in its present condition, subject only to terms that are usual
and customary for sales of such assets (or disposal groups);
Case application
An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify
all the assets and liabilities of that subsidiary as held for sale when the criteria set out are met,
regardless of whether the entity will retain a non-controlling interest in its former subsidiary
after the sale.
Assets that are to be abandoned or wound down gradually cannot be classified as HFS
(although they may qualify as discontinued operations once they have been abandoned),
because their CV will not be recovered principally through a sale transaction.
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Measurement
An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its
carrying amount and fair value less costs to sell
Impairment
At the time of classification as held for sale
Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying amounts of the
asset (or all the assets and liabilities in the group) shall be measured in accordance with applicable IFRSs.
Where FV less costs to sell is lower than CV, the item is written down as an impairment loss in P/L .
If a NCA has been previously revalued(i.e. using a revaluation model) and is now classified as being held for sale, it
should be revalued to FV immediately before it is classified as held for sale. It is then revalued again at the lower of the
CV and the fair value less costs to sell. The difference is the selling costs and these should be charged against profits in
the period.
A gain can be recognized for any subsequent increase in FV less costs to sell, but not in excess of the cumulative
impairment loss that has already been recognized.
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Answer
Changes to plan
Held for sale
If a sale does not take place within one year, an asset (or disposal group) can still be classified as
held for sale if:
The delay has been caused by events or circumstances beyond the entity' s control
There is sufficient evidence that the entity is still committed to the sale.
If the criteria for 'held for sale' are no longer met, the assets or disposal group must be measured at
the lower of:
its CV before it was classified as held for sale adjusted for any depreciation, amortization or
revaluations that would have been recognized had it not been classified as held for sale
its recoverable amount at the date of the subsequent decision not to sell
Any adjustment required is charged to P&L
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Discontinued operations
A discontinued operation is a component of an entity that either has been disposed of, or is classified
as held for sale, and
a. represents a separate major line of business or geographical area of operations,
b. is part of a single co-ordinated plan to dispose of a separate major line of business or geographical
area of operations or
c. is a subsidiary acquired exclusively with a view to resale.
A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. In other words, a
component of an entity will have been a cash-generating unit or a group of cash-generating units
while being held for use.
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终止经营,是指企业满足下列条件之一的、能够单独区分的组成部分,
且该组成部分已经处置或划分为持有待售类别:
(一)该组成部分代表一项独立的主要业务或一个单独的主要经营地
区;
(二)该组成部分是拟对一项独立的主要业务或一个单独的主要经营
地区进行处置的一项相关联计划的一部分;
(三)该组成部分是专为转售而取得的子公司。
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Assets classified as held for sale should be presented separately from other assets in the statement
of financial position
A separate line under current assets
The liabilities of a disposal group classified as held for sale should be presented separately from
other liabilities in the SOFP
Assets and liabilities should not be offset
A single amount in the statement of comprehensive income comprising the total of:
I. the post-tax profit or loss of discontinued operations and
II. the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on
the disposal of the assets or disposal group(s) constituting the discontinued operation
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SBR 2nd proof Q3(b); 2018 Sep SBR Q2; SBR 2nd proof Q4(b);
2018 DEC SBR Q3(b); 2021 Mar/Jun Q2&Q4 NCA held for sale and discontinued
SBR 2nd proof Q3(a)(i); 2018 SEP SBR Q3; 2018 Dec SBR Q1(c);2018 Sep SBR Q2;
2020 Mar SBR Q3; 2020 Sep/Dec SBR Q3; 2020 Mar SBR Q1&Q3; 2020 Sep/Dec SBR Q3
2021 Mar/Jun Q3
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