F7

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3 Designed to give you the knowledge and application of: Section C: Financial Statements C1. Statements of cash flows C2. Tangible non-current assets C3. Intangible assets C4. Inventory C5. Financial assets and financial liabilities C6. Leases C9. Taxation

4 C2: Non current assets - Tangible  Initial cost of a non-current asset (including a self-constructed asset)  Subsequent expenditure that may be capitalised  Capitalisation of borrowing costs (IAS 23)  Revaluation of property, plant and equipment  Accounting for gains and losses on the disposal of revalued assets  Calculating depreciation on: revalued assets, and assets that have two or more major items or significant parts Learning Outcomes

5 Tangible non-current asset (TNCA) TNCA = Tangible (Physical / touchable) + Non-current (other than current) assets Current assets are assets Realised (sold / consumed) in entities normal operating cycle Which are held for trading Like cash / cash equivalent (unless restricted from being exchanged) Is expected to realise within 12 months after SOFP date

6 Recognition of non-current assets Costs which can be capitalised Costs which cannot be capitalised Purchase price Overhead cost, cost of launching the product Costs incurred for bringing the asset to the location & condition necessary for its intended use Expenses on opening new business & relocating the existing one Initial estimate of restoring the site Initial losses when assets operate at low capacity & cost of incidental operations An item is recognised as NCA if Future economic benefits flow to entity Cost of an item can be measured reliably

7 Purchase price  Purchase price i.deduct trade discounts and rebates ii.add duties and non-refundable taxes  The price to be considered - cash price equivalent at the recognition date

8 Costs directly attributable … Employee benefits (e.g. wages paid to workmen involved in construction / erection) Costs directly attributable to bringing the asset to its location and condition so as to make it available for its intended use: Initial delivery and handling costs (e.g. freight) Installation costs (e.g. wages to install machinery) Testing costs net of revenue generated, such as sale proceeds of material produced during a test run (e.g. material and wages directly related to test production) Professional fees (e.g. architects’ fees)

9 Borrowing costs  Capitalising borrowing costs (BC) = including BC in the cost of qualifying asset  A qualifying asset - takes substantial time to prepare for use or sale BC which can be capitalised  Interest on the funds borrowed specifically for constructing minus any investment income on temporary investment of these borrowings  Borrowing costs on funds borrowed generally but used for obtaining a qualifying asset

10 Capitalisation of borrowing cost Commences when Stops when  Costs for the asset are occurring  Borrowing costs are being incurred  Activities needed to prepare asset for its use / sale are in progress All the activities necessary to prepare the qualifying asset for its intended use or sale are complete Continued…

11 Subsequent costs and measurement after recognition IMPROVES the earnings capacity of the asset works efficiently or lasts longer Capital expenditure Capitalised MAINTAINS the existing capacity of asset (e.g. day to day servicing cost recognised as expense in in SOCI) Revenue expenditure Not capitalised Refer to Test Yourself 4 page 175

12 Measurement after recognition  Revalued amount = fair value (FV) of asset at the revaluation date  FV is derived from market based values  If no market value available - FV estimated considering its income or using replacement cost approach / value in use Cost model : carried at cost less accumulated depreciation if any Revaluation model : Carried at revalued amount – accumulated depreciation & Impairment losses Chose accounting policy

13 Accounting for revaluations First Time Cost of an asset (Carrying amt.) $10,000 $ 8,000 $ 12,000 $5,000 $9,000 $15,000 $11,000

14 Depreciation of non-current tangible asset Depreciation calculation after revaluation  Depreciation will be based on revalued amount  Full depreciation amount charged as expense to SOCI  Difference between depreciation on revalued amount & original cost may be transferred from revaluation reserve to retained earnings Depreciation is systematic allocation of depreciable amount of an asset over useful life

15 Depreciation of assets having one or more significant parts If cost of part of an asset is Significant when compared to cost of total asset then That part should be depreciated separately Insignificant parts are depreciated together Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately. IAS 16 Para 43

16 Depreciation methods  The straight-line method: This results in a constant charge over the useful life if the asset’s residual value does not change  The reducing (diminishing) balance method: This results in a decreasing charge over the useful life  The units of production method: This results in a charge based on expected use or output

17 During the year to 30 September 20X7, the following events took place: For the purpose of depreciation calculations, assume that all the work mentioned above was completed at 1 October 20X6 Required: Calculate the carrying amount of Stanburt's machine at 30 September 20X7 and its related expenditure in the SOCI for the year ended 30 September 20X7. Explain the treatment of each item. $ millions 1.Engine, which had run for 30,000 hours to date developed serious problems It was replaced by a better engine with estimated life of 50,000 hours and a cost of the engine was used for 5,000 hours during the year The engine was used for 5,000 hours during the year 2.Polishing and painting was done to the outer casings, costing Other components were upgraded with a cost of The remaining life of this is 5 years Question

18 This is a case of a complex asset, where different components are treated differently for the calculation of depreciation. First we need to calculate the carrying value of the components at 30 September 2006 (after the completion of 8 years) ComponentCost $m Depreciation $m Carrying value $m Engine102.00(76.5) (102/40,000 x 30, Outer casings306.00(97.92) 306/25 x 8) Other components of machine (102.0) (153/12 x 8) (276.42) Continued… Answer

19 The following adjustments are needed before we calculate the depreciation charge for the year: 1.The carrying value of the existing engine ($25.5 m) is derecognised i.e. written off. The cost of the new engine ($142.8m) is recognised as an asset. 2.Polishing and painting ($0.78m) is an expense and is to be charged to SOCI as a repairs and maintenance expense. 3. The upgrade of other components is recognised as an asset. Since there is no replacement of existing parts, there is no de recognition. Continued…

20 Depreciation for the year to and the carrying value at 30 September 20X7 Notes:  1. No depreciation is provided on the old engine. The charge for the new engine is / 50,000 x 5,000 =  2. The charge for the casings is / 25 = 12.24, as calculated earlier for the b/fwd figures.  3. Carrying amount of old components will be depreciated over 5 years: (153.0 – 102.0) / 5 = New additions to the components will also be depreciated over 5 years: (61.2/5 = 12.24). Total depreciation on these two is = Component $m CostAdditionsDeductionTotalDepn b/fwd Depn for year DeductionTotalCarrying amount Engine (102.0) (76.5) Casings Components (102.0) (76.5) Continued…

21 RECAP:  Initial cost of a non-current asset (including a self-constructed asset)  Subsequent expenditure that may be capitalised  Capitalisation of borrowing costs (IAS 23)  Revaluation of property, plant and equipment  Accounting for gains and losses on the disposal of revalued assets  Calculating depreciation on: revalued assets, and assets that have two or more major items or significant parts