1. ACCOUNTING FOR NON-CURRENT ASSETS CHAPTER 9 PAGES 323-357

2. ACCOUNTING FOR NON-CURRENT ASSETS Objectives: Define non-current assets and be able to identify and classify these in the Balance Sheet Distinguish between capital and revenue expenditure items and evaluate and describe the effects that such distinction has on the recording procedures Explain the distinction between depreciation, depletion and amortisation Explain the cost allocation concept of depreciation Compare and contrast the various methods of calculating depreciation on property, plant and equipment Record the accounting entries for depreciation of property, plant and equipment and amortisation of intangible assets.

3. ACCOUNTING FOR NON-CURRENT ASSETS Objectives: (continued) Record the accounting entries for the disposal of different types of property, plant and equipment Explain the necessity for a property, plant and equipment register and prepare the necessary records

4. ACCOUNTING FOR NON-CURRENT ASSETS Non-Current Assets Non-current assets are any assets other than current assets They are assets that are purchased by the business and are not intended for resale but are to be used within the operation of the business to earn revenue They will normally be kept and used for longer than one accounting period.

5. ACCOUNTING FOR NON-CURRENT ASSETS Non-Current Assets When non-current assets are classified in the Balance Sheet, they are grouped under the following headings: Property, plant and equipment Intangible assetsOther financial assets (investments) Other LandFranchisesGovernment Securities Long-term accounts receivable BuildingsPatentsShares in Companies FurnitureTrademarksDebentures MachineryCopyrights Research and development costs Brand names Goodwill

6. Non-Current Assets Capital and Revenue Expenditure Capital Expenditure: -Expenditure resulting in the acquisition and installation of an asset whose life will extend over more than one accounting period -This expenditure is capitalized (treated as an asset) and appears in the Balance Sheet.

7. Non-Current Assets Capital and Revenue Expenditure Capital Expenditure: -The following are regarded as capital expenditure: -Expenditure made to bring an asset into a location and condition ready for use -For example, if a machine is purchased, all freight, installation costs and any other such expenses paid are placed in the relevant asset account. Any legal costs associated with the purchase of assets, such as land, are capitalized.

8. Non-Current Assets Capital and Revenue Expenditure Capital Expenditure: -The following are regarded as capital expenditure: -Improvement or addition to existing assets. Eg. New bodies to delivery vans, extensions to existing buildings, car parks, and storage facilities are also treated as assets. -Major expenditure to extend the life of the asset would be capitalized (treated as an asset). Eg. The cost of fitting a new or reconditioned motor to a vehicle to extend its useful life to the business would be capitalized.

9. Non-Current Assets Capital and Revenue Expenditure Revenue Expenditure: -Expenditure for property or services that will be consumed during the current accounting period -They are considered an expense to the business because they are charged against revenue earned as part of the matching principle of accounting.

10. Non-Current Assets Capital and Revenue Expenditure Revenue Expenditure: -The following are regarded as revenue expenditure: -Expenditures to maintain an asset in an efficient working condition. Eg repairing a damaged motor, repainting a building, replacing tyres on a truck, repairing broken windows, replacing broken parts on machinery or blown light bulbs, cleaning floors- all placed in expense accounts -Expenditures that are associated with assets but which will be consumed during the accounting period. Eg motor vehicle registration, insurance, fuels and oils

11. Non-Current Assets Capital and Revenue Expenditure Accounting for the purchase of property, plant and machinery - Read pages 325-327 - Answer question 9.3 on pg 327

14. Non-Current Assets Depreciation and Amortisation

15. Depreciation and Amortisation The worth or value of many non-current assets goes down as they get older. Eg. Machinery, motor vehicles and furniture The reasons why they go down in value is due to depreciation and amortisation

16. Depreciation and Amortisation Depreciation Definitions: Depreciation is the allocation of the depreciable amount of an asset over its useful life. The term is usually used in relation to physical assets Depreciable amount is the cost of the depreciable asset less the net amount expected to be recovered on disposal of the asset at the end of its useful life

17. Depreciation and Amortisation Depreciation How do non-current assets depreciate (lose value)? -Wear and tear: Assets that are mechanical or electrical eventually wear out. -Obsolescence: In our highly technological world, new inventions may make existing equipment obsolete before the end of its useful life (not needed anymore because a bigger and better version has come out)

18. Depreciation and Amortisation Amortisation Definition: Amortisation refers to the gradual writing off of the cost of certain assets through the passing of time or depletion. It usually refers to the writing off of intangible assets and natural resources -Passing of time: certain assets, such as a patent taken out for 20 years, lessen in worth each year. After 20 years, it has no value -Depletion: The quantity of natural resources available from mines, quarries and forests diminishes (goes down) as material is removed from them.

19. Depreciation Cost allocation concept of depreciation accounting Depreciation accounting refers to the process used to allocate the cost of the property, plant and equipment asset over the life of the asset by making periodic charges against revenue. These charges are one part of the important principle of accounting known as the “matching principle”, which states that expenses incurred in earning revenue must be matched against the revenue earned for that period. Matching of the expense against the relevant revenue gives rise to the concept that property, plant and equipment assets are ‘deferred charges to revenue’- this means that the cost of the asset is delayed or allocated to future accounting periods in which the asset is used.

20. Depreciation Factors determining the depreciation charge The following factors determine the depreciation charge under the cost allocation process: -The asset’s cost price (not including GST) -The asset’s anticipated useful life -The asset’s anticipated residual value (the anticipated worth to the business of the asset at the end of its estimated life- eg how much money will you get for it??) -The method of calculating the depreciation charge

21. Depreciation Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method Diminishing Balance Method

22. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: With this method, each accounting period is allocated the same portion of the cost of the non-current asset less any residual value. The information required to use this method includes: -Original cost of the asset (including necessary expenses but excluding GST) -Estimated life of the asset -Estimated residual value of the asset.

23. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: Method of Calculation: Depreciation for each accounting period = Original Cost – Estimated Residual Value Estimated Life

24. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method:

25. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: Advantages of method: -Simple to use -More appropriate where the benefits from the asset are roughly equal in each period, such as furniture and buildings Disadvantages of method: -It does not take into account the degree of usage, age or efficiency of the asset -It does not allow for the likelihood of greater cost of repairs in the later life of the asset due to wear in earlier accounting periods

26. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: Complete Activity 9.7 on pg 331. In this format: Furniture (cost) :? Add Delivery:? Total Cost:? Less Estimated residual:? Estimated life:? Annual Depreciation = (Equation)

27. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: Answers (Activity 9.7 on page 331)

28. Methods of Calculating the Depreciation Charge: Straight line (fixed instalment) method: Answers (Activity 9.7 on page 331) b) Furniture (cost)4500 Add Cartage and insurance130 Total Cost4630 Less Estimates residual430 $4200 Estimated life5 years Annual Depreciation4200 = $840 5

29. Methods of Calculating the Depreciation Charge: Diminishing Balance method: -With the diminishing balance method, a uniform rate of depreciation is applied in each period to the cost of the asset reduced by any accumulated depreciation (the diminished balance) -The information required to use this method includes: -Original cost of the asset (incl. expenses, excl. GST) -Accumulated depreciation -Rate of depreciation to be applied

30. Methods of Calculating the Depreciation Charge: Diminishing Balance method: Method of Calculation -Depreciation for the period = Rate of depreciation X Diminished Balance (Diminished balance = Original cost – Accumulated depreciation) A major difference with this method is that the residual value is not subtracted from the original cost before calculations are made.

31. Methods of Calculating the Depreciation Charge:

32. Diminishing Balance method: Advantages of this method: -It is suitable for use where the service rendered by the asset is greatest in the early years of its life (eg. Cars and machinery). The greatest charges against revenue occur in the periods where the greatest benefits are obtained. -The depreciation charge is lower as the asset becomes older and when there is a likelihood of higher maintenance costs. This has the effect of evening out the overall charge against each period’s revenue.

33. Methods of Calculating the Depreciation Charge: Diminishing Balance method: Disadvantage of this method: -The depreciation charge in the final year may need to be adjusted unless the formula is used.

34. Methods of Calculating the Depreciation Charge: Diminishing Balance method: Complete Activities 9.9 and 9.10 on pg 333.

35. Methods of Calculating the Depreciation Charge:

37. Accounting for Depreciation: -Once the amount of depreciation has been determined, an entry must be made in the accounting records. -The entry is only recorded at the end of the accounting period as a balance day adjustment or when an asset is sold. The entry will be: Depreciation on……..Drxxx Accum. Depreciation on…Crxxx (Depreciation allowed for the year)

38. Accounting for Depreciation: Depreciation on……..Drxxx Accum. Depreciation on…Crxxx (Depreciation allowed for the year) The effect of this entry is: -To create a Depreciation Expense account to be matched against the revenue for the period -To create an Accumulated Depreciation account, which has the effect of showing the carrying amount of the asset in the Balance Sheet. The asset cannot be credited directly because the depreciation is only an estimate.

39. Methods of Calculating the Depreciation Charge: Accounting for Depreciation: Let’s complete 9.12 (page 336) together!!

40. Accounting for Depreciation: Now it’s your turn. Complete 9.13 (page 336)

41. Accounting for Depreciation: 9.13

42. Methods of Calculating the Depreciation Charge: Accounting for Depreciation: 9.13

43. Accounting for Depreciation: 9.13

44. Disposal of a property, plant and equipment asset:

45. Disposal of a property, plant and equipment asset: -When an asset is sold or disposed of, it is desirable to record such a sale through a special account called a Disposal account and not through the asset account itself. -Remember that if an asset is disposed of (physically leaves the business), all the records in the General and subsidiary ledgers must be adjusted accordingly.

47. Disposal of a property, plant and equipment asset: -Read example on pages 337- 340. -Complete exercise 9.15 on page 341

48. Disposal of a property, plant and equipment asset:

50. Disposal of a property, plant and equipment asset: -Complete Exercise 9.30 on page 357. -Add an extra part in: d) Complete the extract for the Income Statement (2008 and 2009) showing any relevant accounts and their balances.