1. Adjustments to financial statements 1
Mr. Barry
A-level Accounting Year 12

2. A-level Accounting Year 12
IAS 16 PPE
“The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.”
Mr. Barry
A-level Accounting Year 12

3. A-level Accounting Year 12
What is depreciation?
Depreciation is the means by which the loss in value of a non-current asset is spread out over the useful life of the asset
Depreciation is an expense
Depreciation is the loss in value of a non-current asset over its useful economic life that is apportioned to financial periods
It’s a non-cash expense
Mr. Barry
A-level Accounting Year 12

4. Accounting for Depreciation
Fixed assets other than land lose their ability over time to provide services
Costs of equipment, buildings, and land improvements should be transferred to expense accounts in a systematic manner during their expected useful lives.
DEPRECIATION
Adjusting entry to record depreciation is usually made at the end of each month or at the end of the year Fixed assets other than land lose their ability over time to provide services
Mr. Barry
A-level Accounting Year 12

5. A-level Accounting Year 12
Adjusting Entry
Account
Debit
Credit
Depreciation expense
£7,000
Accumulated depreciation - truck
£7,000
Mr. Barry
A-level Accounting Year 12

6. A-level Accounting Year 12
Depreciation
Accumulated depreciation
Shows the amount that the asset has lost in value since its purchase
Depreciation expense
Shows the amount that the asset has lost in value this period.
Factors that cause a decline the ability of a fixed asset to provide services may be identified as
Physical depreciation
Occurs from the wear and tear while in use and from the action of the weather
Functional depreciation
Occurs when a fixed asset is no longer able to provide services at the level for which it was intended.
Mr. Barry
A-level Accounting Year 12

7. Factors in accounting for depreciation expense
The fixed asset’s initial cost
Its expected useful life (UEL)
Its estimated value at the end of its useful life (residual value)
Mr. Barry
A-level Accounting Year 12

8. A-level Accounting Year 12
Depreciation Methods
Straight line
Reducing balance
Mr. Barry
A-level Accounting Year 12

9. A-level Accounting Year 12
1. Straight line Method
Provides for the same amount of depreciation expense for each year of the asset’s useful life
Annual depreciation expense =
Cost – residual value
UEL
Mr. Barry
A-level Accounting Year 12

10. A-level Accounting Year 12
Example 1
A machine had a cost of £24,000, residual value of £2,000 and useful economic life of 5 years
Annual depreciation expense =
Cost – Residual value
Life
= £24,000 - £2,000
5 years
= £4,400 annual depreciation
Mr. Barry
A-level Accounting Year 12

11. A-level Accounting Year 12
Adjusting entry
Account
Debit
Credit
Depreciation expense
£4,400
Accumulated depreciation - Machinery
£4,400
Mr. Barry
A-level Accounting Year 12

12. Income Statement Entry
Less Expenses Depreciation charge Rent
4,400
3,000
Mr. Barry
A-level Accounting Year 12

13. Statement of financial position (balance sheet) Entry
NON CURRENT ASSETS
Machinery at Cost
24,000
Accumulated depreciation
4,400
Net Book Value
19,500
Mr. Barry
A-level Accounting Year 12

14. A-level Accounting Year 12
Example 2
A machine had a cost of £30,000, residual value of £5,000 and useful life of 6 years. Calculate depreciation under the straight line method?
What is depreciation expense in year 3?
ANSWER= = £30,000 - £5,000
6 years
= £4,167 annual depreciation
Mr. Barry
A-level Accounting Year 12

15. Reducing Balance Method
Provides for a declining periodic expense over the estimated useful life of the asset.
Book value
= Cost – Accumulated depreciation
Mr. Barry
A-level Accounting Year 12

16. 2. Reducing Balance Method
Using this method the depreciation charge is a fixed percentage of the cost of the asset in the first year.
In the second and later years the same percentage is taken of the reduced balance or net book value (cost less depreciation already charged)
Mr. Barry
A-level Accounting Year 12

17. A-level Accounting Year 12
Example
If a machine is bought for £10,000 on 1/1/11 and depreciation is to be charged at 20% per annum using the reducing balance method
The depreciation calculations for the first three years would be as follows:
Mr. Barry
A-level Accounting Year 12

18. A-level Accounting Year 12
Answer
Year 1
Year 2
Year 3
Cost= £10,000 X .20
2, 000 depreciation
Cost- Acc Dep= £10, 000- £2,000= £8,000 (NBV) X .20
1,600 depreciation
£8,000- £1,600= £6,400 (NBV) X .20
1,280 depreciation
Mr. Barry
A-level Accounting Year 12

19. A-level Accounting Year 12
Choice of Methods
A business can choose whichever method it prefers
Straight Line Method – same depreciation charge is charged each year – suit assets where benefits are to be gained evenly over the years
Reducing Balance Method – more depreciation is charged in the early years – suit assets where main value is to be obtained from the asset in the early years
Mr. Barry
A-level Accounting Year 12

20. A-level Accounting Year 12
Financial Accounting
Depreciation of Non current Assets II:
Disposals, Impairments and Revaluations
Mr. Barry
A-level Accounting Year 12

21. A-level Accounting Year 12
Summary
Non current assets fall in value
Through consumption and use (wear & tear; obsolescence; depletion etc.)
Financial accounts need to take account of this factor
This is done through an annual charge for depreciation (effectively reduces the original cost of an asset each year to reflect wear & tear/usage)
Mr. Barry
A-level Accounting Year 12

22. A-level Accounting Year 12
Summary
Annual depreciation charge calculated using either the:
Straight Line Method (based on cost)
Reducing Balance (based on NBV at end of each period)
Annual depreciation charge is charged as an expense through the Income Statement
Mr. Barry
A-level Accounting Year 12

23. A-level Accounting Year 12
Summary
In Balance Sheet must show for each class of fixed asset
Cost
Accumulated Depreciation (depreciation charged to date i.e. from date of acquisition)
Net Book Value (NBV)
Cost - Accumulated Depreciation = NBV (reduced value of the asset at the end of each accounting period)
Mr. Barry
A-level Accounting Year 12

24. Recording Depreciation
Non current Asset Accounts are always kept for showing the assets at cost price (or revalued amount)
Depreciation is shown accumulating in a separate “Accumulated Depreciation account or Provision for Depreciation Account”
Mr. Barry
A-level Accounting Year 12

25. Recording the Disposal of a non current Asset
Remove Cost
Calculate depreciation on disposed asset
Remove disposed asset depreciation from accumulated depreciation
Calculate gain(profit) or loss on disposal
Mr. Barry
A-level Accounting Year 12

26. A-level Accounting Year 12
Double Entry
Depreciation Charge
Dr.: Depreciation (I/S) (Expense)
Cr.: Accumulated Depreciation
being charge for the year
Disposal
Dr. : Disposal Account
Cr. : Non current Account
being cost of non current asset disposed of
Mr. Barry
A-level Accounting Year 12

27. Double Entry - Disposal
Dr.: Accumulated Depreciation
Cr.: G/L on Disposal account
being accumulated depreciation on asset
disposed of.
Dr. : Bank Account
Cr. : G/L on Disposal Account
being remittance received on disposal
Mr. Barry
A-level Accounting Year 12

28. Double Entry - Disposal
Transfer the balance on the disposal account to the Income Statement account
If a profit is made on disposal the credit side will be greater than the debit side
If a loss is made on disposal the debit side will be greater than the credit side
NBV of Disposal (Cost - accumulated Depreciation) > Proceeds = Loss (< Proceeds = Profit)
Mr. Barry
A-level Accounting Year 12

29. A-level Accounting Year 12
IAS 36 Impairment 1
Impairment exists where the carrying value of the asset in the BS is greater than the recoverable amount.
If an asset’s value in the accounts is greater than its realistic value (recoverable amount), then it can be said that the asset suffered an impairment loss.
Treatment
If asset had been revalued then write off impairment loss against revaluation surplus
Otherwise should write off that impairment loss to the IS immediately (an expense).
Mr. Barry
A-level Accounting Year 12

30. A-level Accounting Year 12
Revaluation
IAS 16 allows entities to show non current assets at :
Cost or
Revalued to their Fair value (only if fair value can be reliably measured)
Normally use market value for land, buildings, plant, equipment as the fair value
Mr. Barry
A-level Accounting Year 12

31. A-level Accounting Year 12
Revaluation
If a company decides to revalue one of its Non Current Assets it must apply that policy to all of the assets in that Class. (IAS 16)
Revalue all assets in that class at the same time
If a non current asset is revalued – must use a Revaluation Reserve
Dr Asset
Cr Revaluation Reserve
Mr. Barry
A-level Accounting Year 12

32. A-level Accounting Year 12
REVALUATION
Depreciation should always be on the revalued amount.
Will also result in entries to the following BS Accounts:
Non Current asset (cost)
Accumulated Depreciation
Mr. Barry
A-level Accounting Year 12

33. A-level Accounting Year 12
Revaluation
If Company adopts the policy, must have a full revaluation every 5 years
Interim revaluation in Year 3
Revalue to Market value
Details disclosed in Note to the accounts, Original cost, revalued amount, dates, valuers & qualifications etc
Examples
Mr. Barry
A-level Accounting Year 12

34. A-level Accounting Year 12
IAS 16
NB Example of depreciation on revalued asset
Fixed asset cost €3m in Year 2000
Useful economic life = 10 years
Revalued at end of Year 2002 to €3.3m
How is this treated in the accounts ?
Also show entries for Year 2003.
Mr. Barry
A-level Accounting Year 12