1. Accounting Standards 1 Lecture 4 Non-current assets 1

2. Accounting standards Thorough understanding of underpinning concepts n the conceptual framework Understanding of the process of deciding how to include items in the accounts – Definitions of elements (asset and liability) – Criteria for recognition in the accounts – Issues of measurement and disclosure Knowledge of the particular standards studied – Write about the requirements of the standard – Apply the provisions of the standard to a scenario Critique the standards studied 2

3. Structure of examination Section A – compulsory, all numbers – One question worth 50 marks – preparation of consolidated accounts Section B – two questions out of three, each worth 25 marks, mainly written, some numbers – One question on each of the three accounting standards topics – Knowledge of requirements, application of definitions and recognition criteria, application to a scenario, critique of standard 3

4. Elements – IASB framework Asset A resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise Liability A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources 4

5. Recognition criteria for assets It is probable that any future economic benefit will flow to the enterprise And The item has a cost or value which can be measured with reliability 5

6. Measurement issues Initial recording is generally at cost Subsequent expenditure Loss in value – depreciation, impairment Revaluations – replacement cost Valuations at market value or fair value Regular review 6

7. Intangible assets Can’t see them or touch them – lack of physical substance Research and development Goodwill Brand names Copyrights and patents Licences………. IAS38 Intangible assets 7

8. Research and development Is there an asset? A resource controlled by the enterprise? – Yes As a result of past events? – Yes Future economic benefits are expected to flow? – Maybe A battle between prudence and accruals? 8

9. Research Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding IAS38 para 8 – Activities aimed at new knowledge – Evaluation of findings – Search for alternatives for materials, processes,systems – Design/selection of possible alternatives for new or improved materials processes etc 9

10. Development The application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. – Design, construction and testing of pre-production models – Design of tools etc involving new technology – Design etc of pilot plant – Design etc of chosen alternatives for new materials, processes, systems 10

11. Accounting treatment Write off research as incurred: cannot demonstrate future economic benefit Capitalise development only if satisfies ALL the following criteria: – Technically feasible to complete for use or sale – Intention to complete and use or sell – Ability to use/sell – Probable future economic benefit – Available technical, financial and other resources to complete – Reliable measurement of expenditure 11

12. Subsequent treatment Initial cost is all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in a manner intended by management. During development phase – show as a current asset, but review annually to ensure still meets the criteria and not impaired Once production/use starts, amortise over the expected useful life 12

13. Good points Gives definitions for research and development Treatment is clear Gives guidance on when future economic benefits are probable 13

14. Problems Can be difficult in practice to distinguish the research phase from the development phase Can be difficult in practice to judge if the criteria for development expenditure are met In practice it is very hard to estimate future development costs and future profitability of the project 14

15. Goodwill Can be – Internally generated – NOT treated as an asset under IAS 38 – cannot measure cost – Purchased – Acquired in a business combination 15

16. Purchased goodwill Goodwill can only be purchased as part of the acquisition of a business or subsidiary It is calculated as the excess of the purchase price over the fair value of the net assets acquired Purchased goodwill: Capitalise under IAS 38 Acquisition of subsidiary: Capitalise under IFRS 3 16

17. Other intangibles Follow IAS 38 goodwill treatment: – Cannot recognise as an asset if internally generated – Capitalise at cost if purchased as a separate asset – Capitalise at fair value if acquired as part of a business combination 17

18. Subsequent treatment If the asset has a finite useful life, amortise over the expected useful life – usually straight line with no residual value If the asset has an indefinite useful life, carry out an annual impairment test 18

19. Good points Definitions in accordance with the framework Gives guidance on recognition and measurement 19

20. Problems If intangible assets can be valued at fair value on the acquisition of a business, why can internally generated intangibles not be valued the same way? Fair values can be difficult to measure Intangibles can be a significant part of a business, yet are often not included in assets because of measurement difficulties 20

21. Tangible assets IAS 16 Property, plant and equipment Held for use in the business Expected to be used during more than one period Initial measurement at cost – Purchase price – Directly attributable costs – Estimate of costs of dismantling/restoring site 21

22. Directly attributable costs Examples: – Employee costs arising directly from the construction or acquisition – Site preparation – Delivery and handling – Installation and assembly – Testing – Professional fees Option to include borrowing costs (IAS 23) 22

23. Depreciation – definitions IAS 16 Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life Depreciable amount is the cost of an asset or other amount substituted for cost, less its residual value Useful life is – the period over which the asset is expected to be available for use – The number of production units expected to be obtained from the asset Residual value is the estimated amount to be received from disposal of the asset at the end of its useful life 23

24. Depreciation - concepts Measuring the using up or wearing out of the asset Physical, time based or economic Allocates costs to the periods in which the expected future benefits arise If an asset is revalued, depreciation is based on the revalued amount DOES NOT – Give a market value for assets – Provide funds for replacement 24

25. Revaluation Basic valuation is at cost, but assets may be revalued upwards provided fair value can be reliably measured. For intangibles there must be an active market to identify fair value Valuation must be kept up to date Must be applied to all assets within a class Gain goes to revaluation reserve as it is unrealised and is shown in the statement of comprehensive income If a revaluation results in a decrease in value, it will first be debited against any balance in the revaluation reserve in respect of that asset. Any further charges will go to the income statement. 25

26. Good points Established area of accounting with high level of agreement over policies Agrees with framework Revaluation allows more meaningful balance sheet values Revaluation must be consistent – class of assets – kept up to date 26

27. Problems Choice over inclusion of interest costs Depreciation rates are a matter of judgement and could be manipulated Choice over whether or not to revalue 27

28. Impairment Principles relate to all types of asset The carrying value of an asset must not exceed its recoverable amount. Carrying value means the value in the balance sheet – depreciated cost/valuation Recoverable amount is the amount which could be gained by the business from the asset It is the higher of net selling price and value in use Value in use is the future benefits to be gained from use of the asset – the discounted future cash flows – this is difficult to measure 28

29. Summary Big topic – exam question will cover only part eg R&D, other intangibles or PPE Tutorial concentrates on basics and R&D but you need to study the rest There will be extra practice questions and revision questions on all aspects of this topic 29