1. ASSETS

3. Learning Objectives 1. Determine whether an item meets the definition & recognition criteria for assets 2. Calculate initial value of an asset 3. Calculate depreciation using various methods

4. DEFINITION & RECOGNITION CRITERIA Based on Conceptual Framework

5. 1.a Definition An asset must meet 3 criteria a. Future economic benefits Value in use e.g. PP&E Value in use e.g. PP&E Value in exchange e.g. Inventory Value in exchange e.g. Inventory

6. 1.a Definition b. Controlled by the entity (not necessarily owned) Legal right to use e.g. title Legal right to use e.g. title Restrict others from using it Restrict others from using it c. Based on past event or transaction e.g. Purchase or Transfer of Title e.g. Purchase or Transfer of Title

7. Example Asset Aircraft e.g. Boeing 747 Future Economic Benefit Revenue streams from services (passengers & cargo) i.e. value in use √ Control Prevent others from using it e.g. fences & gates, locks √ Past Event Lease agreement & payments √

8. 1.b Recognition Criteria An asset must also meet 2 recognition criteria a. Reliability of Measurement Verifiable i.e. supporting invoices or independent valuation Verifiable i.e. supporting invoices or independent valuation b. Probability that benefits will be received >50% chance >50% chance

9. Example Aircraft Reliability Measured at fair value (independent valuer); or fair value (independent valuer); or present value (of agreed lease payments) present value (of agreed lease payments) Both can be verified √ Probabilit y Based on projected traffic e.g. tourist arrivals & exports √

10. INITIAL VALUE OF ASSETS Capitalization

11. 2.a Cost of Assets Include all expenditure incurred to a. Acquire the asset Purchase cost (invoice price) Purchase cost (invoice price) b. Transport it to the place of business Freight Freight c. Protect it while in transit Insurance Insurance d. Install it e.g. special platform, engine e.g. special platform, engine

12. 2.b Constructed Assets Include cost of Raw Materials Raw Materials Direct Labour Direct Labour Overheads (including professional fees) Overheads (including professional fees) Also include cost of borrowing Relating specifically to the construction Relating specifically to the construction Until the asset (or a part of it) is substantially complete Until the asset (or a part of it) is substantially complete

13. 2.c Assets with no Cost a. Donated Assets Use fair value of assets received Use fair value of assets received b. Assets Received in Exchange Use fair value of consideration given Use fair value of consideration given e.g. giving shares in exchange for property e.g. giving shares in exchange for property

14. Example Mango Bay Ltd acquires a machine from Jets Ltd for the following consideration Cash Rs20,000 Cash Rs20,000 Land costing Rs100,000 (fair value Rs140,000) Land costing Rs100,000 (fair value Rs140,000) Assume Jets bank loan of Rs30,000 Assume Jets bank loan of Rs30,000Required Calculate the cost of the machine

15. Exercise 10 Acquisition Cost Item Value Value Cash paid 20,000 20,000 Land given 140,00 0 140,00 0 Bank Loan acquired 30,000 30,000 Total Rs190, 000

16. 2.d Subsequent Costs Capitalize expenditure that increases a. Economic life e.g. installing a new vehicle engine e.g. installing a new vehicle engine b. Productive capacity e.g. extending the flying range of an aircraft e.g. extending the flying range of an aircraft

17. DEPRECIATION

18. 3.a Purpose Allocate cost of the asset Over its useful life Over its useful life Based on estimates a. Useful life b. Residual Value c. Consumption of benefits

19. 3.b Depreciation Methods Based on consumption of benefits Evenly Straight-line e.g. Buildings Based on usage Units of use e.g. vehicles More in earlier periods Diminishing value or sum-of-digits e.g. machines More repairs & maintenance required in later periods

20. 3.c Calculations Straight Line Initial Cost – Residual Value Expected Useful Life Units of use Units Used x (Cost – R/Value) Total Units Sum of digits Remaining Years x (Cost – R/Value) Total Digits Total Digits = n(n + 1) 2 where n = useful life

21. 3.c Calculations Diminishin g value r = 1 – n Residual Value Cost Cost where r = depreciation rate n = useful Life n = useful Life

22. Example A machine is acquired for Rs110,000. Before it is efficiently operational, it requires installation costing Rs20,000 & modifications costing Rs10,000 It is expected to have a useful life of 6 years & salvage value of Rs15,000 Required Calculate depreciation for the first 2 years

23. Straight-Line Cost Rs110,000 + Rs20,000 + Rs10,000 Total Rs140,000 Residual Value Rs15,000 Useful Life 6 years Annual Depreciatio n Rs140,000 - Rs15,000 = Rs20,833 6

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