Chapter 20
Non-current assets:
acquisition and depreciation
PowerPoint presentation by Anne Abraham
University of Wollongong
©2009 John Wiley & Sons Australia, Ltd
WHAT IS PROPERTY, PLANT AND
EQUIPMENT?
• Any asset with physical substance that is
expected to be used over more than 1 year
• Future economic benefit of property, plant
and equipment will be received over 2 or
more accounting periods
• Therefore depreciable amount must be
allocated in a systematic manner over
useful life to measure depreciation
2
DETERMINING COST OF PROPERTY,
PLANT AND EQUIPMENT
• Refer AASB 116
• Assets acquired are initially recorded at
their purchase consideration
• Purchase consideration is the fair value at
acquisition date of all assets given up or
all liabilities undertaken by the acquiring
entity plus any incidental costs
3
1
DETERMINING COST OF PROPERTY,
PLANT AND EQUIPMENT continued
• Example
495
List price of machine
Less: trade discount (10% of $22 000)
Net price
Less: GST (1/11)
Purchase consideration
Freight inwards (net of GST)
Installation costs (net of GST)
Cost of acquisition
$22 000
(2 200)
19 800
1 800
18 000
820
675
$19 495
4
APPORTIONING THE COST OF LUMPSUM ACQUISITIONS
• Purchase of many assets at once:
– Total cost apportioned over the identifiable
assets
– Each asset recorded at individual cost
– Cost allocated on basis of fair value
• Fair value is the amount for which the
asset can be exchanged between a
knowledgeable, willing seller and a
knowledgeable willing buyer in an arm’s
length transaction
5
APPORTIONING THE COST OF LUMPSUM ACQUISITIONS continued
• Why allocate cost?
– Reported in different accounts
– Land not subject to depreciation
– Office furniture and building have different
economic lives
• Example
– Purchased a small office building to
accommodate expanding business
– Purchase included land, office building and
office equipment
– Total price of $800 000
6
2
APPORTIONING THE COST OF LUMPSUM ACQUISITIONS continued
Cost allocated to specific asset
= Fair value of specific asset x Total cost
Total fair value
Asset
Estimated
fair value
Land
$595 000
Building
170 000
Furniture
85 000
Totals
$850 000
%
70
20
10
100
Allocation
of total
$560 000
160 000
80 000
$800 000
Est. Life
Indefinite
30 years
8 years
7
APPORTIONING THE COST OF LUMPSUM ACQUISITIONS continued
• Journal entry to record acquisition
Jan 2 Buildings
560 000
Land
160 000
Office Equipment
80 000
GST Outlays
80 000
Cash at Bank
(Acquisition of property and equipment)
880 000
8
ASSETS ACQUIRED UNDER A LEASE
AGREEMENT
• Operating lease
– Lessor retains most of the risks and
rewards
– Simple treatment as rent expense
• Finance lease
– Most risks and rewards pass to lessee
– Capitalise leased asset and amortise
– Principal and interest payments
9
3
DEPRECIATION
• Nature of depreciation
– Expected usage
– Expected wear and tear
– Technical and commercial obsolescence
– Legal or similar limits
• Cost needs to be apportioned over
expected useful life
10
Depreciation
Factors in computing depreciation
11
Determining the amount of depreciation
• Useful life is defined as
– The period over which an asset is expected
to be available for use by an entity, or
– The number of production or similar units
expected to be obtained from the asset
• Residual value is the estimated amount
that an entity could currently obtain from
disposal of the asset after deducting the
estimated costs of disposal
• Depreciable amount is cost less residual
value
12
4
Depreciation methods
1. Straight-line method
• Allocates and equal amount of
depreciation to each full accounting
period in asset’s useful life
Annual depreciation = depreciable amount
useful life
13
Depreciation methods continued
• Example
Cost
$33 000
Residual $ 3 000
Estimated useful life of 4 years
Annual depreciation = $33 000 - $3000
4 years
= $7500
– Entry to record depreciation expense at
end of each year
Jun 30 Depreciation Expense – Machinery
7 500
Accumulated Depreciation – Machinery
(Depreciation expense for the year)
7 500
14
Depreciation methods continued
2. Diminishing-balance method
• Results in decreasing depreciation charge
over the useful life of the asset
• Asset more productive in its earlier years
and earns more revenue
Rate = 1 − n
r
c
n = useful life in years
r = residual value (in $)
c = original cost or gross revalued amt (in $)
15
5
Depreciation methods continued
• Example
Cost
$33 000
Residual $ 3 000
Estimated useful life of 4 years
Depreciation rate
Year
1
2
3
4
Carrying amt at
beg of yr
$33 000
18 150
9 982
5 490
x
x
x
Rate
45%
45%
45%
= 1 – 4 (3000/33 000)
= 45% (approx)
Annual
depreciation exp
$14 850
8 168
4 482
2 490
Carrying amt at
end of yr
$18 150
9 982
5 490
3 000 16
Depreciation methods continued
3. Sum-of-years digits
• Different way of applying diminishing
value method
• Depreciation each period is determined by
multiplying the residual amount by
successively smaller fractions
17
Depreciation methods continued
• Example
Cost
$33 000
Residual $ 3 000
Estimated useful life of 4 years
1 + 2 + 3 + 4 = 10
Year
1
2
3
4
Depreciable
amount
$30 000
30 000
30 000
30 000
x
x
x
x
Fraction
4/10
3/10
2/10
1/10
=
=
=
=
Depreciation
for the year
$12 000
9 000
6 000
3 000
Total accum Carrying
depn
amt
$12 000
$21 000
21 000
12 000
27 000
6 000
30 000
3 000
18
6
Depreciation methods continued
4. Units-of-production method
• Determines fixed amount of depreciation
per unit of output
• Annual depreciation is depreciable
amount divided by the production
capacity or useful life in units
Depreciation per = depreciable amount
operating hr
operating hours
19
Depreciation methods continued
• Example
Cost
$33 000
Residual $ 3 000
Estimated useful life of 15 000 hours
Depreciation per operating hour = $33 000 - $3000
15 000 hrs
= $2 per hour
20
Comparison of depreciation methods
•
•
•
•
•
Different annual charges
Same total charge
Generate revenue evenly
straight line
Wear out with use
units of production
Generate more revenue in early years
reducing balance
21
7
SUBSEQUENT COSTS
• Additional costs after acquisition
– Repairs
– Maintenance
– Improvements
– Modifications
• Need to consider impact on useful
life/future economic benefits
22
SUBSEQUENT COSTS continued
• Day-to-day repairs and maintenance
Jun 6 Repairs and Maintenance Expense
GST Outlays
Cash at Bank
(Repairs on delivery truck)
670
67
737
23
SUBSEQUENT COSTS continued
• Overhauls and replacement of major parts
Jul 4
Accumulated Depreciation
24 000
Delivery Van
24 000
(Reversing accumulated depreciation)
Jul 4
Delivery Van
GST Outlays
Cash at Bank
(Installation of a new engine)
Jul 4
Expense on Disposal
Delivery Van
(Disposal of old engine)
4 500
450
500
4 950
500
24
8
SUBSEQUENT COSTS continued
• Leasehold improvements
Jul 4
Leasehold Improvements
GST Outlays
Cash at Bank
(Payments for improvements to
leased building)
10 000
1 000
Jun 30 Depreciation Expense – Leasehold Improvements
2 000
Accumulated Depreciation – Leasehold Improvements
(Depreciation of leasehold improvements)
11 000
2 000
25
PROPERTY AND PLANT RECORDS
• Divided into functional groups with
separate accounts for each group
• Subsidiary ledger for each individual asset
– Income tax
– Insurance
26
DISCLOSURE OF PROPERTY, PLANT
AND EQUIPMENT
XX LTD
Balance Sheet (partial)
as at 30 June ….
Non-current assets
Property, plant and equipment
Land (at cost)
Buildings (at cost)
Less: Accumulated depreciation
Plant and equipment (at cost)
Less: Accumulated depreciation
$164 000
$849 000
231 500
236 400
172 000
617 500
63 800
$845 300
27
9
ANALYSIS, INTERPRETATION AND
MANAGEMENT DECISIONS
• Analysis and interpretation
– Average % useful life expired
– Average useful life (in years)
– Asset turnover (number of times)
– Average property, plant and equipment to
net sales
• Management decisions
– Capital budgeting
28
29
10