ASSETSASSETS

Learning ObjectivesLearning Objectives1.1. Determine whether an item meets Determine whether an item meets

the definition & recognition criteria the definition & recognition criteria for assets for assets

2.2. Calculate initial value of an assetCalculate initial value of an asset

3.3. Calculate depreciation using various Calculate depreciation using various methodsmethods

DEFINITION & DEFINITION & RECOGNITION RECOGNITION

CRITERIACRITERIA

Based on Conceptual Based on Conceptual FrameworkFramework

1.a Definition 1.a Definition An asset must meet 3 criteriaAn asset must meet 3 criteria

a.a. Future economic benefitsFuture economic benefits Value in use e.g. PP&EValue in use e.g. PP&E Value in exchange e.g. InventoryValue in exchange e.g. Inventory

1.a Definition 1.a Definition b.b. Controlled by the entity (not Controlled by the entity (not

necessarily owned)necessarily owned) Legal right to use e.g. titleLegal right to use e.g. title Restrict others from using itRestrict others from using it

c.c. Based on past event or transactionBased on past event or transaction e.g. Purchase or Transfer of Titlee.g. Purchase or Transfer of Title

ExampleExample

AssetAsset Aircraft e.g. Boeing 747Aircraft e.g. Boeing 747

Future Future EconomiEconomic Benefitc Benefit

Revenue streams from Revenue streams from services (passengers & services (passengers & cargo) i.e. value in usecargo) i.e. value in use

√√

ControlControl Prevent others from using itPrevent others from using it

e.g. fences & gates, lockse.g. fences & gates, locks√√

Past Past EventEvent

Lease agreement & Lease agreement & paymentspayments

√√

1.b Recognition Criteria 1.b Recognition Criteria An asset must also meet 2 recognition An asset must also meet 2 recognition

criteriacriteria

a.a. Reliability of MeasurementReliability of Measurement Verifiable i.e. supporting invoices or Verifiable i.e. supporting invoices or

independent valuationindependent valuation

b.b. Probability that benefits will be Probability that benefits will be receivedreceived

>50% chance>50% chance

ExampleExample

AircraftAircraft

ReliabilitReliabilityy

Measured atMeasured atfair value (independent fair value (independent valuer); orvaluer); orpresent value (of agreed lease present value (of agreed lease payments)payments)

Both can be verifiedBoth can be verified

√√

ProbabiliProbabilityty

Based on projected traffic e.g. Based on projected traffic e.g. tourist arrivals & exportstourist arrivals & exports

√√

INITIAL VALUE OF INITIAL VALUE OF ASSETSASSETS

CapitalizationCapitalization

2.a Cost of Assets 2.a Cost of Assets Include all expenditure incurred toInclude all expenditure incurred toa.a. Acquire the assetAcquire the asset

Purchase cost (invoice price)Purchase cost (invoice price)b.b. Transport it to the place of businessTransport it to the place of business

FreightFreightc.c. Protect it while in transitProtect it while in transit

InsuranceInsuranced.d. Install itInstall it

e.g. special platform, enginee.g. special platform, engine

2.b Constructed Assets2.b Constructed AssetsInclude cost of Include cost of Raw MaterialsRaw Materials Direct LabourDirect Labour Overheads (including professional fees)Overheads (including professional fees)

Also include cost of borrowingAlso include cost of borrowing Relating specifically to the constructionRelating specifically to the construction Until the asset (or a part of it) is Until the asset (or a part of it) is

substantially completesubstantially complete

2.c Assets with no Cost2.c Assets with no Costa.a. Donated AssetsDonated Assets

Use fair value of assets receivedUse fair value of assets received

b.b. Assets Received in ExchangeAssets Received in Exchange Use fair value of consideration Use fair value of consideration

givengiven e.g. giving shares in exchange e.g. giving shares in exchange

for propertyfor property

ExampleExampleMango Bay Ltd acquires a machine from Mango Bay Ltd acquires a machine from Jets Ltd for the following considerationJets Ltd for the following considerationCash Rs20,000Cash Rs20,000Land costing Rs100,000 (fair value Land costing Rs100,000 (fair value Rs140,000)Rs140,000)Assume Jets bank loan of Rs30,000Assume Jets bank loan of Rs30,000

RequiredRequired

Calculate the cost of the machineCalculate the cost of the machine

Exercise 10Exercise 10Acquisition CostAcquisition Cost

ItemItem ValuValuee

Cash paidCash paid 20,0020,0000

Land givenLand given 140,0140,00000

Bank Loan Bank Loan acquiredacquired

30,0030,0000

TotalTotal Rs19Rs190,0000,000

2.d Subsequent Costs 2.d Subsequent Costs Capitalize expenditure that increasesCapitalize expenditure that increases

a.a. Economic lifeEconomic life e.g. installing a new vehicle e.g. installing a new vehicle

engineengine

b.b. Productive capacityProductive capacity e.g. extending the flying range of e.g. extending the flying range of

an aircraftan aircraft

DEPRECIATIONDEPRECIATION

3.a Purpose3.a PurposeAllocate cost of the assetAllocate cost of the asset Over its useful lifeOver its useful life

Based on estimatesBased on estimates

a.a. Useful lifeUseful life

b.b. Residual ValueResidual Value

c.c. Consumption of benefitsConsumption of benefits

3.b Depreciation Methods3.b Depreciation MethodsBased on consumption of benefitsBased on consumption of benefits

EvenlyEvenly Straight-line e.g. Straight-line e.g. BuildingsBuildings

Based Based on on usageusage

Units of use e.g. Units of use e.g. vehiclesvehicles

More in More in earlier earlier periodsperiods

Diminishing value Diminishing value or sum-of-digits or sum-of-digits e.g. machinese.g. machines

More repairs & More repairs & maintenance maintenance required in later required in later periodsperiods

3.c Calculations3.c Calculations

StraighStraight Linet Line

Initial Cost – Residual ValueInitial Cost – Residual Value

Expected Useful LifeExpected Useful Life

Units Units of useof use

Units UsedUnits Used x (Cost – R/Value) x (Cost – R/Value)

Total UnitsTotal Units

Sum of Sum of digitsdigits

Remaining YearsRemaining Years x (Cost – x (Cost – R/Value)R/Value)

Total DigitsTotal Digits

Total Digits = Total Digits = n(n + 1)n(n + 1)

22

where n = useful lifewhere n = useful life

3.c Calculations3.c Calculations

DiminishiDiminishing valueng value

r = 1 – n r = 1 – n Residual Value Residual Value

CostCost

where r = depreciation ratewhere r = depreciation rate

n = useful Lifen = useful Life

ExampleExampleA machine is acquired for Rs110,000.A machine is acquired for Rs110,000.

Before it is efficiently operational, it Before it is efficiently operational, it requires installation costing Rs20,000 requires installation costing Rs20,000 & modifications costing Rs10,000& modifications costing Rs10,000

It is expected to have a useful life of 6 It is expected to have a useful life of 6 years & salvage value of Rs15,000years & salvage value of Rs15,000

RequiredRequired

Calculate depreciation for the first 2 Calculate depreciation for the first 2 yearsyears

Straight-LineStraight-Line

Cost Cost Rs110,000 + Rs20,000 + Rs110,000 + Rs20,000 + Rs10,000Rs10,000

Total Rs140,000Total Rs140,000

Residual Residual ValueValue

Rs15,000Rs15,000

Useful LifeUseful Life 6 years6 years

Annual Annual DepreciatiDepreciationon

Rs140,000 - Rs15,000Rs140,000 - Rs15,000 = = Rs20,833Rs20,833

66

ATTENTION COMMERCE ATTENTION COMMERCE STUDENTSSTUDENTS

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