Accounting for Non-Current Assets

• Introduction

• Determining the Cost of Property, Plant and Equipment

• Subsequent Costs

• Fixed Asset Register

• What is Depreciation?

Introduction

Assets are defined as future economic benefits controlled by the entity as a result of past transactions. Assets may be classified as either:

• Tangible; or
• Intangible.

AASB 116 Property, Plant and Equipment deals exclusively with tangible assets. A tangible asset is one with physical substance. The term "property, plant and equipment" is defined in paragraph 6 of AASB 116 as those assets that are:

• Held for use in the production or supply of goods and services for rental to others, or for administrative purposes; and
• Expected to be used during more than one accounting period (i.e. they are considered non-current assets).

Examples of property, plant and equipment include:

• Land
• Buildings
• Plant and equipment
• Office equipment
• Computer equipment
• Furniture and fittings
• Motor vehicles.

Importantly, these assets are expected to be used by the entity to produce its goods and services. This definition excludes items that are bought for the purposes of resale. In that situation, the asset would be classified as inventory and the provisions of AASB 102 Inventories would apply.

Another distinguishing feature of these assets is that the benefits embodied in them span more than one accounting period.

AASB 138 Intangible Assets is the accounting standard dealing with intangible assets. Paragraph 8 of AASB 138 defines an intangible asset as a non-monetary assets without physical substance.

Examples of intangible assets include:

• Trademarks;
• Patents;
• Brand names;
• Customer lists;
• Licenses;
• Franchise agreements; and
• Goodwill.

All of these assets are regarded as identifiable intangible assets, except goodwill, which is regarded as an unidentifiable intangible asset. Accounting for goodwill is specifically covered by the Accounting Standard AASB 3 Business Combinations.

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Determining the Cost of Property, Plant and Equipment

When a tangible non-current asset is acquired by the entity, paragraph 15 of AASB 116 requires that the asset initially be recorded at cost in the balance sheet. The cost of the asset includes:

• Its purchase price, including the cost of purchase, import duties, transport, freight, insurance, shipping and handling costs directly attributable to purchasing the asset. Any trade discounts or rebates received must be deducted. If the entity is registered for the GST, it excludes the GST paid to acquire the asset. The amount of the GST paid represents the input tax credit that the entity is able to claim back from the ATO. This will be shown in the contra liability account entitled "GST receivable".

• Any incidental costs directly attributable to bringing the asset to its present location and condition necessary for it to be used in the manner intended by management, and

• The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Examples of incidental costs directly attributable to the cost of the asset include:

• Employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment
• Costs incurred in preparing the site
• Initial delivery, freight and handling charges
• Installation and assembly costs
• Training costs incurred in training new staff on how to use the asset (but not ongoing training costs)
• Costs of testing whether the asset is functioning properly, and
• Professional consultants' fees.

Incidental costs that should not be included in the cost of property, plant and equipment include:

• Costs of opening a new facility (e.g. opening party)
• Advertising and promotional costs
• Costs of conducting a business in a new location
• Administration and other general overhead costs
• Initial operating losses, such as those incurred while demand for the item's output buildings up, and
• Costs of relocating or re-organising part or all of the entity's operations.

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Subsequent Costs

During the life of an asset, an entity may incur subsequent costs to maintain or improve the asset. These costs range from routine repairs and maintenance to major capital improvements or overhauls to the asset.

From an accounting viewpoint, the question to be asked is whether subsequent costs should be treated as expenses and shown in the profit and loss statement or capitalised by being added to the cost of the asset in the balance sheet.

According to paragraphs 12 to 14 of AASB 116, subsequent costs incurred after the acquisition of an item of property, plant and equipment should only be capitalised if the costs:

• Extend the useful life of the asset
• Improve the quality of its output, or
• Reduce the operating costs associated with the use of the asset.

Hence, day-to-day repairs and maintenance to an item of property, plant and equipment would ordinarily be treated as expenses in the profit and loss statement. For example, costs incurred in the annual servicing of a motor vehicle or minor electrical repairs made to a machine used for business purposes would be regarded as repairs and maintenance. These costs do not extend the useful life of the asset, nor do they improve the quality of its output. Therefore, these costs should be expensed.

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Fixed Asset Register

Because of the importance of items of property, plant and equipment, many entities maintain a fixed asset register. Typically, this register is prepared in a spreadsheet and updated each time an asset is bought or sold. The fixed asset register usually contains the following information:

• The date the asset was acquired
• A description of the asset
• From whom the asset was purchased
• The cost of the asset
• The serial number of the asse
• The date the asset was sold
• The gross sale proceeds of the asset.

It is common practice for entities to attach a serial number to each asset for identification purposes. A photograph of each asset that appears in the fixed asset register should also be taken and maintained, primarily for insurance purposes.

The total cost of assets in the fixed asset register should equal the amount of non-current assets in the balance sheet.

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What is Depreciation?

All non-current assets (with the exception of land) are deemed to provide future economic benefits over a number of years. For this reason, all items of property, plant and equipment, with the exception of land, are considered to have a limited useful life.

Non-current assets with limited useful lives are referred to as "depreciable" assets. All depreciable assets are subject to depreciation.

Account for depreciation represents the process whereby the decline in future economic benefits of an asset through usage, wear and tear and obsolescence is progressively recognized over the life of the asset as an expense in the profit and loss statement.

Accordingly, as the asset is used, the cost of the asset is reduced and recognised as an expense (called "depreciation") in the profit and loss statement.

Depreciation is the systematic allocation of the cost of an asset over its estimated useful life. Depreciation is not a process of valuation. Recording depreciation does not purport to produce an asset value equivalent to current market value. Hence an asset must be depreciated even if its value increases.

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