Kế toán, kiểm toán - Chapter 5: Accounting for and presentation of property, plant, and equipment (ppe) and other non - Current assets

CHAPTER 5Accounting for and Presentation of Property, Plant, and Equipment (PPE) and Other Non-current Assets1Learning ObjectivesDescribe how the cost of land, buildings and equipment is reported on the balance sheet.Explain the differences between the terms capitalise and expense with respect to property, plant and equipment.Discuss the alternative methods of calculating depreciation and the relative affect of each on the Income Statement (depreciation expense) and the Balance Sheet (accumulated depreciation).Discuss the accounting treatment for maintenance and repair expenditures.Describe the differences between an operating and a finance lease.2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLearning ObjectivesDescribe and explain the meaning of various intangible assets, how their values are measured and how their costs are reflected in the Income Statement.3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynTypes of Non-current Assets Future economic benefits, controlled, that entity will USE (infrastructure assets; capital assets) Land Buildings Equipment Leased assets Intangible assets Natural resources4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDecline in asset value in-use over its useful lifeNon-current AssetsAcquisition COST of the asset.Cost of using asset:Depreciation of the asset.Repair and maintenance costs.Disposal of the asset at the end of useful life.PRIMARY ISSUES5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLand is not depreciated.LandAll costs incurred to get land ready for its intended use are capitalised. Purchase price Title (search) fees Razing costs of building on the land Legal fees including transfer fees Real estate commissions6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLandCriticisms:Understates asset values on balance sheet.Fails to provide proper matching in the income statement.Market value may be more relevant for decision makers, BUT (on the other hand) Cost basis is reliable, consistent and prudent.HISTORIC COST PRINCIPLE - basis of acquisition cost7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and EquipmentAll costs incurred to get the asset ready for use are capitalised. Cost accumulation stops when assent is commissioned. Acquisition cost Purchase price Architectural fees Cost of permits Interest on loans Installation and commissioning costs Transportation costs Excavation and construction costs8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and EquipmentEXPENDITURECapitalise?Adds value (Useful life)Increases value of asset.Depreciation expense recognised over life of asset.Full cost reflected in income statement for year.Expense?Restores valueOR9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and EquipmentEXPENDITURECapitalize?How material is the asset?In practice, most accountants will favour expensing costs over capitalising.For income tax purposes, most taxpayers want deductions now rather than later. Expense?OR10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDepreciation is the allocation of the cost of an asset to the years in which the benefits of the asset are expected to be received. It is an application of the matching concept. CostAllocationAcquisitionCost(Unused or future economic benefit)Balance Sheet(Used up or consumed)Income StatementExpenseBuildings and Equipment Depreciation11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDepreciation is the allocation of the cost of an asset to the years in which the benefits of the asset are expected to be received. It is an application of the matching concept.Buildings and Equipment DepreciationDepreciation is NOT an attempt to recognise a loss in the MARKET VALUE of the asset.12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation XXXAsset Less: Accumulated depreciationCarrying amount of asset (NBV) XXX cost(XXX) Amt used up Accumulated depreciation. Cumulative total of all depreciation charges. Contra asset. - Balance sheet disclosure:13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Straight lineAcceleratedAccelerated depreciation methods result in greater depreciation expense and lower net income than straight-line depreciation in early years of an asset’s life.Depreciation Methods14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Accelerated depreciation methods result in greater depreciation expense and lower net profit than straight-line depreciation in early years of an asset’s life.15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Straight-line methodsStraight-lineUnits of ProductionAccelerated methodsReducing balance16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOn 1/1/07, cruisers purchased machinery for $42,000. The equipment has an estimated useful life of four years and an estimated residual value of $2,000.The projected production is 200 boat hulls.Straight-line methodCost - Estimated Salvage ValueEstimated Useful Life Annual DepreciationExpense =Buildings and Equipment Depreciation 17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStraight-line methodCost - Estimated salvage valueEstimated useful life Annual depreciationexpense =Buildings and Equipment Depreciation Annual depreciationexpense =$42,000 - $2,0004 years=$10,00018Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStep 2:Annual depreciation expense=Depreciationexpense / unit produced×Number of units producedin the yearBuildings and Equipment Depreciation Depreciationexpense per unit produced= Cost - Estimated salvage value Estimated total units to be madeStep 1:Units-of-production method19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynStep 2:Annual depreciation expense=$200 / unit×Number of units producedin the yearBuildings and Equipment Depreciation Depreciationexpense per unit produced= $42,000 - $2,000 200Step 1:Units-of-production method20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Reducing-balance methodAnnual depreciationexpense=Double the straight-line depreciation rate×Book value at beginning of year1 Life in years¼ x 2 = 50%× 2Since we are using 2 times the straight-line rate, this is called the double reducing-balance method or double declining balance method21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Reducing-balance methodDouble the straight-line depreciation rate2 × 25% = 50%Depreciation for 200750% × $42,000 = $21,000Depreciation for 2008 50% × ($42,000 - $21,000) = $10,500 22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Comparison of methodsSalvage valueLast year’s depreciation required to make carrying value = salvage value23Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBuildings and Equipment Depreciation Tax depreciationThe useful life of various depreciable assets is determined by the Income Tax Assessment Act 1997 (Cwlth)24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynMaintenance and Repair ExpensePreventative maintenance expenditures and routine repair costs are clearly expenses of the period in which they are incurred.Repair expenses that extend the useful life and/or increase the salvage value of an asset should be capitalised. This would require a change to the original depreciation expense calculation.25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynMaintenance and Repair ExpenseRepair expenses that extend the useful life and/or increase the salvage value of an asset should be capitalised. This would require a change in the depreciation expense calculation.26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDisposal of Depreciable AssetsAsset and accumulated depreciation must both be removed from the books.Gain or loss on disposal will affect the Income Statement. Sales price (of the asset)– Carrying value (original cost – accumulated depreciation)= Gain (loss)27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDisposal of Depreciable AssetsAsset and accumulated depreciation must be removed from the books, for example: Fully depreciated asset scrapped.28Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDisposal of Depreciable Assets Asset sold with a gain on sale recognisedSale Proceeds $1800Carrying value Cost $6000 Accum Dep’n $4500 $1500Gain on sale $30029Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDisposal of Depreciable Assets30Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDisposal of Depreciable Assets Asset sold with a loss on sale recognisedSale Proceeds $0Carrying value Cost $6000 Accum Dep’n $4500 $1500Loss on sale ($1500)31Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLeased AssetsAn operating lease is an ordinary lease for the use of an asset that does not involve any attributes of ownership.A finance lease results in the lessee (renter) assuming virtually all of the benefits and risks of ownership of the leased asset.32Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLeased Assets Finance lease characteristics:The lease is non-cancellable.Lease term is ³ 75% of useful life of asset.Present value of lease payments is ³ 90% of fair value of asset. The economic impact of a financial lease is not really any different to buying the asset outright. It is really a disguised purchase and loan agreement.33Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinance Leases Prior to the accounting standard onLeases, many companies did notrecord finance leases on their BalanceSheets- a practice known as offbalance sheet financing.Now assets under a finance lease areincluded along with purchased assetson the Balance Sheet along with therelated lease liability (shown as thepresent value of the lease payments to be made).34Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn Non-current assets without physical substance. Often provide exclusive rights or privileges. Useful life is often difficult to determine. Usually acquired for operational use. Intangible Assets35Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangibleassetsIntangible AssetsLeasehold improvementsPatents, trademarks and copyrightContractual rightsGoodwillResulting from a purchase transaction36Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangible AssetsLeasehold improvementsCapital expenditure on leased premisesto be amortised over useful life to the tenant or the life of the lease, whichever is shorter.Amortisation is like depreciation- where the cost is allocated over the useful life of the intangible asset.Where tenant has made modifications to a building37Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangible AssetsPatents, trademarks and copyrightCost of obtaining asset should be capitalised.Amortised over remaining useful life to entity or statutory life, whichever is shorter.Internally generated assets cannot be recognised.A patent is a monopoly licence- gives holder exclusive right 38Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangible AssetsGoodwillResults when one firm purchases another for a price that is greater than the fair market value of assets acquired.WHY PAY MORE?acquisition of future profits.excellent management, great location, customer loyalty, unique product or service.39Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangible AssetsGoodwillSubject to impairment test each year.Must be purchased. Australian Accounting Standards do not recognise internally generated goodwill.40Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynIntangible AssetsAmortisation - allocation of the cost of intangible assets over their useful life. The process is similar to depreciation.Recent changes due to international harmonisation:Most intangible assets are subject to an impairment test.Expense associated with amortisation will become an impairment loss.Expense is recorded as a direct reduction in the carrying value of the intangible asset.41Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNatural ResourcesTotal cost, including exploration, rights and development, is capitalised. Extracted from the natural environmentand reported at cost less accumulateddepletion. Examples: oil, coal, iron ore, gas42Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNatural ResourcesDepletion is the term used to refer to the allocation of the cost of natural resources over their useful life. It is usually recognised on a units-of-production basis.43Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOther Non-current AssetsLong-term investmentsLoans receivables (with maturities more than a year after the balance sheet date).When these assets become current, they will be reclassified to current assets.44Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn