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1、MANG 6269Fundamentals of Financial Accounting,Session 3 Accounting for assets: Property, plant and equipment inventories receivables,Todays lecture:,Recap from last time Measurement issues and estimates in financial statements: Non current assets and depreciation Current assets: Inventories Receivab
2、les prepayments Current liabilities Accruals,NON-CURRENT (OR FIXED) ASSETS AND DEPRECIATION,What is a Non Current Asset? What is Meant by: Property, plant and equipment Intangible Fixed Assets Investments held for long term What is meant by “Cost” of a fixed asset? What is meant by Depreciation? Met
3、hods of Depreciation,Definitions - Asset,Asset: A resource controlled by the enterprise and There must be an exclusive right of control a future economic benefit associated with the item is expected to flow to the enterprise The benefit must have arisen from some past transaction or events the item
4、has a cost or value that can be measured with reliability Adapted from International Accounting Committee, Framework for the Preparation and Presentation of Financial Statements, 1989,Non-current asset,Assets acquired for use in the enterprise on a continuing basis not for resale Use may be in the p
5、roduction or supply of goods or services for rental to others or for administrative purposes IAS16,Examples,Tangible Intangible,Cost of property, plant and equipment includes:,its purchase price + import duties and non-refundable purchase taxes - trade discounts and rebates. any costs directly attri
6、butable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Any obligations for costs to be incurred for dismantling etc.,Examples of attributable cost,Repairs and improvements,Cost of Repairs are charged to the income
7、 statement e.g. Cost of improvements - added to the cost of a building e.g.,Depreciation,Non-current (fixed) assets are gradually used up in providing goods and services over time. Purpose of accounting depreciation is to spread the cost of a non-current (fixed) asset over its expected useful life.
8、Depreciation is a method of allocating cost. Achieves a matching of costs against the related revenues. Weetman,Effect on Accounting Equation,Assets = Liabilities + Owners Funds,Depreciation:,“The measure of the cost or revalued amount of the economic benefits of the tangible fixed asset that have b
9、een consumed during the period”. Consumption includes the wearing out, the using up or other reduction in the useful economic life of a tangible fixed asset whether arising from use, effluxion of time, or obsolescence through either changes in technology or demand for the goods and services produced
10、 by the asset.” “The fundamental objective of depreciation is to reflect in operating profit the cost of use of the tangible fixed assets (i.e. the amount of economic benefits consumed by the entity ) in the period. FRS15,Depreciable amount is the cost of an asset, less its residual value.” “Depreci
11、ation is the systematic allocation of the depreciable amount of an asset over its useful life.”IAS16 Note: influence of accruals concept. Net book value is Cost less accumulated depreciation (i.e. The portion of cost that has not yet been used up),Methods of Depreciation include:,Straight line Reduc
12、ing Balance Machine hours,Example,A machine is bought for 20,000. Its expected useful life is 3 years or 60,000 machine hours of use, and its estimated residual value is 8,000. For the Reducing balance method, use 25%. Actual hours used: Year 1 19,000; year 2 21,000; year 3 19,500. Profit before dep
13、reciation in year 1 is 4,500. What is net profit under each of 3 depreciation methods?,Example,A small business buys a machine for 20,000. The owner expects it to last for four years and to be scrapped for nothing at the end of that time. She decides to use straight line depreciation. What will be s
14、hown in the Income statement each year? What will be shown in the balance sheet each year?,Land and Buildings at Valuation,Most fixed assets are shown in the accounts at cost (less accumulated depreciation). However some companies may choose to include land and buildings at revalued amount (less dep
15、reciation). If a company makes this choice, all the assets in the category must be revalued, and they must be revalued at regular intervals. Revaluation reserve Look out for the accounting policy. IAS 16 refers to open market value whereas FRS 15 required valuation to be at existing use value,Impair
16、ment,If circumstances change, directors need to review their non-current assets and see if their value in the accounts (the net book value) has been impaired. If necessary, they will need to reduce the value of the fixed assets to the higher of the net realisable value (what it can be sold for less expenses) or the value in use (the “present” value of estimated future cash flows).,Inventories (Stocks and work-in progress),What are inventories? Accounting for inventories Objectives of invento
