Week 9 &10 - NCA & CA- PPE

Week 9 &10 - NCA & CA- PPE

1. Week 9

   • Current Assets
     • Current Assts?
       • IF: *business expects to realise it, or *intends to sell or consume it, in its normal operating cycle;
       • IF a business holds it primarily for the purpose of trading;
       • IF a business expects to realise it within twelve months after the reporting period;
       • IF the asset is cash or a cash equivalent
     • Inventories?
       • FINISHED GOODS held for sale in the ordinary course of business
       • WORK IN PROGRESS in the process of production for such sale
       • RAW MATERIALS in the form of materials or supplies to be consumed in the production process or in the rendering of services
       • Why important?
         • 'material’ (significant) in a business’s statement of financial position
           • Under/over valuation of inventories has a material impact on calculation of profits
             • Over valuation - profits increased
             • Under valuation - profits reduced
             • Measurement- Valuation of inventories
               • Principle:
                 • "Inventories are measured at the lower of cost and net realisable value"
                   • Cost = comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
                     • Methods of costing
                       • FIFO, Average cost, Standard cost, Selling price - gross margin
                       • What needs to be included
                   • (NRV = estimated selling price - estimated costs of completion and estimated costs necessary to make the sale) - e.g. marketing and distribution
                   • Reasons for differences between COST VS NRV
                     • Permanent fall in market price of inventory
                     • Physical deterioration (failure)
                     • Deliberate decision to sell “below cost” as marketing strategy
                     • Product obsolescence (no longer used)
                     • Deliberate decision to dispose of high inventory levels
             • Pros
               • More relevant information for users by showing current asset value
               • Asset turnover becomes more meaningful since asset value is current/replacement value not lower historic cost?
               • Revaluation upwards improves gearing ratio since equity increases
             • cons
               • • All assets in same class must be revalued so no ‘cherry picking’ allowed
               • • Cannot revert to cost basis once you have moved to revaluation basis
               • Asset group must be revalued regularly and values may go down as well as up
               • • It may be difficult to find a reliable value if there is no active market

2. Week 10

   • NCA - Intangible
     • Why accounting for intangibles important?
       • 1990’s growth of internet and telecom businesses
       • end of 20th century
         • Intellectual capital/knowledge
         • Organisational structures/corporate values
         • Reputation/brand names
       • Many of today’s products increasingly intangible
     • IAS 38 -PPE Recognised ?
       • Expected future economic benefits will flow from the asset to the entity
       • cost can be reliably measured
       • Subsequent expenditure related to an asset can be recognised as PPE
         • Otherwise expenditure must be written off as an expense to profit and loss     
         • Improves or expands capacity of asset
         • Replaces economic benefits already consumed
     • Examples of intangible assets
       • Goodwill, Computer software, Trademarks, Patents Licences, Brands
     • Categorisation of intangible asset
       • Externally purchased e.g. Brand, customer list, patent, software
       • Acquired in a business combination: Separately identified on acquisition – may or may not have been recognised in financial statements of acquire. Goodwill on acquisition
         • Goodwill: IAS38 and IFRS 3
           • Cannot recognise inherent goodwill
           • Purchased goodwill is = Price paid (consideration) - fair value of net assets acquired
           • Goodwill arising on consolidation should be capitalised (but not amortised)
           • Negative goodwill (bargain purchase) should be credited to income statement
           • Review goodwill annually for impairment, write down if necessary
           • Separate out any identifiable intangibles from goodwill
       • Internally generated : Inherent goodwill, Brands etc
         • Is money spent on these activities an expense or an investment?
         • Can they be identified, controlled, and measured reliably, and will economic benefits flow to the business?
     • Initial measurement of an intangible
       • If asset is externally purchased
         • Measure initially at cost (calculated as PPE)
       • If asset is acquired in a business combination
         • If not identifiable then include within goodwill arising on acquisition amount, which is capitalised on acquisition
         • If identifiable and value can be measured reliably , then capitalise separately at fair value
     • Fair value-
       • Ideally obtained from observable prices or data
         • In the absence of this
           • Assets could be grouped together (eg trademark and item)
           • Estimates possibly using probabilities
         • Increased subjectivity
     • Research and development – IAS 38
       • Research – IAS 38
         • Obtaining new knowledge
         • Search for application of new knowledge
         • Search for and design of alternative materials, devices, products, processes, systems,
         • A business undertaking research will be unable to demonstrate that any intangible asset which may result will generate future economic benefits
         • Accounting treatment? --- Expenditure recognised as an expense
       • Development – IAS 38
         • Sounds clear-cut in theory ......but practical application requires experience, judgement, sometimes external expertise Requires businesses to assess future plans No retrospective capitalisation – expenditure capitalised only from point of fulfilment of 6 recognition criteria     
         • Application of research towards specific new or alternative materials, devices, products, processes, systems, services
           • Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore they shall not be recognised as intangible assets
         • Accounting treatment---- Expenditure capitalised as an intangible asset if 6 criteria are ALL demonstrated:
           • Technical feasibility
             • Intention to complete and use or sell the asset
               • Ability to use or sell the asset
                 • The asset will generate future economic benefits
                   • Adequate technical, financial and other resources are available to complete, sell or use the asset
                     • Development expenditure can be measured reliably
         • Capitalisation of development costs
           • Capitalisation only from date all 6 criteria are fulfilled – no retrospective capitalisation of previously incurred costs
           • Capitalised costs include
             • wages and salaries and related costs // fees to register a patent or licence // amortisation of such patents or licences;
               • but exclude general selling and administrative expenditure and costs of training staff to operate the asset

3. Week 10

   • NCA - PPE Tangible
     • Subsequent measurement - depreciation
       • Revaluation model
         • Carrying amount = Fair value at date of revaluation – Accumulated depreciation – Accumulated impairment losses
         • UP OR DOWN?
           • fair value > carrying amount
             • Accounting for gain is: Dr Asset (carrying amount) CR Revaluation surplus (an equity reserve)
               •    Recognised in Other comprehensive income  (also disclosed in statement of changes in equity)     
           • fair value < carrying amount
             • Accounting for loss is: Dr Revaluation Surplus or Profit and loss (if no RS) Cr Asset (carrying amount)
         • Issues
           • Advantages
       • The systematic allocation of the depreciable amount over an asset’s useful life
       • All assets, except land are depreciated (exceptions to this – quarries and mines)
       • Depreciation is recognised
         • Even if the fair value exceeds the carrying amount
         • Even when the asset is continuously subject to repairs and maintenance
     • Initial measurement of PPE - cost
       • Cost model
         • Carrying amount = Cost – Accumulated depreciation – Accumulated impairment losses
       • Includes
         • Purchase price net of trade discounts
         • Costs of testing whether the asset is working properly Professional fees Decommissioning costs

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