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Section 3) Recognition and Measurement issues
1) Non-current asset
Definitions
Tangible assets: touch, see and has practical physical presence (Buildings, Land, Machinery)
● referred to by International Accounting Standards (IAS) as Property, Plant and Equipment (PPE):
○ Held for use in production or supply of goods or services
○ Expected to be used during more than one accounting period
Intangible assets: identifiable non-monetary asset without physical substance such as, Brands, Trademarks,
Patents
▪
▪
▪

Different businesses have different mixes of assets
Car manufacture is tangible heavy (All the spare parts, machines, engines)
Media is intangible heavy (Apple → main asset is technology, patents, trademarks)

Disclosure in company accounts:
● Balance sheet: on the face
● Notes: opening/additions/disposals for cost and accumulated depreciation; net book value
● Accounting policies note
Structure of the subject:
1) Cost

How to enter value into balance sheet → what is involved in measuring
costs

2) Depreciation methods

What is happening during a life of an asset
→ changes in value over time (PPE depreciation)

3) Disposal

Issue of the selling value

4) Valuation

What happens during the life of an asset to value if circumstances changes
for the asset

1) Cost
How do we record costs? Assets – Liabilities = Owner's’ Interest
In the beginning of life, we value them in the balance sheet as:
● Increase non-current assets (PPE)
● Decrease cash or increase liabilities (depending if it is paid by cash or purchased on credit)
What is the cost? (There is JUDGMENT INVOLVED)
● Purchase price / production cost
● Plus any costs necessary to bring the asset into its intended use in its intended location
○ (includes anything they think is appropriate for bringing item into use and location)
○ Eg
...


BAE Systems: Annual Report 2015;
Note 1 to the accounts
Property, plant and equipment
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment
losses
...

Cost - accumulated depreciation + impairment losses
● Cost of self constructed materials: materials, direct labour, appropriate proportion of production
overhead, salary, design department
...

● Treatment of major “repairs”
○ Addition to asset cost versus expense
■ Repairing can make the asset more efficient and better
■ Repairing is still the same as before
■ (SEE TEXTBOOK)
2) Depreciation
To recognise consumption of economic benefits over a period / matching concept (not to try and reflect the
market value of the asset)
→ used up property, plant, equipment to generate sales must match expenses to use machine with the sales generated
Accounting entries:
decrease asset value (balance sheet)
increase expenses (income statement)
● Asset cost – Accumulated depreciation = Net book value (NBV) [also called Carrying Value (CV)]
→ over the year depreciation is added so cost of asset is accumulated which is AKA net book value
How to calculate depreciation?
● Straight line method (Equal amount each year)
● Reducing balance method (Constant percentage in net book value)
EXAMPLE:
Westhoughton Ltd buys a car for £10,000
...

a) Straight line method
▪

Straight line method
▪ Same amount is charged each year
▪ Dep’n expense =
Cost - residual value
No
...
6 or 60%
Depreciation applied to each of the 4 years:
Cost
Year 1: Depreciation charge 60% x cost =
Carrying amount
Year 2: Dep’n charge 60% x carrying amount
Carrying amount
Year 3: Dep’n charge 60% x carrying amount
Carrying amount
Year 4: Dep’n charge 60% x carrying amount
Carrying amount

£10,000
(6,000)
4,000
(2,400)
1,600
( 960)
640
( 384)
256

Comparaison

●
●
●

The end result does not matter
Annual profit and net book value are different
○ Pattern of profitability is different
Straight line is constant depreciation (regular reduction in net book value)

●
●

Reducing balance has a declining value in depreciation
Which one is more appropriate depends on the managerials judgment and choice
○ (Depending on the industry and the type of asset its using)

3) Disposal

■
■

Disposal may generate some proceeds of sale
Comparison to carrying value = profit or loss

Slide 28 example: e
...
sold on first day of year 3 for £400
Straight Line:
Accounting entries
Increase Cash (Assets)
Decrease NBV (Assets)
Decrease in Op
...
Profit

400
(250)
150

NBV = Cost (1000) – Acc Dep (750) = 250

●
●
●

Net book value is different at year 3
Profit depends on assumption managers made in measuring expense
Depends on the characteristics on using the asset Matching and so on…

4) Valuation
Revaluations: strict criteria / regulation
➔
➔
➔

Should be consistent across an asset class (Cars and computer software need regular valuation)
Should be kept up to date
Must be able to prove recoverable amount > book value (What we are doing is not just a guess)

➔
●
●
●

Relevance vs reliability; and the role of the balance sheet
Reliability: numbers being justified, robust and accurate
Relevance: number being useful from financial statements in making decisions
Irrelevant: obsolete, outdated, soft numbers

One way which company values an asset is to employ a professional valuers whose professions are at stake if
anything happens
...

Some companies do not revalue such as M&S:

a) Impairment
➔
➔
➔
➔
➔

Circumstances may arise such that the carrying value of an asset (net book value) is more than its
recoverable amount CV>RA
For example: market conditions, technological advances (can be because of changes in technology)
Must be able to prove recoverable amount >/= carrying value
Again – consider relevance vs reliability; and the role of the balance sheet (Judgment involved)
Eg
...

Example: Vodafone

Characteristics of an asset:
■
A probable future benefit exists
■
The business has an exclusive right to control the benefit
■
The benefit must arise from a past transaction or event
■
The asset must be capable of measurement in monetary form
Intangible assets:
● Non financial assets / no physical substance
● Examples: patents, brands, “human capital” etc
...
amortised

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