Topic 2

Accounting for Assets

 Overview of today’s class

• Definition of assets (What are they?)

• Recognition of assets (When do we record them?)
• Classification of assets (How are they classified?)
• Measurement of assets (How are they measured?)
• Focus on Property, plants and equipment
– Initial & subsequent measurement
– The two models
• The COST model

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 Definition of assets

The Conceptual Framework’s defines an asset as:

• A resource controlled by the entity as a result of
past events and from which economic benefits
are expected to flow to the entity

3 essential characteristics:
1. Expected to provide future economic benefits
2. Must be controlled by the entity
3. Transaction or event giving rise to the control
must have occurred

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 Definition of assets (cont.)

Future economic benefits

The capacity of the assets to provide benefits (cash-flows) to the
entities that use them

Examples of assets and related benefits:

Inventory  account receivables  cash-flows

Machinery  inventory  account receivables  cash-flows

This character is common to all assets irrespective of their

physical or other form

Brands inventory  account receivables  cash-flows

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 Definition of assets (cont.)

Control over the assets upon past

event/transaction:

• It’s the capacity of the entity to benefit from

the asset and to deny or regulate access of
others to those benefits

It’s not restricted only to legal ownership

Other forms of control
 EXAMPLE: Lease agreements
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 Recognition of assets

An asset is to be recognised in the statement of financial

position (balance sheet) only when:
1. it is probable that future economic benefits
embodied in the asset will occur
2. the asset possesses a cost or other value that can
be measured reliably

! ‘Probability’ is a matter for professional

judgment

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 Recognition of assets (cont.)
• If, at a given time, the asset is not able to generate any future
economic benefits then the asset should be expensed

Expense will be called IMPAIRMENT LOSS

EXAMPLE
Sun Ltd has purchased UV equipment for ultraviolet tanning for
$1,000 in 2015. In the same year, the Australian government
has banned the practice of ultraviolet tanning. As a
consequence, the equipment is not going to generate any
future economic benefit and it is written off from Sun’s
Statement of Financial position.
Dr Impairment Loss 1,000
Cr Accumulated impairment loss 1,000

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 Classification of assets

AASB 101 Presentation of Financial Statements

Two basic approaches
1. Current/non-current presentation
2. Liquidity presentation

• The choice falls into the presentation that provides more reliable
and relevant information (i.e. specific industries)

• Not prescribed format of presentation

• Minimum content

Let’s have a look to Woolworths Annual report 2018

(link on CANVAS)
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 Classification of assets

AASB101 identify only characteristics of current

asset:
(a) it is expected to be realised in, or intended
for sale or consumption in, the entity’s
normal operating cycle
(b) it is held primarily for the purpose of being
traded
(c) it is expected to be realised within 12
months after the reporting date; or
(d) it is cash or a cash equivalent (under
AASB 107 Statement of Cash Flows)

Non-current assets as residual

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 Measurement of assets

Different measurement rules for different types of

assets

Sum of total assets will not reflect a single specific

value (cost, fair value etc…)
But…
Different methods better catch the different
characteristics of assets

Our focus is Property, plant and equipment

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 Measurement of Property, plant and
equipment

Two different moments of measurement:

1) Initial measurement:
At cost (acquisition or construction) ONLY

2) Subsequent measurement (the carrying

value of the asset): two alternatives
at cost at fair value
(cost model) (revaluation model)

Let’s have a look to Woolworths Annual report 2018

(link on CANVAS)
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 Initial measurement of PPE

Initial measurement at cost:

Which costs are to be considered if the asset is
acquired?
purchase price +

directly attributable costs* +

costs of dismantling and removing =

Cost of acquisition
*Examples: costs for installation, assembly, delivery and handling,
testing, professional fees etc…
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 Acquisition cost of assets: illustration

Silk Ltd acquires some spinning machinery. The

amount paid to the manufacturer is $75 000, plus
an additional $1000 for delivery. Once the
machinery is delivered, it needs some
modifications before it can be used. The
modifications amount to $3000. An additional
amount of $1000 is paid for installation.

For accounting purposes, what is the ‘cost’ of the

machinery?

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 Acquisition cost of assets: illustration

Amount paid to the manufacturer $75 000

Delivery costs $1 000
Modifications $3 000
Installation $1 000
Total acquisition cost $80 000

What if the asset is internally constructed?

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 Construction cost of an asset: illustration

Kase Ltd internally manufactures an item of

machinery to be used in its production of
transparent fin for surfboards. The cost for
manufacturing the machinery comprises wages of
$90000, raw materials of $35000 and depreciation
of $25000. The depreciation relates to other plant
and machinery used to make the fin-making
machine.
a) Determine the cost for the construction of the machinery

a) Assuming that the machinery satisfies the criteria for

recognition of an asset, what is the accounting treatment for
the costs incurred in the construction?

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 Construction cost of an asset: illustration

a)Determine the cost for the construction of the

machinery

A $ 150,000
B $ 125,000
C $ 90,000
D $ 115,000

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 Construction cost of an asset: illustration

Assuming that the machinery satisfies the criteria for

recognition of an asset, what is the accounting
treatment for the costs incurred in the construction?

A Elimination of costs
B Capitalisation of costs
C Reclassification of costs
D Balancing costs with asset

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 Subsequent measurement of PPE

After initial measurement, two alternative choices for

subsequent measurement

a) Cost model b) Revaluation model

Next lecture

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 Cost Model (AASB116, PPE)

After the initial measurement of PPE at cost,

if COST MODEL is chosen for that category of assets

The asset is carried at its cost less

– Any accumulated depreciation
– Any accumulated impairment loss

• Why is the asset depreciated?

• When and How is the asset impaired?

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 Why is an asset depreciated?

• If an asset is held for a number of periods,

the future economic benefits of the asset are
expected to decline over time
• It is recognised as an expense
• The asset is depreciated over its useful life

Future economic
benefits

Y1 Y2 Y3 Y4

What if the future economic benefits drops due to

change in market conditions?

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 When and How is an asset impaired?

Future economic
benefits Impairment

Y1 Y2 Y3 Y4

When
recoverable amount carrying amount
(= remaining future (= cost – accumulated
economic benefits) depreciation)
How
• Carrying amount is reduced up to recoverable amount
• A loss (impairment loss) is recorded in income statement

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 Calculation of carrying amount

cost of asset
– accumulated depreciation
– accumulated impairment losses (if impaired before)

= CARRYING AMOUNT
(net value of asset)

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 Calculation of recoverable amount

Recoverable amount = remaining future economic

benefits from using or selling
the asset

Select the higher between:

Fair value, less costs of Value in use

disposal (or net selling present value of the
future cash flows
price) generated by an asset
amount obtained from the sale of an
asset less any selling expense

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 Practice: cost model

At the beginning of 2015 Indie Ltd acquired a new

machine from Philip Ltd for $ 52 850.
Indie Ltd also incurred $500 for delivery the machine to
its location, $1200 for the installation of the machine and
$400 as the insurance payment due for the year 2015.
Determine the initial measurement of the machine

A $52 850
B $53 350
C $54 550
D $54 150

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 Practice: cost model

Purchase
Purchase price
price 52 850
Delivery
Delivery $500
Install
Install $1 200
Total
Total $54 550

The journal entry for the acquisition of the machine will be:
Dr Machinery 54,550
Cr Cash 54,550

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 Practice: impairment test

According to Indie, the machine has an expected useful life of 10

years (straight-line depreciation). And at the end of the first year, to
perform the impairment test, the machine has the following values:
fair value less cost to sell $46000,
value in use $ 48000.

Provide calculations to perform the impairment test:

Machine carrying amount = …
(Annual depreciation= … )

Machine recoverable amount = …

Any impairment loss?

In which statement is the impairment loss recorded?
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 PPE impairment test

Annual depreciation= $ 54,550/10 = $ 5,455

Dr Depreciation expense 5,455
Cr Accumulated depreciation 5,455

Machine carrying amount = 54,550 – 5,455 = $ 49,095

Machine carrying amount $ 49,095

Machine recoverable
$ 48,000
amount

Machine carrying amount > Machine recoverable amount

Impairment loss = $1,095

 PPE impairment test

Impairment loss = $1,095

Dr Impairment loss 1,095

Cr Accumulated impair. loss 1,095

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