Non-Current Assets

• Organisations all have items that they need to help them run their business, such as equipment, IT or vehicles. The organisation uses these to produce the goods or services it sells to generate income, and expects to use these items within the business for more than a year, in other words, they are non-current assets.   
• All organisations buy NCA, however, each organisation’s type, size and decision-making process will influence how they acquire them. Let’s compare two businesses to see the similarities and differences.  
• Authorisation policies are unlikely to be the only policies that organisations have in relation to non-current assets
• A capitalisation policy states the level of expenditure over which the item purchased is treated as a non-current asset. If the value of the purchase is below the threshold, the item is treated as an expense.
• The framework of accounting principles that underpin the preparation of financial accounts, enables organisations to set policies that are appropriate for them, provided that accounting principles, such as accruals, going concern and materiality are adhered to, and characteristics like relevance and comparability are adopted. The specific accounting principle relevant to capitalisation is materiality.
• The principle of materiality states that an item is ‘material’ if its omission will influence the economic decisions of the users of the accounts. Judgement needs to be applied in relation to materiality as it means that items which are technically NCA, but have a value that renders them ‘immaterial’, can be written off as expenses.
• • If we capitalise the cost of a purchase, the NCA is listed on the statement of financial position and included in the overall net value of the organisation. 
  • •If we write the cost of a purchase off as an expense, the effect will be to reduce the profit calculated for the period on the statement of profit or loss. 
• a capitalisation policy states the level of expenditure over which the item is purchased is treated as a nca. if the value of the purchase is below the threshold, the item is treated as an expense
• The framework of accounting principles that underpin the preparation of financial accounts, enables organisations to set policies that are appropriate for them, provided that accounting principles, such as accruals, going concern and materiality are adhered to, and characteristics like relevance and comparability are adopted. The specific accounting principle relevant to capitalisation is materiality.
• The principle of materiality states that an item is ‘material’ if its omission will influence the economic decisions of the users of the accounts. Judgement needs to be applied in relation to materiality as it means that items which are technically NCA, but have a value that renders them ‘immaterial’, can be written off as expenses.
• The principle of materiality enables organisations to set capitalisation levels which are appropriate to their size and needs, which are usually determined by their owner(s) and/or the senior management team.
• However, capitalisation has consequences as it affects both profits and the value of the organisation’s assets. 

  • •If we capitalise the cost of a purchase, the NCA is listed on the statement of financial position and included in the overall net value of the organisation. 
  • •If we write the cost of a purchase off as an expense, the effect will be to reduce the profit calculated for the period on the statement of profit or loss. 
• Cost

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  Original purchase price plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended, and any estimated cost of dismantling and removing the item and restoring the site on which it is located. 
• Useful life

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  The period over which an asset is expected to be available for use. 
• Residual value

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  The estimated amount that the asset can be disposed of for, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
• Depreciable amount

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  Cost less residual value.
• Carrying amount

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  Cost less accumulated depreciation.