week 8 -NCA

• NCA definition

  • present economic resource controlled by an entity as a result of past events
  • will provide economic benefit for MORE THAN 12 months
  • are not intended for sale
  • will be used in to help earn revenue
• AASB 116 – Property, Plant and Equipment

  • they tangible items that
  • (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
  • (b) are expected to be used during more than one period.
• COST of an NCA includes:

  • (a) purchase price + import duties + taxes - discounts - rebates.
  • (b) costs incurred to bring the asset to a LOCATION and CONDITION necessary FOR IT TO BE CAPABLE OF OPERATING IN ITS INTENDED MANNER.
  • (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located
• depreciation method -> REDUCING BALANCE METHOD

  • depreciates more in early years, and less in later years
  • allocates a FIXED PERCENTAGE each period, based on the CARRYING AMOUNT
  • formula = carrying amount x % rate
• depreciation method -> units of production method

  • depreciates NCA based on expected output of asset COMPARED to total output in its life
  • the expense changes every year as output of asset changes
  • output eg: machine hours, vehicle km's, flying hours

  A) period

  B) output

  
• other issues

  • Each part of an item of a NCA with a cost that is significant to its total cost should be depreciated separately (eg. truck head and body)
  • The depreciable amount of an asset should be allocated on a systematic basis over its useful life
  • The RV and the UL of an asset shall be reviewed at least at each year and, if differ from estimates, the change(s) should be accounted for as a change in an accounting estimate
• depreciation -> Choosing an appropriate method

  • The depreciation method used shall reflect the PATTERN in which the asset’s future economic benefits are expected to be CONSUMED by the entity
  • the method should be reviewed each year. If expected pattern changes, method should be changed to reflect it.
• measurement subsequent (after) to acquisition

  • a firm must choose one option to apply to the rest of their NCAs

  A) cost

  B) revaluation

  
• cost model

  • a NCA should be recorded as its (cost) - (acc. dep'n) - (impairment losses)
  • after checking for impairments each period, the firm will estimate the recoverable amount of asset
• cost model -> recoverable amount

  • it is the higher of its (fair value less costs of disposal) and its (value in use)
  • fair value - cost of disposal = amount the asset would be sold for in market currently
  • value in use = its worth if it is continued to be used, based on cash inflows and outflows
  • NOTE: BOTH values will be given, just find out which is higher (aka. recoverable amount)
• most model -> recoverable amount rule

  • If the RA of an asset is LESS than its CA, the CA must be reduced to its RA. This is an impairment loss
  • if CA > RA, must record the loss because the value of asset is too high currently
  • if CA < RA, no adjustment because the asset value isn't overstated

  A) impairment loss

  B) <

  C) >

  
• cost model -> recording impairment loss on GJ

  • Increase impairment loss (expense)
  • Incrase Accumulated Impairment Losses (neg. asset)
• impairment losses

  A) impairment losses

  
• cost model summarised

  1. find the carrying amount of the asset (cost less acc. depn)
  2. Determine the recoverable amount (the higher of fair value less costs to sell and value in use)
  3. If the carrying amount is MORE than the recoverable amount. If so, record an impairment loss.
  4. Adjust the depreciation calculation going forward.