FA C01_2 Tangible Fixed Assets

8/12/2019 FA C01_2 Tangible Fixed Assets

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IAS 16: the systematic allocation of the depreciable amountof an asset over its useful life

Process of allocating the cost of a long term asset in a rationaland systematic manner over its useful life. (matching principle)

Applies to all classes of tangible assets:

Land improvements Buildings

Equipment.

..

NOT LAND!

4. Depreciation

The revenue-producing ability of an asset declinesduring its useful life because of wear and tear.

A decline in revenue-producing ability mayalso occur because of

obsolescence.

4. Depreciation


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The balance in AccumulatedDepreciation is not a cash fund.

4. Depreciation

Factors in Computing Depreciation

4. Depreciation


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4. Depreciation

Acquisition cost 50-

Estimated residual value 10

Depreciable amount 40

Useful life 4 years

Depreciation affects the balance sheet through accumulateddepreciation, which is reported as a reduction from plantassets. Book Value = Cost Accumulated Depreciation

Depreciation affects the income statement through

depreciation expense.

Income statement impact of the

different depreciation methods

(p.254) (6=2)

Affects of Depreciation

4. Depreciation


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4. Depreciation

Choice of a depreciation method

IAS 16: the depreciation method used shall reflect the patternin which the assets future economic benefits are expectedto be consumed by the entity.

Methods:

Time based Activity level based

Most commonly used:

Straight-line

Declining-balance

Units-of-activity

4. Depreciation


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4. Depreciation

Depreciable amount (cost)*________________________________________________________________________________________________________

The asset's useful life measured in years

*(cost of the asset less its residual/salvage value)

Straight-line Method

4. Depreciation


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Straight-Line Depreciation Formula

4. Depreciation

Straight-line

Method

Is the most widely

used method ofdepreciation.

Depreciation is thesame for each year

of the asset's usefullife.

2001

2002

2003

2004

2005

Year

4. Depreciation


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Declining-BalanceMethod

Is an acceleratedmethod.

Accelerated methodsof depreciation result

in more depreciationin the early years ofan asset's life andless depreciation inthe later years.

2001

2002

2003

2004

2005

Year

4. Depreciation

Units-of-ActivityMethod

The life of an asset

is expressed in

terms of the totalunits of productionor the use expectedfrom the asset.

2001

2002

2003

2004

2005

Year

4. Depreciation


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An equipment bought in December 2006 with 6.000 lei,is depreciated in 6 years. For 2007 the depreciation

under straight method is 1.000

4. Depreciation

Partial Year Depreciation

If an asset is purchased during the year rather than on January

1, the annual depreciation is prorated for the proportion of ayear it is used.

4. Depreciation

Ex. A building is bought in 10 september 2007, for 65.000 lei.

Company options are: residual value 5.000

usefull life 50 years

straight method depreciation

Establish the depreciation value for 2007, 2008 and the last year.


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Like a companymanager whatdepreciation methodyou will use and why?

RO : straight line

fiscal recognized

Questions/Discussion

4. Depreciation

must be disclosed in the notes to financialstatements. The choice of depreciation method The useful life

Revising Periodic Depreciation When a change in an estimate is required, the change is made

in current and future years but not to prior periods.

Significant changes in estimates must be disclosed in thefinancial statements.

Extending an asset's estimated life reduces depreciationexpense and increases net income for the period.

4. Depreciation


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Impairment

A permanent decline in the market value ofan asset.

Is written down to the new market valueduring the year in which the decline occurs.

4. Depreciation

Sale ofTangible Assets

In the sale of an asset, the bookvalue of the asset is compared

with the proceeds from the sale. If the proceeds exceed the book

value a gain on disposal occurs.

Conversely, if proceeds from the

sale are less than the book valuea loss on disposal occurs.

3. Tangible assets


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Is recorded by decreasing AccumulatedDepreciation for the full amount of depreciationtaken over the life of the asset.

The asset account is reduced for the original cost of

the asset. The loss is equal to the asset's book value at the

time of retirement.

Retirement of Tangible Assets

3. Tangible assets

Analyzing tangible assetsReturns on Asset Ratio

Indicates the amount of net income generated by each dollarinvested in assets

Net IncomeAverage Assets

Asset Turnover Ratio

Indicates

how efficiently a company eses its assets?

how many dollars of sales are generated by each dollarinvested in assets?

Net Sales

Average Total Assets

3. Tangible assets


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Two ways a company can increase its return on assets:

Increase profit per sale--measured by profit margin ratio.

Increase its volume of sales--measured by the asset turnoverratio=

Net Sales

Average Total Assets

3. Tangible assets

acc

Group 21. Tangible assets

211 Land and land improvements

2111 Land

2112 Land improvements

212 Buildings

213 Plant and machinery, motor vehicles, animals and plantations

2131 Plant and machinery

2132 Measurement, control and adjustment devices

2133 Motor vehicles2134 Animals and plantations

214 Furniture, office equipment, protection equipment of human and materialvalues and other tangible assets

Group 23. Non-current assets in progress and advance paymentsfor non-current assets

231 Tangible assets in progress

232 Advance payments for tangible non-current assets

5. Recording the transactions


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General functioning rules forasset accounts

present only debit closingbalance and represent theexistences of assets at acertain time;

debit - the initial existencesof asset, undertaken from theinitial balance sheets asset;

debit - the asset increasesdetermined by the economicoperations, inscribed in the

supporting documents;

credit - the asset decreasesdetermined by the economicoperations, inscribed in the


D Tangible Asset C

Group 28. Amortisation of non-current assets

281 Depreciation of tangible assets

2811 Depreciation of land improvements

2812 Depreciation of buildings

2813 Depreciation of plant and machinery, motor vehicles, animals and plantations

2814 Depreciation of other tangible assets

Group 29. Adjustment for impairment or loss in value of NCA

291 Impairment of tangible assets

2911 Impairment of land and land improvements

2912 Impairment of buildings

2913 Impairment of plant and machinery, motor vehicles, animals and plantations

2914 Impairment of other tangible assets

293 Impairment of non-current assets in progress

2931 Impairment of tangible assets in progress

2933 Impairment of intangible assets in progress



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General functioning rules fordepreciation/impairement of asset

present only credit closingbalance and represent theexistences at a certain time;

credit - the initial existencesundertaken from the initialbalance sheets asset;

credit - the increasesdetermined by the economicoperations, inscribed in the


debit - the decreasesdetermined by the economicoperations, inscribed in the


D Depreciation/impairement C

Practical example1.Entity purchases 2 computers from a supplier with an

invoice value of 2.000 lei and VAT 19% per unit.

2.The invoice is acquitted as follows: 400 lei from thebank account, 2.600 lei from a long term bank loan,

the difference will be paid in one month.3.The computers useful life is 5 years and the

depreciation method is straight-line.

4.After 4 years one computer is sold with 1.000 lei andVAT 19%.



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GENERAL JOURNAL

Op

Explanation Corresponding Accounts SUMS

D C

1 1 The computerspurchases

% = 404 Suppliers of non.

2132 Measurement, control and ...

4426 Input VAT

4000

720

4720

2 2 The invoice to asupplier is acquitted

404 Suppliers of non. = %

Cash at bank in lei 5121

Long term bank loans 1621

3000

400

2600

3 3 Computersdepreciation 1yr,2,3,4

6811 = 2813Expences with depr Depreciation of ..

800 800

4 4 Selling one computerafter 4 yrs

461 = %

Sundry debtors 7583Proceeds from...

4427 Output WATT

1190

1000

190

5 Evidence discharging % = 2132 Measurement, ..

2813 Depreciation of..

6583 Net value of assets disposed

1600

400

2000


GENERAL JOURNAL

O

p

Explanation Corresponding Accounts SUMS

D C

5 6 Receivablescollected throughbank transfer

5121 = 461Cash at bank in lei Sundry debtors

1190 1190

6 7 Ordinary repairs 611 = 5311Expenses with current repairs Cash

200 200

7 8 Computerdepreciation yr 5

6811 = 2813Expences with depr Depreciation of ..

400 400

7 9 Evidencedischarging

2813Depreciation of..= 2132 Measurement, 2000 2000

5. The counter value is collected through bank transfer6. Some ordinary repairs are invoiced by the supplier 200 lei, paid in cash.7. After 5 years the other computer is disposed



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Key point

Disposal

Definitionrecognition Acquisition cost

Production cost

Depreciationmethods

Capital/Subsequentexpenditures

Tangible assets

Documents

FA C01_2 Tangible Fixed Assets