Non-current assets

Welcome to Non-Current Assets!

Hello there! Welcome to one of the most important chapters in your F1 – Financial Reporting journey. In this section, we are going to explore Non-current assets. These are the "heavy lifters" of a business—the big items like buildings, machinery, and even invisible things like software that a company keeps for a long time to help it make money.

Don't worry if the numbers look intimidating at first. We’ll break everything down into simple steps. Think of this chapter as learning how to track the "life story" of an asset, from the day it’s bought to the day it’s sold or wears out.

1. Property, Plant, and Equipment (IAS 16)

IAS 16 is the rulebook for physical assets. These are assets that have physical substance (you can touch them) and are expected to be used for more than one year.

What goes into the "Cost"?

When a company buys an asset, we don't just record the price on the tag. We record everything it costs to get that asset ready for use. This is called Initial Recognition.

Included in Cost:
• Purchase price (minus any trade discounts).
• Delivery and handling costs.
• Installation and assembly.
• Professional fees (like lawyers or engineers).
• Site preparation costs.

Excluded (Treat as Expenses):
• Maintenance contracts.
• Staff training (even if they are learning to use the new machine!).
• Administration and general overheads.

Example: If a bakery buys a new oven for \$5,000, pays \$500 for delivery, and \$200 for a specialist to install it, the total cost recorded is \$5,700. If they spend \$100 on "Grand Opening" flyers, that is an expense, not part of the asset's cost.

Depreciation: Spreading the Cost

Assets don't last forever. Depreciation is the way we spread the cost of an asset over its useful life. It’s not about how much the asset is "worth" if you sold it today; it's about matching the expense to the time the asset helps the business earn money.

Method 1: Straight Line
\nThe asset loses the same amount of value every year.
\n\( \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \)

Method 2: Reducing Balance
\nThe asset loses a fixed percentage of its current value (Carrying Amount) each year. This is common for things like cars that lose value quickly at the start.
\n\( \text{Annual Depreciation} = \text{Carrying Amount} \times \text{Percentage %} \)

Quick Review: Key Terms
\nCarrying Amount: The value currently in the books. \( \text{Cost} - \text{Accumulated Depreciation} \).
\nResidual Value: What we think the asset will be worth at the end of its life.

Key Takeaway:

Always include all costs to get the asset ready for use, but never include training or general repairs. Depreciation ensures the cost of the asset is shared across the years it is used.

2. Revaluation: Giving Assets a Makeover

Sometimes, an asset (like a building) might become much more valuable over time. IAS 16 allows companies to use the Revaluation Model.

When we revalue an asset upwards:
\n1. Increase the asset's value in the Statement of Financial Position.
\n2. Put the "gain" into a special pocket called the Revaluation Surplus (part of Equity/Other Comprehensive Income), not the standard profit account!

Common Mistake: Students often forget that once an asset is revalued, you must calculate new depreciation based on the new value and the remaining useful life.

3. Intangible Assets (IAS 38)

Intangible assets are assets you cannot touch, like software, patents, or licenses. To be an intangible asset under IAS 38, it must be:
\n1. Identifiable (you can separate it from the rest of the business).
\n2. Controlled by the company (you have the legal right to it).
\n3. A source of future economic benefits (it will help you make money).

Research vs. Development

This is a favorite exam topic! How do we treat money spent on creating new things?

Research: This is just "looking for knowledge." We don't know if it will work yet. Rule: Always Expense to the P&L.

Development: This is using research to build a specific product. Rule: Capitalise as an asset ONLY if it meets the PIRATE criteria.

Memory Aid: PIRATE
\n• Probable future economic benefits.
\n• Intention to complete the asset.
\n• Resources available to finish it.
\n• Ability to use or sell it.
\n• Technical feasibility (it actually works!).
\n• Expenditure can be measured reliably.

Did you know? Internally generated "Goodwill" (the reputation of a business built over time) can never be recognized as an asset. Only purchased goodwill (when buying another company) goes on the balance sheet.

Key Takeaway:

Research is a cost (expense), but Development is an investment (asset) if it passes the PIRATE test.

4. Impairment (IAS 36)

Impairment is like an emergency check-up for an asset. It happens when an asset's Carrying Amount is higher than its Recoverable Amount. In simple terms: the books say the asset is worth \$100, but in reality, it's only worth \$80.

How to find the Recoverable Amount:
\nIt is the higher of:
\n1. Fair Value less costs to sell: What you’d get if you sold it today minus the selling costs.
\n2. Value in Use: The value of the cash the asset will generate if you keep using it.

The Impairment Calculation:
\n\( \text{Impairment Loss} = \text{Carrying Amount} - \text{Recoverable Amount} \)
\n(Only if the Carrying Amount is higher!)

Analogy: Imagine you have a phone you think is worth \$400 (Carrying Amount). You could sell it for \$300 (Fair Value) or keep using it to run your business, which is worth \$350 to you (Value in Use). The Recoverable Amount is \$350 (the higher of the two). Your impairment loss is \$400 - \$350 = \$50.

Key Takeaway:

Assets should never be valued at more than they are worth to the business. If the carrying amount is too high, we must "write it down" (impair it).

5. Disposals: Saying Goodbye to an Asset

When we sell an asset, we need to find out if we made a Profit or a Loss on the sale.

The Step-by-Step Process:
1. Calculate the Carrying Amount on the date of sale (Cost minus all depreciation up to that date).
2. Compare the Sale Proceeds to the Carrying Amount.

The Formula:
\( \text{Profit/Loss} = \text{Proceeds} - \text{Carrying Amount} \)

• If Proceeds > Carrying Amount = Profit (Income).
• If Proceeds < Carrying Amount = Loss (Expense).

Quick Review Box:
Initial Cost: Price + Installation + Delivery.
Depreciation: Spreading cost over time.
Revaluation: Updating to current value.
Impairment: Checking if the value has dropped significantly.
Disposal: Final profit or loss calculation.

Don't worry if this seems tricky at first! The key is to always calculate the Carrying Amount first. Once you have that number, everything else—depreciation, impairment, and disposal—becomes much easier to handle.