FAC3704

FAC1502
STUDY UNIT 12

OTHER NON-CURRENT
ASSETS

Financial Accounting I:

Financial Accounting
Concepts, Principles and
Procedures
STUDY UNIT

12
Other non-current assets

Learning outcome

You should be able to record transactions related to other non-current assets such as
investments.

Contents
Page
Key concepts
12.1 Introduction 3
12.2 Intangible assets 3
12.3 Financial instruments 6
12.4 Other financial assets and methods of recording them 7
12.4.1 Cash investments 7
12.4.2 Investments in shares 9
12.5 Revision exercise 9
Self-assessment 9

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 KEY CONCEPTS
• Intangible assets
• Amortisation
• Other financial assets
• Cash investments
• Loans granted
• Investments in shares
• Ordinary shares
• Investment income

12.1 INTRODUCTION
Non-current assets are divided into tangible assets, intangible assets and other financial assets.
Tangible assets (property, plant and equipment) were discussed in study unit 11. Other non-
current assets (intangible assets and other financial assets) are discussed in this study unit.

12.2 INTANGIBLE ASSETS

IAS 38 defines intangible assets as identifiable non-monetary assets without physical
substance that are held for use in the production or supply of goods or services, for rental to
others or for administrative purposes and that are controlled by an entity as a result of past
events and from which future economic benefits are expected to flow to the entity.
An intangible asset is identifiable when it
- is capable of being separated from the entity and can be sold, transferred, licensed,
rented or exchanged, either individually or together with a related contract, identifiable
asset or liability, regardless of whether the entity intends to do so or
- arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations
Examples of intangible assets are as follows:
• patented technology, computer software, databases, and trade secrets
• trademarks, trade dress, newspapers, mastheads and internet domains
video and audiovisual material, like motion pictures and television programmes
• customer lists
• mortgage servicing rights
• licensing, royalty and standstill agreements
• import quotas
• franchise agreements
• customer and supplier relationships
• marketing rights

Internally generated goodwill is within the scope of IAS 38 but is not recognised as an asset
because it is not an identifiable resource.

Intangible assets can be acquired by separate purchase, as part of a business combination, by

a government grant, by exchange of assets or by self-creation (internal generation).

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According to IAS 38, expenditure for an intangible asset is recognised as an expense, unless
the item meets the definition of an intangible asset and
- it is probable that future economic benefits will emanate from the asset and
- the cost of the asset can be reliably measured

INITIAL RECOGNITION OF AN INTANGIBLE ASSET

Intangible assets are initially measured at cost. However, the cost of generating an intangible
asset internally is often difficult to distinguish from the cost of maintaining or enhancing the
entity’s operations or goodwill. For this reason, internally generated brands, mastheads,
publishing titles, customer lists and similar items are not recognised as intangible assets. These
costs must always be recognised in the profit or loss account when they were incurred. The
costs of generating other internally generated intangible assets are classified according to
whether they arise in a research phase or a development phase. Research expenditure is
recognised as an expense in the profit or loss account. Development expenditure that meets
specified criteria is recognised as the cost of an intangible asset. This means the that the entity
must intend and be able to complete the intangible asset and either use it or sell it and be able
to demonstrate how the asset will generate future economic benefits.
Given the nature of intangible assets, subsequent expenditure after the initial cost will only
rarely meet the criteria for being recognised in the carrying amount of an asset and therefore
has to be recognised in the profit or loss account in the period in which it is incurred.

MEASUREMENT AFTER RECOGNITION

An entity must adopt either the cost model or the revaluation model as its accounting policy.
For FAC1502, we will discuss the cost model.
After initial recognition, an entity usually measures an intangible asset at cost less accumulated
amortisation and impairment losses. Amortisation is the systematic allocation of the depreciable
amount of an intangible asset over its useful life. In rare cases, an entity may choose to measure
an asset at fair value when fair value can be determined by reference to an active market.
An intangible asset with a finite useful life, that is, a limited period of benefit to the entity, is
amortised and is subject to impairment testing. An intangible asset with an indefinite useful life,
that is, no foreseeable limit to the period over which the asset is expected to generate net cash
inflows for the entity, is not amortised but is tested annually for impairment.
When an intangible asset is disposed of, the gain or loss on disposal is included in the profit or
loss account (statement of profit or loss and other comprehensive income).

DISCLOSURE OF INTANGIBLE ASSETS

An entity’s intangible assets are disclosed in the financial statements and the notes to the
financial statements.
A note for intangible assets is prepared in the same way as notes for property, plant and
equipment.
The total carrying amount of intangible assets at the end of the year is disclosed in the
statement of financial position of the entity.
Amortisation of intangible assets is disclosed in the statement of profit and loss and other
comprehensive income under distribution, administrative and other expenses.
Below is a basic illustration of how you would disclose intangible assets on the statement of

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financial position.

XYZ TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED … (EXTRACT)
R
Distribution, administrative and other expenses
Amortisation of intangible assets xx xxx

XYZ TRADERS
STATEMENT OF FINANCIAL POSITION AS AT … (EXTRACT)
ASSETS Notes R
Non-current assets
Property, plant and equipment 3 xx xxx
Intangible assets 4 xx xxx

The notes and disclosure of intangible assets and amortisation of intangible assets are beyond the scope of this
module.

GOLDEN RULE
According to IAS 38.118, an entity must present and disclose the following information in the
notes to the financial statements for each class of intangible asset:

- the useful life or amortisation rate

- the amortisation method
- the gross carrying amount
- the accumulated amortisation and impairment losses
- line items in the statement of profit or loss and other comprehensive income in which
amortisation is included
- a reconciliation of the carrying amount at the beginning and the end of the period,
showing
• additions
• assets held for sale
• retirements and other disposals
• impairment losses
• amortisation
• foreign exchange differences

According to IAS 38.122, an entity must disclose

- the basis for determining that an intangible asset has an indefinite life
- a description and the carrying amount of individually material intangible assets
- certain special disclosures about intangible assets acquired by way of government

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 grants
- information about intangible assets whose title is restricted
- contractual commitments to acquire intangible assets

According to IAS 38.126, an entity must disclose

- the amount of research and development expenditure recognised as an expense in the

current period

12.3 FINANCIAL INSTRUMENTS

Financial instruments are any assets that hold capital and can be traded in the market.
Examples of financial instruments are shares, stocks, bonds, futures and options contracts. A
financial instrument is therefore defined as a contract that gives rise to a financial asset of one
entity and a financial liability or an equity instrument of another. It is therefore a contract
between individuals/parties that holds a monetary value. Financial instruments can be created,
traded, settled or modified as per the requirements of the parties involved. IAS 32 outlines the
accounting requirements for the presentation of financial instruments, particularly as to the
classification of such instruments into financial assets, financial liabilities and equity
instruments. The standard also provides guidance on the classification of related interest,
dividends and gains/losses, and when financial assets and financial liabilities can be offset.

When an entity first recognises a financial asset, it classifies it based on the entity’s business
model for managing the asset and the asset’s contractual cash flow characteristics, as follows:
• Amortised cost – a financial asset is measured at amortised cost if both of the following
conditions are met:
- the asset is held within a business model whose objective is to hold assets in order
to collect contractual cash flows; and
- the contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount
outstanding.
• Fair value through other comprehensive income – financial assets are classified and
measured at fair value through other comprehensive income if they are held in a business
model whose objective is achieved by both collecting contractual cash flows and selling
financial assets.
• Fair value through profit or loss – any financial assets that are not held in one of the two
business models mentioned are measured at fair value through profit or loss.
When, and only when, an entity changes its business model for managing financial assets it
must reclassify all affected financial assets [IFRS 9].

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Financial instruments can primarily be classified into two types:
- Derivative instruments
Derivative instruments can be defined as instruments whose characteristics and value
can be derived from their underlying entities, such as interest rates, indices or assets,
among others. The value of such instruments can be obtained from the performance of
the underlying component. They can also be linked to other securities such as bonds
and shares/stocks.
- Cash instruments
Cash instruments, on the other hand, are defined as instruments that can be transferred
and valued readily in the market. Some of the most common examples of cash
instruments are deposits and loans where the lenders and borrowers are required to
be agreed upon.
In tems of IFRS 9, an entity must initially measure all financial instruments at fair value plus or
minus, in the case of a financial asset or a financial liability not at fair value through profit or
loss, transaction costs that are directly attributable to the acquisition or issue of the financial
asset or the financial liability.

12.4 OTHER FINANCIAL ASSETS AND METHODS OF RECORDING THEM

When a financial asset is acquired, the relevant financial asset account is debited and the bank
account credited. IFRS 9 requires and entity to recognise a financial asset or a financial liability
in its statement of financial position when it becomes party to the contractual provisions of the
instrument.

12.4.1 Cash investments

Every entity tries to invest its available cash in the most profitable way, that is, the entity tries
to
• obtain the highest yield or
• earn the best return on its investment

Although cash investments are not always the most profitable type of investment, entities often
have cash temporarily available that they want to invest for a relatively short period. The cash
may be required on a specific future date.
Such an investment may be in the form of a savings account, a call deposit or a fixed deposit.
This kind of investment usually yields interest at a fixed rate or a rate that does not change
often. The income will be disclosed in the profit or loss account (statement of profit or loss and
other comprehensive income).

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 EXERCISE 12.1

SKY IS D LIMIT TRADERS

EXTRACT FROM THE LIST OF BALANCES AS AT 28 FEBRUARY 20.8

Fixed deposit: FAC Bank (12,10%) 800 000

Interest on fixed deposit 48 400

Additional information

On 1 June 20.7, SKY IS D LIMIT Traders invested money in a three-year fixed deposit account
with FAC Bank at 12,10% interest per annum. The interest is payable quarterly. Account for
any outstanding interest.

REQUIRED
Using the information given, show the disclosure of the fixed deposit in the
financial statements of SKY IS D LIMIT Traders for the year ended
28 February 20.8.

SOLUTION: EXERCISE 11.1

SKY IS D LIMIT TRADERS

STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.8 (EXTRACT)
R
Other income
a72
Interest income: fixed deposit 600
a
Interest on fixed deposit = R800 000 x 12.10% x ¾ = R72 600

SKY IS D LIMIT TRADERS

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.8 (EXTRACT)
ASSETS R
Non-current assets
Property, plant and equipment xx xxx
Financial assets : fixed deposit at FAC Bank 800 000

Current assets
Trade and other receivables (xxx + b24 200) xx xxx
b Accrued income = R72 600 – R48 400 = R24 200

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12.4.2 Investment in shares
Dividends earned on investments in shares differ from interest in that interest is usually earned
at a fixed rate while dividends are received only if the company that issued the shares declares
a dividend. The rate at which dividends are to be paid out is decided annually. The accounting
procedure is basically the same as for interest.
As regards the extent of dividends declared, dividends are shown either as a percentage of the
nominal value of the shares or as cents per share. The dividend received will be entered in the
profit or loss account.
Exchange-traded derivatives, such as equity futures and stock options, also fall in this category.

SELF-ASSESSMENT

Now that you have studied this study unit, can you

• describe the form that an investment may take?

• explain how the cost price of an investment is determined?

• record the necessary entries regarding an investment in the accounting

records?

• calculate the net income on an investment and record the related

entries in the accounting records?