BDFA 2103

Financial Accounting II
TOPIC 7

Accounting for Non current Assets

 Capital Expenditures Revenue Expenditures
• any cost that increases the • repairs and maintenance do not
estimated useful life and the extend the estimated useful
capability of the non-current life or capability of the asset.
assets shall be capitalised (added • These expenditures only provide
to the cost of assets) benefit for the current accounting
period.
• Expenses of RM50,000 for
renovating your shop to extend
the show room
Revenue Expenditure:
Items and Treatments
• The items of revenue expenditure are as follows:

(a) Fuel for the motor vehicles;

(b) Insurance of the motor vehicles;
(c) Replacing a broken gate of the premises; and
(d) Repainting the office and factory blocks.
Capital Expenditure versus
Revenue Expenditure
• The errors made in reporting expenditures in the
Statement of Profit and Loss
will affect the following:

(a) Profit and loss, in the final account; or

(b) Asset value, in the Statement of Financial Position.
There are two types of errors that might occur:
(a) Revenue expenditure recorded as capital
expenditure; and
(b) Capital expenditure recorded as revenue expenditure.
Revenue Expenditure
Recorded as Capital
Expenditure

• On 1 June 20X3, Syarikat Boom paid RM400 cash for

the repair of a faulty machine.
• The transaction was recorded as follows:
Capital Expenditure Recorded as Revenue
Expenditure
 ADJUSTMENTS: CAPITAL EXPENDITURE
AND REVENUE EXPENDITURE

• Adjustments are made in order to report the actual

amount of revenue, expenses, and other items in the
Statement of Profit and Loss for a particular period.

• As a result, the actual profit and loss amount will be

accurate.
 DEFINITION OF NON-CURRENT
ASSETS

• MFRS 101 defined non-current asset as assets other than current assets.

• Non-current assets are used to generate revenue and not for resale.

• Non-current assets include items such as land, building, plant, equipment,

machinery, motor vehicles, fixtures and fitting and long-term investments
 These non-current assets are normally classified into the
following groups:

Tangible non-current Intangible non-current

assets assets
• property, land, building, • copyrights, goodwill, patterns,
plant and equipment franchises and trademarks

Long-term investments
shares in another company.
ACCOUNTING FOR TANGIBLE
NON-CURRENT ASSETS

• MFRS 116 defines property, plant and equipment as tangible

assets that:
• MFRS 116 also states that these assets must be recorded at cost.
• This cost includes the purchase price and any directly attributable
cost in bringing the asset to working condition.

Examples of directly attributable costs are:

 INTANGIBLE ASSETS

• essentially have no monetary value and do

not have a physical form.

• Its value is determined by the law or the rights or benefits to the

owners or businesses

• One example of an intangible asset that is often found or used is

goodwill.

• Goodwill is the amount of intangible assets that contribute to the

success of a business such as location, reputation or good image,
skills as well as competencies of employees or management or
close contacts between the debtors, customers and suppliers
There are two types of goodwill in the business, which are:

(a) Goodwill inherited (inherent goodwill); and

(b) Goodwill purchased (purchased goodwill).

Evaluation

Goodwill acquired for the maximum amortisation period is 25 years.

Useful lives commence on the date it is purchased and amortisation is

on a straight-line basis
PRESENTATION IN THE BALANCE SHEET
 DEPRECIATION

Technical and
Physical wear and
Normal usage commercial Time factor Depletions
tear
obsolescence
• non-current • think of buildings • old models will • assets that are • natural resources
assets can lose deteriorating from lose their value leased, patterns like ores and oil
their value by weather effects. when a latest and copyrights will deplete as
physical model that is have a set time production
deterioration more effective limit. The values continues.
and efficient is of these assets
available in the decrease as time
market. Think of goes by
computers!
DEPRECIATION
• MFRS 104 – Depreciation accounting defines depreciation as the
allocation of the depreciable amount of an asset over its estimated
useful life.
• In other words, the cost of assets less its residual value (depreciable
amount) will be depreciated over its estimated useful life.
• To measure depreciation of an asset, the following information is
required:

(a) Original cost of the assets

(b) The estimated useful life of the asset
(c) The estimated residual value of the asset
Methods in calculating depreciation
Straight Line Method

The depreciation charges for AMT lorry

The entry to record one year depreciation on 31/12/2011

Carrying amount is also known as net realisable value, net book value
and this is the amount reported in the balance sheet
Reducing Balance Method

• Allocates more of the assets depreciable amount in the earlier life of

the asset.
• The assets original cost is multiplied with a set depreciation rate.
• The depreciation rate can be calculated with the following
formula.
• For AMT’s lorry, the depreciation rate is calculated as follows:
The following is the depreciation schedule for AMTÊs lorry under the reducing
balance method:
Units-of-production Method

For AMT’s lorry the depreciation rate is:

Depreciation expense is then determined through the actual

usage per annum.
The following is the depreciation schedule for AMTÊs lorry under the
unit-of production method

Microsoft Excel has a built-in function to auto calculate depreciation. Open

up an Excel file, go to Function, and select to view the financial category.

They have functions to calculate straight line, double declining balance and
sum-of year digit depreciation.
Depreciation patterns through time
 ACCOUNTING ENTRIES FOR NON
CURRENT ASSETS AND DEPRECIATION
EXPENSES
 BASES OF PROVIDING DEPRECIATION

End-of-year Basis Month-to-month Basis

(Yearly Basis) (Monthly Basis)
• Using this basis, the dates during the • This provision is made on one months
year when the assets were bought or ownership, one months provision‰
sold will be ignored. basis for depreciation.
• It will only calculate a full periods • A fraction of a month is usually ignored.
depreciation on the assets in use at the
end of the period. • However, some may consider it as one
• Thus, assets sold during the accounting months ownership if they have
period will have no provision for possessed the assets for
depreciation made for that last period, more than or equal to 15 days.
regardless of how many months they
were in use
• In contrast, assets that are bought during
the period will have a full period of
depreciation provision calculated, even
though they may not have been used
throughout the whole of the period.
 PRESENTATION OF NON-CURRENT
ASSETS IN THE FINANCIAL STATEMENT

Statement of Profit and Loss and Other Comprehensive Income

Statement of Financial Position

ILLUSTRATION OF CALCULATING
DEPRECIATION

• Syarikat XYZ purchased Machine A on 1 March 20X2 for RM10,000

using cheque. The Machine A was estimated to last for 5 years. The
accounting year-end of the company is at 31 December.

• Based on the Above Information, You are Required to:

(a) By using the straight line method, calculate the depreciation expense, if
the estimated salvage value of the Machine A is RM1,000.
(b) Record the transactions for the year ended 31 December 20X2 and
31 December 20X3, if a full years depreciation is charged in the year of
purchase (year end basis).
(c) Record the transactions for the year ended 31 December 20X2 and
31 December 20X3, using the basis of one month ownership needs one
month depreciation.
DISPOSAL OF NON-CURRENT ASSETS

Retiring or Discarding the Non-current Asset

Selling the Non-current Asset

If selling price is higher than the assets carrying amount, a gain on

disposal will be recorded, while a loss on disposal will be recorded if the
selling price is lower than the assets carrying amount
Exchanging the Non-current Asset for Another
Non-current Asset

Normally the seller will receive a trade in value for the asset
exchanged.
In other words, the buyer will only pay the difference between the costs
of the new asset less the trade in value of the old asset.
Exchange With No Gain or Loss

• As for the transaction of exchange, we will identify any gain or loss

by comparing the book value of the old asset with its market value.
• No gain or loss occurs when the current market value of the old
asset is equal to its book value

Example 3.5
In this example, let us assume that Pantas van (the old one) can be exchanged at
RM61,750. This exchange with the book value which is equal to the market value
will result in no gain or loss occurred in this example.
• Next, let us calculate the cash that Pantas should pay:
Exchange With Loss on Exchange

• Loss on the exchange occurs when the market value of the old
asset is less than its book value
Assume that the old delivery vans market value for exchange is
RM58,500. Compared to the book value, the market value of the old
delivery van is lower.
• Cash payment for the remaining amount also increase by RM3,250
compared to the previous situation, as calculated below:
Exchange With Gain on Exchange

Let us assume that the market value of the delivery van is RM63,000.
The calculation below shows that there is a gain on the transaction of
exchange at RM1,250

However, the gain will not be recorded as a gain on exchange in the

financial record.

This concept is in line with the principle of prudence. Any gain occur will
be used to reduce the cost of the new asset.
End of Topic 3