CHAPTER 10

NON-CURRENT ASSETS AND

DEPRECIATION

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 LEARNING OBJECTIVES
 Identify the accounting principles behind accounting for NCAs and depreciation;
 Specify what is included in the cost of a NCA;
 Use the straight line and reducing balance methods to calculate depreciation;
 Calculate profits and losses on disposal of NCA, including part-exchange disposals;
 Specify the effects of changing residual values, useful lives and depreciation methods on
amounts in the SOPL and SOFP;
 Identify the situations that may result in the impairment of assets and calculate an
impairment loss;
 Identify how to account for NCAs, depreciation and disposals in the ledger accounts;
 Calculate the figure in the SOFP for tangible NCAs and the figures that appear in the PPE
note;
 Calculate the depreciation charge and disposals on gross and net profit in the SOPL;
 Specify the uses of the assets register;
 Identify the accounting treatments of intangible assets, including goodwill and
development expenditure.
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TOPIC LIST
1. Tangible NCA and depreciation (IAS 16) (FRS 102 s17)
2. The objective of depreciation
3. Calculating depreciation
4. Accounting for depriciation
5. Impairment of assets (IAS 36)
6. Non-current asset disposals
7. The asset register
8. Intangible NCAs (IAS 38)
9. The NCAs note to the SFP

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1. TANGIBLE NCA AND DEPRECIATION
 NCA: has a useful life extends beyond one reporting period
 The cost of a non-current asset includes: purchase price;
delivery costs; taxes and duties; irrecoverable VAT; installation
and assembly costs; professional fees; testing costs
 Enhancement expenditure
 Part of an asset's cost may be settled by trading in an old asset
in part-exchange
 All assets except freehold land have a finite useful life
 Many assets have a residual value at the end of useful lives
 Depreciation allocates the asset's cost less its residual value
over its useful life.
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1. TANGIBLE NCA AND DEPRECIATION
 NCA: expected to be used…
 Tangible: physical substance
 Intangible: no physical substance

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1. TANGIBLE NCA AND DEPRECIATION
1.1. IAS 16, Property, Plant and Equipment
 Objective:
 Recognition
 Carrying amount
 Depreciation

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1. TANGIBLE NCA AND DEPRECIATION
1.2. Cost of PPE
 All amounts incurred to acquire the asset + directly
attributable to bringing the asset to the location and
condition necessary for being capable of operating
 Note: CARS: VAT not usually recoverable (SO?)

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1. TANGIBLE NCA AND DEPRECIATION
1.3. Paying for PPE
 A business might purchase a new non-current asset
 for cash
 on credit
 part-exchange: The supplier of the new asset agrees
to take the old asset, and gives the buyer a reduction in
the purchase price of the new asset. This reduction is
the part-exchange value of the old asset.

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1. TANGIBLE NCA AND DEPRECIATION
1.3. Paying for PPE
Worked example: Part-exchange
A business purchases a new delivery van, trading in an
old van in part-exchange. The cost of the new van is
£25,000 and the part-exchange value of the old van is
£10,000. Therefore, the business will pay the van
dealer £15,000.

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1. TANGIBLE NCA AND DEPRECIATION
1.4. Useful life
 Physical life v economic life
 Useful life: estimated economic life
 Note: freehold land – unlimited useful life

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1. TANGIBLE NCA AND DEPRECIATION
1.5. Depreciation
 Depreciation: systematic allocation of cost less
residual value, over useful life
 3 related factors – what are 3 factors relevant to the
calculation of depreciation?

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1. TANGIBLE NCA AND DEPRECIATION
1.6. Residual value
 Residual value: The estimated amount that the entity
would obtain from disposing of the asset, after
deducting estimated disposal cost
 Depreciable amount? (what is it?)

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 1. TANGIBLE NCA AND DEPRECIATION
1.6. Residual value
INTERACTIVE QUESTION: DEPRECIABLE AMOUNT
ABC company purchased a new car for a sales representative.
The invoice received contained the following information: (£)
- List price of the car: 18,720
- Deposit paid: (6,200)
- Amount due: 12,520
It is estimated that the new car will have a useful life of three
years and will have a residual value of £6,360.
Requirement:
Calculate the total amount to be depreciated in respect of the
new car.

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2. THE OBJECTIVE OF DEPRECIATION
2.1. Accounting concepts and depreciation
 Accrual principle: it would be inappropriate to charge
cost of an asset to any single period!
 Depreciation: method to spread cost of NCA over its
useful life (accrual principle)

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2. THE OBJECTIVE OF DEPRECIATION
2.2. Common depreciation misconceptions:
 Depreciation represents the fall in value of an
assets?
 Deprication: to set aside money to replace the asset
at the end of its useful life?

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2. THE OBJECTIVE OF DEPRECIATION
2.2. Common depreciation misconceptions:
 Depreciation NOT reflects the fall in value of an
assets
 Deprication NOT to set aside money to replace the
asset at the end of its useful life

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3. CALCULATING DEPRECIATION
 Straight line basis:
Monthly depn charge = (a/s cost – RV)/useful life

 Reducing balance basis

Annual depn charge = carrying a/m x %to be applied

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3. CALCULATING DEPRECIATION
When a non-current asset is depreciated:
(a) Depreciation: is an expense of the reporting period
in SPL
(b) The NCA is wearing out and being consumed, and
so its cost in the statement of financial position
must be reduced by the amount of depreciation
charged

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 3. CALCULATING DEPRECIATION
The amount of depreciation deducted from the cost of a NCA
to arrive at its carrying amount will build up (or
'accumulate') over time: called accumulated depreciation.
WORKED EXAMPLE:
A non-current asset costing £40,000 has a useful life of four
years and an estimated residual value of nil, it might be
depreciated by _____???_______ per annum. And the
accumulated depreciation at the end of the 3rd year is
__________
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3. CALCULATING DEPRECIATION
3.1. Methods of depn
 Straight line method
 Reducing balance method

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3. CALCULATING DEPRECIATION
3.2. Straight line method
 Depreciable amount is charged in equal instalments
 Annual depn v monthly depn
 Other way of stating straight line method of depn:
percentage per annum on the asset’s depreciable
amount.

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3. CALCULATING DEPRECIATION

3.2. Straight line method

WORKED EXAMPLE
A business has a reporting period from 1 January to 31
December and purchases a non-current asset on 1 April
20X1, at a cost of £24,000. The useful life of the asset is
four years, and its value is nil.
Requirement:
What is the depreciation charge for the reporting period to
31 December 20X1?
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3. CALCULATING DEPRECIATION
3.3. The reducing balance method
 Depreciation charge is fixed percentage of the b/f
carrying amount of NCA
 Not concerned with residual value (nor the
percentage)
 Note: yearly depn charge

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3. CALCULATING DEPRECIATION
3.3. The reducing balance method
WORKED EXAMPLE
A business purchases a non-current asset at a cost of £10,000
on 1 January 20X1, which it plans to keep for three years to 31
December 20X3. The business wishes to use the reducing
balance method to depreciate the asset, and calculates that
the rate of depreciation should be 40% of the reducing balance
(carrying amount) of the asset.
Requirement:
Calculate the depreciation charge per annum and the carrying
amount of the asset at the end of each reporting period? 24
 3. CALCULATING DEPRECIATION
3.4. Applying a depn method consistently
 A business can choose which method of depreciation to
apply to its PPE.
 Once this decision has been made, it should be applied
consistently from reporting period to reporting period.
 A change in the method of depreciations is permitted if
there is a change in the way in which the asset is used.

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 3. CALCULATING DEPRECIATION

3.4. Applying a depn method consistently

INTERACTIVE QUESTION: DEPRECIATION
A lorry bought for a business cost £17,000 plus VAT at 20%. It
is expected to last for five years and then to be sold for
£2,000 plus VAT.
Requirement:
Work out the depreciation to be charged to each 12-month
reporting period under:
a) the straight line method
b) the reducing balance method, using a rate of 35% 26
 3. CALCULATING DEPRECIATION

3.5. Depreciating subsequent expenditure

 Subsequent expenditure: depreciated over remaining
useful life of the initial asset
WORKED EXAMPLE
Malcom buys a building on 1.1.X0 for £200,000. On 1.1.X2,
he adds an extension that cost £50,000.
Requirement:
Calculate the annual depreciation charge before and after
the extension is built, on the basis of straight line
depreciation over 10 years, with no residual value.
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3. CALCULATING DEPRECIATION
3.6. Reviewing and changing depreciation method
 Remaining carrying amount is depreciated under
new method

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 3. CALCULATING DEPRECIATION

3.6. Reviewing and changing depreciation method

WORKED EXAMPLE
Jakob Co. purchased an asset for £100,000 on 1.1.X1. It had an
estimated useful life of five years and it was depreciated using the
reducing balance method at a rate of 40%. On 1.1.X3 it was
decided to change the depreciation method to straight line. There
was no change to the useful life , and no residual value is
anticipated.
Requirement:
Show the depreciation charge for each year (to 31 December) of
the asset’s life.
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 3. CALCULATING DEPRECIATION

3.7. Reviewing and changing useful life & residual value

The residual value and estimate useful life of a non-current
asset should be reviewed and changed if they are no longer
appropriate.

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 3. CALCULATING DEPRECIATION

3.7. Reviewing and changing useful life & residual value

WORKED EXAMPLE
A business purchased a non-current asset costing £12,000
with an estimated useful life of four years and no residual
value. The business decided after two years that the useful life
of the asset has been underestimated and it still has five more
years to come making its total useful life seven years.
Requirement:
Calculate the annual depreciation charge for final five years?
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 3. CALCULATING DEPRECIATION

3.7. Reviewing and changing useful life & residual value

INTERACTIVE QUESTION: CHANGE IN RESIDUAL VALUE
An asset had a cost of £10,000, an estimated useful life of 10
years and a residual value of £200. At the start of Year 3 a
review shows its remaining useful life was unchanged but the
residual value was reduced to nil.
Requirement:
Calculate the depreciation charge for each of Year 1 to 3 on
the straight line basis.
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4. ACCOUNTING FOR DEPRECIATION

4.1. Accounting for depreciation

 Set up accumulated depreciation account
 Record depreciation charge for the period:
DEBIT Depreciation expense (SPL) £X
CREDIT Accumulated depreciation (SFP) £X
 The balance on the accumulated depreciation account is the total
accumulated depreciation
 NCA cost accounts are unaffected by depreciation
 In SFP, the balance on the accumulated depreciation account is set
against the NCA cost accounts to derive the carrying amount

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 4. ACCOUNTING FOR DEPRECIATION

4.1. Accounting for depreciation

WORKED EXAMPLE
Brian Box set up his own computer software business on
1.3.20X6. He purchased a computer system on credit from a
manufacturer for £16,000. The system has a useful life of three
years and a residual value of £2,500 and the business applied
the straight line method of depreciation.
Requirement:
Draw out the T account for the cost of the asset and
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4. ACCOUNTING FOR DEPRECIATION
4.2. Adjusting TB for depreciation
 Calculate amount of depreciation
 Prepare year-end journal to record depn (and
impairment loss)
 Enter journal in adjustment column
 Adjust the initial TB

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5. IMPAIRMENT OF ASSETS

Asset is impaired when

Carrying amount Recoverable amount

(Accounting records) (FV-cost to sell/value in use)

CA – RA = impairment loss
 KEY DEFINITIONS
Impairment loss: the amount by which the carrying amount of an asset or
cash-generating unit exceeds its recoverable amount

Carrying amount: the amount at which an asset is recognised in the balance

sheet after deducting accumulated depreciation and accumulated
impairment losses

Recoverable amount: the higher of an asset's fair value less costs of disposal

(sometimes called net selling price) and its value in use

Fair value: the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date (see IFRS 13 Fair Value Measurement)

Value in use: the present value of the future cash flows expected to be derived
from an asset or cash-generating unit
 Identifying an asset that may be impaired
At the end of each reporting period  indication of impairment?

Intangibles with indefinite useful life Annual test for

Intangibles not yet available for use impairment

Goodwill acquired in combination  annual test for impairment

5. IMPAIRMENT OF ASSETS
Indications of impairment

External sources Internal sources

• Decline in market value • Obsolescence/physical damage

• Significant changes (market, • Significant changes
technology, legal, economic) (restructuring, discontinuing)
• Increase in interest rates • Internal reporting evidence
• CA > market capitalization
5. IMPAIRMENT OF ASSETS
Recoverable amount

Higher of asset’s/CGU’s

Fair value less cost to sell Value in use

- If any of these > CA No impairment

- If FV-cost to sell impossible to set Use value in use

 IAS 36 – IMPAIRMENT OF ASSETS
Value in use

= present value of the future cash flows expected to be

derived from an asset/CGU

Future cash flows Variations

Time value of money Uncertainty

Other factors
 IAS 36 – IMPAIRMENT OF ASSETS
Value in use

1. Future cash flows 2. Discounting

Year Future cash flow Discount factor at 10% Present value
1 3,000 0.909 2,727
2 2,800 0.826 2,314
3 2,500 0.751 1,878
4 2,000 0.683 1,366
5 1,200 0.621 745
∑ 11,500 9,031

Value in
use
5. IMPAIRMENT OF ASSETS

Fair value less costs to sell

measurement may be by way of:

- a binding sale agreement
- the current market price less costs of disposal
(where an active market exists).
5. IMPAIRMENT OF ASSETS: ACCOUNTING
Impairment loss

Carrying amount Recoverable amount

Cost Model Revaluation Model

Debit:P/L- Credit:Asset (a) Debit:OCI- b

impairment (adjustment) Revaluation
loss surplus
(b)Debit:P/L-impairment
loss
Adjust depreciation for future periods to new CA!
5. IMPAIRMENT OF ASSETS
WORKED EXAMPLE: Impairment and depreciation

A business purchased a building on 1.1.20X1 at a cost of £100,000.

The building had a 20-year useful life. During 20X5, property prices
fell sharply indicating that the building maybe impaired. On 31
December 20X5, the business undertook an impairment review and
determined that the building had a fair value less costs of disposal of
£60,000 and a value in use of £50,000.

Requirement:

Calculate:

a) The impairment loss of the business at 31 December 20X5.

b) The depreciation charge for the year ended 31 December 20X6
6. NCA DISPOSALS
 Profit or loss on disposal => capital income or
capital expense
 Not part of gross profit

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6. NCA DISPOSALS
6.1. The principles behind calculating profit or loss
on disposal
The difference between:
 Carrying amount
 Net disposal proceeds (or part-exchannge value)

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6. NCA DISPOSALS
6.2. Accounting for NCA disposals
Question: What is our pupose of recording disposal:
Answer: we need to eliminate
 The cost of the asset
 The accumulated depreciation of the asset
 Record the cash received or receivable account
 Calculate profit/loss on disposal
(Note: before conducting this step, remember to record
depreciation for the year of disposal (if applicable))
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6. NCA DISPOSALS
6.2. Accounting for NCA disposals
Open disposals account to record disposal of NCA
(a) The following items appear in the disposals account:
(1) The value of the asset (at cost)
(2) Accumulated depreciation
(3) The disposal proceeds, if any
(b) Profit or loss on disposal is the difference between:
(1)The disposal proceeds; and
(2) The carrying amount
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6. NCA DISPOSALS
6.2. Accounting for NCA disposals
Let us make journal entries together!
1) Open disposal account
2) Remove the cost of the asset
3) Remove accumulated depreciation
4) Record the disposal proceeds
5) Balance off the disposal account

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 6. NCA DISPOSALS
6.2. Accounting for NCA disposals
WORKED EXAMPLE:
A business purchased a NCA on 1.1.20X1 for £25,000. It has
an estimated useful life of six years and an estimated
residual value of £7,000 and is depreciated on the straight
line basis. The asset was sold after three years on 1.1.20X4
to another trader who paid £17,500 for it.
Requirement:
What was the profit or loss on disposal? Show the relevant
ledger entries?
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6. NCA DISPOSALS
6.3. Disposals of NCA given in part-exchange
 Part-exchange/trade-in value: considered as the NRV
(i/o disposal proceeds) of the old asset
 Now, let us record disposal of NCA in part-exchange!
(Note: i/o recording disposal proceeds
(cash/receivable); we will record a new asset (at cost)
and some cash/payable we have to pay or promise to
pay)

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6. NCA DISPOSALS
6.3. Disposals of NCA given in part-exchange
WORKED EXAMPLE
Asset A, costing £20,000 is acquired by a business for
£12,000 plus its old asset B. Asset B costs £15,000 and has
had £4,000 depreciation charged in respect of it.
What are the relevant ledger account entries?

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6. NCA DISPOSALS
6.4. The TB and NCA
WORKED EXAMPLE
Rodrigo’s initial trial balance as at 31 December 20X0 is as
follows:

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6. NCA DISPOSALS
Trial balance
Debit Credit
Current assets 87,420
Capital at 1.1.X0 100,000
Freehold land and buildings - cost at 1.1.X0 100,000
Freehold land and buildings – acc. depr at 1.1.X0 15,000
Plant and equipment - cost at 1.1.X0 45,000
Plant and equipment - accumulated depreciation at 1.1.X0 18,750
Motor vehicles - cost at 1.1.X0 25,000
Motor vehicles - accumulated depreciation at 1.1.X0 14,650
Current liabilities 15,420
Expenses 5,830
Purchases 58,740
Sales 205,640
Drawings 47,670
Suspense 200
369,660 369,660

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6. NCA DISPOSALS
6.4. The TB and NCA
The following matters have now been discovered:
(a) On 1 January 20X0 Rodrigo disposed of an item of plant that had cost
£10,000 and on which £1,250 depreciation had been charged. He
received payment by bank transfer for £7,950. The accounting entry
made was to the debit cash at bank account and credit the suspense
account.
(b) On 1 January 20X0, he also traded in a car that had cost £8,000 and on
which £4,500 depreciation had been charged for a new car costing
£13,300. He also paid £7,750 by bank transfer. The only entry with
regard to this transaction was to credit the cash at bank account and
debit the suspense account.
(c) With regard to the assets held at 31 December 20X0, depreciation on
the freehold building of £5,000, on plant and equipment of £5,290, and
on motor vehicles of £6,900, is to be charged.
Requirement:
Prepare Rodrigo’s year-end journals as at 31 December 20X0 in respect of
these matters and calculate the final trial balance
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7. THE ASSET REGISTER (‘MEMORANDUM’)
7.1. Data kept in asset register
 The internal reference number (physical identification)
 Manufacturer's serial number (for maintenance)
 Description of asset
 Location of asset
 Department which uses the asset
 Purchase date (for calculation of depreciation)
 Cost, enhancement expenditure
 Depreciation method and estimated useful life
 Carrying amount
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8.INTANGIBLE NCA
 Purchased goodwill may appear as an asset in a
company’s SFP. It represents the amount paid for a
business in excess of what its net assets are worth.
 Some development costs are capitalised on the SFP.
 Intangible non-current assets should be subject to
reviews for impairment of their value

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8.INTANGIBLE NCA
8.1. Goodwill – 8.2. Purchased goodwill
 What is good will?
 Why purchased goodwill (and not internally
generated?)

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8.INTANGIBLE NCA
8.3. Accounting for purchased goodwill
(To be discussed in Chapter 15)

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8.INTANGIBLE NCA
8.4. How is the value of purchased goodwill decided
 Difference between price agreed and value of net
assets in the accounting records of the new business
 Calculation of goodwill precede fixing purchase
consideration of the business

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8.INTANGIBLE NCA
8.5. Development costs
 Two ways of treatment of development costs:
 Write off as expense
 Capitalise as asset
 Note: IAS38: development costs MUST be
capitalised as asset – if the criteria are satisfied!

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8.INTANGIBLE NCA
8.5. Development costs
 Activity: When development expenditure is carried
forward as an asset: what are the accounting
entries?

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8.INTANGIBLE NCA
8.5. Development costs
 Accounting entries are:
DEBIT NCA (Development cost) £X
CREDIT Cash/payables £X
 The cost of this NCA will need to be allocated to the
SPL as it is matched against the income it generates.
This process is essentially the same as for
depreciation of tangible non-current assets, but it is
called amortisation.
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8.INTANGIBLE NCA
8.6. Other intangible assets
 Licences purchased by a company
 Patents on ideas or designs developed by a company

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8.INTANGIBLE NCA
8.6. Other NCA
 Investments held for the long term

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8.INTANGIBLE NCA
8.6. Other NCA
Worked example p.178!
 Note: disposal proceeds, gains/losses on disposal, not
appear in NCA note

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End of Chapter 10
Thank you!

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