SESSION 06 NON-CURRENT ASSETS

0601
OVERVIEW
Objective
To prescribe the accounting treatment for non current assets.


IAS 40
INVESTMENT
PROPERTY
IAS 16 PROPERTY
PLANT AND
EQUIPMENT
IFRS 5 NON-CURRENT ASSETS
HELD FOR SALE AND
DISCONTINUED OPERATIONS
IAS 20
GOVERNMENT
GRANTS
NON-CURENT
ASSETS
IAS 38
INTANGIBLE
ASSETS
Recognition Criteria
Initial measurement
Subsequent measurement
Subsequent Costs
Non depreciation
Accounting treatment
Granted asset
IAS 23
BORROWING
COSTS
Classification
Measurement

Identifiability
Initial measurement
Subsequent
measurement
Accounting treatment

Recognition
Initial Measurement
Subsequent measurement


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1 IAS 16 PROPERTY PLANT AND EQUIPMENT
1.1 Recognition Criteria
An item of property, plant and equipment shall be recognised when:
it is probable that future economic benefits associated with the asset will flow to the
entity, (satisfied when risks and rewards have passed to the entity), and
the cost of the asset to the entity can be measured reliably.
Usually readily satisfied because exchange transaction evidencing purchase identifies
cost. For self-constructed asset, a reliable measurement of cost can be made from
transactions with third parties for the acquisition of materials, labour and other inputs
used.
In certain circumstances it is appropriate to allocate the total expenditure on an asset to
its component parts and account for each component separately.
1.2 Initial measurement
Property, plant and equipment shall initially be measured at cost.
Cost will include the following, where relevant;
Purchase price, including import duties and non-refundable purchase taxes (after
deducting trade discounts and rebates.)
Directly attributable costs of bringing the asset to location and working condition,
for example:
costs of employee benefits (e.g. wages) arising directly from construction or
acquisition;
costs of site preparation;
initial delivery and handling costs;
installation and assembly costs;
costs of testing proper functioning (net of any sale proceeds of items
produced);
professional fees (e.g. architects and engineers);
decommissioning costs; and
borrowing costs.
1.3 Subsequent measurement
1.3.1 Cost Model
Carry at cost less any accumulated depreciation and any accumulated impairment
losses.
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1.3.2 Revaluation Model
Carry at a revalued amount, being fair value at the date of the revaluation less any
subsequent accumulated depreciation and any accumulated impairment losses.
To use this model fair values must be reliably measurable.
1.4 Subsequent Costs
The issue is whether subsequent expenditure is capital expenditure (i.e. to the statement
of financial position) or revenue expenditure (i.e. to the statement of comprehensive
income).
1.4.1 Running costs
Servicing costs (e.g. labour and consumables) are recognised in profit or loss as
incurred.
Often described as repairs and maintenance this expenditure is made to restore or
maintain future economic benefits.
1.4.2 Part replacement
Some items (e.g. aircraft, ships, gas turbines, etc) are a series of linked parts which
require regular replacement at different intervals and so have different useful lives.
The carrying amount of an item of property, plant and equipment recognises the cost of
replacing a part when that cost is incurred, if the recognition criteria are met.
The carrying amount of replaced parts is derecognised (i.e. treated as a disposal).
1.4.3 Major inspection or overhaul costs
Performing regular major inspections for faults, regardless of whether parts of the item
are replaced, may be a condition of continuing to operate an item of property, plant and
equipment (e.g. an aircraft).
The cost of each major inspection performed is recognised in the carrying amount, as a
replacement, if the recognition criteria are satisfied.
On initial recognition an estimate will be made of the inspection costs and that amount
will be depreciated over the period to the 1
st
inspection. This amount is part of the
original cost recognised and is not an additional component of cost.
Any remaining carrying amount of the cost of the previous inspection (as distinct from
physical parts) is derecognised.
SESSION 06 NON-CURRENT ASSETS
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Illustration 1

A shipping company is required by law to bring all of their ships into dry dock
every 5 years for a major inspection and overhaul. Overhaul expenditure
might at first sight seem to be a repair to the ships but it is actually a cost
incurred in getting the ship back into a seaworthy condition. As such the costs
must be capitalised.
A ship that cost $20 million with a 20 year life must have a major overhaul
every 5 years. The estimated cost of the overhaul at the 5 year point is $5
million.
The depreciation charge for the first 5 years of the assets life will be as follows:
Overhaul Capital
Cost 5 15
Years 5 20
__ ___
Depreciation per year 1 0.75

Total accumulated depreciation for first 5 years will be $8.75, and the carrying
value of the ship at the end of year 5 will be $11.25 million.

The actual overhaul costs incurred at end of year 5 are $6 million. This amount
will now be capitalized into the costs of the ship, to give a carrying value of
$17.25 million.

The depreciation charge for years 6 to 10 will be as follows:
Overhaul Capital
Cost 6 11.25
Years 5 15
__ ___
Depreciation per year 1.2 0.75

Annual depreciation for years 6 to 10 will now be $1.95 million.

This process will then be continued for years 11 to 15 and years 16 to 20. By the
end of year 20 the capital cost of $20 million will have been depreciated plus
the actual overhaul costs incurred at years 5, 10 and 15.Illustration 1

1.5 Non depreciation
1.5.1 Background
It has long been argued that certain assets shall not be subject to the general rule that all
assets should be depreciated.
Many companies in some jurisdictions have taken to the practice of not depreciating
certain of their assets.
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1.5.2 Arguments employed
Assets are maintained to a very high standard. This maintenance cost is charged to the
statement of comprehensive income in lieu of depreciation.
The residual value is at least equal to the carrying value (maybe due to maintenance).
Assets have a very long useful economic life such that depreciation is not material.
Asset is not currently in use.
1.5.3 IAS 16 accounting treatment
Repair and maintenance policy may affect useful life (e.g. by extending it or increasing
residual value) but the standard says that this does not negate the need to charge
depreciation. It would seem that the standard dictates that depreciation must be
charged in all circumstances but it is likely that a case can be made for non depreciation
on the grounds that the residual value is bigger than the carrying value of the asset.
2 IAS 40 INVESTMENT PROPERTY
2.1 Recognition
Investment property shall be recognised as an asset when
it is probable that the future economic benefits that are attributable to the
investment property will flow to the entity, and
the cost of the investment property can be measured reliably.
Investment properties under construction are now accounted for as investment
properties in accordance with IAS 40. Previously they were accounted for as property,
plant and equipment under IAS 16.
2.2 Initial Measurement
An investment property shall be measured initially at its cost, which is the fair value of
the consideration given for it, and will include any transaction costs.
2.3 Subsequent measurement
An entity shall choose either the fair value model or the cost model as described in the
standard and apply that policy to all of its investment properties.
2.3.1 The cost model
After initial recognition, an entity that chooses the cost model shall measure all of its
investment property using the cost model in IAS 16 Property, Plant and Equipment, that is
at cost less any accumulated depreciation and impairment losses.
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An investment property, measured under the cost model, that is subsequently classed
as held for sale in accordance with IFRS 5 NCA held for sale and discontinued operations
shall be measured in accordance with that standard.
2.3.2 Fair value model
After initial recognition, an entity that chooses the fair value model shall measure all of
its investment property at its fair value (except in exceptional circumstances).
A gain or loss arising from a change in the fair value of investment property shall be
included in profit or loss for the period in which it arises.
3 IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
3.1 Classification
Non-current asset will be classed as held for sale when its carrying value will be
recovered mainly through proceeds on disposal rather than the continuing use of the
asset.
The asset must be in a condition that would allow for its immediate sale and the sale
musty be highly probable.
3.2 Measurement
Immediately before classification of the asset as held for sale it shall be measured in
accordance with the relevant standard.
On classification as held for sale the asset shall be measured at the lower of its carrying
value and the assets fair value less costs to sell. Any loss on valuing at fair value less
costs to sell shall be charged against profits unless the asset has a revaluation surplus in
which case the loss will be taken through other comprehensive income, resulting in a
decrease in the revaluation reserve.
Once classed as held for sale the asset will no longer be depreciated, the asset will also
be presented separately, from continuing use assets, on the statement of financial
position.
4 IAS 38 INTANGIBLE ASSETS
4.1 Identifiability
An intangible asset, whether generated internally or acquired in a business
combination, is identifiable when it:
is separable; or
arises from contractual or other legal rights.
These criteria distinguish intangible assets from goodwill acquired in a business
combination.
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4.2 Initial measurement
Intangible assets should be measured initially at cost, following the same principles as
for tangible assets.
An intangible asset may be acquired:
separately;
as part of a business combination;
by way of a government grant;
internally generated;
by an exchange of assets.
4.3 Subsequent measurement
An entity can choose either a cost or revaluation model.
4.3.1 Cost model
Cost less any accumulated amortisation and any accumulated impairment losses.
4.3.2 Revaluation model
Revalued amount, being fair value at the date of the revaluation less any subsequent
accumulated amortisation and any accumulated impairment losses.
Fair value must be determined by reference to an active market (see below).
This is different to the treatment of revaluation under IAS 16 where depreciated
replacement cost can be used when there is no evidence of market value.
The revaluation model does not allow:
the revaluation of intangible assets that have not previously been recognised as
assets;
the initial recognition of intangible assets at amounts other than their cost.
The revaluation is carried out according to the same principles applied in accounting for
other assets. For example:
Surplus is taken through other comprehensive income and increases the
revaluation reserve;
Deficit is expensed unless covered by a previously recognised surplus;
All intangibles in the class must be revalued, etc.
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4.3.3 Active markets
The revaluation of intangibles will be uncommon in practice as it is not expected that an
active market will exist for most intangible assets in that:
they will not be homogeneous (most are unique);
willing buyers and sellers may not be normally found at any time;
prices are not usually available to the public.
For example, active markets cannot exist for brands, newspaper mastheads, music and
film publishing rights, patents and trademarks. Each item is unique, transactions are
relatively infrequent and contracts are negotiated between individual buyers and
sellers.
However, examples do exist of active markets for intangible assets freely transferable
taxi licences, fishing licences and production quotas.
The Kyoto agreement has given rise to an active market in the buying and selling of
emission rights.
Illustration 2

In 1990, in the United States, legislation was introduced to authorise sulphur
dioxide pollution at a limited rate from power-generating systems an
emission right. Such rights are no longer granted. Organizations reducing
their emissions through, for example, modernisation, then had excess pollution
rights (i.e. an ability to pollute which was surplus to their requirements). An
active market in emission rights emerged as new plants sought to buy the
excess.


5 IAS 23 BORROWING COSTS
5.1 Accounting treatment
All borrowing costs related to a qualifying asset must be capitalised as part of the cost of
that asset.
All other borrowing costs are expensed as and when they are incurred.
SESSION 06 NON-CURRENT ASSETS
0609
6 IAS 20 GOVERNMENT GRANTS
The standard considers the accounting treatment for government grants in respect of
income based grants and asset based grants. This section only considers the issues
related to asset based grants.
6.1 Accounting treatment
The standard allows two possible methods of accounting for asset based grants.
6.1.1 Present as deferred income
The grant will be presented as deferred income in the statement of financial position.
Deferred income is included within the liability section of the statement of financial
position, split in terms of the non-current and current element.
The deferred income will be credited to profits over the life of the related asset, in the
same manner in which that asset is depreciated.
Commentary

Some accountants would argue that this method includes an item in the statement of
financial position that does not meet the definition of a liability and is therefore
contrary to the framework.

6.1.2 Deduct from cost of asset
The other option is to deduct the grant from the cost of the asset.
The impact on profits will be the same as the previous method due to the fact that the
charge for depreciation will now be based upon the net cost of the asset.
Commentary

Some accountants would argue that this method allows a form of offsetting on the face
of the statement of financial position.

6.2 Granted asset
Some intangible assets may be acquired free of charge, or for nominal consideration, by
way of a government grant (e.g. airport landing rights, licences to operate radio or
television stations, import quotas, rights to emit pollution).
Under IAS 20 both the intangible asset (debit entry) and the grant (credit entry) may be
recorded initially at either fair value or cost (which may be zero).
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Illustration 3

Neelix is an entity involved in the harvest and production of foodstuffs. On 31
December it was awarded a fishing quota of 1,000 tonnes of cod per annum for
5 years.
The quota requires a registration fee of $1,000. The fair value of the fishing
quota is $10,000,000 (net of the registration fee).

Analysis
Measurement of the intangible asset on initial recognition is at either:
Cost or Fair value
$1,000 $10,000,000

FOCUS
You should now be able to:

apply and discuss the timing of the recognition of non-current assets and the
determination of their carrying amounts including revaluations;
apply and discuss the treatment of non-current assets expected to be sold including
those operations that are expected to be discontinued;
apply and discuss the accounting treatment of investment properties including
classification, recognition and measurement;
apply and discuss the accounting treatment of intangible assets including the criteria for
recognition and measurement subsequent to acquisition and classification.