AKW 104 Accounting & Finance

Lecture 5
Dr. Cheah Soo Jin

Assets
An asset is an economic resource.
It can be tangible or intangible
It can be owned or controlled to produce
economic value, or benefits.

Classification of Assets
In accounting, assets are generally classified
into:
- Current Assets
- Non-Current Assets

Current Assets
any assets which are reasonably expected
to be sold, consumed, or exhausted
through the normal operations of a
business within the current fiscal year.
e.g. Cash, Inventory, Debtors, Short-term
deposits

Non-Current Assets
Assets that are not likely to turn to
unrestricted cash within one year of the
balance sheet date.
Non-current assets represent a firms longterm investment.

Non-Current Assets
Non-current assets may also be classified into:- Tangible Assets, and Intangible Assets.

- Tangible assets are assets that you can see

and feel its existence (e.g. machine, etc.)
- Intangible assets are assets that are not
physical in nature (e.g. trade marks, software)

Type of Non-Current Assets

Property, plant and equipment (PPE)
Natural Resources (e.g. minerals)
Intangible assets

Property, Plant and Equipment

They are held for use in the business for the
production of goods or services.

They are NOT meant for sale within the

current fiscal year.

PPE
Land and building
Machine

Vehicle

Furniture

Recognition Principles
How an item can be recognized as asset?
1) It will probably generate future economic
benefits.

2) Its cost can be measured reliably.

Initial Costs of an asset

Initial costs include:
a) purchase price,
b) cost of transporting the asset to the place
which it is going to be used.
c) Installation charges, and related legal
expenses.
d) Import duty, and GST

Accounting treatment for Initial Cost

Example: A machine is bought on credit for
RM25,000

Journal entries:
Dr
Machinery
A/c Payable

Cr

25,000
25,000

Subsequent Costs
Expenditures incurred for the day-to-day
servicing/maintenance of the asset cannot be
recognized as asset. They should be treated
as Expenses.

Expenditure which will enhance the value or

capacity of the asset can be recognized as
asset.

The Concept of Useful Life

Most assets have a limited useful life.
The value of an asset is normally expected to
decrease over its useful life.
Freehold Land is perhaps the only exception.

What is the difference between a freehold

property and a leasehold property?

True & Fair Value

In order to reflect the true and fair value of an
asset, an entity may adopt either the Revaluation
Method (Revaluation Model) or the Depreciation
Method (Cost Model) to adjust the book value of
the asset.
Revaluation Method is normally used to revalue
landed properties.
Depreciation Method is normally used to revalue
other non-landed properties.

Accounting Treatment for Revaluation

Revaluation is normally performed by
professional Valuer.
Value is determined from market-based
evidence.
Once an entity opts to use the Revaluation
Method, it must revalue its assets on regular
intervals.
Revaluation may result in either a gain or a
loss.

Accounting Treatment for Revaluationcontd

A revaluation gain occurs when the revalued
amount of the asset is higher than its book
value, e.g. book value is RM500,000, whereas
it has been appraised to have a market value
of RM800,000. The Revaluation gain is
recognised as follows:
Land
Dr. 300,000
Revaluation Surplus Cr. 300,000

Accounting Treatment of Revaluationcontd

On the other hand, if the value of the landed
property is appraised to have a market value
(RM350,000) that is lower than its book value
(RM400,000), then a revaluation loss must be
recognised as follows: Revaluation Loss Dr. 50,000
Land
Cr.
50,000

Depreciation
It is reduction in value of an asset over time,
due in particular to wear and tear.

Depreciation is a method of allocating the cost

of an asset over its useful life.

Depreciation Methods
The Straight-line Method
The value of an asset is written off over its
useful life in equal instalments.
example: Cost of an asset is RM20,000
It has a useful life of 5 years.
Yearly Depreciation = 20,000/5 =4,000

Depreciation Methods-contd
There a few accounting terms relating to
depreciation:
Depreciation Expense,
Accumulated Depreciation
Depreciable Amount
Carrying Amount
Salvage Value

Depreciation Methods-contd
A machine is bought in Year 1 for RM22,000.
It has a useful life of 5 years, and a salvage
value of RM2,000
The Straight-line method is used to depreciate
the machine.
Yearly depreciation expense = (22000-2000)/5
= 4,000
(Salvage value = Residual Value)

Depreciation Methods-contd
Computation of depreciation expense
Year

Cost
(a)

Depn
Expense
(b)

Accu.
Depn
(c)

Carrying
amount
(a)-(c)

22,000

4,000

4,000

18,000

22,000

4,000

8,000

14,000

22,000

4,000

12,000

10,000

22,000

4,000

16,000

6,000

22,000

4,000

20,000

2,000

Depreciable Amount = Cost Residual Value

Depreciation Methods-contd
Other depreciation methods include:- Diminishing Balance Method (basing on a
fixed % of the Cost)(also known as Declining
Balance Method.
- Double-Declining Balance Method
- Unit-of-Production Method

Impairment Loss
An asset is termed as impaired asset when its
worth on the market is less than its value
stated in the book.
Technically speaking, it means its recoverable
amount is less than its fair value less cost to
sell and its value in use.

Some technical terms

Fair value less cost to sell
-disposal price in an arms length transaction
minus cost of disposal
Value in use
- the present value of future cash flows
expected to be obtained from using the
asset.

Natural Resources
Include timber trees, oil and gas reserves
The value of such assets will decline upon
extraction.
The accounting treatment is similar to
Depreciation Method, however the correct
term to use is Depletion instead of
Depreciation.

Intangible Assets
Intangible with limited useful lives will
similarly be written off in the same manner as
depreciation of tangible assets.
However, the correct term to be used is
Amortisation instead of Depeciation.

End of Chapter 5
Thank you for your kind attention !