Lecture Notes on Tangible Non-Current Assets

Introduction

• Lecture on Chapter 8: Tangible Non-Current Assets.
• Important for F3 and F7.
• Foundation for advanced topics.

What are Non-Current Assets?

• Definition: Assets that cannot be converted to cash within 12 months.
  • Purchased to use, not for resale.
• Examples: Buildings, machinery, vehicles.
• Current Assets: Assets convertible to cash within 12 months.

Tangible vs. Intangible Assets

• Tangible Assets: Can be touched/seen (e.g., buildings, machinery).
• Intangible Assets: Cannot be physically touched (e.g., software).

Cost of Tangible Non-Current Asset

• Cost Definition: Price paid to acquire the asset, including additional costs related to its purchase.
• Depreciation: Reduction in asset value over time due to use (wear and tear).

Example of Depreciation

• Purchase of an Apple phone for $100,000.
  • After 1 year, it may sell for approximately $40,000.
  • Depreciation reflects loss of value due to usage.

Story of Depreciation

• History of how depreciation concepts arose from tax laws.
• Businessman example illustrates the need for depreciation in accounting to reflect true financial status.

Definition of Non-Current Assets

• Non-Current Assets: Used continuously in a business, including both tangible and intangible assets.
• Current Assets: Expected to be realized or consumed within the operating cycle of 12 months.

Property, Plant, and Equipment (PPE)

• New terminology for non-current assets as per IAS 16.
• PPE includes tangible items used for production, rental, or administrative purposes and expected to last more than one period.

Important Terms

• Cost: Amount paid or fair value given to acquire an asset.
• Fair Value: Amount for which an asset could be exchanged between knowledgeable parties.
• Carrying Amount: Value of the asset after deducting accumulated depreciation.
• Accumulated Depreciation: Total depreciation charged against an asset over time.

Recognition of Non-Current Assets

• Criteria for recognizing an asset in accounts:
  1. Future economic benefits likely to flow to the entity.
  2. Cost can be measured reliably.

Types of Expenditure

• Asset Expenditure: Increases an asset's capacity or extends its life (e.g., major repairs, upgrades).
• Revenue Expenditure: Maintenance costs that do not enhance asset value (e.g., regular repairs).

Depreciation Methods

1. Straight-Line Method

• Formula: (Cost - Residual Value) / Useful Life.
• Depreciation is constant every year.

2. Diminishing Balance Method (DBM)

• Formula: (Carrying Amount) x (Depreciation Rate).
• Depreciation decreases each year as the carrying amount decreases.

Example of Straight-Line Calculation

• Cost: $10,000; Residual Value: $1,000; Useful Life: 5 years.
• Annual Depreciation: ($10,000 - $1,000) / 5 = $1,800.

Accumulated Depreciation

• Total depreciation charged by the end of any year.
• Books Representation: Cost is shown separately, and accumulated depreciation is shown separately.

Homework Assignments

• Revise theory from the lecture.
• Complete practice questions on the ACCA Study Hub.
• Prepare to discuss doubts and concepts in the next class.

Conclusion

• Reminder about the importance of understanding depreciation for both theoretical and practical applications.
• Preparation for upcoming classes based on earlier chapters.