Non Current Assets

How Non Current Assets are Accounted for

Non current assets can be accounted for in several different ways in
accordance with IAS 38 (Intangible fixed assets) and IAS 16 (Property,
Plant and Equipment).

Initial Cost:
PPE

Land
Intangible Assets

The initial cost of property, plant

and equipment (PPE) is recognised
as being the costs directly
attributable to bringing an asset to
the location and condition necessary
for it to be capable of operating in
the manner intended by
management [IAS 16]. This
includes the initial purchase cost,
employee costs directly related to
construction or acquisition,
professional fees, testing costs, site
preparation, delivery costs,
installation costs and assembly
costs. It also includes any
dismantling and site restoration
costs (eg: for an oil rig in the North
Sea) [ICAEW, 2013].
Land is measured in exactly the
same way as the rest of PPE for
initial cost.
Intangible assets are also initially
measured in the same way as PPE.
However, if an intangible asset is
acquired as part of a business
acquisition it is to be measured at
its fair value. Internally generated
intangibles are measured at cost
when they meet the recognition
criteria (aside from internally
generated goodwill which can never
be recognised). [IAS 38]

Subsequent valuation:
PPE

Land
Intangible Assets

In future years, PPE can be valued

at its carrying value (Costdepreciation). Its cost can either be
kept at historical cost or done on
the revaluation basis. Under the
revaluation basis, it must be
revalued at least once every 5
years. The new value is recorded in
the statement of financial position
(SOFP) with any increase in
valuation being debited to a
revaluation surplus account and
credited as retained earnings. The
increase/decrease is then
recognised in the statement of
comprehensive income with any
decrease able to be deducted from
the surplus account before being
deducted from the income
statement. All accumulated
depreciation is removed upon
revaluation. The same policy must
be used for a whole class of assets
eg: property [ICAEW, 2013]
Land is not depreciated so is either
kept at historical cost or revaluated,
no carrying value is needed.
Intangible assets are also measured
on either an historical cost or
revaluation policy. Their value is
amortised (effectively the same as
depreciation). [IAS 38]

Depreciation:
PPE

Land
Intangible Assets

Depreciation is calculated either on

a straight line or reducing balance
basis. Straight line is calculated as
initial cost less any residual value
divided by the estimated useful life.
The asset is depreciated by the
same value for each year of its
useful life. Reducing balance
calculates the carrying value of an
asset (cost minus accumulated
depreciation) and then takes a
percentage of it as depreciation so a
higher amount of depreciation is
charged in the early years of the
assets life. Each significant part of
an item of PPE must be depreciated
separately. [IAS 16]
Land is not depreciated.
Intangible assets are amortised on
a straight line or reducing balance
basis. [IAS 38]

Impairment:
PPE

Land
Intangible assets

If the value of an asset in the

financial statements is higher than
the value it could be realistically
sold for then the asset is seen as
impaired. The assets value should
be reduced by the difference and
the impairment loss charged as an
expense in the statement of
comprehensive income. If there
have been any previous increases of
value under the revaluation policy
then any loss can be taken out from
the revaluation surplus with the
remainder being charged as an
expense. This is done by debiting
PPE and crediting the revaluation
surplus (if applicable) and the
statement of comprehensive income
(if the impairment is greater then
the revaluation surplus). When
calculating if there has been an
impairment the value of the asset is
counted as the higher of its fair
value less costs to sell and its value
in use to the business. [IAS 36]
Land is impaired in the same way
as the rest of PPE.
Intangible assets are subject to
impairment in the same way as
tangible non current assets.
Intangible assets with an indefinite
useful life and goodwill acquired in
a business combination need to
undergo an impairment review on a
yearly basis [ICAEW, 2013].

Held for sale:

PPE

Land

Intangible Assets

An asset qualifies as held for sale

when it could be sold in its present
state immediately and it is highly
likely (about 75% or greater) that it
will be sold. To classify as held for
sale, the assets must also represent
a geographical area of locations of a
major line of business, is part of a
single co-ordinated plan to sell one
of the aforementioned operations or
be part of a subsidiary acquired
exclusively for resale. Upon
classification of an asset as held for
sale, it is revalued as net realisable
value less costs to sell. Any
impairment or increase in value of
the asset from the carrying value is
recognised as previously stated.
The cost of the asset is then
credited to PPE to remove it from
the total value of PPE with the net
realisable value (NRV) debited to a
new held for sale account and all
the accumulated depreciation
removed by debiting the
accumulated depreciation account.
Upon sale, the held for sale account
is credited with the sales proceeds
being a debit to cash, any
difference in the amounts being put
through the income statement as a
profit/loss upon disposal. Assets
being abandoned cant be classed
as held for sale. [IFRS 5].
Land is accounted for with the rest
of PPE since on its own, land
doesnt meet the classification of an
asset held for sale.
Individual intangible assets cant be
held for sale since they dont meet
the criteria. If they are part of a
subsidiary which was bought for
resale then they are removed from
the accounts in the same way as
tangible non-current assets as
detailed above, with the NRV of the
intangible asset incorporated into
the total held for sale figure.

Other disposals:
PPE

Land
Intangibles

Assets that are to be sold but dont

classify as being held for sale are
accounted for in exactly the same
was as those that are held for sale
but the changes to the accounts are
recorded upon sale of the asset.
The cost is credited to remove it
from the PPE account, any
accumulated depreciation debited to
remove it, the proceeds debited to
cash and the profit/loss upon
disposal put through the income
statement. If an asset is abandoned
then the cost are accumulated
depreciation are removed with the
loss being put through the income
statement. If an asset with no
residual value reaches the end of its
useful life then accumulated
depreciation will equal the cost in
the accounts and both can be
removed without a profit or loss to
be recognised. [IAS 16]
Land is accounted for in the same
way as the rest of PPE.
Intangibles are accounted for in the
same way as PPE [IAS 38]

Why These Methods are Appropriate

All of the above methods of accounting for assets have been devised by
the IASB (International Accounting Standards Board) and have gone
through a long process before publication. The following section will look
at why each of the various measures is appropriate for the task they are
designed to perform.
The initial valuation of PPE is appropriate since while the cost of the
asset itself is the main bulk of the total cost, it is not the only cost
incurred as a result of the purchase. If the asset had not been bought,
then other costs such as site clearance costs or legal fees would have
been avoided. As a result, all of the costs directly attributable to the asset
can be included in the initial cost. Intangible assets are only recognised
when they can be reliably measured and are probable to bring future
economic benefits [IAS 38]. The same cost model is appropriate for
separately acquired intangibles for the same reasons as PPE. Goodwill
acquired as part of a business combination is calculated as a balancing
figure between the amount paid and the value of everything else the

company owns since it is the only thing that cannot be valued. Fair value
is a suitable measure for any other intangibles acquired in a business
combination since that is the value it could be sold for, the figure in the
SOFP is what the previous owners paid for it less amortisation, not what
its new owners have acquired that specific asset for.
Historical cost and revaluation are both suitable methods for subsequent
valuation of an asset. Historical cost less depreciation is particularly
suitable for an asset that is unlikely to be sold since it looks at how much
the asset is worth to the business compared to when it was bought.
Revaluation is suitable since it takes into account the market value of an
asset. This is especially suitable for assets that have the potential to be
sold and have frequent fluctuations in market value such as property.
Revaluation must be used for intangible assets with an indefinite useful
life since they cannot be amortised. Both methods take into account any
residual value of the asset and the useful life.
Depreciation and amortisation can be calculated on a reducing balance
or straight-line basis. Reducing balance takes a larger amount of
depreciation in the early years and then a smaller charge in the final years
since it is calculated as a percentage of the carrying value. This is
particularly appropriate for assets that are more useful to the company in
their early years. Straight-line depreciation spreads the cost of the asset
out evenly over the whole useful life of the asset. This is more appropriate
for assets that are expected to have a consistent output over their
expected useful life. Land is not depreciated since it is said to have an
indefinite useful life.
Impairment and an increase in revaluation are both dealt with suitably.
An increase in property value is a form of income and so recognised in the
statement of comprehensive income (SOCI). An impairment, rather than
all be taken as an expense can be taken out of the revaluation surplus
first, recognising that a large decrease in value can just be down to the
market movements and not an actual large impairment of the asset itself,
meaning only the loss on the previous carrying value is recognised.
When held for sale, an asset is held in the accounts as a current asset
(since it is expected to be sold within a year) at its net realisable value,
the expected amount from the sale. The criteria for held for sale assets
are suitable since if it doesnt meet the criteria, it is likely to be too small
to be material and not worth separating out of the accounts. For smaller
non-current asset, it is better to just recognise their sale upon its
completion.

What Problems can Analysts face as a Result of Different

Accounting Policies when Trying to Compare Companies?
The following section will look at problems that analysts can face when
trying to compare the financial statements of different companies when
they use different accounting policies.
One of the main difficulties analysts face when comparing businesses to
other companies in their industry is different accounting policies being
used for the accounts. For example, if Sainsburys used the cost method
and ASDA used the revaluation method for property price, they would
both get very different results, even if they had a similar amount of
property. If property prices were higher than when the property was
bought, then ASDA would have a higher value for property than
Sainsburys. On the other hand, if property prices decreased then the
value of property for ASDA would be lower than that as Sainsburys. As
such, it is very difficult to analyse the value of property when companies
use different methods as they could have both bought the same amount
of property at the same historical cost, yet have vastly different values for
it in the accounts if their have been large fluctuations in the valuation of
property. Since the difference in depreciation after an increase in value
can be taken to retained earnings from the revaluation surplus, retained
earnings will usually look better for a company that uses the revaluation
method when property prices are increasing which is normal due to
inflation. As such, it looks like the company has more money available to
invest or cover debt, meaning that an analyst is likely to predict better
results for them.
Another large difference in property valuations could be down to whether
straight line or reducing balance depreciation/amortisation is used. It has
a greater effect on the cost method than the revaluation method since
accumulated depreciation is wiped out with each revaluation. If two
companies were using the cost method for the same value of property
with the same estimated useful life, then for most of the useful life a
company using the straight-line depreciation method than a company
using the reducing balance depreciation method. As the reducing balance
method takes a percentage of the carrying value, it takes a larger value
than the straight-line method in the earlier years and a smaller amount in
later years. This means that over the useful life of an asset, the value
under straight-line depreciation is higher than that of the same asset
under the reducing balance method. Consequently, depending on the age
of the assets a company owns the depreciation charge to the income
statement will be higher or lower under reducing balance than under
straight line. This will in turn effect analysts predictions for the coming
year as previous years results play a large part in their predictions.
The best way for analysts to solve these problems would be to take the
time to calculate what the values would be under the other accounting
policy where all the figures are available. This would then allow
comparison since the same accounting policy would have been used.
While this is easy for depreciation (especially since most companies use

straight-line), it can be a problem for other figures such as converting PPE

figures from the historical cost method to the revaluation method.
Normally this would involve getting an expert in to value the asset but for
analysts this would be an unnecessary expense. There could also be a
problem for converting figures from the revaluation to historical cost
method if the original cost is difficult to find. In these circumstances it
might be best to only compare a companies results to their competitors
when they both use the same accounting policy.

Bibliography
ICAEW.(2013). Financial Accounting Study Manual. Exeter. Polestar
Wheatons
IFRS Foundation. IAS 16 Property Plant and Equipment
IFRS Foundation. IAS 38 Intangible Assets
IFRS Foundation. IAS 36 Impairment of Assets
IFRS Foundation. IFRS 5 Assets Held for Sale