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Installation costs and costs required to make it suitable for the purpose
intended needs to be considered as well as historical cost
Note 1 to the financial statements discloses the policy with respect to
interest
Capitalising vs. expensing choice e.g supervisors salaries
o If there has been a betterment of the asset, cost should be
capitalized (added to cost of assets)
o If not, cost should be charged to an expenses e.g. account called
repairs and maintenance expense.
10.2 Depreciation of
and depreciation expense
assets
If the whole asset cost was deducted from profit in the period in which
it was acquired, that would make that period s profit relatively low,
and subsequent periods profits relatively high.
Depreciation involves an allocation of cost in order to measure profit. It
is not a system to track value changes in assets or to measure the
current value of those assets in the balance sheet.
Accumulated
depreciation is a
contra asset, entry
has no cash
component
Depreciation has no
cash effect
1.
S
t
r
a
g
h
i
t
line depreciation
o Cost of asset
o Est. useful life
o Est. salvage value recovery
amount when asset is sold at end
of useful life
Depreciation=
2. Reducing balance
o Cost of asset
o Accumulated depreciation = total depreciation recorded since
acquisition of asset
o Depreciation rate = % of book value (cost depreciation to date)
Depreciation=( Cost accumulated depreciation ) rate
remaining book value of asset rate
s
c
c=originalcost
Costest . salvage v
est .no of units of use produc
10.6 Impairment
and
assets revaluations
In Australia, directors need to ensure that the carrying value of an
asset < recoverable amount. If not, carry amount needs to be reduced
to recoverable amount impairment loss
Recoverable amount = whichever is higher: an assets fair value
costs to sell or value in use.
Value in use = PV of future CF
NCA must be measured using cost model or revaluation model.
In latter case, accumulated depreciation is effective brought forward i.e
expense is recognised earlier than expected
10.7
Patents, copyrights,
trademarks and legal property
10.10
Reporting of NCA and associated
depreciation/amortisation
Corporations Act 2011 and Australian Accounting Standards require
disclosures including:
Depreciation and amortisation expenses
Cost and accumulated depreciation by major classes of assets
(revalued amount shown in place of cost)
Description of enterprise's accounting policies with respect to
depreciation/amortisation
Details of carrying amount for each class of property, plant and
equipment
Statement that assets have not been valued above recoverable
amount
10.11
Managers and NCA
Managers need to make judgments:
What should be included in the cost of an asset, and over what period
should it be depreciated?
When should assets be revalued, and who should do the revaluation?
Should development costs be capitalised or expensed?
Over what period should intangibles be amortised, or are they subject
to an impairment test?
What value should be put on brand names, trademarks and so on?
Decision affect valuation of assets affect performance measures e.g.
return on assets affect profit figure
10.12
Public sector issues
Heritage assets are included in departments assets at nominal value
of $1 justifiable due to unique of cultural attributes of vast majority of
acquisitions which will be retained in perpetuity