TANGIBLE & INTANGIBLE NON CURRENT

ASSETS

LECTURE NOTES

Contents
IAS 16 Property, Plant & Equipment ....................................................................................................... 2
IAS 38 Intangible Assets ........................................................................................................................ 12

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 IAS 16 Property, Plant & Equipment

Objective of IAS 16 – to prescribe the accounting treatment for property, plant and equipment in
the financial statements

 Recognition

Property, plant & equipment can only be recognised as an asset in the financial statements if;-

 It is probable that future economic benefits associated with the item will flow to the entity

and

 The cost of the item can be measured reliably

Any item of property, plant & equipment that satisfies the definition of an asset should initially be
measured at cost.

 What is cost?

Cost comprises;-

(a) Cost of Purchase - The purchase price, including import duties and non-refundable taxes
(Vat is reclaimable by business and is therefore excluded from Purchase Price) and after
deducting trade discounts and rebates.

(b) Any other costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management ( Key
Phrase – “That is costs which would only have been avoided if the asset had not been
constructed or acquired”)

(c) Initial estimate of costs of dismantling and removing the asset and restoring the site on
which it is located. Ask yourself if the conditions for a provision exist (PO-PO-
RE!) – If conditions exist, then create provision and capitalise the discounted cost of the
provision

Note: Entity should not recognise in the carrying amount of an asset the cost of its day-to-day
servicing. (revenue expenditure)

Initial cost =

 Purchase cost (minus any purchase discount and excluding recoverable tax)

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  Directly attributable costs

– professional fees

– delivery costs (carriage inwards)

– site preparation costs

– costs of testing whether the asset is functioning properly (i.e. pre production testing)
, after deducting the net proceeds from selling any items produced while bringing
the asset to that location and condition (such as samples produced when testing
equipment)

– Labour Costs on a normal basis – Ignore increased costs due to strike action

– Borrowing Costs incurred with the item

 Initial estimate of dismantling costs and site cleaning/restoration costs at the end of the
asset’s life -

Excluded from cost are items of revenue expenditure such as

 Cost of Training staff to use the plant & equipment (Cr Bank, Dr Staff Training Expense)

 Early settlement discounts (Dr Liability, Cr Statement of profit or loss )

 Purchase of maintenance contracts in respect of the plant & equipment (Cr Bank, Dr
Prepayments/Statement of profit or loss )

 Administration or Other General Overheads

 All of the above items are accounted for through statement of profit or loss

 the cost of abnormal amounts of wasted material, labour, or other resources is not included in
the cost of the asset. (e.g. the increased labiur cost due to an industrial dispute – the increase is
not capitalised)

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Subsequent Measurement of Property, Plant & Equipment

Entity can choose either

 Cost Model

OR

 Revaluation Model

Whichever model is chosen, will be the company’s accounting policy with respect to property,
plant and equipment and must be applied consistently to an entire class of property, plant &
equipment.

 Cost Model

Property, plant & equipment should be carried at;-

COST

Less

Accumulated depreciation and impairment losses

 Revaluation Model

Property, plant & equipment should be carried at ;-

Fair value at date of revaluation

less

Any subsequent accumulated depreciation and impairment losses.

(Therefore if an asset is revalued at the year end date, subsequent depreciation will not
occur until the next year. So carrying amount of asset will be its fair value at reporting date)

Note: Revaluations should be sufficiently regular to ensure that carrying amount doesn't differ
materially from fair value. Fair Value is usually the market value.

In the case of specialised assets, depreciated replacement cost can be used instead of fair
value, when adopting the revaluation model

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  Gains on Revaluation (Revalued Amt – Carrying Amount)

Where an asset is revalued upwards from its carrying amount

1. Dr Asset; Cr Revaluation Reserve

2. The gain on revaluation is disclosed as other comprehensive income in the

statement of profit or loss and other comprehensive income and is not included in
profit or loss for the period. The amount of the unrealised gain reported will be the
gross gain (i.e. before any adjustments in respect of deferred tax if applicable in the
question)

3. There is an exception to the rule in No 2 – if the gain on revaluation reverses a

previous loss on revaluation , where the loss was recognised in profit or loss (i.e.
Statement of profit or loss ) the revaluation gain should be recognised in profit or
loss not “other comprehensive income” (Dr Asset; Cr Statement of profit or loss )

 Loss on Revaluation (Revalued Amt – Carrying Amount)

Where an asset is revalued down from its carrying value

1. Cr Asset; Dr Revaluation Reserve

2. Decrease on Revaluation is disclosed in “Other Comprehensive Income” assuming

that the loss on revaluation reverses a previous gain on revaluation, where the gain
was recognised in “other comprehensive income” the decrease should be reported
in other comprehensive income

3. If the conditions in number 2 do not apply, then the loss is recognised through profit
or loss (Cr Asset; Dr Statement of profit or loss ) – e.g. For a decrease on revaluation
where there was no previous revaluation gain

 Note that when a revaluation takes place, the depreciation for the period up to the date of
revaluation should be deducted from the carrying value before calculating the revaluation
surplus. This is a common mistake made by students

 Note: Under the Revaluation Model, increases in the value of assets should be accounted
for in the statement of financial position under Revaluation Reserves as follows;-

Dr. Asset Cost x

Dr. Acc Depr x

Cr. Revaluation Reserve x

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BUT

If there is a revaluation decrease in an asset – this decrease should be included as an expense in

statement of profit or loss (unless the decrease reverses a previous gain as described above) as
follows;-

Dr. Expenses x

Cr. Asset Cost x

Cr. Acc Depr x

Depreciation

 Depreciation begins when the asset is available for use !!! (Think of a newly built hospital
unit that it not being used) (Per IAS 16, consumption of future economic benefits occurs not
only through use but also through obsolescence and wear and tear) – This contrasts with IAS
38 - Amortisation of Capitalised Development Expenditure

 Should be allocated on a systematic basis over assets useful life

 Charge for each year is recognised in Statement of profit or loss

 Method of depreciation used should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed.

 Land is not depreciated because it has an indefinite useful life (unless the land is used in
mining or similar industries)

2 depreciation methods – (a) Straight Line and (b) Reducing Balance

 IAS 16 allows for a change in the method of depreciation where this results in a fairer
presentation of the entity’s results

 Change in depreciation method = Change in Accounting Estimate not accounting policy (IAS
8)

 Change in depreciation method is not applied retrospectively

Review of Useful Economic Life

 Should be reviewed at the year-end and revised if necessary.

 If useful life is revised – carrying amount at date of revision should be depreciated over
revised useful life.

 Change in useful life is a change in accounting estimate

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Depreciation and the Revaluation Reserve

If an asset is revalued upwards, then its carrying value increases and a revaluation reserve is created.
2 points should be noted as a result of this:

i. As the depreciation charge is based on a higher revalued amount, then

the charge to the SOPL will typically be higher, then if the cost model
was applied
ii. As the asset is depreciated, its carrying value declines but the
revaluation reserve remains the same

Consequently, IAS 16 gives companies the option of transferring some of the gain from the
revaluation reserve to offset the additional depreciation. The amount of the surplus transferred is
the difference between the depreciation based on the revalued carrying amount of the asset, and
depreciation based on the asset’s original cost (or transfer from the revaluation reserve to retained
earnings in line with the depreciation policy being adopted for the revalued asset)

De-recognition

 Asset should be de-recognised on;-

(a) Disposal

(b) When no more future economic benefits are expected from asset

 Any gain or loss should be included in statement of profit or loss as gain/loss on disposal
(not included in Sales Revenue!!)

 Also Disposal proceeds should not be included in Sales Revenue

 Gain/Loss calculated as follows;-

Disposal Proceeds less Carrying Amount

N.b. : Any revaluation reserve standing to the credit of a disposed asset should be
transferred to retained earnings as a reserve movement.

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N.B. Subsequent Expenditure

 Subsequent expenditure on non current assets should be capitalised where

– The subsequent expenditure improves the asset ( for example by enhancing its
performance or extending its useful life) i.e. Adds value to the asset above and
beyond its original condition – provides enhanced future economic benefits –
matching concept!!!

– The subsequent expenditure is for a replacement part (provided that the part it
replaces is treated as an item that has been disposed of)

– Examples of Subsequent expenditure on a building

– Constructing an extension to the building

– Replacing the Elevators or the heating/air conditioning system

N.B. Subsequent Expenditure

 Subsequent Expenditure which does not meet the criteria for capitalisation is instead
expensed to statement of profit or loss as incurred

Key Disclosures - IAS 16

For each class of depreciable asset, these include

- Depreciation method used

- UEL’s or depreciation rates used
- Total depreciation charged for the period, and
- Gross amount of depreciable assets and related accumulated
depreciation
- If material, the reason for any change in depreciation method

For revalued assets these include

- Name and qualification of valuer

- Basis of valuation
- Date and amount of valuations

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Illustration

Property, Plant & Land& Building Plant Total

Equipment
€m €m €m

Cost or Valuation:

At 1 October 2013 280 150 430

Additions 50 50

Revaluation (15) nil (15)

At 30 Sept 2014 265 200 465

Accumulated
Depreciation

At 1 October 2013 40 105 145

Charge for Year 9 35 44

Revaluation (40) nil (40)

At 30 Sept 2014 9 140 149

Carrying Value 30 256 60 316

September 2014

The Land and buildings were revalued by an appropriately qualified valuer on an existing use basis
on 1 October 2013. They are being depreciated on a straight line basis over a 25 Year Life. Plant is
depreciated at 20% per annum on cost

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 REVALUATIONS OF PROPERTY, PLANT & EQUIPMENT

IAS 16

OVERVIEW

1. Increase/Gain on Revaluation

Where the Gain is

Increase/Gain in reversing a previous
value which is not decrease which was
reversing a recognised as an expense
previous i.e. through profit or loss
loss/decrease

Dr Asset

Cr Statement of profit or loss

Dr Asset
Cr Revaluation Reserve (if the
Cr Revaluation Reserve gain is greater than the original
loss/decrease on revaluation)
Note: Disclose in OCI!
Note: Only the excess carried to
Revaluation Reserve (if
applicable) will be disclosed in
OCI

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 2. Decrease/Loss on Revaluation

Where the Loss is

Decrease/Loss in reversing a previous
value which is not increase which was
reversing a recognised as an increase
previous in the revaluation reserve
gain/increase

Cr Asset

Dr Revaluation Reserve
(*OCI*)

Dr Statement of profit or loss

Cr Asset (if applicable!)

Dr Statement of profit or Dr Revaluation Reserve with the

loss amount of the loss which is
reversing the previous gain
Note: No Disclosure in
taken to revaluation reserve –
OCI because the loss is
Disclose in OCI)
accounted for through
profit or loss!

Dr Statement of profit or loss

with the excess of the loss on
revaluation over the previous
gain on revaluation if this
applies – No Impact on OCI

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 IAS 38 Intangible Assets

 Objective:

To set out the treatment of intangible assets that are not covered by other accounting standards -
e.g. Goodwill acquired in a business combination is covered by IFRS 3 BUSINESS COMBINATIONS

Most long term intangible assets are amortised over their expected useful life ( amortisation is the
equivalent of depreciation)

 Definition:

An “intangible asset” is “an identifiable, non monetary asset without physical substance” (e.g.
Landing rights for an airline company)

An intangible asset should be recognised if all the following criteria are met

- It is identifiable I

- It is controlled by the entity C

- Probable Inflow of future economic benefits P
- Reliable Measurement of Cost can be made RM

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IAS 38 states that to be identifiable, an intangible asset

– Must be separable (capable of being separated or divided from the entity and sold,
transferred, rented) or

– Must arise from contractual or other legal rights

Control: An entity controls an intangible asset if it has the power to obtain the future economic
benefits (usually net cash inflow) flowing from the resource e.g. Legal rights that are enforceable in
court, copyrights

Staff training and customers list are not intangible assets because they fail the control test – staff
could leave the business at any time and the customers on a customer list have no obligation to
make future purchases

Assets acquired as a result of a government grant (i.e. granting of Govt Licence) may be capitalised
at fair value, along with a corresponding credit for the value of the grant. Asset and grant will be
amortised/released over useful life. Net effect on profits is nil

 Internally Generated Intangibles:

 General Rule: Internally generated intangibles are generally not recognised in the financial
statements due to failure of the identifiability test or its cost cannot be measured reliably

 Examples of Possible Intangible Assets include:

– Goodwill Acquired in a Business Combination

– Computer Software

– Patents

– Copyrights

– Motion Picture Films

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 – Import Quotas

– Franchises

– Customer and Supplier Relationships

 In particular the following internally generated intangibles cannot be recognised

– Start Up, Pre Opening and Pre Operating Costs

– Training Costs

– Relocation Costs

– Advertising Costs

– Goodwill

– Brands

– Mastheads (e.g. Newspaper masthead)

– Publishing Titles

– Customer Lists

– Customer Relationships (whether contractual or non contractual)

 If some of the listed items are purchased from another business entity they might be
recognised because

– Pass the “identifiablilty test”

– Cost capable of being reliably measured

 The exception to the ban on capitalising internally generated intangibles is “Development

Expenditure” which meets the recognition criteria for capitalisation as an intangible asset

 Research and Development Expenditure:

 Research: original and planned investigation undertaken to gain new scientific or technical
knowledge and understanding

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  Development: the application of research findings or other knowledge to a plan or design
for the production of new or substantially improved products, processes, systems or services
before the start of commercial production or use

 Exam Note: If a question uses the word “research” then this is obviously an indicator to
expense the expenditure

Development Expenditure Examples:

 Design, construction and testing of pre production prototypes

 Construction and operation of a pilot plant that is not large enough for economic
commercial production

 Design, construction and testing of new materials, products or processes

Accounting Treatment of Research Costs:

 The cost of research should not be recognised as an asset

 Such expenditure must be written off as an expense in the year in which incurred

 Tangible assets used in research should be recognised as plant and eqiupment

Accounting Treatment of Development Costs:

 Expenditure on development can only be capitalised as an intangible asset when all of the 6
following conditions are met

1. P robable Future Economic Benefits

2. I ntention to Complete and use/sell

3. R esources adequate to complete and use/sell

4. A bility to use/sell

5. T echnical Feasibility

6. E xpenditure can be reliably measured

Memory Aid: “PIRATE”

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 Failure to meet all 6 conditions means expenditure is treated as research costs –

 So just because the expenditure is classified as development expenditure, does not

necessairly mean it will be capitalised - the criteria for capitalisation must first be met

 Once such expenditure has been written off as an expense, it cannot subsequently be
reinstated as an intangible asset

 N.B. Amortisation of capitalised development expenditure does not begin until the
commercial use of the product, service or process has started – matching concept -
matching incomes from the development expenditure with expenses of development

 Measurement of Intangibles:

 Initial measurement is at cost. For internally generated intangible asset (like development
expenditure) cost is the expenditure incurred from the date when the asset first meets the
recognition criteria (Exclude selling,admin & general overheads; training costs; advertising
expenditure)

 The cost of a separately acquired intangible asset comprises:

o Its purchase price, including import duties and non refundable purchase taxes, after
deducting trade discounts and rebates, and
o Any directly attributable cost of preparing the asset for its intended use – e.g.
employee costs and professional fees associated with bringing the asset to its
working condition

 Subsequent Measurement

– Cost Model (Cost – Acc Amortisation - Any Imp. Losses) or

– Revaluation Model (Fair Value – Subsequent Acc Amortisation – Subsequent Imp

Losses)

 Rules on Revaluation gains/losses follow the guidance in IAS 16

 An Intangible asset which could be revalued is a Taxi Licence, Milk Quotas,

Fishing Quotas

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  Amortisation & Impairment of Intangible Assets:

 Useful life of an intangible asset is either

– Finite

– Or Indefinite

 Finite Life:

– Intangible to be Amortised over its Useful Life

– Amortisation written off to profit or loss

– If indicators exist, then an impairment review should be carried out (As Per IAS 36
IMPAIRMENT OF ASSETS)

 Indefinite Life (N.B.)

– No Amortisation

– Impairment reviews to be carried out annually

– IAS 38 Intangible Assets

IAS 38 & IFRS 3:

 Deals with Purchased Goodwill created when one business acquires another

 Will be covered when studying consolidated accounts in Section 2 of the Syllabus

Disclosures

The financial statements should disclose the following for each class of intangible assets,
distinguishing between internally generated intangible assets and other intangible assets

 Whether the useful lives are finite or indefinite

 Amortisation rates used for assets with finite lives
 Amortisation methods used for assets with finite lives
 The gross carrying amount and the accumulated amortisation at the beginning and end of
the period and a reconciliation between the two
 Details of revaluations
 Total amount of research and development expenditure recognised as an expense during
the period

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Intangible Assets (other than Goodwill) Acquired as Part of Business Combination

IFRS 3 Business Combinations and IAS 38 Intangible Assets addresses the recognition of separable
intangible assets. Once an intangible asset of a Subsidiary is “identifiable” and has a reliable “fair
value”, then it can be recognised as an Intangible Asset on the acquisition of a Subsidiary.

So for example, €1m spent on a research project , and for which a reliable fair value of €1.2m has
been estimated by the purchasing company directors, can be recognised as an intangible asset in the
context of a business combination.

Likewise, if a subsidiary has a “customer list” which could be sold to other companies and the fair
value of this “customer list” can be reliably measured at €3m, then this too can be recognised as an
intangible asset , but again, only in the context of a business combination

So, in summary, items can be recognised as intangible assets in a business combination scenario,
once they are “identifiable” and have a “fair value which can be reliably measured”

Website Costs

SIC 32 – Intangible Assets – Web Site Costs, states that an entity’s own website that arises from
development and is for internal or external access is an internally developed intangible asset that is
subject to the requirements of IAS 38

All expenditure on developing a website solely for advertising an entity’s own products and services
should be recognised as an expense when incurred

However, if an entity is able to demonstrate that a website is capable of generating future economic
benefits (for example, orders can be placed through the website) , then the related costs can be
capitalised (i.e. PIRATE)

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INCLASS QUESTIONS

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