BUSN7050
Corporate Accounting
Research School of Accounting 2
Lecture 3
Accounting for non-current assets and
intangibles
• Property, plant and equipment (Chapter 6)
• Impairment of assets (Chapter 8)
• Intangible assets (Chapter 7)
3PART 1: PPE- Revaluations and impairment
Sub-topics:
• Definition, initial recognition and measurement of
property, plant and equipment (PPE) items
• Cost versus revaluation model
• Revaluation of PPE items
• Revaluation increments and decrements and their
reversal
• Impairment and accounting for impairment loss
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PART 2: Intangibles
Sub-topics:
• Definition of intangible assets
• Recognition criteria for intangibles
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51. Property, plant and equipment
• AASB 116 defines property, plant & equipment (PPE)
as (par. 6):
– tangible items
– with a specific use within an entity
– that are expected to be used during more than one
accounting period (i.e. they are non-current in nature).
• PPE is normally divided into classes. Common classes
include land, buildings, machinery, motor vehicles.
• AASB 116 specifically excludes assets held for re-sale
(those are treated in AASB 5).
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62. Recognition of items of PPE
• The cost of a PPE item is recognised as an asset if:
– it is probable that future economic benefits will flow to
the entity (not necessarily generated by the asset),
– the cost can be reliably measured.
• Where no new future economic benefits are expected to
flow to the entity, costs incurred should be expensed (e.g.
repairs but not betterments).
• Component parts (with different useful lives) are required
to be separately accounted for.
• Example: an aircraft - the engine, frame and fittings of an
aircraft are likely to have different useful lives.
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73. Initial measurement of PPE
PPE is initially measured at cost, which includes:
• Purchase price (at fair value)
• Directly attributable costs required to bring the asset to
the location and condition necessary for it to operate
• Initial estimate of costs of dismantling, removing the
item or restoring the site (at present value)
Purchase price includes duties and taxes after deducting rebates and discounts
Refer to section 5.3.2 of text for detailed lists of items specifically included and
excluded from this component
Example: dismantling an offshore oil platform
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84. Cost versus revaluation model
• PPE to be measured at either cost or fair value.
• The policy that is chosen must be applied to a whole
class of assets.
• Entities may switch from fair value to cost for justifiable
reasons (primarily based on relevance) and with adequate
disclosures and need to adjust the information
prepared previously if the switch is to cost.
Cost model
• AASB 116 requires that assets are carried at
cost less any accumulated:
– Depreciation
– Impairment losses.
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94. Cost versus revaluation model
Revaluation model
• As an alternative to the cost model, AASB 116 allows the
revaluation model to be used for classes of assets.
• Any revaluation of PPE must be to fair value.
• Market price is to be used where an active and liquid
market exists.
• Frequency of revaluations is not specified, but must be
performed with sufficient regularity such that the carrying
amount of assets is not materially different from their FV.
• Revaluation is performed on a class basis, but accounting
for revaluation is performed on an asset-by-asset basis.
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4. Cost versus revaluation model
Revaluation model
• If FV(fair value)>CA:
– revaluation increment (potential profit – recognised as
other comprehensive income (OCI), not profit and loss and
should be accumulated in equity as asset revaluation surplus
(ARS)).
• If FV(fair value)– revaluation decrement (potential loss – recognised as part
of profit and loss).
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5. Revaluation of PPE
• To account for revaluation increments/decrements for
depreciable assets, we can use the net method
or the gross method.
1. Net method - General procedure:
• Any balance of accumulated depreciation is credited to
the asset account prior to revaluation, so the amount
recognised for the asset is the revalued amount.
2. Gross method - Alternative method:
• Accumulated depreciation may be restated
proportionately with the change in gross carrying amount of
the asset, so the carrying amount after revaluation is the
revalued amount.
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5.1. Revaluation increments
Example 1 - Revaluation increment for a depreciable asset (using the net-
amount method)
• Historical cost = $40 000
• Acc. dep. = $15 000
• Fair value = $45 000
The journal entry to recognise the revaluation would be:
Dr Acc. dep. - machinery 15 000
Cr Machinery 15 000
Dr Machinery 20 000
Cr Gain on revaluation (OCI) 20 000
(To record the revaluation increment and write-off the accumulated
depreciation)
Dr Gain on revaluation (OCI) 20 000
Cr Asset revaluation surplus 20 000
(To transfer the gain on revaluation to asset revaluation surplus)
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5.2. Revaluation decrements
Example 2 - Revaluation decrement for a depreciable
asset (using the net method):
• Historical cost = $400 000
• Acc. dep. = $190 000
• Fair value = $150 000
The journal entries on revaluation would be:
Dr Acc. dep. - building 190 000
Cr Building 190 000
Dr Loss on revaluation (P&L) 60 000
Cr Building 60 000
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5.3. Reversal of revaluation decrements
and increments
Example 3 - Reversal of a previous revaluation increment
• Land was acquired on 1 January 2010 for $200 000 in cash
• The land has a market value of $290 000 on 1 January 2011
• The market value falls to $140 000 on 30 June 2013
1 January 2010
Dr Land 200 000
Cr Cash 200 000
1 January 2011
Dr Land 90 000
Cr Gain on revaluation (OCI) 90 000
Dr Gain on revaluation (OCI) 90 000
Cr Asset revaluation surplus 90 000
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5.3. Reversal of revaluation decrements
and increments
30 June 2013
Dr Loss on revaluation (OCI) 90 000
Dr Loss on revaluation (P&L) 60 000
Cr Land 150 000
Dr Asset revaluation surplus 90 000
Cr Loss on revaluation (OCI) 90 000
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5.3. Reversal of revaluation decrements
and increments
Example 4 - Reversal of a previous revaluation decrement
Land was acquired for $200 000 on 1 July 2009.
• On 30 June 2010 it has a fair value (FV) of $150 000.
• On 30 June 2012 FV is considered to be $270 000.
1 July 2009
Dr Land 200 000
Cr Cash 200 000
30 June 2010
Dr Loss on revaluation (P&L) 50 000
Cr Land 50 000
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5.3. Reversal of revaluation decrements
and increments
30 June 2012
Dr Land 120 000
Cr Gain on revaluation (P&L) 50 000
Cr Gain on revaluation (OCI) 70 000
Dr Gain on revaluation (OCI) 70 000
Cr Asset revaluation surplus 70 000
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5.4. Transfers from ARS
• Transfers may be made from the asset revaluation
surplus (ARS) in the following circumstances:
– When a revalued asset is derecognised (i.e.
scrapped or sold): the balance in the ARS may be
transferred to retained earnings.
– When a revalued asset is being depreciated: the
ARS may be progressively transferred to retained
earnings over the useful life of the asset.
– Bonus shares may be issued from the ARS.
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6. Impairment
• Entities are required to conduct impairment tests to ensure their
assets are not overstated.
• If carrying amount (CA) > recoverable amount (RA) – asset needs
to be written down to its RA (AASB 136).
– CA - cost of asset (or revalued amount) less acc. depreciation and
impairment losses thereon.
– RA - higher of:
• Fair value, less costs to sell (or net selling price): amount
obtained from the sale of an asset less the costs of disposal.
• Value in use: present value of the future cash flows expected
to be derived from an asset.
– The write-down is called an impairment loss.
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6.1. Impairment losses
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6. Impairment
• Indicators of impairment are classified into two groups:
internal and external.
• External indicators include:
– Decline in market value – technological advancements
– Adverse changes in entity’s environment/market – e.g.
a competitor may have patented a new product
– Increases in interest rates – affects the value in use.
• Internal indicators include:
– Obsolescence or physical damage
– Change in asset use – has the asset become idle?
– An asset’s economic performance being worse than
expected.
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• Not all assets require this test. Notable exclusions:
• Inventories
• Deferred tax assets
• Assets held for resale.
• The following assets must be tested annually:
• Intangibles with indefinite useful lives
• Intangibles not yet available for use
• Goodwill acquired in a business combination.
6. Impairment
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6.2. Cost versus revaluation model
Cost model: impairment loss is recognised directly in
profit and loss
• An asset has a CA of $100 (cost of $160 – acc. dep. of
$60) and a RA of $90.
Dr Impairment loss 10
Cr Acc. dep. & impairment loss-Asset 10
Revaluation model: impairment loss is recognised as
revaluation decrement
• An asset has a CA of $100 (FV of $120 – acc. dep. of $20)
and a RA of $90. There is no prior ARS recorded.
Dr Accumulated depreciation 20 Dr Loss on revaluation 10
Cr Asset 20 Cr Asset 10
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6.2. Cost versus revaluation model
Revaluation model: impairment loss is recognised as
revaluation decrement
• An asset has a CA of $100 (FV of $120 – acc. dep. of $20)
and a RA of $90. The ARS for this asset is $50.
Dr Accumulated depreciation 20
Cr Asset 20
Dr Loss on revaluation(OCI) 10
Cr Asset 10
Dr Asset revaluation surplus 10
Cr Loss on revaluation(OCI) 10
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6.3. Impairment of CGU
• Impairment losses will at times be determined by reference
to a ‘cash-generating unit’ rather than to a specific asset.
• Cash-generating unit (CGU) is defined as:
“the smallest identifiable group of assets (generating cash
flows from continuing use) that are independent of the cash
inflows from other assets or groups of assets”
Example. A plant has a combined carrying value of $1 mil,
made up as follows:
Asset 1 $100 000
Asset 2 $200 000
Asset 3 $300 000
Asset 4 $400 000
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6.3. Impairment of CGU
• The value in use of the cash-generating unit amounted to $800 000
• The current fair value less costs to sell is $750 000
• The total impairment loss will be equal to $1 000 000 less the greater
of the value in use and fair value less costs to sell, i.e. $200 000.
• The impairment loss would be apportioned across the four assets
by using their respective carrying values as the basis for the allocation.
CA Pro-rata Impairment
loss allocated
Adjusted CA
Asset 1 100 000 1/10 20 000 80 000
Asset 2 200 000 2/10 40 000 160 000
Asset 3 300 000 3/10 60 000 240 000
Asset 4 400 000 4/10 80 000 320 000
1 000 000 200 000
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6.3. Impairment of CGU
• The accounting entry to record the impairment loss on the CGU:
Dr Impairment loss 200 000
Cr Accum. impairment losses—Asset 1 20 000
Cr Accum. impairment losses—Asset 2 40 000
Cr Accum. impairment losses—Asset 3 60 000
Cr Accum. impairment losses—Asset 4 80 000
• The CA of an individual asset cannot be reduced below the highest
of:
– Fair value less costs to sell (if determinable);
– Value in use (if determinable); or
– Zero.
If, for example, the RA of Asset 1 is $90,000, the maximum
impairment loss that can be allocated to it is $10,000. The remaining
$10,000 must be allocated across the other assets in the CGU.
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6.3. Impairment of CGU
• The accounting entry to record the impairment loss on the cash-
generating unit would be:
Dr Impairment loss 200 000
Cr Accum. impairment losses—Asset 1 10 000
Cr Accum. impairment losses—Asset 2 42 222
Cr Accum. impairment losses—Asset 3 63 333
Cr Accum. impairment losses—Asset 4 84 445
Adjusted
CA
Pro-rata Impairment
loss allocated
Total Impairment
loss allocated
Asset 1 10 000
Asset 2 160 000 16/72 2 222 42 222
Asset 3 240 000 24/72 3 333 63 333
Asset 4 320 000 32/72 4 445 84 445
720 000 10 000 200 000
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6.3. Impairment of CGU
• Goodwill is an asset that shows a residual balance on
acquisition, consisting of assets that cannot be individually
identified or separately recognised. Therefore, goodwill
can only be tested for impairment at the CGU level.
• Where an impairment loss arises in a CGU with goodwill
the following allocation rules apply:
– reduce the carrying amount of the CGU’s goodwill to
zero.
– allocate the impairment loss to the other assets of the
CGU on a pro rata basis.
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6.4. Reversal of impairment loss
• Recognised impairment losses are reassessed annually.
• Ability to recognise a reversal of an impairment loss and
the accounting for that reversal is dependent on whether
the reversal relates to an individual asset, a CGU, or
goodwill.
• Previously recognised impairment losses in relation
to individual assets are able to be reversed.
– The new CA cannot be higher than the CA that would
have been determined had no impairment loss been
previously recognised (i.e. for depreciable assets, the
impact of depreciation needs to be considered).
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6.4. Reversal of impairment loss
• The reversal of any impairment loss relating to a CGU is
allocated across the assets of the CGU (excluding
goodwill) on a pro-rata basis.
• Goodwill impairment cannot be reversed.
• The CA of an asset cannot be increased above the
lower of:
• its RA (if determinable)
• the CA that would have been determined had no
impairment loss been recognised in prior periods.
• Any excess from the above situation is allocated across
the remaining assets in the CGU on a pro-rata basis.
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6.4. Reversal of impairment loss
• Cost model: the journal entry to record the reversal is:
Dr Acc. dep. & impairment loss
Cr Impairment loss reversal
• Revaluation model:
– if the impairment loss was recorded to the P&L the
journal entry would be the same as above.
– If the impairment loss was recorded against the
ARS, the journal entry to record the reversal of the
impairment loss would be:
Dr Asset
Cr Asset revaluation surplus
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Part 2
Accounting for intangible assets
• Intangible assets (Chapter 7)
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1. Definition of intangible assets scope
• For many companies there is a substantial
difference between their financial position
(book value) and market capitalisation
(worth on the stock market).
• Accounting standards do not allow the
recognition of some items that the market
considers to be valuable such as:
• human resources
• customer satisfaction.
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1. Definition of intangible assets
• Identifiable non-monetary assets without physical
substance
• Identifiable assets:
– They can be separately identified and sold or arise
from contractual or other legal rights. Examples
include customer lists, brands, trademarks, franchise
agreements.
• Monetary assets:
– Money held and assets to be received in fixed or
determinable amounts of money
• Physical substance:
– The ability to see and touch the asset
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2. Recognition of intangible assetsle
assets
• The following recognition criteria must be met
before it can be recognised as an asset:
– It is probable that future economic benefits
attributable to the asset will flow to the entity.
– The cost of the asset can be measured reliably.
• Intangible assets acquired externally (either
separately or as part of a business
combination) can be recognised if the general
recognition criteria for assets are satisfied.
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2. Recognition of intangible assets
• The expenditure incurred internally to generate future economic
benefits does not normally result in the recognition of an
intangible asset – instead, a so called internally generated goodwill
may be created, but that cannot be recognised as an asset.
• Also, AASB 138 specifically states that internally generated brands,
mastheads, publishing titles, customer lists and items similar in
substance shall not be recognised as intangible assets.
– The expenditure on those cannot be distinguished from the cost of
developing the business as a whole.
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Measurement
• Internally generated intangible assets:
– Internally generated asset may be created over a
period of time.
– In contrast to separate acquisition and business
combinations where there is a single acquisition date.
– An entity has to classify the generation of the asset
into:
• a research phase
• a development phase.
• Intangibles that can never be recognised:
– Specific internally generated intangibles assets.
– Research costs.
2. Recognition of intangible assetsle
assets
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2. Recognition of intangible assets
• Intangible assets can be created internally, mainly as a result of
research and development (R&D) activities:
– Research: Generally precedes development:
• original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.
– Development: Typically involves the commercial application of
knowledge generated in earlier research phases:
• application of research findings or other knowledge to a plan or
design for the production of new or substantially improved
materials, devices, products, processes, systems, or services prior
to the commencement of commercial production or use.
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2. Recognition of intangible assets
• With regards to R&D activities, the research expenditure is to be
written off as expense as incurred:
– No intangible asset arising from research (or from the research phase of
an internal R&D project) shall be recognised.
• However, the development expenditure can be capitalised and
recognised as “Deferred development costs” only from the date
the following recognition criteria were first met:
– technical feasibility of completing
– intention to complete and use or sell
– ability to use or sell
– availability of resources
– existence of a market or internal usefulness.
– ability to measure costs reliably.
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2. Recognition of intangible assets
Costs included as part of deferred development costs:
• all directly attributable costs necessary to create, produce and
prepare the asset to be capable of operating in the manner
intended by management (AASB 138, par. 66).
Examples of directly attributable costs are:
• costs of materials and services used;
• costs of employee benefits arising from generation of the
intangible asset;
• fees to register a legal right;
• amortisation of patents and rights used.
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