Session 1 Accounting for Assets 2013.Ppt

8/12/2019 Session 1 Accounting for Assets 2013.Ppt

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Slide 1

Holmes Institute 2013 11

HI5020Corporate Accounting

Session 1Accounting for Assets

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HI5020 Corporate AccountingWelcome to HI5020 Corporate Accounting!

Course overview:

12 weeks of sessions (no mid-semester break)

Study week (week 13)

Exam week (week 14)

Assessments:

Two class assessments (tests), each test carries amark equal to 20% of the total assessment.

Final Examination is equal to 60% of total assessment

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HI5020 Course Topics

Week Topic Chapter

1 Account ing for Assets 4

2 Accounting for Liabilities 10

3 Accounting for Owners Equity 13

4 Income and Changes in Equity 16

5 Cash-flow Statements 19

6 Segment r epor ting and related parties 24 & 25

7 Group Structures 27

8 Accounting for intra-group transactions 28

9 Non-controlling interest 29

10 Indirect interest 30

11 Changes in degree of ownership 31

12 Accounting for equity investments 32

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2/18

Slide 4


Course Text / Materials

Deegan, C. (2012) Australian Financial Accounting7th edition. McGraw-Hill .ISBN: 9780071012409.

Course slides & notes are provided on Blackboard.

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Slide 5


Session Objectives Understand what an Asset is and the various

classifications under AASB.

Disclosure requirements to AASB 101

Understand how to recognise costs

Recognition issues

Methods of recognising asset value

Methods of accounting for assets

Capitalisation of expenditure subsequent toacquisition

Allocation of costs to individual items

Deferred payments on acquisition

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Slide 6


What is an Asset?

According to the AASB Framework, an asset

is something that:

1. Is expected to provide future economic benefits tothe entity;

2. Must be controlled by the entity (but does not haveto be legally owned);

3. A transaction or event giving rise to the controlmust have already occurred.

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Slide 7


Further Clarification

AASB Paragraph 89 provides recognition of assetsbeing:

It is probable that the future economic benefitsembodied in the asset will eventuate, and the assetpossesses a cost or other value that can be

measured reliably.

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Slide 8


Relevant accounting standards

There are three standards of particular relevance.

A. AASB 116 Property, Plant and EquipmentRequirements for revaluations, depreciationand determining acquisition cost of property,plant and equipment

B. AASB 138 Intangib le Assets

A. Revaluation of intangible assets and other issues

C. AASB 136 Impairment of Assets When torecognise an impairment loss

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Slide 9


Assets

Assets can be classified according to Asset classesnamely fixed assets, investments, intangible assets,current assets and deferred costs.

Under AASB 101 Presentation of Financial

Statements, assets are classified as:

a) Current Assets

b) Non-current Assets (consisting of Fixed Assetsand Intangible Assets).

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Slide 10


Current Assets

Assets that are expected to be consumed, sold orconverted into cash within the next twelve monthssuch as:

Cash/Bank

Accounts Receivable

Prepayments such as rent, insurance, etc.

Stock/Inventory/Supplies

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Slide 11


Non-current AssetsAssets not categorised as Current Assets, used toderive a future economic benefit.

A. Fixed Assets include: Land and Buildings (separated)

Motor Vehicles

Plant and Equipment

B. Intangible Assets include: Goodwill

Patents

Copyrights

Deferred Tax Assets

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Balance Sheet Entries

All current Assets are shown first, generally themost liquid so cash first, then debtors, followedby stock, prepayments, etc.

Then Non-current Assets, with Fixed Assets listedfirst, followed by Intangible Assets.

And as most students would be aware, eachasset classification is recognised in the Chart ofAccounts in financial records, assets commencingwith the number 1.

e.g. 1.100 Cash

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Slide 13


Cost of a Fixed Asset

A fixed asset, when purchased will often includemore than just that actual cost of the asset, e.g. Acompany purchases a new piece of machinery forthe following:

Equipment $250,000

Transport to site $ 10,000

Lifting machine to relocate equipment $ 5,000 Wiring, etc. $ 8,000

The total cost of the asset is $273,000

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Slide 14


Acquisition of an Asset Using Fair ValueWhat if the asset, say land was paid for via the following:A. Cash $200,000

B. Truck

Cost $150,000

Accumulated Depreciation $ 60,000

Market Value $ 75,000

C. Shares 5,000 shares with a market value of $8.00.

How much should the asset value be recorded at?

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Acquisition of Fixed Asset

It is necessary to recognise the value of the assetsbased on Fair Value (market value), not at bookvalue, so the assets would have a value of:

Truck $75,000

Shares $40,000

Plus of course the cash of $200,000

$200,000 + $75,000 + $40,000 = $315,000

Journal entries are shown on the next slide.

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Slide 16


Recording the acquisition

Recording of acquisition would be:

Dr. Cr.

Land 315,000

Accumulated Dep. Truck 60,000

Loss on disposal of Truck 15,000

Cash 200,000

Share Capital 40,000

Truck 150,000To record the purchase of land

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Slide 17


1.1 Your turnA machine purchased was paid for via the following:

A. Cash $350,000

B. Motor vehicle

Cost $45,000

Accumulated Depreciation $15,000

Market Value $25,000

C. Shares

3,000 shares with a market value of $4.50.

How much should the asset value be recorded at?Prepare the journal entry for the transaction.

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Slide 18


Solution:

Dr. Cr.

Machine 388,500

Accumulated Depreciation 15,000

Loss on disposal 5,000

Cash 350,000

Share Capital 13,500

Vehicle 45,000

To record purchase of machine

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Slide 19


Acquisition of an Asset

Later in this session we will discuss theCapitalisation of Expenditure incurred subsequentto the acquisition of an asset.

Next, let us look at Recognition issues.

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Recognition Issues Based on the requirements on an entity, when

considering recognition, it would be expectedthat a high-level of professional judgementwould be required when faced with the option ofcategorising something as either an expense oran asset.

The choice of options can have ramifications onthe balance sheet (considering factors such asnet assets to shares, etc.)

A L = C

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Slide 21


Worked example 4.1 (pp. 145-146)

RSC Ltd. has assets of $4,300,000, liabilities of $2,700,000so the equity must be $1,600,000. Number of issued sharesis 3,000,000.

They designed and produced a machine that cost $640K tomanufacture a new style of container.

Breakdown of costs are raw materials, $325,000, wages(payable), $260,000 and depreciation of $55,000 (related toother P&E used to make machine)

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Slide 22


Worked example 4.1 (pp. 145-146) (cont.)

If the expenditure is to be recognised as an asset(satisfies the criteria):

Dr. Cr.

Machinery 640,000

Wages Payable 260,000

Raw Materials 325,000

Accumulated Depreciation 55,000To record asset produced internally for income-producing purposes

Net assets will not change. Why?

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Recognition Issues - AssetsBalance sheet, there will be an equal change in bothassets and liabilities.

Raw Materials (RM) CR, machinery use of rawmaterials, DR, (they counter each other)

Lets see what the outcome is:

Increase in assets = $260,000 (being $640K lessRM of $325K and depreciation, $55K)

Increase in liabilities = $260K (wages payable).

Next slide shows Balance Sheet accounts changes.

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Recognition changes - assets

Assets

$4,300,000

--------------

$4,300,000

Liabilities

$2,700,000

Equity

$1,600,000

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$4,300,000

Assets

Total Assets $4,30 0,000

Less RM used 325,000

$3,975,000

Plus Machine $640,000

Less Acc.Dep. 55,000 585,000

TOTAL $4,560,000

Liabilities

$2,700,000

Plus

Acc.Wages 260,000

TOTAL $2,960,000

Equity $1,600,000

TOTAL $4,560,000

Old B/sheet New balance sheet

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Slide 25


Recognition issues - Expense

If the consideration is that the asset will probably notgenerate any future cash flows, then it would betreated as an expense and the following journalentry would apply:

Dr. Cr.

Impairment loss-machinery 640,000

Accumulated Impairment loss 640,000

To record the loss on impairment

Write-off of the asset will see net assets fall by this amount.

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1.2 Your turnLabour Ltd. has assets of $2,700,000, liabilities of$2,100,000, equity of $600,000. Number of issued sharesis 1,000,000.

They designed and produced a machine that cost $410Kin order to manufacture a sellable product.

Breakdown of costs are raw materials, $235,000, wages(payable), $150,000 and depreciation of $25,000 (relatedto other P&E used to make machine).

Calculate and journalise for both asset and expense.

What are the considerations?

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Solution

If recognised as an asset (will generate future returns), then:

Journal:

Dr. Cr.

Machinery 410,000

Raw Materials 235,000

Wages Payable 150,000

Accumulated Depreciation 25,000

To record asset produced internally for income-producing

Balance sheet

Increase in assets by $150,00 (410K (235K+25K))

Increase in liabilities by $150,000 (wages payable)

If recognised as an expense (will not generate future returns), then:

Dr. Cr.

Impairment loss machinery 410,000

Accumulated Impairment Loss 410,000

To record impairment loss

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10/18

Slide 28


Methods of Accounting for Assets

Three recognised method:

1. Historical-cost accounting basis forrecognising the value of the asset on price paid

2. Present-value accounting basis forrecognising value of an asset based on net-present value.

3. Market-value accounting assets recorded atnet market value, any changes in value treated asprofit or loss from previous period.

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Methods of Accounting for Assets (cont.)Most companies in Australia favour the historicalmethod as it is easy to understand, based on anactual costs and a measureable reduction in value(pre-determined method and rate of depreciation).

Whilst may have changed in recent years, asurvey in 1995 of CFOs from Group of 100, 80%

favoured historical cost, but it could be assumedthat little change has occurred.

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Slide 30


Capitalisation of Expenditure - Asset

Earlier we discussed what costs could berecognised as being part of an asset. Now we willlook at those costs subsequent to an acquisitionwhich would be considered.

Refer to worked example 4.4 (pp. 163-164).

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11/18

Slide 31


Costs associated with an asset

We know that a business both the purchase priceof an asset as well as the set-up costs. But whatabout costs for restoration and dismantling oncethe asset has completed its useful life?

Consider a mine. Dig the hole with a mining

machine but once the mine is exhausted, theequipment needs to be dismantled, the landrestored to an approved level. These costs alsoneed to be considered.

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Example: Libom Ltd.Libom Ltd. purchase a drill for raw materials on 1/7/09. Cost ofdrill is $3,455,000. Installation costs are the following:Site access costs $1,548,000Transportation of dri ll $ 330,500Set-up $ 190,000Licence/consent $ 854,900Engineers fees $ 250,000Total $3,173,400Dismantl ing costs $ 110,500 ( in 6 years t ime)Site clean-up $1,749,000Transport costs $ 285,000Replacement-Flora $ 427,700Total $2,572,200

Costs to be over life of the mine. Discount rate is 9%.

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Example: Libom Ltd. (cont.)

We need to consider PV (Present value) of the clean-up/removal costs and use the equation:

(1+i)yx +/-p

Total costs is $2,572,200 for clean-up in 6 years soPV will be:

(1.09)yx +/-6 = 0.596267326

0.596267326 x $2,572,200 = $1,533,719

Why PV, because $1.00 in 6 years will have lessvalue than $1.00 today.

Now we can journal this:

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12/18

Slide 34



Dr. Cr.

Drill 8,162,119

Cash/Payables 6,628,400

Provision for Restoration 1,533,719

To record acquisition of drill and provision forrestoration.

Lets consider following accounting periods. What isthe interest expense and provision for restorationcosts? Remember the discount rate is 9%.

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Slide 35


Example: Libom Ltd. (cont.)Date Opening

BalanceInterest (9%) Balance

1/7/09 1,533,719

30/6/10 1,533,719 138,035 1,671,754

30/6/11 1,671,754 150,458 1,822,212

30/6/12 1,822,212 163,999 1,986,211

30/6/13 1,986,211 178,759 2,164,970

30/6/14 2,164,970 194,847 2,359,817

30/6/15 2,359,817 212,383 2,572,200

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Slide 36



30/6/10 Journal

Dr Interest expense 138,035

Cr Provision for restoration 138,035

To record the interest expense on restoration of drill site

30/6/11 Journal

Dr Interest expense 150,458

Cr Provision for restoration 150,458

To record the interest expense on restoration of drill site.

Did you notice the balance in the f inal year matched the full

restoration amount ($2,572,200)?

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Slide 37


1.3 Your turn: PHB Ltd.

PHB Ltd purchase a drilling rig for raw materials on 1/1/07. Cost of drill is$5,125,000. Installation costs are:

Site access costs $1,998,000

Transportation of drill 472,500

Set-up 364,000

Licence/consent 773,600

Engineer fees 326,400

Total $3,934,500

Dismantling costs $ 243,650 (in 5 years time)

Site clean-up 2,424,000

Transport costs 289,000

Replacement-flora 388,700

Total $3,126,065

Costs to be over life of the mine. Discount rate is 7.5%.

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Slide 38


SolutionStep 1:

Calculate the PV of the restoration costs.

(1.075)yx+/-5 = 0.696558632

0.696558632 x $3,126,065 = $2,177,488

Dr. Cr.

Drill Rig 11,236,988

Cash/Payable 9,059,500

Provision for restore 2,177,488

To record acquisition of drill rig, installation and provisionfor restoration

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Slide 39


Solution (cont.)

Step 2:

Calculate Interest expense & provision for restoration

Date O/Balance($) Interest(7.5%)($) C/Balance($)

1/1/07 2,177,488

31/12/07 2,177,488 163,311 2,340,799

31/12/08 2,340,799 175,560 2,516,359

31/12/09 2,516,359 188,727 2,705,086

31/12/10 2,705,08 202,881 2,907,967

31/12/11 2,907,967 218,097 3,126,065

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Slide 40


Solution (cont.)Step 3:

31/12/07

Dr. Cr.

Interest Expense 163,311

Provision for Restoration 163,311


31/12/08

Dr. Cr.

Interest Expense 175,560

Provision for Restoration 175,560


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Slide 41


Allocation of CostsQ: How are costs allocated when a package

asset is purchased?

A: A valuer experienced in such matters would apply

a % rate totalling 100% across the assets

purchased.

Example: Purchase Price of $8,500,000

E.g. Land 48% = $4,080,000

Buildings 27% = $2,295,000

Stock 10% = $ 850,000

Equipment 15% = $1,275,000

TOTAL 100% = $8,500,000

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Slide 42


Allocation of Costs (cont.)

Journal entry would be:

Dr. Cr.

Land 4,080,000

Buildings 2,295,000

Stock 850,000

Equipment 1,275,000

Bank 8,500,000

To record acquisition of Assets

Note: Land and buildings recognised separately due to differingaccounting treatment (land-appreciate, buildings-depreciate, etc.)

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Slide 43


Deferred Payments on Acquisition

It is common for an entity to acquire assets andhave a payment plan in place to pay for the assetover a period of time.

AASB 123 the cost of an item of property, plant and

equipment is the cash-price equivalent at the recognition

date. If payment is deferred beyond normal credit terms,

the difference between the cash-price equivalent and thetotal payment is recognised as interest over the period of

credit unless such interest is recognised in the carrying

amount of the asset in accordance with the allowed

alternative treatment

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Slide 44


Deferred payments on acquisitionCost of an item must be determined by discountingthe amounts payable in the future to their presentvalue at the date of acquisition.

Refer to worked example 4.6 (page166)

Equation used is:

1-(1+i)yx +/- p

i

i = interest rate, p = periods

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Slide 45


RSC Ltd.

RSC Ltd acquired a drilling rig , paying $320,000 ondate of inception (1/7/10) and are required to makean additional 6 annual payments of $400,000, f irstannual payment due 30/6/11

Interest rate on borrowings is 9%.

We are required to calculate the amount payable andthen journalise for inception date and then for nexttwo years.

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Slide 46


RSC Ltd. (cont.)

Part A: Calculating the amount payable

1) Init ial payment (no change) $ 320,000

2) 1-(1.09)yx +/- 6/0.09 = 4.48591859

4.48591859 x $400,000 = $1,794,367

Total $2,114,367

We now know the value and can now journalise.

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Slide 47


Deferred payments on acquisition1/7/10 Journal entryDR Asset-Drill Rig 2,114,367

CR Bank 320,000

CR Loan on asset 1,794,367

To record acquisition of drill rig rec ognising loan payable

30/6/11 Journal entry

DR Interest expense 161,493

DR Loan on asset 238,507

CR Bank 400,000

To record payment on asset acquired 1/7/10

30/6/12 Journal entry


DR Loan on asset 259,973

CR Bank 400,000

To record payment on asset acquired 1/7/10

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Slide 48


Deferred Payments on Acquisition

You will note that the interest payments reducedfrom 2010 to 2011!

This is because the interest is calculated againstthe OPENING BALANCE each year, not theHISTORICAL BALANCE.

The reducing interest component means that thepayment on principal of the loan increases.

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Slide 49


1.4 Your turn

RIO Ltd acquired five trucks for their mine inWestern Australia, paying $1,800,000 on date ofinception (1/7/08) and are required to make anadditional 7 annual payments of $2,000,000, firstannual payment due 30/6/12

Interest rate on borrowings is 8.5%.

Required:

Calculate the amount payable and then journalisefor inception date and then for the next two years.

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Slide 50


SolutionStep 1: Calculate the amount payable

Initial payment $ 1,800,000

1-(1.085)yx+/-7/0.085

= 5.11851352 x 2,000,000 10,237,027

TOTAL $12,037,027

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Slide 51


Solution (cont.)Step 2: Journalise

1/7/08

DR Trucks 12,037,027

CR Bank 1,800,000

CR Loan payable 10,237,027

To record acquisition of mine trucks

30/6/09


DR Loan payable 1,129,853

CR Bank 2,000,000

To record payment on asset (mine trucks) acquired 1/7/08

30/6/09


DR Loan payable 1,225,890CR Bank 2,000,000

To record payment on asset (mine trucks) acquired 1/7/08

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Slide 52


Solution (cont.)

Checking payments to completion

Date O/B($) Interest($) Loan($) C/B($)

1/7/08 10,237,027

30/6/08 10,237,027 870,147 1,129,853 9,107,174

30/6/09 9,107,174 774,110 1,225,890 7,881,284

30/6/09 7,881,284 669,909 1,330,091 6,551,193

30/6/10 6 ,551,193 556,851 1,443,149 5,108,044

30/6/11 5,108,044 434,184 1,565,816 3,542,22830/6/12 3 ,542,228 301,089 1,698,911 1,843,317

30 /6/ 13 1 ,8 43 ,31 7 1 56 ,6 81 1 ,8 43 ,3 17 -

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Slide 53


Session SummaryThis completes this session where a number ofaspects in the recognition and recording of assetswas covered.

Next week, Accounting for Liabilities will be covered.

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Session 1 Accounting for Assets 2013.Ppt

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