Tangible fixed assets

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Tangible fixed assets

• International Standards
• IAS 16 property, plant and equipment
• (value and depreciation)
• IAS 23 borrowing costs
• (capitalisation of interest costs)
• IAS 36 - impairment

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Fixed Asset Valuation

• Value in exchange
• output value
• net realisable value (NRV)
• input value
• historic cost (HC)
• adjusted historic cost (CPP)
• Replacement cost (RC)
• Value in use
• net present value (NPV or VIU)

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Asset Definitions
(1) Canning
an asset is any future service in money, or any
future service convertible into money, the
beneficial interest in which is legally or
equitably secured to some person or set of
persons such a service is an asset only to that
person or set of persons to whom it runs
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Asset Definitions
(2) Sprouse and Moonitz
assets represent expected future economic
benefits, rights to which have been acquired by
the enterprise as a result of some current or
past transaction
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Characteristics of Assets

• There must exist some specific right to future
  benefits or service potentials
• The rights must accrue to a specific person or
  entity
• There must be a legally enforceable claim to the
  rights or services
• There must be a recognisable transaction

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Why Value Assets ?

• A means of measuring income
• Presentation of the entitys financial position
  to investors, actual or potential
• For use by other outside interested parties
• For use by management

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Deprival Value

• When NPV gt NRV gt RC - use RC
• When NRV gt NPV gt RC - use RC
• When NPV gt RC gt NRV - use RC
• When NRV gt RC gt NPV - use RC
• When RC gt NRV gt NPV - use NRV
• When RC gt NPV gt NRV - use NPV

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Depreciation

• The measure of the wearing out, consumption, or
  other reduction in the useful economic life of a
  fixed assets whether arising from use, effluxion
  of time or obsolescence through technology or
  market changes

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Depreciation
Value
Revenues
Costs
Economic life
Time
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Factors affecting the assessment of depreciation

• The original cost or valuation of the asset
• The residual value of the asset
• The assets useful economic life
• The method of depreciation employed

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Tangible fixed assetsthe main issues

• Initial measurement
• Valuation
• Revaluation
• Depreciation

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INITIAL MEASUREMENT

• Should be costs directly attributable to bringing
  the asset into working condition for its intended
  use
• Capitalisation of finance costs, including
  interest, may be appropriate
• Subsequent expenditure which enhances an asset's
  performance may be capitalised

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VALUATION

• Non-specialised properties - Existing Use Value
  (EUV)
• Specialised properties - depreciated replacement
  cost
• Properties surplus to an entity's requirements -
  Open Market Value (OMV)
• Other tangible fixed assets - market value or
  depreciated replacement cost

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REVALUATION

• Tangible fixed assets should be revalued only
  where the entity adopts a policy of revaluation.
• Where such a policy is adopted then it should be
  applied to individual classes of tangible fixed
  assets.
• It need not be applied to all classes of tangible
  fixed assets held by the entity
• Revaluations need to be carried out on a regular
  basis

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REVALUATION GAINS

• Revaluation gains will normally be recognised in
  the STRGL except when they represent a reversal
  of a previous revaluation loss
• Any revaluation gain which is taken to the Profit
  and Loss Account (income statement) should be
  adjusted for notional depreciation

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REVALUATION LOSSES

• Revaluation losses will normally be recognised in
  the Profit and Loss Account (income statement)
• Revaluation losses may be recognised in the STRGL
  until the carrying cost of the asset reaches its
  depreciated historical cost

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DEPRECIATION

• The fundamental objective of depreciation is to
  reflect in the operating profit the amount of
  economic benefit consumed in the period
• Even if an asset is revalued and the revalued
  amount is an increase on the carrying amount
  there will still need to be a depreciation charge

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DEPRECIATION

• Split depreciation is not acceptable
• All assets should be depreciated with the
  exception of land
• Impairment reviews should be carried out on a
  regular basis