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ASSETS. Learning Objectives. Determine whether an item meets the definition & recognition criteria for assets Calculate initial value of an asset Calculate depreciation using various methods. DEFINITION & RECOGNITION CRITERIA. Based on Conceptual Framework. 1.a Definition.

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learning objectives
Learning Objectives
  • Determine whether an item meets the definition & recognition criteria for assets
  • Calculate initial value of an asset
  • Calculate depreciation using various methods
definition recognition criteria

DEFINITION & RECOGNITION CRITERIA

Based on Conceptual Framework

1 a definition
1.a Definition

An asset must meet 3 criteria

  • Future economic benefits
    • Value in use e.g. PP&E
    • Value in exchange e.g. Inventory
1 a definition1
1.a Definition
  • Controlled by the entity (not necessarily owned)
    • Legal right to use e.g. title
    • Restrict others from using it
  • Based on past event or transaction
    • e.g. Purchase or Transfer of Title
1 b recognition criteria
1.b Recognition Criteria

An asset must also meet 2 recognition criteria

  • Reliability of Measurement
    • Verifiable i.e. supporting invoices or independent valuation
  • Probability that benefits will be received
    • >50% chance
2 a cost of assets
2.a Cost of Assets

Include all expenditure incurred to

  • Acquire the asset
    • Purchase cost (invoice price)
  • Transport it to the place of business
    • Freight
  • Protect it while in transit
    • Insurance
  • Install it
    • e.g. special platform, engine
2 b constructed assets
2.b Constructed Assets

Include cost of

  • Raw Materials
  • Direct Labour
  • Overheads (including professional fees)

Also include cost of borrowing

  • Relating specifically to the construction
  • Until the asset (or a part of it) is substantially complete
2 c assets with no cost
2.c Assets with no Cost
  • Donated Assets
    • Use fair value of assets received
  • Assets Received in Exchange
    • Use fair value of consideration given
    • e.g. giving shares in exchange for property
example2

Example

Mango Bay Ltd acquires a machine from Jets Ltd for the following consideration

Cash Rs20,000

Land costing Rs100,000 (fair value Rs140,000)

Assume Jets bank loan of Rs30,000

Required

Calculate the cost of the machine

exercise 10
Exercise 10

Acquisition Cost

2 d subsequent costs
2.d Subsequent Costs

Capitalize expenditure that increases

  • Economic life

e.g. installing a new vehicle engine

  • Productive capacity

e.g. extending the flying range of an aircraft

3 a purpose
3.a Purpose

Allocate cost of the asset

  • Over its useful life

Based on estimates

  • Useful life
  • Residual Value
  • Consumption of benefits
3 b depreciation methods
3.b Depreciation Methods

Based on consumption of benefits

example3

Example

A machine is acquired for Rs110,000.

Before it is efficiently operational, it requires installation costing Rs20,000 & modifications costing Rs10,000

It is expected to have a useful life of 6 years & salvage value of Rs15,000

Required

Calculate depreciation for the first 2 years

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