Non-Current Assets

IAS 16 Property, Plant and Equipment applies to tangible non-current assets such as land, buildings, plant, machinery, motor vehicles, fixtures, and equipment.

Recognition criteria: An item of PPE is recognised as an asset when:

• 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

Initial measurement at cost. Cost includes:

• Purchase price — after deducting trade discounts and rebates, plus any import duties and non-refundable purchase taxes
• Directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management:
  • Site preparation and clearance costs
  • Delivery, handling, and transportation costs
  • Installation and assembly costs
  • Costs of testing whether the asset is functioning properly (net of any proceeds from selling items produced during testing)
  • Professional fees directly related to the asset (e.g., architects, engineers, surveyors)
• Estimated costs of dismantling, removing, and restoring the site — when the entity has a legal or constructive obligation to do so (recognised as a provision under IAS 37, with the corresponding debit added to the asset cost)
• Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset (IAS 23 — capitalised as part of the cost of the asset)

Costs EXCLUDED from PPE (expensed as incurred):

• Administration and other general overhead costs
• Costs of opening a new facility or introducing a new product
• Advertising and promotional costs associated with the asset
• Training costs for staff to use the asset
• Costs incurred while the asset is capable of operating but has not yet been brought into use, or is operating at less than full capacity
• Initial operating losses
• Costs of relocating or reorganising operations

Cost recognition ceases when the item is in the location and condition necessary for it to operate as intended. Costs incurred after that point are expenses.

After initial recognition, an entity must choose one of two models for each class of PPE (e.g., all land, all buildings, all vehicles). The choice must be applied consistently to the entire class.

Cost Model

Revaluation Model

Component Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable amount = Cost (or revalued amount) − Residual value

The depreciation method should reflect the pattern in which the asset's future economic benefits are expected to be consumed. It should be reviewed at least annually; if the expected pattern has changed, the method is changed as a change in accounting estimate (IAS 8) — applied prospectively.

Similarly, the useful life and residual value must be reviewed at least annually and revised if expectations differ from previous estimates.

Straight-Line Method

Reducing Balance (Diminishing Balance) Method

Units of Production Method

When an asset is disposed of (sold, scrapped, or exchanged), it is derecognised. Any difference between the net disposal proceeds and the carrying amount at the date of disposal is the profit or loss on disposal, recognised in profit or loss (not as revenue).

Profit / (Loss) on disposal = Net disposal proceeds − Carrying amount at date of disposal

Where: Carrying amount = Cost − Accumulated depreciation to the date of disposal

Part-year depreciation: If an asset is disposed of part-way through an accounting period, depreciation should be charged from the start of the period up to the date of disposal, using the entity's accounting policy (e.g., depreciate to the month of disposal, or charge a full year/no charge in the year of disposal — policy must be applied consistently).

Journal entries for disposal:

1. Charge depreciation up to the date of disposal (if mid-year)
2. Transfer the asset cost and accumulated depreciation to a disposal account:
   Dr Accumulated depreciation / Cr Asset (cost) — to remove accumulated depreciation
   Dr Disposal account / Cr Asset (cost) — to transfer the remaining carrying amount
3. Record proceeds: Dr Cash (or Receivable) / Cr Disposal account
4. The balance on the disposal account is the profit (credit balance) or loss (debit balance), transferred to profit or loss

Revalued assets: If the disposed asset was previously revalued, any remaining revaluation surplus relating to that asset is transferred from the revaluation surplus to retained earnings. This is a reserve transfer within equity — it does not pass through profit or loss, and it does not affect the profit or loss on disposal calculation.

When one item of PPE is acquired in exchange for another non-monetary asset, the cost of the new asset is measured at fair value — unless:

• The exchange transaction lacks commercial substance (i.e., the entity's future cash flows are not expected to change significantly as a result of the exchange), OR
• Neither the fair value of the asset received nor the asset given up can be measured reliably

If fair value cannot be used, the new asset is measured at the carrying amount of the asset given up. No gain or loss is recognised.

If fair value is used and the exchange has commercial substance, a gain or loss on disposal of the old asset is recognised as the difference between its carrying amount and its fair value.

An intangible asset is an identifiable non-monetary asset without physical substance. Examples: patents, trademarks, copyrights, licences, software, customer relationships, brand names.

Recognition criteria — an intangible asset is recognised only when:

1. It is identifiable: either (a) separable — can be separated from the entity and sold, transferred, licensed, rented, or exchanged individually or together with a related contract/asset/liability, OR (b) arises from contractual or other legal rights
2. It is probable that future economic benefits will flow to the entity
3. The cost can be measured reliably

Purchased Intangible Assets

Internally Generated Intangible Assets

Amortisation and Impairment of Intangibles

Investment property is property (land or a building, or part of a building, or both) held by the owner (or lessee under a finance lease / right-of-use asset) to earn rentals, for capital appreciation, or both.

Investment property is NOT:

• Property used in the production or supply of goods/services or for administration (→ IAS 16 PPE)
• Property held for sale in the ordinary course of business (→ IAS 2 Inventory / IFRS 5)

Initial measurement: At cost (including transaction costs).

Subsequent measurement — choice of model (applied to ALL investment property):

Fair value model:

• Investment property is measured at fair value at each reporting date
• Changes in fair value are recognised in profit or loss (not OCI)
• No depreciation is charged

Cost model:

• Measured at cost less accumulated depreciation less impairment (same as IAS 16 cost model)
• Fair value must still be disclosed in the notes

Critical distinction from IAS 16 revaluation:

Transfers: Property may be transferred between investment property and owner-occupied PPE (or vice versa) when there is a change in use. The transfer is made at the carrying amount (cost model) or fair value at the date of change of use (fair value model).

Government grants are assistance from government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the entity's operating activities.

Recognition: Grants are recognised when there is reasonable assurance that (a) the entity will comply with the conditions attached to the grant and (b) the grant will be received.

Revenue grants (related to income or expenses):

• Recognised in profit or loss on a systematic basis over the periods in which the entity recognises the related costs as expenses
• Can be presented as: (a) other income, or (b) deducted from the related expense
• Example: a grant of £50,000 to subsidise wages over 2 years → £25,000 recognised in income each year

Capital grants (related to the purchase/construction of non-current assets):

• Method 1 — Deferred income: The grant is set up as deferred income (liability) and released to profit or loss systematically over the useful life of the related asset. The asset is recorded at its full cost and depreciated normally.
• Method 2 — Deduct from asset cost: The grant is deducted from the cost of the asset. Depreciation is then calculated on the net (reduced) amount.

Both methods result in the same net effect on profit over the asset's life, but they present differently on the SoFP.

Repayment: If conditions are not met and the grant must be repaid, the repayment is accounted for as a change in accounting estimate (IAS 8 — prospective treatment). For capital grants: deferred income is reduced and any excess recognised in profit or loss; or the carrying amount of the asset is increased and additional depreciation charged prospectively.