Accounting for Assets

Accounting for Assets

Problem Solutions

Ch 17 – Qn 1 SIMPLE SA

(a) Annual depreciation charge

Year 1

Straight-line

(SF800,000 − SF104,000)/4= SF174,000

Reducing balance

DepreciationNew carrying value

Year 1 40% of SF800,000= SF320,000SF480,000

Year 2 40% of SF480,000=SF192,000SF288,000

Year 3 40% of SF288,000=SF115,200SF172,800

Year 3 40% of SF172,800=SF69,120SF103,680

SF103,680 is acceptably close to the straight-line residual value of SF104,000

(b) Comment to include

• Directors responsible under IAS 16 for selecting an appropriate method.

• Little guidance given as to how to exercise the choice but the following matters may be relevant:

• risk of technological change

• incidence of repairs

• extent to which the asset characteristics favour a particular method, e.g. a lease would be amortised evenly over its life

Ch 17 – Qn 4 AMY

(a) The figures should be the total cost of making the non-current asset usable, excluding all costs of actually using it. Therefore,

11,000 + 100 + 200 + 400 = £11,700

The additional component is the cost of the machine as it enhances the revenue-earning capacity of the asset.

The replacement parts are the cost of using the machine – hence the difference in treatment between the two. Maintenance is obviously a cost of usage.

(b) Depreciation spreads the cost (or value) of an item over its useful life, in appropriate proportion to the benefit (usefulness).

It is necessary in accordance with the matching convention – allocating expense against corresponding benefit, as part of the profit calculation.

(c) The straight-line method charges a constant percentage of the cost (or value) each year.

The diminishing balance method charges a constant percentage of the net book value (cost less accumulated depreciation brought forward).

Thus, the straight-line method has a constant charge but the diminishing balance method has a charge reducing each year of the asset life.

The two methods therefore make different assumptions about the usefulness, the trend or pattern of benefit, of the fixed asset concerned.

(d) Objectivity implies lack of bias. It removes the need for, and the possibility of, subjectivity, of personal opinion. For an accounting figure to be objective, it must be expected that all accountants would arrive at the same figure.

Clearly, the figure stated on an invoice has a high degree of objectivity. However, the calculation of depreciation is based on estimates of future life and future usefulness and is therefore highly subjective.

(e) This practice can claim the advantage of greater prudence, as the expense is always the higher of the two possibilities. However, it seems to lack consistency. Perhaps more importantly, it obviously fails to attempt to follow the matching convention. It makes no attempt to make the trend of expenses consistent with the trend of benefit or usefulness.

If the profit figure, or profit trend, is regarded as important, then it seems an unsatisfactory practice.

Chapter 19 Exercise

Ch 19 Qn 6BRANDS PLC

(i) The milk quota is traded in an active market and it would therefore be included in the consolidated balance sheet at its fair value of £600,000.

(ii) The licence was acquired without any fee being required and it therefore had a nil cost to Countrywide.

However, in the consolidation, it is necessary to consider whether there is a fair value that can be attached to it.

In the circumstances given, that is difficult. This is because there is no active market in that this is the first licence to have been granted and the estimated cash flows may not be sufficiently reliable to establish an amount as the licence has only recently been granted and there is no experience to support the estimates.

In the circumstances, no value could be attached to the licence in the consolidated statement of financial position.

(iii) In considering the ‘Naughty but Nice’ yoghurt trade, there is the advantage that there has been a sale of a similar trade name that indicates the existence of a reliable value. If this sale is accepted as evidence, then it might be that the trade name could be reported in the consolidated statement of financial position at £2. However, justification would be required to support the increase above the current sale price comparator of £1.5m.