CHAPTER 3: TANGIBLE NON-CURRENT ASSETS (PAGE 63 & 556)

Scope & Definition

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction.

Residual value is the net amount which the entity expects to obtain for an asset at the end of its useful
life after deducting the expected costs of disposal.

Entity specific value (Giá trị xác định theo đặc thù đơn vị) is the present value of the cash flows an
entity expects to arise from the continuing use of an asset and from its disposal at the end of its useful
life, or expects to incur when settling a liability.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (IFRS 13)

Carrying amount (giá trị ghi sổ/còn lại) is the amount at which an asset is recognised in the statement of
financial position after deducting any accumulated depreciation and accumulated impairment losses.

An impairment loss (tổn thất tài sản) is the amount by which the carrying amount of an asset exceeds
its recoverable amount. (IAS 16)
Carrying amount > Recoverable amount
Impairment loss = Carrying amount – Recoverable amount
 Recoverable amount (giá trị có thể thu hồi): giá trị cao hơn giữa giá trị hợp lý của tài sản trừ đi
chi phí bán (net fair value) và giá trị sử dụng (value in use) của tài sản đó.
o Maximum amount of money from continuing using or selling the asset
o Net fair value = Fair value – Cost to sell
o Value in use: Giá trị hiện tại của các dòng tiền dự kiến trong tương lai sẽ thu được từ
một tài sản.
 Example: A Co hold an item of machinery. The following information is relevant:
o The machine is held at historical cost
o The carrying amount of the machinery is $10,500
o The fair value of the machinery is $10,000, the cost of selling is $500
o The value in use of the machinery is estimated to be $9,000
Determine whether the machinery is impaired and if so, calculate the impairment loss. The asset
has never been previously revalued.

Net fair value (NFV) = 10,000 – 500 = $9,500

Value in use (VIU) = $9,000
 Recoverable amount = net fair value = $9,500 because NFV is higher than VIU.

Carrying amount = $10,500

Since carrying amount > recoverable amount, the machinery is impaired.
Impairment loss = 10,500 – 9,500 = $1,000
Other Comprehensive Income (OCI) – Accounting mechanism to include revenues, expenses, gains and
losses within the financial statement that have not been realized yet.
 OCI is recorded under normal operations income statement.
 Accumulated OCI is record under Equity and will be transferred to Retained Earning at the end
of the period.

Income Statement Balance Sheet

(Statement of Comprehensive Income/SOCI) (Statement of Financial Position/SOFP)
Revenue Assets
Cost
Net Income Liabilities
Comprehensive Income
OCI Equity
Retained earnings
Total Comprehensive Income Accu. OCI

Example:

DEBIT Investment 1,000

CREDIT Cash 1,000

DEBIT Investment 500

CREDIT Gain OCI 500

DEBIT Investment 100

CREDIT Gain OCI 100

Income Statement Balance Sheet

(Statement of Comprehensive Income/SOCI) (Statement of Financial Position/SOFP)
Revenue Assets
Cost Investment 1,000
Net Income
Comprehensive Income Liabilities
OCI
Equity
Total Comprehensive Income Retained earnings
Accu. OCI

Income Statement Balance Sheet

(Statement of Comprehensive Income/SOCI) (Statement of Financial Position/SOFP)
Revenue Assets
Cost Investment 1,000 + 500
Net Income
Comprehensive Income Liabilities
OCI 500
Equity
Retained earnings
 Total Comprehensive Income Accu. OCI

Income Statement Balance Sheet

(Statement of Comprehensive Income/SOCI) (Statement of Financial Position/SOFP)
Revenue Assets
Cost Investment 1,500 + 100
Net Income
Comprehensive Income Liabilities
OCI 500 + 100
Equity
Total Comprehensive Income Retained earnings
Accu. OCI

Property, plant, and equipment (plant assets/fixed assets) are tangible assets of a durable nature.
 “Used in operations” (production/supply of goods or services, for rental to others, or for
administrative purposes) and not for resale.
 Expected to be used more than one period (one fiscal year).
 Long-term in nature and usually depreciated.
 Possess physical substance.
 Includes:
o Land
o Building structures (offices, factories, warehouses), and
o Equipment (machinery, furniture, tools).

Recognition & Measurement

Recognition of PPE
2 criteria:
 It is probable that future economic benefits associated with the asset will flow to the entity
(inflow)
o Assess the degree of certainty attach to such flow based on evidence available at the
date of initial recognition (usually the date of purchase).
 The cost of the asset to the entity can be measured reliably (have invoice and data for checking)
o The purpose (for use/rent) for which an item is acquired and/or held
o The useful life of an item (longer than 1 period)
o The future economic benefits flowing to the entity
o Cost if reliably measurable
 Apply to subsequent expenditure and costs incurred initially
Example: A shop building is extended to include a new café as a revenue source

Items recognized as PPE:

 Separate items:
o Major components or spare parts (linh kiện)
 o Large and specialised items: should be broken down into its composite part where
different parts have different useful lives and different depreciation rate, thus, identified
individually.
o Example: An aircraft can be separated into the body and engines, which have different
useful life and separately recorded in PPE.
 Safety and environmental equipment (required by law): necessary for the entity to obtain
future economic benefits from its other assets.
 Group of relatively insignificant items together (small tools)

Note: Smaller items (tools, dies and moulds) are not individually recognized as PPE. They are written off
as expenses.

Recognition of Initial Costs (After PPE qualifies for recognition as an asset)

Historical cost measures the cash or cash equivalent price of obtaining the asset and bringing it to the
location and condition necessary for its intended use.

In general, components of cost/costs include:

1. Purchase price, including import duties and non-refundable purchase taxes, less trade discounts
and rebates.
2. Directly attributable costs of bringing the asset to the location and condition necessary for it to
be used in a manner intended by the company.
 The costs are capitalised into the cost of the asset.
 Costs to be included:
o Costs of employee benefits arising directly from the construction or acquisition of the
item of PPE
o Costs of site preparation
o Initial delivery and handling costs
o Installation and assembly costs
o Professional fees
o Costs of testing
o Site restoration provision (dự phòng cho chi phí/nghĩa vụ trong tương lai)
3. Estimate of cost of dismantling and removing asset along with restoring site
 The platform gives rise to a liability for restoration under IAS 37 Provisions, Contingent Liabilities
and Contingent Assets.
 It is an essential condition of having the asset available for use.
 Included in the value of the asset and depreciated over its useful life.

 Cost = Purchase Price + Directly Attributable Costs + Estimated costs of dismantlement, removal,
and restoration
 These costs bring an asset into working condition.
Costs to be Capitalized (cộng vào tiền gốc): original costs after purchasing, not yet using the asset

 Equipment/Machinery:
o Purchase price
o Freight and handling charges
o Insurance on the equipment while in transit (while operating)
o Cost of special foundations if required
o Assembling and installation costs
o Costs of conducting trial runs
o Repairing costs for second-hand machinery

Note: Đối với new machinery, chi phí sửa chữa sẽ không tính vào cost mà tính vào expense. Nếu dùng
second-hand machinery, chi phí sửa chữa sẽ cộng vào cost.

 Land (not depreciable):

o Purchase price
o Closing costs, such as title to the land, attorney’s fees, and recording fees
o Costs of grading, filling, draining, and clearing (chi phí phát sinh để đưa đất vào sử dụng)
o Assumption of any liens, mortgages, or encumbrances on the property
o Additional land improvements (hàng rào, bóng đèn, parking lot…) that have an indefinite
life (long-term)
 Building:
o Materials, labor, and overhead costs incurred during construction
o Professional fees and building permits
o Self-constructed assets

Note: Đối với new-constructed building, chi phí thuê labor, kĩ sư thiết kế, engineering… sẽ cộng vào
building. Đối với existing/old building muốn xây lại thì chi phí renovation sẽ cộng vào cost của old
building.

Decommisioning cost
  The elements of cost to be incorporated in the initial recognition of an asset are to include the
estimated costs of its eventual dismantlement.
 Recorded at fair value, usually the present value of future cash outflows associated with the
reclamation or restoration.

Cost of self-constructed assets:

 Same as acquired assets
 If business makes their own assets and sell them externally, then the asset’s cost will be the cost
of its production.
 Abnormal costs (wasted material, labour or downtime costs) are excluded from the asset’s cost.
 Example: A building company builds its own head office.

Subsequent expenditure:
 Expenditure incurred in replacing or renewing a component of an item of PPE must be
recognised in the carrying amount of the item.
 The carrying amount of the replaced or renewed component must be derecognised.

The following costs will not be part of the cost of property, plant or equipment unless they can be
attributed directly to the asset's acquisition, or bringing it into its working condition.
 Administration and other general overhead costs
 Start-up and similar pre-production costs
 Initial operating losses before the asset reaches planned performance
 All of these will be recognised as an expense rather than an asset

Exchanges of assets:

If items of PPE are exchanged, IAS16 requires them to be measured at fair value, unless
 The exchange transaction lacks commercial substance
 The fair value of neither of the assets exchanged can be measured reliably
 Cost is measured at the carrying amount of the asset given up (assets before exchanging).

Exercise 1:

The expenditures and receipts below are related to land, land improvements, and buildings acquired for
use in a business enterprise. Determine how the following should be classified:

a. Money borrowed to pay building contractor (signed a note/notes payable)

b. Payment for construction from note proceeds
c. Cost of land fill and clearing
d. Delinquent real estate taxes on property assumed by purchaser
e. Premium on 6-month insurance policy during construction
f. Refund of 1-month insurance premium because construction completed early
g. Architect’s fee on building
h. Cost of real estate purchased as a plant (nhà máy) site (land $200,000 and building $50,000)
i. Commission fee paid to real estate agency
j. Cost of razing and removing building
 k. Installation of fences around property
l. Proceeds from residual value of demolished building
m. Interest paid during construction on money borrowed for construction
n. Cost of parking lots and driveways
o. Cost of trees and shrubbery planted (permanent in nature)
p. Excavation costs for new building

Answer:

a. Building  cho building construction

b. Building  cho building construction
c. Land  đưa đất vào sử dụng
d. Land  thuế đánh vào đất chứ không phải vào nhà
e. Buildings  cho building construction
f. (Buildings)  trừ vào tài khoản buildings
g. Buildings
h. Land  mua đất để xây nhà máy
i. Land  real estate liên quan đến đất
j. Land  để đưa land vào sử dụng
k. Land improvements
l. (Land)  Khi demolish building thì chi phí tháo dỡ nhà toàn bộ sẽ tính vào cost of land vì đây là
chi phí đưa đất vào sử dụng. Nếu trong căn nhà chuẩn bị phá (để đưa đất vào sử dụng) còn tài
sản bán được không tính vào tiền đất vì không phải chi phí tháo dỡ
m. Buildings
n. Land improvements
o. Land  vì permanent, không bị deplete
p. Buildings

Exercise 2:

Tusco bought 20 machines to producing cotton on 1 Jan 2020 with cost of $100,000 for each and
company receives a trade discount at $1,000 for each. Furthermore, for enhancing the capacity of these
machines, Tusco paid more $400 for each machine to upgrade rotating wheel of the machines. The
project related to these PPE (Property Plant and Equipment) last for 4 years. When the project ended at
31/12/2023. The dismantling cost is $50,000 for each, discount rate 10%. Calculate the initial cost of the
machines.

Answer:

Initial cost for 1 machine = (100,000 – 1,000) + 400 + 50,000 x (1 + 10%)-4 = $133,550

Initial cost for 20 machines = $2,671,013

 Exercise 3:

Corella Ltd has acquired a new equipment, which it has now installed in its factory. Assess which of the
following items should be capitalized into the cost of the equipment. Provide a reason for your
conclusions.

a) Labour and travel costs for managers to inspect possible new items of equipment and for
negotiating for the new equipment.
b) Freight costs and insurance to get the new equipment to the factory.
c) Costs for renovating a section of the factory, in anticipation of the new equipment's arrival, to
ensure that all the other parts of the factory will have easy access to the new equipment.
d) Cost of cooling machine to assist in the efficient operation of the new equipment.
e) Costs of repairing the factory door, which was damaged by the installation of the new
equipment.
f) Training costs of workers who will use the equipment.

Answer:

a. Yes
b. Yes
c. Yes
d. Yes
e. No (recorded as expense)
f. No (cannot be controlled)

Subsequent Measurement

Companies value PPE in subsequent periods using either

 Cost method: IAS 16 requires that assets are carried at historic cost less any accumulated:
o Depreciation
o Impairment losses

The costs incurred at the time the capacity is changed must be able to be measured reliably.

= Cost – Accumulated Depreciation – Accumulated Impairment Loss

 Fair value (revaluation) method:

o Increase in value: credited to a revaluation surplus (ie part of owners' equity)
o Decrease in value: any decrease should be recognised as an expense

Revaluation model is available only if the fair value of the item can be measured reliably.

= Fair Value – Subsequent Accumulated Depreciation – Subsequent Accumulated Impairment Loss

Type of Expenditure Definition Usual Accounting Treatment

 Costs of day-to-day servicing to maintain a given
Repairs and Maintenance Expense in the priod incurred
level of benefits (regular maintenance)

Expenditure required for continuing operation Capitalize and amortize over the period
Regular major inspections
of the Asset between major Inspections

Capitalize and depreciate over the

The addition of a new major component to an
Additions remaining useful life of the original asset
existing asset
or its own useful life, whichever is shorter
Capitalize and depreciate over the useful
Improvements The replacement of a major component
life of the improved asset
If expenditures are material and clearly
Expenditures to restructure an asset without increase future benefits, capitalize and
Rearrangements
addition, replacement, or improvement depreciate over the future periods
benefited

Example:
A piece of machinery has an annual service costing $10,000. During the most recent service, it was
decided to replace part of the engineering meaning that it will work faster and produce more units of
product per hour. The cost of the replacement part is $20,000.

Would this expenditure be treated as asset or expense items?

Answer:

$10,000: recorded as expense

$20,000: capitalized

Revaluation surpluses:

Revaluation surpluses are recognized in equity (credit to OCI), meaning not recognized in income
statement, unless there was previously a decrease on the revaluation of the same asset. Revaluation
profit/loss is recognized in income statement.

 Increase in value on revaluation:

DEBIT Carrying amount (statement of financial position) X

CREDIT Other comprehensive income (revaluation surplus) X

 Decrease in value on revaluation:

DEBIT Revaluation profit/loss X

CREDIT Carrying amount (statement of financial position) X
Treatment of Revaluation Adjustments

 Linear (chỉ tăng hoặc chỉ giảm, không vừa tăng vừa giảm)
o Tăng: Gain on Revaluation (OCI)
o Giảm: Expense on Revaluation
 Vừa tăng vừa giảm:
o Ban đầu tăng: Gain on Revaluation (OCI)
o Lúc sau giảm qua mức original cost
 Từ phía trên đến original cost: Loss on Revaluation (OCI)
 Từ original cost xuống dưới: Loss on Revaluation (P/L)
 Comparing Fair Value to Carrying Value:
o Fair Value > Carrying Value: gain
o Fair Value < Carrying Value: loss

Note: Nếu equipment/land/machinery tăng value thì surplus ghi nhận vào income/OCI (credit), còn nếu
giảm value thì surplus ghi nhận vào income/OCI (debit)

Example 1: Reversing a revaluation decrease

Binkie Co has a year end of 30 June 20X6. On 1 July 20X3, a decline in land value led the company to
reduce the carrying amount of land from $150,000 to $130,000. The decline was recorded as an expense
in profit or loss. There have been no further changes in the land until a surge in land prices in the current
year mean the land is worth $200,000 at 30 June 20X6.

Account for the revaluation in the current year.

Answer:

Example 2: Revaluation decrease

Using the information in Example 1, but swapping round the figures, let’s assume that the land original
cost was $150,000, it was revalued upwards to $200,000 on 1 July 20X3 and the valuation at 30 June
20X6 has fallen to $130,000.
Account for the decrease in value.

Answer:

Example 3:

Binkie Co has an item of land carried in its books at $13,000. Two years ago a slump in land values led
the company to reduce the carrying value from $15,000. This was taken as an expense in profit or loss.
There has been a surge in land prices in the current year, however, and the land is now worth $20,000.

Account for the revaluation in the current year.

Answer:

DEBIT Expense on Revaluation (P/L) 2,000

CREDIT Land 2,000

DEBIT Land 7,000

CREDIT Revaluation surplus 2,000
Gain on Revaluation (OCI) 5,000
Example 4:

Let simply swap round the example given above. The original cost was $15,000, revalued upwards to
$20,000 two years ago. The value has now fallen to $13,000.

Account for the decrease in value.

Answer:

DEBIT Revaluation Surplus 5,000

Loss on Revaluation (P/L) 2,000
CREDIT Land 7,000

Example 5:

a) On 31 December, 2019

Land $ 150,000
Motor vehicle $ 65,000
Less: Accumulated depreciation 25,000 40,000

A decision is made on 31 December 2019 to adopt the revaluation model, and to revalue both classes of
assets: the land to a fair value of $170,000 and the motor vehicle to a fair value of $45,000.

b) After the revaluation, the asset accounts appear as follows:

 Land $ 170,000
Motor vehicle 45,000

Depreciation expense for the year ending 31 Dec 2020 if the vehicle has a useful life of 3 years and
residual value at $3,000?

c) On 31 December 2020, motor vehicle fair value is $25,000

Motor vehicle $ 45,000

Less: Accumulated depreciation 14,000 31,000

d) On 31 December, 2019

Land $ 150,000
Motor vehicle $ 65,000
Less: Accumulated depreciation 25,000 40,000

On 31 December 2019, fair values for the land and motor vehicle have fallen to $140,000 and $34,000.

e) On 31 Dec 2019

Motor vehicle $ 34,000

On 31 December 2020, the fair value of the vehicle is $30,000. Useful life 3 years and residual value
$3,000.

Answer:

Motor:
31.12.2020
Cost = 65k
Acc. Dep. = 25k (deleted as Cost = 45k
motor has new value) Acc. Dep. = 14k
-> CV = 40k -> CV = 31k
FV = 45k FV = 25k

31.12.2019

(CV: carrying value, FV: fair value)

a) Note:
 Step 1: Mới vào ghi ngay Debit Accumulated Depreciation (write off).
 Step 2: So sánh cost với FV để biết land tăng (debit) hay giảm (credit) giá trị.
 Step 3: So sánh FV với CV để biết gain (credit) hay loss/expense (debit).

2019 Dec 31 DEBIT Land 20,000

CREDIT Gain on Revaluation (OCI) 20,000
 31 DEBIT Accumulated Depreciation 25,000
CREDIT Gain on Revaluation (OCI) 5,000
Motor 20,000

31 DEBIT Gain on Revaluation – Land (OCI) 20,000

Gain on Revaluation – Motor (OCI) 5,000
CREDIT OCI Summary 25,000

31 DEBIT OCI Summary 25,000

CREDIT Revaluation Surplus 25,000

45,000−3,000
b) Depreciation expense = = $14,000
3

2020 Dec 31 DEBIT Depreciation Expense – Motor 14,000

CREDIT Accumulated Depreciation – Motor 14,000

c)

2020 Dec 31 DEBIT Accumulated Depreciation – Motor 14,000

Loss on Revaluation – Motor (OCI) 5,000
Expense on Revaluation – Motor (P/L) 1,000
CREDIT Motor 20,000

d)

2019 Dec 31 DEBIT Expense on Revaluation (P/L) 10,000

CREDIT Land 10,000

31 DEBIT Accumulated Depreciation 25,000

Expense on Revaluation (P/L) 6,000
CREDIT Motor 31,000

34,000−3,000
e) Depreciation expense = = $10,333
3

Cost = 34,000 | Carrying value = 34,000 – 10,333 = 23,667 | Fair value = 30,000

2020 Dec 31 DEBIT Depreciation Expense – Motor 10,333

CREDIT Accumulated Depreciation – Motor 10,333

31 DEBIT Accumulated Depreciation – Motor 10,333

CREDIT Gain on Revaluation – Motor (P/L) 6,000
Gain on Revalution – Motor (OCI) 333
Motor 4,000
Depreciation Method: Straight-line

C ost−Salvage value
Depreciation expense =
Useful life

Review of Useful Life: depends on frequency of using the asset

Example 1:

B Co acquired a non-current asset on 1 January 2022 for $80,000. It had no residual value and a useful
life of ten years. On 1 January 2025 the remaining useful life was reviewed and revised to four years.
What will be the depreciation charge for 2025?

Answer:

Original cost 80,000

Depreciation 2022 – 2024 (80,000 x 3/10) 24,000 56,000

Carrying amount at 31 Dec 2024 = 56,000

Remaining life 4 years

Depreciation charge 2025 – 2028 = 56,000/4 = 14,000

Example 2:

Apex Fitness Club uses straight-line depreciation for a machine costing $23,860, with an estimated 4 year
life and a $2,400 salvage value. At the beginning of the third year, Apex determines that the machine has
3 more years of remaining life, after which it will have an estimated $2,000 salvage value.

Compute:
(1) The machine’s book value at the end of its second year.
(2) The amount of depreciation for each of the final three years given the revised estimates.

Answer:

23,860−2,400
Annual depreciation expense = = $5,365
4

2 years depreciation = Accumulated depreciation = 5,365 x 2 = $10,730

4 years  2 years used  remain 2 years + 1 year

 ( 23,860−10,730 )−2,000
New depreciation expense = = $3,710
3

Example 3:

Crinckle Co bought an asset for $10,000 at the beginning of 2016. It had a useful life of five years. On 1
January 2018 the asset was revalued to $12,000. The expected useful life has remained unchanged (ie
three years remain). Account for the revaluation and state the treatment for depreciation from 2018
onwards.

Answer:

Derecognition

A company may retire plant assets voluntarily or dispose of them by:

 Sale
 Exchange
 Discarded (throw away)

Depreciation must be taken up to the date of disposition.

Example 1: Disposal of Assets

Rayya Co. purchases a machine for $126,000 on January 1, 2020. Straight-line depreciation is taken each
year for 4 years assuming a seven-year life and no salvage value. The machine is disposed of on July 1,
2024, during its fifth year of service.

a) Prepare entry to record the partial year’s depreciation on July 1, 2024.

b) The machine is sold for $50,000 cash.
c) The machine is sold for $41,000 cash.

Answer:

126,000−0
Accumulated depreciation at 01/07/2024 = x 4.5 = $81,000
7

Book value at 01/07/2024 = 126,000 – 81,000 = $45,000

a)

DEBIT Depreciation expense 9,000

CREDIT Accumulated depreciation (18,000 x 6/12) 9,000
 b)

DEBIT Cash 50,00

0
Accumulated depreciation 81,00
0
CREDIT Gain on sale 5,000
Machine 126,000

c)

DEBIT Cash 41,00

0
Accumulated depreciation 81,00
0
Loss 4,000
CREDIT Machine 126,000

Example 2:

Gilly Constrution trades in an old tractor for a new tractor, receiving a $29,000 trade-in allowance and
paying the remaining $83,000 in cash. The old tractor had cost of $96,000, and had accumulated
depreciation of $52,500.

Prepare the journal entry to record the exchange.

Answer:

Book value = 96,000 – 52,500 = $43,500

Cost of new tractor = 29,000 + 83,000 = $112,000

DEBIT New tractor 112,000

Accumulated depreciation 52,500
Loss on trade – in 14,500
CREDIT Cash 83,000
Old tractor 96,000

Example 3:

ACB Ltd has a policy of revaluing its equipment to fair value. The details at 30 June 2022 relating to ACB
Ltd’s equipment, which had previously been revalued upwards by $28,000, are as follows.

Equipment $ 352,000
Less: Accumulate depreciation 88,000 $ 264,000
At the date of the revaluation increase (1 July 2021) the equipment had a zero residual value and a
useful life of 4 years. Depreciation has been calculated using the straight-line method. On 31 December
2022, ACB Ltd was informed that the fair value of the equipment was $200,000. The useful life and
residual value have not changed. At 30 June 2023, the carrying amounts are not materially different from
fair values.

a) Prepare all necessary general journal entries at 31 December 2022.

b) Calculate depreciation expense at 30 June 2023.
c) How would the motor equipment be shown in financial statements at 30 June 2023?

Answer:

a)

DEBIT Depreciation expense 44,00

0
CREDIT Accumulated depreciation 44,000

DEBIT Accumulated depreciation (88k + 44k) 132,000

Loss on Revaluation (OCI) 20,000
CREDIT Equipment 152,000

b)

DEBIT Depreciation expense 40,00

0
CREDIT Accumulated depreciation [(200 x 2.5) x 6/12] 40,000

Disclosure