Tangible Non-Current Assets

Objective A & B: Defining and Comparing Non-Current and Current Assets

A non-current asset (also called a fixed asset) is an asset that is held for use in the production or supply of goods and services, for rental to others, or for administrative purposes, and is expected to be used for more than one accounting period. Examples include land, buildings, machinery, vehicles, and furniture.

A current asset is an asset that is expected to be realised (converted to cash), sold, or consumed within the entity's normal operating cycle or within 12 months of the reporting date. Examples include inventory, trade receivables, cash, and prepayments.

Objective C & D: Capital vs. Revenue Expenditure

One of the most important judgements in accounting is whether expenditure should be capitalised (recorded as an asset) or expensed (charged to profit or loss). This is the distinction between capital expenditure and revenue expenditure.

Capital expenditure is expenditure that results in the acquisition of a non-current asset or enhances the future economic benefits of an existing asset beyond its original standard of performance. Examples:

• Purchasing new machinery
• Adding an extension to a building
• Installing a new engine in a vehicle that extends its useful life

Revenue expenditure is expenditure that maintains the existing earning capacity of an asset or relates to the day-to-day running of the business. Examples:

• Routine repairs and maintenance
• Repainting a building
• Replacing worn tyres on a vehicle

The key test under IAS 16 is whether the expenditure provides future economic benefits beyond the current period and beyond the asset's original standard of performance. If yes, capitalise. If no, expense.

Objective E & F: Acquisition and Disposal

Acquisition

When a tangible non-current asset is acquired, it is recorded at its cost, which includes all expenditure necessary to bring the asset to its working condition and intended location.

Journal entry: Dr Non-Current Asset (cost) | Cr Cash/Payables

Disposal

When a non-current asset is disposed of, the entity must:

1. Remove the asset's cost from the asset account
2. Remove the accumulated depreciation from the accumulated depreciation account
3. Record the proceeds received
4. Calculate and record the gain or loss on disposal

Gain/Loss = Proceeds − Carrying Amount

Where: Carrying Amount = Cost − Accumulated Depreciation

A disposal account is often used to calculate the gain or loss:

• Debit Disposal account with the asset's cost
• Credit Disposal account with accumulated depreciation
• Credit Disposal account with proceeds (Dr Cash/Receivables)
• The balance on the disposal account is the gain (credit balance) or loss (debit balance)

Part Exchange

In a part exchange, the old asset is traded in as partial payment for a new asset. The part exchange value is treated as the disposal proceeds of the old asset. The remaining balance is paid in cash.