ACCA Applied Knowledge · Financial Accounting

Tangible non-current assets: formula sheet

Full chapter guide

Key formulas

Cost of a non-current asset (IAS 16): Cost = Purchase price (net of trade discounts) + import duties and non-refundable taxes + directly attributable costs + initial estimate of dismantling/restoration costs; Directly attributable costs include delivery, installation, site preparation, testing and professional fees. Recoverable sales tax is not included.
Costs excluded from the asset: Administration and general overheads, staff training, advertising, initial operating losses, and repairs and maintenance = expense in profit or loss; If it does not bring the asset to working condition, it is not capital.
Subsequent expenditure rule: Improves or extends the asset or replaces a significant part = capital. Restores or maintains the existing standard = revenue; Check whether future economic benefits increase beyond the original assessment.
Effect of misclassification: Capitalised in error: profit and assets overstated. Expensed in error: profit and assets understated; Depreciation on the wrongly capitalised amount partly reduces the overstatement.
Depreciable amount: Cost − residual value; Cost includes delivery and installation. Under reducing balance the percentage is applied to carrying amount, not to this figure.
Straight-line annual charge: (Cost − residual value) ÷ useful life in years; Same charge every full year.
Reducing balance annual charge: Opening carrying amount × depreciation rate %; The rate is applied to carrying amount without first deducting residual value. Depreciation should not take the carrying amount below residual value. The rate is usually given in the question.
Carrying amount: Cost − accumulated depreciation; This is the figure shown in the statement of financial position.
Change in estimate: (Carrying amount at date of change − new residual value) ÷ remaining useful life; Apply from the date of change. Do not adjust prior years.
Depreciation journal: Dr Depreciation expense (profit or loss); Cr Accumulated depreciation; Accumulated depreciation is a separate account per asset class and is deducted from cost.
Cost of an asset: Cost = purchase price (net of trade discounts) + delivery + installation + testing + other costs to bring into use; Exclude repairs, training, and recoverable sales tax.
Carrying amount: Carrying amount = Cost − Accumulated depreciation; Use depreciation up to the date of disposal, including any part-year charge.
Profit or loss on disposal: Profit/(loss) = Proceeds − Carrying amount; A positive answer is a profit. A negative answer is a loss.
Part exchange proceeds: New asset cost = Part exchange allowance + Cash paid; The allowance is the disposal proceeds of the old asset.
Disposals account entries: Dr Disposals (cost); Cr Accumulated depreciation (depreciation to date); Cr Bank/Receivable (proceeds); If credits (accumulated depreciation plus proceeds) exceed the debit (cost), the balancing figure is a debit entry. That is the profit, transferred to profit or loss. If debits exceed credits, the balancing figure is a credit. That is a loss.
Revaluation gain or loss: Gain or (loss) = Fair value − Carrying amount before revaluation; Carrying amount = cost − accumulated depreciation at the revaluation date. Bring depreciation up to date first.
Gain treatment: Dr Asset (cost or valuation) / Cr Revaluation surplus (OCI); If an earlier loss on the same asset went through profit or loss, credit profit or loss first up to that loss.
Loss treatment: Dr Revaluation surplus (up to balance on that asset) / Dr Profit or loss (excess) / Cr Asset; Apply to each asset separately, not to the class as a total.
Depreciation after revaluation: (Revalued amount − Residual value) ÷ Remaining useful life; Land is not depreciated. Where there is a residual value, deduct it first.
Excess depreciation transfer (optional): Dr Revaluation surplus / Cr Retained earnings = Depreciation on revalued amount − Depreciation on original cost; This is a reserve transfer, not part of profit or loss.
Revaluation journals using the gross method: Dr Accumulated depreciation (remove) / Dr or Cr Asset cost (to valuation) / Cr Revaluation surplus; The net effect is that the asset's carrying amount equals fair value and accumulated depreciation is reset to zero.
Carrying amount: Carrying amount = Cost (or revalued amount) − Accumulated depreciation; Calculated per asset in the register. The register total should equal the ledger cost less ledger accumulated depreciation.
Reconciliation rule: Register total cost = General ledger cost account balance; Do the same check for accumulated depreciation. Any difference means an error in the register, the ledger, or both.
Profit or loss on disposal: Profit or (loss) = Disposal proceeds − Carrying amount at date of disposal; The register gives the cost and accumulated depreciation of the asset sold, so you can work this out.
Register roll-forward: Closing cost = Opening cost + Additions − Disposals at cost (± revaluations); Use the same layout for accumulated depreciation: opening + charge for year − depreciation on disposals.
Carrying amount: Carrying amount = Cost (or valuation) − Accumulated depreciation − Impairment losses; This is the figure shown in the statement of financial position.
Reconciliation of carrying amount: Opening carrying amount + Additions + Revaluation increases − Revaluation decreases − Impairment losses − Disposals (at carrying amount) − Depreciation for the year = Closing carrying amount; Include every movement in the year, or the roll-forward will not reconcile. Layout is often shown as cost and accumulated depreciation columns instead. Both approaches reach the same closing figure.
Revaluation surplus: Revaluation surplus = Fair value − Carrying amount before revaluation; Credit to revaluation surplus (OCI) when positive, except to the extent the gain reverses an earlier revaluation decrease on the same asset that was charged to profit or loss. That part is recognised in profit or loss. A deficit is charged to profit or loss, except to the extent of any existing surplus on that asset, which is charged to OCI first.
Class rule: One model per class of PPE; revalue the whole class together; You may use different models for different classes, such as cost for plant and revaluation for land.
Annual depreciation (straight-line): (Cost − Residual value) ÷ Useful life; Applied on the cost or on the revalued amount, depending on the model.

Quick revision

Capital expenditure creates or improves an asset; revenue expenditure maintains it and goes to profit or loss.
Cost includes purchase price, delivery, installation, testing and directly attributable costs, less trade discounts.
Straight-line depreciation = (cost − residual value) ÷ useful life.
Reducing balance depreciation = rate × opening carrying amount for the year.
Carrying amount = cost (or valuation) − accumulated depreciation.
Gain or loss on disposal = proceeds − carrying amount at disposal.
A change in estimate is applied from now on; do not restate past years.
Revaluation surplus goes to other comprehensive income and equity, not profit or loss.
After a revaluation, depreciate the new carrying amount over the remaining life.
A register records each asset's cost, location, depreciation and carrying amount, and should be reconciled to the ledger.
Land is not depreciated; buildings are.
IAS 16 requires disclosure of measurement basis, depreciation methods and lives, and a reconciliation of carrying amounts.

Common mistakes

Capitalising staff training costs for a new machine Fix: IAS 16 excludes training. It does not bring the asset to its location or condition. Expense it.
Treating all repairs as revenue Fix: Read what the work does. Replacing a major part or upgrading capacity is capital. Restoring the original standard is revenue.
Deducting residual value before applying the reducing balance rate. Fix: In reducing balance, apply the rate to the carrying amount without first deducting residual value. Just check that depreciation does not take the carrying amount below residual value.
Applying the reducing balance rate to original cost every year. Fix: Each year, recalculate on the opening carrying amount (cost less accumulated depreciation to date).
Comparing proceeds with cost instead of carrying amount. Fix: Always calculate carrying amount first. Profit or loss is proceeds minus carrying amount.
Forgetting depreciation for the part year up to the disposal date. Fix: Read the question for the depreciation policy in the year of disposal. Add the charge up to the sale date if required.
Taking a revaluation gain to profit or loss. Fix: Remember that the gain is unrealised. Credit the revaluation surplus and show it in other comprehensive income.
Comparing fair value with cost instead of with carrying amount. Fix: Always deduct accumulated depreciation up to the revaluation date before you find the gain.
Saying the register is part of double entry. Fix: Remember it is a memorandum record. Only the general ledger has debits and credits.
Journalling a correction when only the register is wrong. Fix: Journal only if the ledger is wrong. If the register missed an item the ledger already has, update the register only.

Exam tips

Objective test questions often list five or six costs. Classify each one on paper before looking at the options.
For number entry, show the cost build-up: start with the net price, then add only attributable costs.
Check whether sales tax is recoverable. The question usually states it. If not stated, follow the wording given.
In Section B, expect the cost of an asset to feed into a depreciation or disposal calculation. Get the cost right first.
Read what the work achieves, not what it is called. A repair that increases capacity is capital.
Read what the question asks for: the annual charge, accumulated depreciation or carrying amount. Many wrong options are the right working but the wrong figure.
In number entry questions, check the units, sign and rounding instructions before you type.
Look for hidden cost items: delivery, installation and testing that the asset works properly go into cost. Repairs, staff training and general overheads do not.