Tangible Non-Current Assets (Financial Reporting – ACCA)

 1. IAS 16 Property, Plant and Equipment (PPE)
 
Definition & Recognition Criteria
Property, plant, and equipment are tangible items held for use in the production or supply of goods/services, for rental to others, or for administrative purposes, and are expected to be used during more than one period.
 
An item of PPE is recognized as an asset if, and only if:
It is probable that future economic benefits associated with the item will flow to the entity.
The cost of the item can be measured reliably.
 
Initial Measurement
PPE is initially measured at its cost.
Included Capital Costs: Purchase price (less trade discounts), import duties, non-refundable purchase taxes, site clearance/preparation, delivery, installation, assembly, professional fees (architects/engineers), capitalised borrowing costs (IAS 23), and the present value of dismantling/restoration costs.
Excluded Expenses (Written off as incurred): Administration and general overheads, staff training, opening/inauguration costs, advertising/marketing, initial operating losses, fuel, servicing, and abnormal costs (e.g., wasted materials or idle labor during construction delays).
 
Dismantling & Restoration Provisions
When an entity has an obligation to decommission or dismantle an asset at the end of its useful life, the present value of the future obligation is added to the initial cost of the non-current asset and recognised as a liability (provision). Over time, the liability is unwound by multiplying the opening provision by the discount rate (charged as a finance cost in profit or loss), while the capitalised asset amount is depreciated as normal.

 
Example 1.1 (Initial Cost & Dismantling Provision):
On 1 January 20X1, an energy firm builds an offshore wind turbine for $10,000,000. It is legally required to dismantle the turbine in 20 years. The estimated future cost of dismantling is $4,000,000. The cost of capital is 5%.
Present Value of Dismantling: .
Initial Asset Cost Capitalised: .
Year 1 Depreciation: .
Year 1 Finance Cost (Unwinding of Discount): .
Year-end Liability Balance: .
 
Subsequent Expenditure
Capital Expense (Asset): Capitalise if expenditure enhances future economic benefits (e.g., extends useful life, increases capacity/productivity, replaces a significant component, or represents a major safety inspection/overhaul).
Revenue Expense (Expense): Charge directly to the Statement of Profit or Loss if expenditure merely maintains current operational capabilities (e.g., day-to-day servicing, general repairs, routine maintenance).
 
Example 1.2 (Subsequent Expenditure Classification):
A factory machine undergoes an annual service costing $10,000. During the service, an upgraded motor is installed for $20,000, increasing output capacity by 30%.
Treatment: The $10,000 routine service is expensed immediately to profit or loss. The $20,000 motor upgrade enhances future economic benefits and is added to the carrying amount of the non-current asset.
 
 2. Depreciation Accounting

Basic Rules

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

• Depreciable Amount = Cost (or Revalued Amount)  Residual Value.
• Depreciation begins when the asset is available for use (not when it actually starts production) and continues even if the asset is idle.
• A change in depreciation method or useful life/residual value is a change in accounting estimate under IAS 8 (adjusted prospectively over the remaining useful life).

Example 2.1 (Revision of Useful Life):

An asset purchased on 1 January 20X1 for $20,000 (4-year original life, zero residual value) has been depreciated at $5,000/year. On 1 January 20X3 (carrying amount = $10,000), management reviews asset lives and determines the remaining useful life is now 4 years from that date.

• Treatment: Prospective adjustment. New annual depreciation for 20X3 onwards = .

Component & Overhaul Accounting

When an asset consists of major components with significantly different useful lives, each part is depreciated separately. Major inspection/overhaul costs are capitalised as a separate component and depreciated over the period until the next major overhaul.

Example 2.2 (Aircraft Component & Overhaul Split):

An airline purchases an aircraft for $25 million with a total body life of 20 years. However, $5 million of this cost relates to engine overhauls required every 5 years. At the end of Year 5, an overhaul is completed at a cost of $6 million.

• Years 1–5 Annual Depreciation:
  • Body:
  • Initial Overhaul Component:
  • Total Annual Depreciation (Years 1–5): $2.0 million
• Years 6–10 Annual Depreciation:
  • Body:
  • New Overhaul Component:
  • Total Annual Depreciation (Years 6–10): $2.2 million

Total Annual Depreciation (Years 6–10): $2.2 million
             
 3. Revaluation Model (IAS 16)

Entities can choose between the Cost Model (Cost less Accumulated Depreciation & Impairments) and the Revaluation Model (Fair Value less Subsequent Accumulated Depreciation).
Key Revaluation Rules
Regularity: Revaluations must be conducted with sufficient regularity so that carrying amounts do not differ materially from fair value at the reporting date.
Entire Class: When an item is revalued, the entire class of PPE to which it belongs must be revalued (to prevent selective cherry-picking).
Accounting Entries for Upward Revaluation
Restate gross asset cost/valuation to fair value.
Eliminate existing accumulated depreciation against the asset account.
Credit the revaluation gain to Other Comprehensive Income (OCI) and accumulate it in equity under the Revaluation Surplus.



 
Revaluation Losses & Excess Depreciation
Revaluation Loss: Expensed to profit or loss immediately as an impairment, unless there is a pre-existing credit balance in the revaluation surplus for that specific asset, in which case the loss is debited to OCI to offset the surplus first.
Excess Depreciation Reserve Transfer: After upward revaluation, annual depreciation increases. Entities may make an annual transfer directly within the Statement of Changes in Equity (SOCIE) from Revaluation Surplus to Retained Earnings for the excess depreciation:


 
 
 
Example 3.1 (Revaluation and Reserves Transfer):
A property costing $30 million ($6m land, $24m building) with an original 40-year life is revalued after 10 years to $60 million ($15m land, $45m building). Remaining life = 30 years.
Carrying Amount at Valuation Date: Land $6m + Building ($24m – 10/40  $24m) $18m = $24m.
Revaluation Gain in OCI: .
New Annual Depreciation: .
Old Annual Depreciation: .
Annual Reserve Transfer (SOCIE):  (Dr Revaluation Surplus / Cr Retained Earnings).
 
Disposal of Revalued Assets
Upon disposal of a revalued asset:
Calculate Profit/Loss on Disposal in the P&L as: .
Transfer any remaining balance in the Revaluation Surplus for that asset directly to Retained Earnings via the SOCIE.
 
4. IAS 20 Accounting for Government Grants

Grants are recognized only when there is reasonable assurance that the entity will comply with the conditions attached and the grant will be received. Grants are matched against the related costs on an accruals basis.
Types of Grants
Revenue Grants (Income-Related):
Presentation: Present either as a separate credit line in the Statement of Profit or Loss or deduct from the related expense.
Capital Grants (Asset-Related):
Method 1 (Netting off): Deduct the grant from the initial asset purchase cost; depreciate the net asset figure.
Method 2 (Deferred Income): Record the grant as deferred income (split between current and non-current liabilities) and release it systematically to profit or loss over the useful life of the asset.
 
Example 4.1 (Capital Grant Accounting Comparison):
An entity buys machinery for $100,000 (5-year useful life, straight-line) and receives a $15,000 capital grant.
Method 1 (Netting Off):
Asset Carrying Amount: .
Annual P&L Depreciation: .
Method 2 (Deferred Income):
Asset Carrying Amount: .
Annual P&L Depreciation: .
Annual P&L Grant Credit: .
Closing Deferred Income Balance (Year 1):  ($3,000 Current Liability, $9,000 Non-Current Liability). (Note: Both methods result in a net $17,000 annual P&L hit).
 
 5. IAS 23 Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset (one that necessarily takes a substantial period of time to get ready for its intended use or sale) must be capitalised as part of the asset cost.
Capitalisation Window
Commences when ALL three are met: Expenditure is being incurred, borrowing costs are being incurred, and activities to prepare the asset are in progress.
Suspended during: Extended periods in which active development is interrupted.
Ceases when: Substantially all activities necessary to prepare the qualifying asset for its intended use or sale are complete.
Capitalisation Formulas
Specific Borrowings:

General Borrowings: Multiply qualifying expenditures by the weighted average borrowing rate of general funds.
 
Example 5.1 (Capitalised Interest on Specific Loan):
On 1 January 20X8, Wilson takes an $18 million 5% loan to construct a factory. Surplus funds of $6 million are invested at 2% until 31 May 20X8. Construction starts on 1 March 20X8 and finishes on 31 December 20X8 (10 months).
Interest Payable (10 construction months): .
Investment Income (3 construction months: March 1–May 31): .
Net Capitalised Borrowing Cost: . (Pre-construction interest and investment income earned in Jan–Feb go to P&L).
        
6. IAS 40 Investment Property

An Investment Property is land or a building held to earn rentals, for capital appreciation, or both, rather than for owner-occupation or sale in the ordinary course of business.
Initial & Subsequent Measurement
Initial: Measured at cost.
Subsequent Choice (Applied to ALL investment properties):
Cost Model: Follows IAS 16 (Cost less accumulated depreciation & impairments).
Fair Value Model: Revalued to Fair Value at each reporting date. Gains/losses go directly to Profit or Loss (NOT OCI/Revaluation Surplus). No depreciation is charged.
 
Reclassification & Transfers
Property, Plant & Equipment (IAS 16)  Investment Property (IAS 40 Fair Value Model): Revalue under IAS 16 up to the date of change (gain to OCI/Revaluation Surplus), then transfer to IAS 40 at Fair Value.
Investment Property (IAS 40 Fair Value Model)  Property, Plant & Equipment (IAS 16): Revalue under IAS 40 up to the date of change (gain/loss to P&L), then transfer to IAS 16 at Fair Value (which becomes deemed cost).
 
Example 6.1 (Transfer from Investment Property to Owner-Occupied):
Kyle Co holds an investment property (Fair Value Model) carried at $12 million on 1 January 20X1. On 1 July 20X1, Kyle Co occupies the property for its own operations. On 1 July 20X1, the asset’s fair value is $14 million (remaining life = 14 years).
P&L Fair Value Gain (1 July): .
P&L Depreciation (July 1–Dec 31): .
SOFP Carrying Amount (31 Dec 20X1):  (under PPE).

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