Accounting #6 - Non-Current Assets and Depreciation: black

black_samvara

Accounting #6 - Non-Current Assets and Depreciation

Mar 04, 2010 09:37

OMG half way through already, we skipped up two flights of stairs to use a lecture theatre that was cooler - UWA is powersaving and spending that energy on the labs *g* the temperature was pretty decent for me.

Group exercise #2 results were 90% which was awesome. Test #2 was 70% / 75% and review tells me I fall to pieces when faced with questions in the form 'if W changes will X, Y & Z...' a) increase, increase and decrease b) increase, decrease and decrease c) etc. I want to blame it on dyslexia and that does make it harder but it's also not understanding the relationships well enough to be able to make a sensible call.

What is Depreciation? (Hehe, wikipedia says Not to be confused with Deprecation.) The best I can do in simple language is say it's an accounting trick used to spread the cost of something over the entire time you use it. In non-simple language it's 'the process of allocating the net acquisition cost of a non-current asset to the particular periods that relate to the use of that asset.'

It does not represent the value (rise or fall) of the asset despite looking suspiciously similar.

Why do we do it?

So we can watch our assets being consumed (burn, baby, burn)
NOT so we can maintain business capacity although that seems to be a side-affect
NOT so we can match expense to revenue on balance sheet although that also seems to be a side-affect

How do Aussies do it? Handy guides may be found in the below sources:

IAS 16 Property, plant and equipment
AASB 116 Property, plant and equipment: Depreciation is 'an expense recognised systematically for the purpose of allocating the depreciable amount of a depreciable asset over its useful life.'

Break for 15 mins to snack and talk about Organisational Behaviour. It looks like I got lucky doing it last year, the assessment structure has changed and people seem stressed about it. Have offered my (dubious) study notes for moral support.

Things to think about:

Total acquisition costs - wah, have to factor in such things as shipping, taxes, licensing/registration, essential setup costs, installation, tuning etc.
- At acquisition - '...all reasonable and necessary expenditure incurred to place the asset in position and condition for use'
- After acquisition - '...all expenditures which enhance the future economic benefits of the asset beyond those initially expected and or extend the useful life of the asset'
Disposal value; predicting of
Useful life, predicting of
Choice of depreciation method

What if we get it wrong?

See Worldcom:Accounting Scandals where CEO Bernard Ebbers and friends reported expenses as assets to the tune of an estimated $11 billion. Oops.

Break to work on an example in small groups: Total acquisition costs exercise - am loudest person :( We decided to capitalise upgrading the floor for new, heavier machinery, capitalise a contractor tuning said machinery and capitalise something else I cannot remember.

Vocabulary: Capitalise = use depreciation rather than treat as expense in current year.

Useful life; predicting of: can measure:

Potential physical life
Potential technical life
Expected commercial life
Legal life (i.e. patent, copyright)

Depreciation methods

Straight line method: Buy car worth $50,000, estimated useful life 4 years, worth $10,000 on resale (Residual Value). Maths is (Cost - Residual Value)/Useful life = (50,000 - 10,000)/4 = 10,000. Depreciate at $10,000 per year.

Declining Balance Method (aka Reducing Balance Method or Accelerated Method): Buy car worth $50,000, estimated useful life 4 years, worth $10,000 on resale. Maths is work out depreciation rate (4 years = 25% per annum). Introduce fudge factor of 1.5 or 2 depending on how enthusiastic you want to be, this example uses 1.5. Rate = 25% x 1.5 = 37.5%. Take 37.5% in year 1 = 37.5% of 50,000 = 18,750 and keep doing that to the reduced balance each year.

Unit based: Aware of existence but we didn't cover the maths in class.

Comparison of methods: Outcome is very similar but spread during life is different

Straight line: $40,000
- Simple and convenient
- Higher earnings in earlier years
Reducing: $42,371
- More complex
- Lower earnings in earlier years

Break to do a group exercise and do maths - compare two identical companies who use different methods to measure depreciation and who capitalised/expensed renovations differently. How to choose between them? Only difference is accounting methods despite different predicted profits.

What is the written-down (aka carrying value or book value)? (I'd be more bitter about this if one of my other loves Chemistry didn't measure temperature in Celcius, Farenheight, Kelvin and Clunks.)

'... cost of the non-current asset less the total depreciation to date.' Yes, you can revalue assets and frequently do in which case written-down value is valuation minus depreciation to date.

Implications for accounting policies: when comparing entities be aware of their choice of depreciation policies. Or hire an analyst you trust :p See Woolworths 2008 Financial Report page 79 for their somewhat non-detailed policy.

Intangible assets are divided into

Identifiable - patents, mastheads, trademarks. If purchased, record at cost. Depreciate (except we use a special word 'amortise') if expected to have a finite life, check annually for impairment if indefinite life.

Unidentifiable - goodwill, market penetration, effective advertising, good labour relations. If purchased, record at cost, not amortised, check annually for impairment.

Fled home playing v. loud music and danced with the woofer.
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