NON-CURRENT ASSETS

1.      Introduction
The assets of a business are classified as current assets or non-current assets.
IAS 1 (Presentation of financial statements) defines current assets and then states that all other assets should be classified as non-current assets.
Current assets include, cash, receivables, prepayments (see chapter 7) and inventory. They are all items that will be used or recovered in the short term.
A non-current asset is an asset which is used by the business over a number of years.
Non-current assets may be:

•  Tangible non-current assets. These are physical assets, such as land and buildings, plant and equipment, and motor vehicles; or

•  Intangible non-current assets. These are assets that do not have a physical existence such as patent rights.

Non-current assets are initially recorded in the accounts of a business at their cost. The cost of an item of property, plant and machinery consists of:

•  its purchase price after any trade discount has been deducted, plus any import taxes or non-refundable sales tax; and/or

•  the directly attributable costs of ‘bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management’ (IAS 16 Property, plant and machinery). These directly attributable costs may include:

· employee costs arising directly from the installation or construction of
the asset
· the cost of site preparation
· delivery costs (‘carriage inwards’)
· installation and assembly costs
· professional fees directly attributable to the purchase.
A question might provide information about the installation cost of an asset. This is capitalised as part of the cost of the asset.


2.      Capital and revenue items: capital and revenue expenditure
The difference between capital and revenue items, and between capital and revenue expenditure was explained in an earlier chapter.

Improvements are capitalised
Expenditure on a non-current asset after acquisition is treated as capital expenditure when it represents an improvement. This is added to the cost of the original asset.

Repairs are expensed
Expenditure on a non-current asset after acquisition is treated as revenue expenditure when it is incurred to make a repair. This is recognised as an expense in the statement of comprehensive income.

Advance payments
A business might make an advance payment towards a non-current asset.
This is recognised as a receivable known as an advance. It represents the right that the business has to receive an asset (or part of one) at some time in the future.

Advance Payments

Advances are not depreciated. An advance will become part of the cost of an asset when it is purchased.

1.      Depreciation and non-current assets

A business invests in assets in order to generate profit.

The accruals concept results in the recognition of revenue and the cost of earning that revenue in the statement of comprehensive income in the same accounting period.

This is relatively straight forward for costs. For example, rent for a period enables a business to use premises that are used to make profit. The rent is charged to statement of comprehensive income.

Expenditure on non-current assets is also incurred to enable a business to generate a profit. A non-current asset will help a business generate profit over several accounting periods. The cost of the benefit received from the use of such an asset must be recognised in the statement of comprehensive income in the same period that the benefit is recognised.

Depreciation

Depreciation is an expense that matches the cost of a non-current asset to the benefit earned from its ownership. It is calculated so that a business recognizes the full cost associated with a non-current asset over the entire period that the asset is used. In effect, the cost of the asset is transferred to the statement of comprehensive income over the life of the asset. This may be several years.

This article explains depreciation as an expense calculated at the end of the accounting period as an end-of-year adjustment. This might be the case for small businesses but larger businesses will often use software that is able to recognize depreciation on a monthly basis.

Read Also: END OF YEAR ADJUSTMENTS