School of Accounting

ACCT 1511: Accounting and Financial Management 1B

Semester 2, 2013

Topic 2

Assets (1): Application of Financial Reporting Principles

Student Handout
Contents:
1.
Learning Objectives (LO)
2.
Tutorial Questions
3.
Lecture Materials

Website: http://telt.unsw.edu.au

Introduction and Learning Objectives

At the end of this week, you should:
LO1. Understand the definition and recognition criteria for assets and expense, and why
they are important.
LO2. Be technically competent in journal entries and T-accounts relevant to assets.
LO3. Be technically competent in calculating gains/ losses on disposals and related journal
entries.
LO4. Understand the link between cost, asset and expense.
LO5. Appreciate that accrual accounting involves judgement.

Required Readings

Required Readings

Trotman, Gibbins & Carson (TGC) Chapter 6.3-6.4

Trotman, Gibbins & Carson (TGC) Chapter 10.1-10.5 and 10.7-10.8
The Accounting Framework

Additional References
Additional References
http://www.aasb.com.au
AASB 3 Business Combinations
AASB 116 Property, Plant and Equipment
AASB 138 Intangible Assets

For Week 2 Lecture

1. Bring this handout (including all the attachment).

2. Bring a calculator.*
*Please make sure to get your calculator approved by the university prior to the exam
(https://my.unsw.edu.au/student/academiclife/assessment/examinations/Calculator.html).

Tutorial Questions for Topic 2

PASS Class Preparation Question:

Trotman and Gibbins:
Problem 6.15

Tutorial Preparation Questions:

Trotman and Gibbins:
Problem 6.16
Problem 6.12
Problem 10.18
Problem 10.24

Tutorial Homework Questions:

Trotman and Gibbins (see below):
Past Exam Questions (see below):

Problem 10.15 (adapted)

Problem 10.17 (adapted)
Question 3 from mid-session exam 2011,
semester 2 (adapted)

Tutorial Group Work Allocation:

Group 1: Question 3 from mid-session exam 2011, semester 2, part A and B
Group 2: Question 3 from mid-session exam 2011, semester 2, part C
Group 3: Problem 10.17
Group 4: Problem 10.15

Mid-session exam 2011, semester 2: Question 3 (6 MARKS) Adapted.

TuneIn Pty Ltd produces headphones using cutting edge technology. The company spends
significant effort on improving its technology, and employees have a legal duty to maintain
confidentiality. A project to create a new sound technology that was started in 2008 had a
significant breakthrough in the beginning of 2009 that finally caused the management to
believe that all costs could be recouped through future sales. It is expected that the project
would be ready for production and sales within a year or two.
In 2008, TuneIn Pty Ltd incurred costs of the project amounted to $65,000 and the activities
were concerned with obtaining new knowledge and finding suitable materials. In 2009,
TuneIn Pty Ltd incurred costs of $75,000 in assembling a pre-production prototype and an
additional $20,000 testing the prototype.
Required:
(a) How much of the project costs can be recognised as assets on TuneIn Pty Ltds 2008
balance sheet? If no assets can be recognised on the balance sheet, write Zero. [1 mark]

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If you have recognised any assets in TuneIn Pty Ltds 2008 balance sheet (question (a)
above), explain how the transaction satisfies the essential characteristics and recognition
criteria of Assets. If you have not recognised any assets, explain how the transaction does
not satisfy these criteria.
(b) Application of essential characteristics: [3 marks]
Future benefit:

Control:

Past event/transaction:

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(C) Application of recognition criteria: [2 marks]

Probable:

Reliable measurement:

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Problem 10.17 (Adapted): Repairs versus Capitalising

Gibbs Ltd operates a manufacturing facility to produce its key products. On 1 July 2012, the
balance of an equipment account was as follows:
Manufacturing equipment
Accumulated depreciation

$120,000
($78,000)

During 2013 financial year, Gibbs Ltd incurred the following costs which were paid in cash:
Equipment maintenance and repairs
Major equipment upgrade to improve efficiency

$1000
$35,000

The equipment has an expected useful life of 20 years, and residual value of is $7,200. Gibbs
Ltd depreciates equipment on a straight line basis.
Required:
a) What is the journal entry that was made on 30 June 2012 for depreciation on
manufacturing equipment? Show your workings.

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b) Indicate the effects of the two costs during 2013 on assets, liabilities and shareholders
equity:

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c) Give the journal entries to record the two costs during the 2013 financial year:

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Problem 10.15 (Adapted): Asset Disposal

Cavalier sold two assets in the 2013 financial year end. On 1 July 2012, prior to their
disposal, the following were shown in the companys account:
Machine

Costs

1
2

$40,000
$62,500

Residual
value
$5,000
$7,500

Expected
useful life
7 years
10 years

Accum. depn
(straight line)
$15,000
$0

Machine 1 was sold on 1 July 2012 for $10,000 cash. Machine 2 was sold on 30 June 2013
for $30,000. $20,000 was received in cash, and the remaining $10,000 on credit.
Required:
What journal entries are required to record the disposal of Machine 1?

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What journal entries are required to record the disposal of Machine 2?

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Lecture Workshop

2010 Session 2 Mid-semester Exam (Adapted)

QUESTION 1 (VERSION A)
The following information is taken from the accounts of Ray Ltd.
Motor Vehicles, 1 January 2006
Motor Vehicles, 31 December 2006
Accumulated Depreciation Motor Vehicles, 1 January 2006
Accumulated Depreciation Motor Vehicles, 31 December 2006
Depreciation Expense Motor Vehicles, year ended 31 December 2006
Gain on sale of motor vehicle, year ended 31 December 2006
Cost price of motor vehicles sold during the year

Required:
By using relevant t-account(s),
(1) calculate the cash proceeds from sale of Motor Vehicle, and
(2) calculate the cash paid for the purchase of a new Motor Vehicle.

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$000
620
740
230
290
150
10
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(3) Write down the journal entry for the sale of motor vehicles during the year.

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(4) Discuss how the concepts of cost, asset and expense relate to the motor vehicle.

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2010 Session 2 Mid-semester Exam (Adapted)

QUESTION 3 (VERSION A)
Your Boss is an entrepreneur who has worked hard over 20 years to build a successful chain
of cafes in Sydney with a recognised name, Moonbacks & Co. Your Boss wishes to borrow
money from the bank to fund further expansion. You have been hired as the accountant to
prepare the financial statements for this company and have been asked whether the goodwill
from the successful business can be recognised as an asset in order to make it easier to
borrow from the bank.
Required:
According to the AASB Framework and AASB3 Business Combinations, what is the
appropriate treatment for this business goodwill? Apply ALL elements of the relevant
definition and recognition criteria in your answer.
(a) Should goodwill be recognised as an asset? [1 mark, but must be consistent with
application of definition and recognition criteria, on the next page, in order to be awarded]

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QUESTION 3 (CONTINUED)

(b) Application of definition criteria: [3 marks]

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(c) Application of recognition criteria: [2 marks]

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Accrual Accounting

Topic 2

Asset v. Expense

ACCT1511

Definition

Assets (1)
General Principles

Recognition

Asset

Expense

Revenue v. Liability v. Equity

Revenue

Liability

Equity

Measurement

Income Statement & Balance Sheet

Effect

With thanks to Dr Cheng Lai

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Classifications In The Balance Sheet

Assets & Liabilities: Definition & Recognition

Does the item have all the essential
characteristics of an A (L)?

3 general classes (assets, liabilities and

equity) are further subdivided.

Assets
Current assets
Non-current assets
Intangible assets

Does the A (L ) meet both

the recognition criteria?

Yes
A (L) recognised in the
entitys balance sheet

No

Yes

Liabilities and equity

Current liabilities
Non-current liabilities
Share capital
Retained earnings
Other reserves

Details might appear in

the annual report

No
Separately disclosed in
the notes

Assets: Definition

Future Economic Benefits

An asset is a resource controlled by the

The potential to contribute, directly or

indirectly, to the flow of cash and cash
equivalents to the entity. (para. 53)

entity as a result of past events and from

which future economic benefits are expected
to flow to the entity (AASB Framework,
paragraph 49)

e.g. Does it form part of operating activities, can

we sell for, or convert it into, cash, or does it
have the capability to reduce cash outflow......

Essential characteristics:
Future economic benefit (or service potential)
Controlled by the entity
Result of past events
Examples?
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Control

Past Event

An entity controls the asset if it controls the

Entities normally obtain assets by purchasing or

producing them, but other transactions or
events may generate assets.

benefits expected to flow to the entity.

Although the capacity of an entity to control
benefits is usually the results of legal rights,
an item may nonetheless satisfy the definition
of an asset even when there is no legal
control.
E.g. Certain types of leases; by keeping
know-how obtained from a development
activity secret/confidential etc.
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e.g. grants/donations, discovery of mineral deposits.

Transactions or events expected to occur in the

future do not, in themselves, give rise to assets.
e.g. Intention to purchase inventory does not, of itself,
meet the definition of an asset.

Assets: Definition

Assets: Recognition

Non-essential characteristics:

Only when the item meets two recognition

criteria (AASB Framework, paragraph 83):

Acquisition at cost but may discover gold

deposit

1. It is probable that any future economic benefit

associated with the item will flow to the entity;

and
2. The item has a cost or value that can be
measured with reliability.

Tangibility but may be intangible

Exchangeability but cannot sell goodwill
separately from acquired business
Legal enforceability but lessee does not
legally own leased equipment

Two VERY IMPORTANT things to note:

1) Do not confuse probability of FEB in recognition criteria with
potential of FEB in Asset Definition.
2) Note that it is enough to measure either cost or value with
reliability (i.e. one of them is enough).
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Example 1

Example 2
A highly specialised equipment without resale or
residual value

A storage warehouse purchased for cash

Essential characteristics:

iii.

Recognition criteria:

(a)

Probable
Measured reliably

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Essential characteristics:

i.

Benefits
Control
Past transaction

ii.

iii.

Recognition criteria:

(a)

Probable
Measured reliably

(b)

i.

Benefits
Control
Past transaction

ii.

(b)

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Current vs. Non-Current Assets

Current Assets (ACCT1501)

Cash and cash equivalents can include overnight money

AASB 101, para. 57:

An asset shall be classified as current when it satisfy any of the
following criteria:
a)it is expected to be realised in, or is intended for sale or
consumption in, the entitys normal operating cycle;
b) It is held primarily for the purposes of being traded;
c) It is expected to be realised within twelve months after the
reporting date; or
d) It is cash or cash equivalent (as defined in AASB 107 unless it
is restricted from being exchanged or used to settle a liability for
at least twelve months.
All other assets shall be classified as non-current

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market accounts and other very liquid investments

Short-term investments include trading securities and

available-for-sale securities
Trade debtors and other receivables are reported net of

allowance for doubtful debts

The proper presentation of inventories includes

disclosure of basis of valuation, method of pricing and

stage of completion in the case of manufacturing firms
Prepaid expenses are expenditures for benefits
expected to be received within 1 year or the operating
cycle
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Non-Current Assets

Non-Current Assets

Long term investments may be

investments in securities (eg bonds, shares, long-term
notes)
investments in tangible non-current assets (eg land not
used in operations)
investments set aside in special funds (eg sinking fund,
pension fund)
investments in affiliated entities
Property, plant and equipment consists of properties of a

Intangible assets lack physical substance and are not

continued

financial instruments (see next slide)

They include patents, licences, copyrights, franchises,

goodwill, trademarks
Non-current assets with limited life are written off

(amortised) over their useful life

Indefinite life assets (eg goodwill) are assessed

periodically for impairment

other assets non-current asset section vary widely in

practice: They may include deferred charges, non-current

receivables, intangible assets, assets in special funds,
deferred income tax, property held for sale, advances to
subsidiaries

durable nature used in the regular operations of the firm

They include land, building, machinery, furniture, tools and

wasting resources (eg timber, minerals)

Most PPE assets (except land) are either depreciable or

depletable, i.e. expensable

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Intangible vs Tangible Assets

An intangible asset is an identifiable non-

The definition excludes monetary items: i.e.

monetary asset without physical substance

(AASB 138, para 8)

financial instruments are not Intangible assets

Typical intangible assets include:

It must meet the essential characteristic of an asset:

patents, licences, copyrights, franchises,

trademarks etc.

i.e. control, FEB, past event/transaction

In addition, it must be identifiable:
An asset meets the identifiable criterion...when it:
a) It is separable, that is, is capable of being separated or
divided from the entity and sold, transferred, licensed,
rented or exchanged, either individually or together with a
related contract, asset or liability; or
b) Arises from a contractual or other legal right, regardless of
wether those rights are transferable or separable from the
entity or from other rights or obligations
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Intangible Asset Recognition

Separate Acquisition

Only when the item meets two recognition

Because....the effect of probability is reflected

criteria (AASB 138, paragraph 21):

1. It is probable that the expected future
economic benefit that are attributable to the
asset flow to the entity; and
2. The item has a cost that can be measured
with reliability.

in the cost of the asset. Therefore, the

probability recognition criterion.....is always
considered to be satisfied for separately
acquired intangible asset (AASB138, para 25)
In other words, if we buy an intangible asset,
for example a patent, we recognise it as an
asset on the balance sheet.

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Internally Generated Intangibles/R&D

Internally Generated Intangibles/R&D

It is difficult to assess whether an internally

To asess, whether an internally generated

assets meets the criteria for recognition, an
entity classifies the generation of the asset into
(AASB 138, para 52):

generated intangible asset qualifies for

recognition because of problems in:
a) Is there an identifiable asset that will
generate expected future benefits
b) Determining the cost of the asset reliably.
(i.e. is the cost incurred part of the day to day
operation or is it specific to the asset?)

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a) A research phase
b) A development phase

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So what is Research?

So what is development?

Research is original and planned investigation

undertaken with the prospect of gaining new
scientific or technical knowledge and
understanding.

Development is the application of research findings

or other knowledge to a plan or design for the
production of new or substantially improved
materials, devises, products, processes, systems or
services before the start of commercial production
or use.

e.g. 1) Activities aimed at obtaining new knowledge; 2) the search

from evaluation and final selection of, applications of research
findings or other knowledge; 3) the search for alternatives for
materials, devices, products processes systems or services; 4) and
the formulation, design, evaluation and final selection of possible
alternatives for new or improved materials, devices, products,
processes, systems or services.

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e.g. 1) the design, construction and testing of pre-production or preuse prototypes and models; 2) the design and tools, jigs, moulds and
dies involving new technology; 3) the design, construction and
operations of a pilot plant that is not of a scale economically feasible
for commercial productions; and 4) the design, construction and
testing of a chosen alternative for new or improved materials,
devices, products, processes, systems or services.
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Development Accounting Treatment

Research - Accounting Treatment

An intangible asset arising from the development (or from the

development phase of an internal project) shall be
recognised if, and only if, an entity can demonstrate all of the
following:

No intangible asset arising from research (or from the

research phase of an internal project) shall be
recognised. Expenditure on research (or on the
research phase of an internal project) shall be
recognised as an expense. (AASB 138, para 54).

a) the technical feasibility of completing the intangible asset so

that it will be available for use or sale.
b) its intention to complete the intangible asset and use or sell it
c) its ability to use or sell the intangible asset
d) how the intangible asset will generate probable future
economic benefits....
e) the availability of adequate technical, financial or other
resources to complete the development and to use or sell the
intangible asset
f) its ability to measure reliably the expenditure attributable to the

Why?
In the research phase of an internal project, an entity
cannot demonstrate that an intangible asset exists that
will generate probable future economic benefits...
(AASB 138, para 55).

intangible asset during its development.

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Some Intangible asset are never recognised

as asset if they are internally generated.

Goodwill A special case

Internally generated brands, mastheads,

publishing titles, customer lists, and items

similar in substances shall not be recognised
as intangible assets (AASB 138, para 63)

Goodwill is non-current intangible asset, but it is

not identifiable....
Goodwill is an accounting concept meaning the
value of an entity over and above the value of
its separate identifiable assets less liabilities.
- because of synergies, reputation, loyalty
of clients, staff knowledge etc.

Why?
Expenditure on internally generated brands,
mastheads, publishing titles, customer lists and
items similar in nature cannot be distinguished from
the costs of developing the business as a whole
(AASB 138, para 64)
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Recognising and Measuring Goodwill

Simple Illustration
Cost of Business:
$30,000
Fair Value of Identifiable Assets: $40,000
Fair Value of Liabilities Assumed: $20,000
Fair Value of Net Assets:
$20,000
Goodwill:
$10,000

Goodwill as of the acquisition date is

measured as:
1)The consideration transferred,
2)less the fair value of the net identifiable
assets acquired and the liabilities assumed.
(AASB 3: somewhat simplified Much more
of this in Accounting 2B).

Dr Identifiable Assets
Dr Goodwill
Cr Liabilities
Cr Cash

i.e. purchased goodwill is calculated as the amount paid for a

business less the fair value of the net assets obtained.

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40,000
10,000
20,000
30,000

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Goodwill

Amortisation and Impairment of Intangibles

Only purchased goodwill included.

- An entity must assess whether useful life is

finite or indefinite.

Internally generated goodwill shall not be

- If finite, the intangible asses is amortised.

recognised as an asset (AASB 138, para 48)

- E.g. leases, franchises, patents etc.

Why?

- If indefinite, the asset is not subject to

amortisation, but would need to test annually
for impairment (impairment is next week).

in some cases, expenditure is incurred to generate future economic

benefits....[and] is often described to as contributing to internally
generated goodwill. Internally generated goodwill is not recognised
as an asset because it is not an identifiable resources controlled by
the entity that can be measured reliable at cost (AASB 138, para
49)

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- E.g. goodwill.

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Test Your Understanding

Assets & Expense : Another Approach

We have incurred a cost/expenditure.
Dr Asset or Expense? XXX
Cr Cash/Accounts Payable XXX

Are these assets and can it be recognised?

1. A box of paper clips.

Does the item have all the essential characteristics of an Asset?

Yes

2. A deposit received by a company for

services to be rendered.

Does the Asset meet both

the recognition criteria?

No
No

Expense

3. List of subscribers to an Internet service.

Yes

4. CBAs satisfied customers.

Asset recognised in the

entitys balance sheet

5. Employees of a firm: Our people are our

greatest assets.
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Expenses: Definition

Expenses: Recognition

decreases in economic benefits during the

Recognition (AASB Framework, para 94):

accounting period other than the owners

distributions (AASB Framework, para 70)

Decrease in future economic benefits, either

decrease in asset or increase in liability

Essential characteristics:

Decreases in economic benefits

Other than the owners distributions (i.e.
Dividends)

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Can be measured with reliability

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Cost v. Asset v. Expense

Depreciation an expense (ACCT1501)

A matter of classification? A matter of timing?

Is Cost/Expenditure and Expense

Property, plant, and equipment usually have

limited useful lives:

interchangeable?

That is, the economic benefits are consumed over time.

Cost/expenditure = Amount of cash/equivalents

For example, if a machine was purchased 10 years ago, the

future economic benefits are likely to be much less now than
when the machine was originally purchased.

paid or fair value of consideration given

Definition: Asset (capitalise) or Expense

Depreciation is the systematic allocation of the

depreciable amount of an asset over its useful life.

Transformation:
Asset to Expense (e.g. depreciation)
Expense to Asset (e.g. Manufacturing)
(More in Management Accounting)
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Depreciation is a process of

ALLOCATION OF COST - NOT VALUATION

Matching Principle
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Calculating depreciation (ACCT1501)

Residual value (ACCT1501)

Depreciation starts when the asset is ready

Estimated useful Residual Value defined:

The estimated amount that an entity would currently

for use as intended by the management.

obtain from disposal of the asset, after deducting the

estimated costs of disposal, if the asset were already
of the age and in the condition expected at the end of
its useful life
The residual value is used to calculate the
depreciable amount (the amount that must be
allocated over the life of the asset).
Depreciable Amount = Asset Cost - Residual Value
The depreciable amount must be allocated on a
systematic basis over an assets useful life.

To choose a depreciation method, we need to

make judgments on:

useful life
residual value (sale or scrap)
pattern of flow of benefits over the useful life.
i.e. the pattern of revenue will determine how we
allocate the costs in the appropriate periods.

Useful life, Residual value and pattern of flow

will need to be reassessed annually.
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Useful life (ACCT1501)

Depreciation methods
Three Common Methods (ACCT1501):
straight-line
reducing balance
units of production
Are these methods Reliable? Relevant?
All depreciation methods are an approximation
The apparent precision of any depreciation
method is illusory
But they are Verifiable (Reliable in the sense
that it uses established methodology)

Estimated useful life defined:

The period of time over which an asset is

expected to be available for use by an entity; or
The number of production or similar units
expected to be obtained from the asset by the
entity.
Note:
Useful life relates to an assets expected utility to
the enterprise.
Useful life differ from physical life of the asset.

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Journal entry

Illustration

For all depreciation methods:

A machine with an original cost of $50,000

Dr Depreciation expense
Cr Accumulated depreciation (what type?)

and accumulated depreciation of $24,000 (as

at 30 June 2008)
It was sold on 1 August 2008 for $21,000
cash.
The straight line method was used to record
depreciation on the old asset.
The annual amount of depreciation was
$12,000.
Required: Prepare journal entries to record
the events explained.

Why not Cr Asset directly? Why 2 accounts?

What is the value of an asset after

depreciation? What is the value of an asset?

When is the value of an asset Reliable?
Why depreciate asset?

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Illustration (Cont.)

Example: Purchase of Notebook Computer

Recording depreciation up until Historical Cost

the date of disposal
Acc Depn
Dr Depn Exp 1,000
Cr Acc Depn
1,000
Removing the non-current asset
from the companys books.
Dr Cash
21,000
Dr Acc Depn
25,000
Cr Machinery
50,000
Dr Loss on Sale
4,000

See AASB 116 Property, Plant and Equipment

Purchase of Notebook

50,000
25,000

Carrying/Book Value

25,000

Cash received (Market

Value)

21,000

Accounting Gain/(Loss)
because of estimation
error

(4,000)

Purchase price $1,400

Delivery charge $100
Questions:
1. An asset?
2. Recognise on B/S?
3. Measurement?
4. Then what?

Why do we have estimation error?

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Example: Purchase of Notebook Computer

Depreciation
Straight-line
3 years
No residual value
Cost?
Asset?
Expense?

Case: Notebook Account Balances

Year

Cost

Accumulated
Depreciation

Carrying
Value
(Asset)

Depreciation
Expense

3
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Comparison Tangible and Intangible with

Limited Useful Life

Journal Entries
Beginning year 1:
Dr Notebook
Cr Cash (purchase price)
Cr Cash (delivery charges)

Tangible
Tangible Asset
Depreciation Expense
Accumulated
Depreciation (Contra
Asset)
Depreciation Methods

End year 1 to 3:
Dr Depn Expense
Cr Accumulated Depreciation
End year three to de-recognise the asset
Dr Accumulated Depreciation
Cr Notebook

Intangible
Intangible Asset
Amortisation Expense
Accumulated
Amortisation (Contra
Asset)
Amortisation Methods

Straight line

Straight line

Reducing balance

Reducing balance

Etc

Etc

Just the terminology

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Accrual Accounting requires Judgement

Asset v. Expense

Definition

Asset

Expense

Lecture Workshop

Revenue v. Liability v. Equity

Revenue

Liability

Refer to lecture handout

Equity

Recognition

Measurement

Effect

Income Statement & Balance Sheet

With thanks to Dr Cheng Lai

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