Accounting for non-current assets and inventory
Accounting for non-current assets and inventory in CIMA F1 tests IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 2 Inventories. Expect calculations on capitalised cost, depreciation, revaluation, amortisation, inventory cost and write-downs to net realisable value.
IAS 16: cost and depreciation
Initial cost includes purchase price net of trade discounts, import duties, directly attributable costs of bringing the asset to the location and condition for use (site preparation, delivery, installation, testing), and an initial estimate of dismantling costs. Exclude staff training, advertising, relocation and abnormal waste. Depreciate systematically over the useful life using a method that reflects the pattern of benefits. Residual value and useful life are reviewed at least annually. Component accounting is required where parts have significantly different useful lives. Depreciation begins when the asset is available for use and ceases at disposal or when classified as held for sale. Land is not normally depreciated.
Revaluation
Under the revaluation model, carrying amount is fair value at the revaluation date less subsequent depreciation. A surplus goes to other comprehensive income and is accumulated in a revaluation surplus within equity. A deficit goes to profit or loss unless it reverses a previous surplus on the same asset. Depreciation after revaluation is based on the revalued carrying amount, residual value and remaining life.
IAS 38 and IAS 2
Research expenditure is expensed. Development expenditure is capitalised only if technical feasibility, intention and ability to complete, probable future economic benefits, adequate resources, and reliable measurement are all demonstrated. Inventory is measured at the lower of cost and net realisable value (NRV). Cost includes purchase costs, conversion costs and other costs to bring inventory to its present location and condition; exclude abnormal waste, storage (unless necessary) and selling costs. FIFO or weighted average is permitted; LIFO is prohibited. Write-downs are expensed and reversals are capped at the original write-down.
Worked example
A machine costs £120,000, has a ten-year life and £20,000 residual value. After three years it is revalued to £95,000; remaining life is seven years and residual value £15,000. Annual depreciation was (£120,000 − £20,000)/10 = £10,000, so carrying amount is £90,000. The surplus is £5,000 to OCI. New depreciation is (£95,000 − £15,000)/7 = £11,428.57.
Traps
Do not capitalise repairs or training. Do not depreciate land. Do not take revaluation deficits to OCI unless reversing a prior surplus. Do not write inventory above cost. Recoverable VAT is excluded from cost.