Definition of an asset
Resource controlled by enterprise, as a result of a past event and future economic benefits
recognition criteria of asset
Probability of future economic benefits and cost or value that can be measured with reliability
Initial Recognition of an asset
FPS always at cost
How should it be reported on FPS (ASSET)
At cost (inventory), Cost less accum/depr less accum/impir (PPE), Revalued amount less accum/depr (Bldgs), Fair value (IP).
How an asset can impact the profit and loss section
- Depreciation/Amortisation
- Fair value adjustment (gain or loss)
- Profit/Loss on Disposal
- Impairment
Measure recoverable amount (asset)
Higher of Net Selling
Price (NSP) OR Value in Use (VIU)
recoverable amount < asset carrying value then
IMPAIRMENT occurs (Dr Impairment loss;
Cr Accumulated depreciation)
amounts spent on the asset after it has been recognised
Expense (Profit and loss) OR Capitalise - if it increases FEBs (FPS)
high inventory balance a good company to invest in
Company could have a high inventory balance, but could be unable to sell inventory for various reasons
What do we need to know about the inventory in order to make an informed decision
know how management is managing inventory as part of working capital
Problems with too much inventory
1.Tying up cash that could be put to better use
2.Obsolescence, technologically outdated, damage
3.May not realise its initial value when sold-lower profit margin
4.Storage space-opportunity cost
5.Additional costs-storage, insurance, wages
Problems with too little inventory
Loss of customers or business
2 bookkeeping methods for recording inventory
Perpetual and Periodic
Perpetual system
Recording system that keeps track of inventory on hand at any time
Periodic system
Recording system that only calculates inventory balance at the end of each accounting period
Regular stock counts are essential
1.Perpetual system: detect theft, shrinkage, error
2.Deters employees from theft
3.Enables you to see what items are slow-moving, obsolete for accounting purposes
4.Enables you to see what items sell- planning purposes
Reasons for Perpetual stock count
1.Can determine how much of each inventory item is on hand at any point in time
2.System can warn you when you reach a pre-determined level of inventory so that you know to order more
3.Can compare physical quantities per stock count to theoretical quantities per system
Importance of preparing budgets and forecasts
Estimate future sales and hence, inventory needs
Name various methods on control
2.Economic Order Quantity
assessing the profitability of a company
look at GP % and not just at turnover
Property, Plant and Equipment
tangible assets that are held by the enterprise for use in production, supply of goods, rental or admin and are expected to be used for more than one period
How should PPE be reported on FPS
Carrying value of PPE
cost/revalued amount less accum depn less accumulated impairment
Reasons to revalue PPE
1.To bring net asset value of company per balance sheet closer to market value (i.e. provide more relevant information).
2.Part of defense strategy in takeover situation.
Improve debt/equity ratio.
3.Strengthen balance sheet when applying for loan finance or facing debt covenant constraints.
4.Entity under pressure to report lower profits (e.g. trade union demanding higher pay or regulators looking for monopoly control).
Reason to continue using cost model
1.To avoid cost associated with the revaluation model.
2.To report a higher profit figure (lower depreciation and higher profit on disposal of asset).
3.To harmonize with US-GAAP which does not allow revaluation model (for firms listed on both the JSE and US stock exchanges).
4.To avoid cumbersome disclosure (of both revalued amounts and historical cost amounts.
what must the company disclose in their financial statements
1.Depreciation expense for the year
2.Useful life
3.Cost, accumulated depreciation, carrying value at beginning and end of year
4.Cost or Revaluation model
5.Revaluation surplus reported under 'other comprehensive income' in SOCI.
6.Acquisitions and disposals
Reasons for disclosure
Need to know whether value of PPE has increased because of revals or acquisitions. Too many disposals could signal financial distress.
Intangible Assets
Identifiable non-monetary assets without physical substance
Recording intangible assets to profit and loss section
Amortisation (when it has indefinite life) and Impairment (when limited/indefinite life -test impairment annually)
Tangible assets not recognised on B/S
brand, employees and reputation. Only on B/S if meets asset definition
Internally generated
produced within the company (reputation, brand name). Not recognised on B/S because does not meet asset definition and recognition criteria
impairment (definition)
When an asset is no longer worth as much as is reflected on the balance sheet
Recoverable amount (definition)
higher of net selling price and value in use
Value-in-use (definition)
the PV of future cash flows to be obtained from the asset
Impairment loss (definition)
If carrying amount is higher than recoverable amount
Reasons Investment Property is held
To earn rentals, and/or For capital appreciation
Reasons items cant be investment property
1.Owner occupied (PPE)
2.Held for resale (Inventory)
3.Still under construction (PPE)
Reporting Investment Property on FPS
COST MODEL (With depreciation) and FAIR VALUE MODEL (Without depreciation)
When property measured on FPS under fair value model
Remeasured at end of each year, adjustments are made in profit and loss section in the statement of change in equity