MANG 1004 W4 Slides

8/10/2019 MANG 1004 W4 Slides

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ESTIMATES AND

JUDGEMENTS

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AREAS TO BE COVERED

• Non current assets

• Inventory

• Trade receivables

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INITIAL RECOGNITION

Initially recognised at cost. Cost includes:

• Purchase price

• Directly attributable costs of making asset ready for use – Site preparation

– Delivery and handling

– Installation and testing

– Professional fees.

Cost does not include admin or general costs

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DEPRECIATION

The measure of the cost or revalued amount of theeconomic benefits of the tangible fixed asset thathave been consumed during the period.

Consumption includes the wearing out, using up orother reduction in the useful economic life of atangible fixed asset whether arising from use,

effluxion of time or obsolescence through eitherchanges in technology or demand for the goodsand services produced by the asset.

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DEPRECIATION

• Useful economic life

• Residual value

• Method of depreciation

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USEFUL ECONOMIC LIFE

The period over which the entity expects to derive

economic benefit from that asset.

Typical useful lives:

Land Not depreciated

Buildings 50 years

Plant, machinery, fixtures & fittings 10 – 20 yearsMotor vehicles 4 years

Computer equipment 3 – 5 years

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RESIDUAL VALUE

Net realisable value at the end of the assets

useful life.

– Based on prices ruling at date of acquisition

– Can take account of planned maintenance.

– Update on a regular basis

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METHODS OF DEPRECIATION

• Straight line

Equal amount of an assets economic benefitsare consumed each year.

• Reducing balance

Assumes the asset provides greater benefits inthe earlier years

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DEPRECIATION EXAMPLE

Cost of asset £10,000

Residual value £256

Useful economic life 4 years

Charge using straight line:

(10,000 – 256)/4 = £2,436

Reducing balance percentage: 60%

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DEPRECIATION EXAMPLE

Straight line Reducing balance

Cost 10,000 10,000

Dep’n charge (2,436) (6,000)

NBV 7,564 4,000Dep’n charge (2,436) (2,400)

NBV 5,128 1,600

Dep’n charge (2,436) (960)

NBV 2,692 640

Dep’n charge (2,436) (384)

NBV 256 256

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DETERMINING POLICY

• Expected usage

• Expected physical deterioration

• Economic or technical obsolescence

• Legal or other limits

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REVIEW OF JUDGEMENTS

• Review all estimates annually

• Adjust future depreciation if necessary

• Final adjustment made on disposal: – Compare proceeds with net book value

– Too much depreciation charged gives rise to

a profit on sale

– Too little depreciation charged gives rise to a

loss on sale.

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REVALUATIONS

• Regulatory requirements – Reliable measurement

– Regular revaluations

– No selective revaluations

• Gain recognised in equity

• Adjust depreciation

• Loss not reversing previous upward valuation toincome statement

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REVALUATION EXAMPLE

A property cost £1m. It has a useful life of 10 years and nil residualvalue. It is depreciated on the straight line basis and revalued annually. At the end of year one it is revalued to £1,080,000.

£’000

Opening book amount 1,000Depreciation (100)

Net book value 900

Revaluation gain 180

Valuation 1,080

Old depreciation charge 100

New depreciation charge (1,080/9) 120

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INVENTORY

Stock includes

• Goods purchased for resale

• Raw materials for use in production• Work in progress

• Finished goods

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VALUATION OF INVENTORY

Inventory should be valued at the lower

of cost and net realisable value.

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COST OF INVENTORY

That expenditure that has been incurred inthe normal course of business in bringing

the product or service to its present location

and condition.

Includes

– Cost of purchase

– Cost of conversion

• Direct costs

• Production overheads

• Other overheads

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DETERMINING COST

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DETERMINING COST

• FIFO

• LIFO

• Average cost

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STOCK EXAMPLE

Date Trans No.

Units

Unit cost Total

cost

No in

stock

1.1.07 Purch 100 2.00 200 100

10.1.07 Purch 50 2.50 125 15011.1.07 Sale 75 75

13.2.07 Purch 100 2.25 225 175

14.2.07 Sale 20 155

20.2.07 Sale 25 130

3.3.07 Purch 70 2.30 161 200

5.3.07 Purch 50 2.45 122.5 250

10.3.07 Sale 70 180

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NET REALISABLE VALUE

The actual or estimated selling price (net of

trade but before settlement discounts) less

all further costs to completion and all costs

to be incurred in marketing, selling anddistributing the product.

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NET REALISABLE VALUE

EXAMPLE

What is the net realisable value of thefollowing partly completed item of stock:

Materials and labour to date 800

Materials and labour to complete 200

Sales price 1,500

Advertising costs 100

Packaging 50

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TRADE RECEIVABLES

• A bad debt is virtually certain not to be

received.

• A doubtful debt may or may not be

received.

– Specific provision

– General provision

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CONCLUSIONS

Problems

• Accounts include a number of estimates

• Difficulties in preparing accounts

• Difficulties in comparing companies

• Scope for manipulation

Solutions

• Disclosure

• Accounting regulation

• Audit

• Review panel

Documents

MANG 1004 W4 Slides