Accounting (Basics) - Lecture 7 CLASSIFICATION OF LONG-TERM ASSETS, WAYS OF THEIR ACQUISITION. BASIC PROCEDURES OF ACCOUNTING OF ASSETS ACQUISITION AND DEPICTION DURING THEIR LIFETIME. METHODS OF LONG-TERM ASSETS DEPRECIATION (ACCOUNTING PERSPECTIVE). Content nClassification of long-term (fixed) assets n Ways of their acquisition nBasic procedures of accounting of assets acquisition and depiction during their lifetime nMethods of long-term (fixed) assets depreciation (accounting perspective). 2 Long-term assets nLong-term assets should be the most profitable assets of the company which are kept for a long time and, therefore, a decision about them is a strategic decision made by the top management or owners of the company. nThey are not consumed at once, but gradually through depreciations. 3 Long-term assets nIn some cases they are not consumed at all, and do not lose value but, on the contrary, gain it (e.g. land, collections, cultural monuments). nTheir liquidity is the lowest and, therefore, they are located in the balance sheet at the beginning of assets. 4 Long-term assets nThey are classified into three basic parts: Long-term assets qI. Long-term intangible assets qII. Long-term tangible assets qIII. Long-term financial assets 5 Classification of Long-Term Assets nThe accounting system specifies the following accounting groups for long-term assets: qLong-term intangible assets qLong-term tangible assets, depreciated qLong-term tangible assets, not depreciated qIntangible and tangible fixed assets under construction and acquired long-term financial assets qAdvance payments for long-term assets n 6 Classification of Long-Term Assets nThe accounting system specifies the following accounting groups for long-term assets: qLong-term financial assets qAdjustments to long-term intangible assets qAdjustments to long-term tangible assets qAdjustments to long-term assets n 7 Long-Term Intangible Assets nThese are not physical and provide particular economically beneficial rights for the company. nThe assessment level from which these rights will be considered long-term intangible assets is stated by the company itself (with the exception of goodwill) taking into account the principles of importance and the contextual and fair reflection of assets in the company’s accounting. 8 Long-Term Intangible Assets nThe usability time of these assets is longer than one year i.e. the time during which the assets can be used for the existing or accelerated future activities of the company. nLong-term intangible assets are reproduced gradually through depreciation. nThe method and time of depreciation are selected by the company in the depreciation plan (with some exceptions in different accounting systems). 9 Long-Term Intangible Assets nThe company usually uses the following accounts for keeping records of long-term intangible assets: qResearch and development qSoftware qValuable rights qGoodwill qOther long-term intangible assets qIntangible fixed assets under construction qPaid advances for intangible fixed assets n n 10 Tangible Fixed Assets nThese assets have a physical, tangible form. nThey are items put into a state so that they can be used i.e. completing items and meeting the technical functions and obligations stated by special regulations for use (can be put into operation). nThey can be depreciated or not depreciated. 11 Tangible Fixed Assets nThe depreciation period, which depends on the time of use and the depreciation method, is selected by the company in the depreciation plan (with some exceptions in different accounting systems). nThe valuation from which the enterprise considers assets as fixed tangible assets can be chosen by the company (according to concrete accounting rules in sigle countries). 12 Tangible Fixed Assets nThe company usually uses the following accounts for keeping records of long-term tangible assets: qLand qBuildings halls and structures qCapital equipment and property units qPerennial crops qBreeding and draught animals qOther tangible fixed assets 13 Tangible Fixed Assets nThe company usually uses the following accounts for keeping records of long-term tangible assets: qWorks of art and collections qTechnical assessment qTangible fixed assets under construction qAdvance payments for tangible fixed assets qAdjustments to acquired assets n 14 Long-Term Financial Assets nThe company acquires the following assets to: qhave influence in another company qhave higher revenues than from other investment nIn both cases the final objective is to gain an economic benefit by this investment through dividends, a profit share or revenues from the sale of long-term financial assets. 15 Long-Term Financial Assets nThe company usually uses the following accounts for keeping records of long-term financial assets: qShares and ownership interest with a controlling influence in enterprises qShares and ownership interest with a substantial influence in enterprises qImplemented securities and ownership interests qOutstanding securities held to maturity qOther loans qOther long-term financial assets n 16 Fixed assets are not: nLow-value intangible and tangible assets that the company has decided are not fixed assets. nIn this case intangible fixed assets are posted during acquisition into costs (to the debit of the account “Services”) and tangible assets are accounted for as with inventories (including handing them over for use to the debit of the cost account “Consumption of material”). 17 Fixed assets are not: nThe company states what types of these posted assets will be monitored up to cancelling them in the operative record-keeping and showing them in the Notes to the financial statement. nShort-term financial assets which are recorded in accounting class Financial accounts (see lecture 6) 18 Acquisition of Fixed Assets nThe most frequent way of acquiring fixed assets is by purchasing them. nThey can be acquired by the company’s activities, the investment of an affiliate or without payment (gift). 19 Acquisition of Fixed Assets nDuring the acquisition, as in the case of inventories, calculating accounts are used – Tangible and intangible fixed assets under construction and acquired long-term financial assets, on which, first of all, all parts of the acquisition price are ascertained and consequently (after meeting all the requirements for the use of assets) they are transferred to the respective assets accounts. 20 Fixed Assets Acquired by Purchasing nThey may be purchased through an invoice, in cash or a bank credit. nThey are acquired through calculating account which can be omitted if it is clear there are no outstanding parts of the acquisition price and the asset can be immediately put into use. 21 Fixed Assets Acquired by Purchasing nIf the acquisition process is not finished on the day of closing the accounts, these assets remain recorded in calculating account according to the nature of the asset in one of the following accounts: qintangible fixed assets under construction, qtangible fixed assets under construction, qacquisition of long-term financial assets n 22 Acquisition of Low-Value Assets nFor low-value intangible and tangible assets with a usability time of more than one year, the company can decide whether it will record them as long-term or not. nIf yes, they must be recorded under an internal accounting regulation showing the valuation from which the company considers this asset as long-term. 23 Acquisition of Low-Value Assets nThe accounting procedure for the acquisition of low-value assets is the described before. n After being put into use the assets will be recorded in the respective account as Land, etc. or in the account Capital equipment and property units and depreciated according to the depreciation plan. n 24 Acquisition of Low-Value Assets nThe accounting procedure for the acquisition of low-value assets is the described before. n After being put into use the assets will be recorded in the respective account as Land, etc. or in the account Capital equipment and property units and depreciated according to the depreciation plan. n 25 Acquisition of Low-Value Assets nIf the top management of the company decides that low-value assets will not be recorded as long-term, there are two acquisition procedures: qthe acquisition price of fixed intangible assets is transferred to costs (expenses) qfor capital equipment and property units with an independent technical specification, the same method is used as for the acquisition of inventories and their consumption n 26 Acquisition of Long-Term Assets through the Company’s Activities nThe company may acquire intangible fixed assets through its own activities (its overheads) as in the case of inventories. nAll costs spent on acquiring these assets are capitalized through costs (expenses) and the asset is recorded in the respective acquisition (calculating) account. nAfter meeting the use requirements it is transferred to the respective assets account and is depreciated. 27 Cancelling Fixed Assets nFixed assets are cancelled mainly because they are depreciated (physical liquidation), sold or donated. nThey can also be stolen (damage) or destroyed. 28 Cancelling Fixed Assets nTo cancel depreciated assets, first of all, posting of adjusting entries up to the full amount of the acquisition price (single depreciation of the net book value) must be completed. nThe price of non-depreciated assets and long-term financial assets is posted to the debit of costs (expenses) when they are liquidated. 29 Cancelling Fixed Assets nThe costs (expenses) of the physical liquidation are posted to the debit of the account Other operating costs (expenses) and any remaining material from the liquidation is taken to the warehouse and is recorded in the account Other operating revenues. 30 Depreciation of Long-Term Assets nThe company acquires each asset to obtain an economic benefit. nThe asset enters into the economic process in which it is consumed and changed into products that are exchanged for money. nThe degree of the achieved effect depends on the amount of consumed assets of the company and the speed with which they are exchanged (length of the economic useful life of an asset). 31 Depreciation of Long-Term Assets nAccording to the character of the production, some assets are used by the company over the long term, they are not consumed straight away but gradually and some of them are not consumed at all, but on the other hand they are appreciated in time, such as land, works of art, collections, items of cultural monuments, ownership interests and long-term securities. n 32 Depreciation of Long-Term Assets nThe gradual decrease in the value of long-term assets as they are used (physical wear or moral ageing) and the transfer of these amounts (depreciation) to the operating costs of the company is called depreciation. n 33 Depreciation of Long-Term Assets nThere are two kinds of depreciation: qaccounting (straight-line, regressive, progressive and use) qtax (different in different countries according to their tax legislation). q q qWe are going to talk about accounting depreciation only. n 34 Depreciation of Long-Term Assets nLong-term tangible and intangible assets are depreciated by the entity with the ownership or management rights to them. nExceptionally, long-term assets are depreciated by the lessee in the case of leased movable assets and real estate which are used by the lessee during the entire taxable period or technical appreciation or they were paid by the lessee and the owner increased the input price. There are two kinds of depreciation: n 35 Accounting Depreciations nThe company depreciates long-term assets indirectly through accumulated depreciation accounts based on the depreciation plan. nThis plan is created by the company for individual items depending on their expected time of use, calculating methods and the way they are used. 36 Accounting Depreciations nLong-term assets are recorded in the respective account at the purchase (input) price and their overall depreciation resulting from cleared depreciations is monitored in the respective accumulated depreciation accounts. nThe net book value is ascertained by comparing both accounts, i.e. the part of the input price of long-term assets which will be transferred to the costs (expenses) of the company during the remaining time they are used. n 37 Accounting Depreciations nDepreciations are booked up to 100% of the input price. nDepreciation starts usually in the month after the assets are put into use. nTax depreciation can be usually temporarily interrupted, whereas accounting depreciation cannot be interrupted. 38 Accounting Depreciations nLong-term tangible and intangible assets which do not meet the stated limit by the company, i.e. ‘low value’ long-term assets, can be depreciated gradually or consumed once off (as inventory or a service). nThe calculated depreciations are rounded upwards. n 39 Accounting Depreciations nIf a difference arises in the amount of accounting depreciations (depreciation of long-term intangible assets and tangible assets) and tax depreciations (depreciations mentioned when calculating the income tax base), this business result must be modified when counting income tax base. 40 Accounting Depreciations nTherefore, small and medium-sized firms which are not audited and do not need to know the economic depreciations of long-term assets for the price calculations of their products, are recommended to have the closest unity of tax and accounting depreciations. 41 Accounting Depreciations nAccounting depreciations are divided into time depreciation and performance based depreciation. nTime depreciation can be stated as even, accelerated or decelerated according to the following equation: 42 Straight-line accounting depreciation 43 n nWhere qD = depreciation qP = input price qt = number of years of economic useful life D = P / t Straight-line accounting depreciation 44 nWith even depreciation the level of the annual (monthly) depreciation is not changed - D1 =D2 - it is constant. nThe main advantage of this, the most used depreciation method, is its simplicity. Accelerated (regressive) accounting depreciation nWhere qi = a year of depreciation 45 D = (2 x P x (t+1-i)) / ( t x (t+1)) Accelerated (regressive) accounting depreciation nThe rule that depreciation in a previous year is higher than in the following year applies to accelerated depreciation - O1 > O2 . nThe basic advantage of this depreciation method is that it enables the economic resources of the company and the implementation of new, modern technology to be accumulated faster. 46 Accelerated (regressive) accounting depreciation nIt protects the company against the moral ageing of long-term assets and decreases the risk of inflation. 47 Decelerated (progressive) accounting depreciation n 48 D = (2 x P x ((t+1) - (t+1-i))) / ( t x (t+1)) Decelerated (progressive) accounting depreciation nThe company can select the progressive depreciation method if it needs to decrease costs (expenses) in the first years and, on the other hand, decrease the business result (profit) later. 49 Performance-based depreciation nThis is used for machines or equipment and shows the technical (physical) wear of long-term assets. nHowever, the disadvantage is that it does not reflect moral (economic) wear of long-term assets. nThe amount of depreciation depends on the expected total use and its allocation during the time of use. n 50 Performance-based depreciation - Example nCalculate the depreciation on a machine with an acquisition price of CZK 600,000 over an eight-year economic useful life - the company assumes production of 2 million products according to the below sales budget. 51 Performance-based depreciation - Example Year 1 2 3 4 5 6 7 8 Sales in thousands 200 200 200 200 300 400 300 200 Depreciation CZK thousands 60 60 60 60 90 120 90 60 52 The depreciation rate per output unit is 600,000 / 2,000,000 = 0.3 CZK/item. Example nThe company purchased a personal car in February 2018 for CZK 480,000 which it wants to use for four years. Calculate and book the straight-line accounting depreciation by the end of the accounting period, i.e. by 31.12.2018. n 53 Example nThe depreciation is calculated for the period from starting to use the asset up to the end of the calendar year, i.e. 10/12 of the value of the annual depreciation which for straight-line depreciation is CZK 120 thousand. n 54 Capital equipment Accumulated depreciation Depreciation (expenses) PS 480 1) 100 1) 100