Lezione del 30 settembre di Economia aziendale

MEASURING NON-CURRENT ASSETS USEFUL LIFE OF A NON-CURRENT ASSET

• The useful life of an asset is an estimate of the number of years an asset is

likely to remain in service for the purpose of profit generation

• Assets with limited useful lives :

– Plant, machinery and equipment

– Patents

• Assets with unlimited useful lives :

– Brand names

– Financial instruments

– Agricultural assets

– Investment property

The first point is to understand when we are able to determine the useful life of

a non current asset like a laptop, so for how many years I’m gonna use this

laptop, what can be a useful life of a laptop, 4/6 years; if you are able to do this

resumable assumption you’re life is easy update the laptop in the balance

sheet.

• Non-current assets with limited useful lives are depreciated (tangible asset)

or amortized (intangible asset)

• Depreciation (amortization) is the allocation of the cost of the asset to the

periods in which the asset is used. You can use it to update the value of that

asset in the balance sheet, depreciation is basically the cost of using that asset

in a specific reporting and it represent the decries in the value of that asset in

the same accounting period.

– On the balance sheet, depreciable assets are therefore reported at their cost

less accumulated depreciation (see Income Statement for details)

For instance; if I purchase a looptop for 2000 euros they use it for 5 years

depreciation is basically the cost of using this laptop in one year, after using

this laptop for one year, the cost of using this laptop is 400 euros, so after one

year the value of this laptop will be no more 2000 euros but 1600 euros, and so

on… this is a way to update the book value in a non current asset each year.

• Non-current assets should be periodically subject to an impairment test

– Cost less accumulated depreciation cannot be higher than the future

economic benefits associated to the asset.

In this example we have this asset, and initialli is reported in the balance sheet

this value 2000’000 dollars, in this specific asset in 5 years, the value at the

end of 5 years is 50’000 dollars.

• Depreciation cannot be used in the case of non-current assets with

unlimited useful lives

• In these cases, fair value/economic benefits must be determined

An important distinction between asset with limited or unlimited useful life;

Assets with limited useful life this means that you can record this asset, but

then in the book update of that asset as time goes by you have to calculate the

depreciation. For assets with unlimited useful life like brand names, investment

property, you have to estimate the fair value of that asset every year, this can

be challenging, because you have to put the right number on the balance sheet

• The carrying amount of receivables is the expected cash to be received

• The value of receivables must be reduced by the amount expected to be

uncollectable (allowance for doubtful debts)

• On the balance sheet, receivables are therefore shown at their net amount

– Net amount = gross value – allowance for doubtful debts

– The details for the gross value and allowance are disclosed in the notes

How we can determine the book value or the carrying amount of trader

receivables in the balance sheet? of course when a customer purchase some

product service or credit the customer has the right to use the product that

have been acquire but also is require by law to pay some amount of money in a

specific time period, but sometimes a customer is not able to pay anymore, so

the company who gave the opportunity to pay in a specific time period is not

getting money anymore. If this resources will not generate some venefits you

have to eliminate this from the balance sheet.

Typically this info is not reported directly in the main table of the balance sheet

but if you go to the note you can find the amount of the trade receivable.

• Carrying value of inventory must be the lower of its

– Net realisable value or

– Acquisition cost

• Net realisable value : expected selling price less the expected costs

associated with getting the inventory to a saleable state (costs of marketing,

selling and distribution).

We call inventories a product or raw materials that are purchased by a business

entity and then will be using for manufactory etc…

How we can determined the value of the inventory? Basically there are two

option; the forst is to consider the amount of money that a company can get by

selling this product, this is called the net realisable value; or you can consider

the acquisition cost so the price that the business entity has purchase in the

inventory.

• To determine the acquisition cost of inventories one should take into

account that:

– Inventories can be purchased at different times at different prices

– Entities usually do not track all inventory movements (from the purchase to

sale)

• 2 cost assumptions permitted under IFRSs

– First-in, first-out (FIFO)

– Weighted average

Typically business entity acquire a lot of items at different times and a different

price, typically business entity at least for some items are not able to truck

excaclty what are the product that are still in the inventory and the product

that have been sold, and this create some issue when deciding what is the

value of those inventory that are still available for the business entity at the

end of the year. For this reason we have to make some assumptions.

• FIFO cost assumption assumes that the items sold/used are the ones that

have been in the inventory the longest

– So the unsold/unused items (i.e. inventories a the end of the period) are those

ones that have been purchased most recently.

• Weighted average cost assumption calculates a weighted-average cost

of inventory purchased, and applies this to the number of units sold/used and

unsold/unused.

LIMITATION OF THE BALANCE SHEET

1. Balance sheet shows asset, liability and equity values at a particular point

in time and may not be representative of other points in time

2. The entity’s true value is not reflected due to:

– Items that generate future benefits or involve future sacrifices not satisfying

definition and/or recognition criteria

– The historical nature of the balance sheet

3. Preparing a Balance sheet involves management choices and estimations

The balance sheet is organized across this 3 main type of items: asset

liability and equity

INCOME STATEMENT

This statement basically shows the income and the expencec that the business

entity is able to achieve during a reporting period, and a resulting profit is the

difference between income and expenses. If the difference is positive we have

a positive profits, if we have a loss this will decrease the value of equity, so the

value for the shareholders, so the incme statement is an important report for

the owners of a business entity. Profit can be generate between both operating

and non operating activities.

• Income

: Increases in economic benefits during the accounting period in the

form of inflows or enhancement of assets or decrease of liabilities that result in

increases in equity, other than those relating to contributions from equity

participants. Income is something that increase basically the equity of a

business entity, this increasing is related to an increasing of the asset or a

decreasing liability, because of the accounting equation.

• Expenses : Decreases in economic benefits during the accounting period in

the form of outflows or depletions of assets or incurrences of liabilities that

result in decreases in equity, other than those relating to distributions to equity

participants. It’s the opposite of an income; suppose that for instance the value

of an equipment decreases, if we have a decrease this means that the entity in

this period has used this equipment as somewhat consumed this equipment,

this decrease in value generate a decrease in equity.

Let’s focus on some of this items, the first line is always started with revenue

cost of sales, this is the main type of income, associated top selling products or

service to customers; and then we have some type of expenses that are

present in different forms, and relates to the entity and the use of some of the

resources, for different reason. Then we have the first total, that is the profit

before tax, and based to this amount of money typically tax are computed,

after this, you made the total and we have the profit of the year, the profit of

the year increases or decreases the equity. This is the general idea of the

income statement.

ACCRUAL ACCOUNTING VS CASH ACCOUNTING

• Income statement is prepared on the basis of accrual accounting

• Accrual accounting is a system in which transactions are recorded in the

periods they occur, rather than in the periods the cash is received or paid

– Transactions are recorded independently from receipt/payment of cash.

So accrual accounting is somewhat related to cash receipts or cash payments

and income statements is prepared under an accrual accounting not under

cash accounting.

• A cash accounting system would determine the financial result as the

difference between the cash received the cash paid

– Transactions are recorded in the period the cash is received/paid .

• Under accrual accounting, the following may occur for Income:

– Income is recognised in the IS without receipt of cash ( accrued income ): the

income has been earned (service provided), but not yet paid for (e.g. trade

receivables)

– Cash is received but income is NOT recognised in the IS ( income received in

advance ): it is a liability until the income is earned (e.g. obligation to deliver

the product in the future)

• Income is recognized only when it is earned (a product has been sold

or a service provided).

if I’m selling this smartphone, to a customer, this means that this costumer can

use this smartphone, this generate an income; let’s make that the customer

has payed for this customer, what is the effect? An increasing income, an

increasing equity, balance by an increasing cash. Let’s assume that the

customer has not paid yet, and the customer can pay in the next month, this is

still an income, that is balance with an increasing of an account receivable, this

is still an income, so can be recognize in the income statement.

Under an accrual accounting, show the rider the value of the product, that the

entity was able to sell at the time of the reporting period. Independently of the

receivable cash. You can also have an income, you can have a situation in

which you have an increasing of cash but not an income and this is the case of

the income receiving in advance that despite the nae, is not an inco