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The financial statements should disclose the following for capitalised development costs:

• the amortisation method used and the expected period of amortisation
• a reconciliation fo the carrying amounts at the beginning and end of the period, showing new expenditure incurred, amortisation and amounts written off because a project no longer qualifies for capitalisation
• amortisation during the period.

In addition, the financial statements should also disclose the total amount of research and development expenditure recognised as an expense during the period.

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Research is original and planned investigation undertaken with the prospect of gaining new knowledge and understanding.

Development is the application of research findings.

Research expenditure

No intangible asset arising from research should be recognised.

Development expenditure

An intangibel asset arising from development should be recognised if, and only if, an enterprise can demonstrate all of the following:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale
• its intention to complete the intangible asset and use or sell it
• its ability to use or sell the intangible asset
• how the intangible asset will generate probable future economic benefits. Among other things, the enterprise should demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
• the availability of adequate technical, financial and other resources to coplete the deveplopment and to use or sell the intangible asset
• its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount to be includeed is the cost of the development. Note that expenditure once treated as an expense can’t be reinstated as an asset.

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Purchased goodwill arises as a result of a purchase transaction.

It will be recognised withtin the accounts because at a specific point in time the face of purchase has established a figure of value for the business as a whole which can be compared with the fair value of the individual assets acquired, and this figure will be incorporated in the accounts of the acquiring business as the cost of the acquisition.

The goodwill arising on an acquisition to be recognised as an asset and amortised over its useful life. The useful life taken should not normally exceed twenty years, but a longer life may be taken if it can be justified by the circumstances.

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Revaluation method is a method of calcuating the depreciation. Sometimes, the value of non-current asset should be revalued according to the market condition for fairness.

When an item of property, plant or equipment is revalued, the entire class of property, plant or equipment to which the asset belongs must be revalued. For example, when a non-current asset has been revalued, the charge of depreciation should be based on the revalued amount and the remaining useful economic life of the asset. Therefore, because of the revaluation the depreciation is higher than previously. And an upward revaluation has resulted in a higher depreciation charge to the income statement.

The prime function of depreciation is to write off the “cost” of an asset over its expected life. If the cost is increased, the depreciation to be charged increases.

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The aim of this method is to show a higher depreciation charge in the early years of the life of an asset.

For example, the cost of asset is $4,200, the scrap value is $200, the estimaged usefullife is four years.

Sum of digits: 4 years + 3 years + 2 years + 1 years =10

The formula for sum of the digits is:

It gives the sum of the digits for any number of years. So the sum of the digits for four years is: 4*5/2=10.

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Under this method the depreciation charge will be higher in the earlier years of the life of the asset. Here needs a percentage to apply. And in the first year the percentage is applied to cost but in subsequent years it’s applied to the asset’s net book value (alternatively known as written down value).

The net book value (NBV) or written down value (WDV) of a non-current asset is its original cost less the accumulated depreciation on the asset to date.

The formula of reducing balance method is:

And there’re problems in using the formula:

1. if there is no residual value, Dp becomes 100%
2. if residual value is small relative to cost, Dp becomes a very high percentage.

For example, a trader purchased an item of plant for $1,000. The depreciation charge for each of the first five years is to be calculated, assuming the depreciation rate on the reducing balance to be 20% p.a.

Notice that this method results in higher depreciation charges in earlier years, and a much annual rate is required than for the straight line method if the asset is to be written off over the same period.

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It’s the simplest amd most popular methods of calcuating depreciation. Under the straight line method of depreciation, the depreciation charge is constant over the life of the asset. And we need know three pieces of information:

1. the original (historical) cost of the asset
2. an estimate of its useful life to the business
3. an estimate of its residual value at the end of its useful life.

You should according to the the orginal, the residual value, and the estimated useful value to calculate the annual depreciation charge.

For example, a company puerchased a car on 1 January 2008 at a cost of $24,000. The company estimates that its useful life is four years, after which he will trade it in for $4,000. The annual depreciation charge is to be calculated using the straight line method.

Depreciation charge = ($24,000 – $4,000)/4= $5,000 p.a.

If the car had been puracased on 30 september 2008, we should only charge three months’ depreciation in 2009. The depreciation charged should be:

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Property, plant and equipment are tangible assets held by an anterprise for more than one accounting period for use in the production or supply of goods or services, for rental to others, or for administrative purposes.

It is probable that future economic benefits associated with the asset will flow to the enterprise; and the cost of the asset can be measured reliably.

The initial measurement of the value of a tangible non-current asset should be cost or, if the asset was obtained by an exchange, fair value at the time of the exchange.

The useful life of assets should be periodically reviewed, and if they have changed materially the depreciation charge should be adjusted. The factors to be considered in determining useful life are:

1. rate of usage
2. epected wear and tear
3. technical obsolescence
4. legal or other limits on the use of the asset, such as the expiry of a lease.

Load normally has an unlimited life and so does not require depreciation, but bulidings should be depreciated.

There are seveal methods of calcuating depreciation, the methods are:

1. straight line method
2. reducing balance method
3. sum of the digits method
4. revaluation method.

In the financial statements, each major class of depreciable asset should be disclosed:

1. the measurement base used (e.g cost or revaluation)
2. the depreciation methods used
3. the useful lives or the depreciation rates used
4. total depreciation charged for the period
5. the gross amount of depreciable assets and the related accumulated depreciation.

We’ll discuss all the detailed of the property, plant and equipment later.