Non-Current Assets and Depreciation
The cost of a non-current asset includes all reasonable and necessary costs incurred to place the asset in a position and condition ready for use, plus all costs incurred which enhance the future econmic benefits of an asset beyond the initial acquisition.
Materiality is a term used to indicate the relative importance of a non-current asset to an entity. In general, an item is material if it is sufficiently important to influence the economic decisions of users on the basis of financial statements.
A non-current asset has a number of potential lives including: physical life, technical life, commercial life and legal life. The useful life is the period over which the asset is expected to be used.
Depreciation is the reduction of the value of an non-current asset over its useful life.
The written-down or book value is normally the cost of the non-current asset less the total depreciation. In some cases (e.g., buildings) the asset may be revalued.
Depreciation may be conducted by:
A straight line method ((cost - residual value)/useful life) or;
a reducing balance method. The rate is 1 = useful life sqrt(residual value/cost of asset) or;
a units of output method calculated the depreciation change base don the units extracted each year as a percentage of the total units the aset is expected to yield less residual value. (cost - residual value * number of units in period)/total expected number of units
The reported profit of an organisation can vary significantly depending on the depreciation method used.
Intangible assets lack physical substance; it includes trademarks, franchises, brand names etc as well as customer loyalty, location (should be in land value) etc. Most intangible assets are amortised. Goodwill is not; it is re-evaluated annually.
Amortisation amount = ((cost of intangible asset - residual value)/useful life)