NCAs 101

Cost of a non-current asset is...

• The estimated future economic value of a non-current asset, after taking into consideration the effects of accumulated depreciation

• The costs to buy and bring a non-current asset to its intended use

• The costs to operate, repair and maintain a non-current asset in working condition

Answer explanation

When we say "cost of a non-current asset", we are referring to the original price (on price tag) that business buys the non-current asset for.

Non-current assets are

• Resources that a business owns or controls which provide benefits for one financial year

• Costs incurred in the operation of a business to earn income in the same accounting period

• Resources that a business owns or controls which provide benefits that last beyond one financial year

Answer explanation

Non-current assets, in layman terms, refer to items that business holds for use in daily operations, that are not for sale in the next 12 months.

For example, a cafe business owns tables and chairs for its customers' dining in the cafe (benefit). These tables and chairs are what the business owns and holds that are intended for its operations and not for sale anytime soon.

Net book value of a non-current asset is...

• The costs to buy and bring a non-current asset to its intended use

• The estimated future economic value of a non-current asset, after taking into consideration the effects of accumulated depreciation

• The costs to operate, repair and maintain a non-current asset in working condition

Answer explanation

The difference between cost and net book value is that net book value takes into consideration the effects of accumulated depreciation of a non-current asset. It reflects the true value of a non-current asset at any point in time after any wear and tear, for example.

As such, to derive the net book value of a non-current asset, we use the formula: Cost - Accumulated Depreciation.

Depreciation refers to the allocation of the cost of a non-current asset over its estimated useful life whereas accumulated depreciation refers to the total depreciation to date.

• True

• False

Answer explanation

The definition of depreciation comes from one of its calculation method of: (Cost - scrap value) / number of years of useful life.

The reason for such annual cost allocation is to account for the decrease in value of non-current assets due to wear and tear, for example.

Accumulated depreciation, as the name suggests, is not the yearly depreciation amount, but the total depreciation amount from the time business owns the non-current asset.

The formula for straight-line method of depreciation is (Net book value x %) whereas the formula for reducing-balance method of depreciation is [(Cost - scrap value) / number of years of useful life].

• True

• False

Answer explanation

Straight-line method of depreciation, as the name suggests, will result in same depreciation amount incurred every year.

On the other hand, reducing-balance method of depreciation, as the name suggests, will result in reducing depreciation amount incurred every year due to the changing net book value of the non-current asset.