Accounting for Non-Current Assets

Depreciation is the systematic allocation of the cost of a non-current asset over its useful life. The main methods of calculating depreciation include straight-line, reducing-balance, sum-of-digits, and units-of-production methods. Each method reflects different patterns of asset usage and expense recognition.

1. Straight-Line Method: This method allocates an equal amount of depreciation each year. The formula is:

\[ \text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \]

2. Reducing-Balance Method: This method applies a fixed percentage to the carrying amount of the asset each year, resulting in decreasing depreciation expenses over time. The formula is:

\[ \text{Depreciation Expense} = \text{Carrying Amount} \times \text{Depreciation Rate} \]

3. Sum-of-Digits Method: This method accelerates depreciation by allocating more expense in the earlier years. The formula involves calculating the sum of the digits of the useful life and applying it to the remaining life of the asset.

4. Units-of-Production Method: This method bases depreciation on actual usage. The formula is:

\[ \text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Units}} \times \text{Units Produced} \]

Select the appropriate method based on the nature of the asset and the business’s financial reporting objectives.

When disposing of a non-current asset, it is essential to determine the profit or loss on disposal. This involves comparing the sale proceeds with the asset's carrying amount (net book value). According to IAS 16, the carrying amount is the asset's cost less accumulated depreciation and any impairment losses.

1. Calculate the Carrying Amount:
- Determine the cost of the asset.
- Subtract accumulated depreciation.
- If applicable, account for any impairment losses.

2. Determine Sale Proceeds:
- Identify the cash received or receivable from the sale.

3. Calculate Profit or Loss on Disposal:
- Profit/Loss = Sale Proceeds - Carrying Amount.
- A positive result indicates a profit, while a negative result indicates a loss.

For Kenyan businesses, ensure compliance with the Companies Act 2015 when recording disposals and consider any tax implications under KRA regulations. Accurate records of disposals are crucial for financial reporting and tax purposes.

A non-current asset schedule provides a detailed overview of an entity's non-current assets, including their cost, accumulated depreciation, and net book value (NBV). This schedule is essential for financial reporting under IAS 16 - Property, Plant and Equipment.

To prepare the non-current asset schedule, follow these steps:
1. List each non-current asset: Include the asset's description and date of acquisition.
2. Record the cost: This includes the purchase price and any directly attributable costs necessary to bring the asset to its intended use.
3. Calculate accumulated depreciation: Use the appropriate method (straight-line or reducing balance) as per the company's policy. Ensure that the depreciation expense is recorded annually.
4. Determine the NBV: Subtract accumulated depreciation from the cost of the asset. This represents the asset's current value on the balance sheet.

Ensure compliance with the Companies Act 2015 and relevant IFRS standards when preparing the schedule. This schedule is crucial for stakeholders, including investors and regulators, to assess the financial health of the business.