Question

According to Asset Valuation principle, in IFRS how the long lived assets are valued at the acquisition and throughout its life? Explain with two examples.

Answer 1

Long lived Assets are those Assets that have long life, usually more than one year. They are also referred to as Non current Asset. As per IFRS the company is free to follow either "cost method" or "revaluation method". we have used cost method below.

Non current Assets can be classified into two categories-

1) Assets having limited/finite life- For the purpose of account of assets having limited life, its cost is capitalised to the books of accounts at the time of its acquisition. During its remaining useful/economic life, it is depreciated at appropriate rate and method of depreciation as followed by the company.

The cost includes Purchase price of Asset as well as all such expenditure which are incurrend to bring the asset to present and working condition.

Example 1- A company purchased a machine for $100,000 and incurred $50,000 in its installation. The machine has a useful life of 5 years.

In above example, company will capitalise the entire purchase price and installation cost i.e $150,000 at the time of acquisition. and in coming 5 years i.e useful life of asset, the asset will be depreciated by $30,000 each year if straight line method of charging depreciation is followed.

2) Assets having infinite life- Assets having finite life are just recorded at the time of acquisition at cost. If cost method is followed then, it will remain in the books of accounts at the cost throughout the life of the asset. If company follows revaluation method then company revalues such assets annually for the increase or decrease in fair market value of asset. Such increase or decrease is adjusted through the Profit and Loss account annually.

Example 2: The company purchased a land for $50,000,000 .

In such case, the land will be recorded in the books of accounts at $50,000,000 and no further adjustments will be made to it throughout the life of the company.

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