FINANCIAL REPORTING ANALYSIS

 Capital expenditure is written off to the statement of profit or loss (depreciation ,

amortization, impairment loss), but this takes place over a number of accounting
periods.

Depreciation
Depreciation is the systematic allocation of the depreciable amount (cost – residual
value) of an asset over its useful life. This reflects the value of economic benefits
which have been consumed during the accounting period.

All non-current assets which wear out must be depreciated but those which do not wear
out need not be depreciated (eg land).

Depreciation is not a cash expense. It is not intended to provide a fund for the
replacement of the asset.

The accrual / matching concept is applied in depreciation whereby it requires the whole
costs to be spread out over it useful life and not written off totally as an expense in the first
year of its purchase. The costs should be included in the Statement of Profit or Loss in
the same period as the sales those costs helped to produce.

Assessment of depreciation and its allocation to the account years can be based on the
following factors:
(a) Cost of the asset
(b) Its estimated useful life
(c) Its estimated residual value

Residual value of an asset is the estimated amount that an entity would currently obtain
from disposal of the asset, after deducting the estimated costs of disposal, if the asset
were already of the age and in the condition expected at the end of its useful life.

Useful life is
 Period over which an asset is expected to be available for use by an entity; or
 The number of production or similar units expected to be obtained from the asset by
an entity.

Factors that need to be considered in determining useful economic life:

a. Expected usage of the asset

b. Expected physical deterioration of the asset (Physical deterioration includes exposure
to sun, wind and other climate factors)
c. Economic or technological obsolescence (regardless of good physical condition, the
economic life of the asset may be reduced by economic / technological obsolescence)

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FINANCIAL REPORTING ANALYSIS

Depreciation begins when the property, plant and equipment is available for use and
ceases at the earliest date when the asset is classified as held for sale and the date that
the asset is derecognised.

Depreciation Methods

There are several acceptable methods used to calculate depreciation.

Straight line method is also known as fixed instalment method and original cost
method. This method is very simple and conceptually appropriate to employ.

This is one of the most widely used methods for the calculation of depreciation charge. By
this method, the number of years of use is estimated and the cost is then divided by the
number of years to give the depreciation charge each year.

Under this method, the amount of depreciation will be equal each year, since depreciation
is charged at fixed rate on cost of asset.

Annual depreciation = Original cost – Estimated residual value

Estimated useful life

Dr. Depreciation expense account (Statement of Profit or Loss)

Cr. Accumulated depreciation account

Reducing balance method, the depreciation is charged at a fixed rate like the straight
line method. But the rate percent is not calculated on cost of asset as is done under fixed
instalment method - it is calculated on the book value of asset.

The book value of an asset is obtained by deducting depreciation from its cost. The book
value of asset gradually reduces on account of charging depreciation. Since the
depreciation rate per cent is applied on reducing balance of asset, this method is called
reducing balance method or diminishing balance method.

Year 1 Depreciation = Cost x Rate of depreciation

Year 2 Depreciation = Net Book Value x Rate of depreciation

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FINANCIAL REPORTING ANALYSIS

Disposals

When disposal takes place, the asset is sold in exchange for money. We no longer own
the asset and hence the net book value needs to be removed from the book (cost less
accumulated depreciation) and the amount of cash received has to be booked in.

It is a capital income since it involves the sale of non-trading assets.

- The treatment for capital income is to recognize the gain / loss on the disposal.
- The gain / loss on disposal is the difference between:
The net book value of the asset at the time of sale; and the proceeds of sales

Accounting entries for disposal of non-current asset include:

(a) Transfer the original cost of the asset sold to an asset disposal account
Dr. Disposal account
Cr. Non-Current Asset – cost account

(b) Transfer the depreciation already charged to the asset disposal account
Dr. Accumulated depreciation account
Cr. Disposal account

(c) Account for the sale proceeds of the disposal

Dr. Cash / Bank account
Cr. Disposal account

Proceeds > NBV => Gain

Proceeds < NBV => Loss

Balance in the disposal account to work out the profit or loss to the Statement of Profit or
Loss.
• If the account shows a CREDIT balance, it is a gain on disposal.
• If the account shows a DEBIT balance, it is a loss on sale

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FINANCIAL REPORTING ANALYSIS

Topic 4: Introduction to Company Account (I)

Learning Objectives

Describe the various types of sources of finance, including shares, share capital,
debt instruments. Prepare the journal entry of shares and debts.

After studying this topic you will be able to:

1. Understand the different types of companies

2. Understand that the equity of an organisation can consist of several different accounts
3. Understand that within equity there can be various classes of shares, each providing
different rights to holders
4. Provide the journal entries to recognise the issue of both fully paid and partly paid
shares by a company

Various Forms of Companies

A Company or a joint stock company is an enterprise established through a process law
for undertaking (usually) a business venture. A company is an artificial person existing in
the eyes of law and distinct from its members. It has a share capital divided into shares,
the owners of which are known as members or shareholders.

Private Company
This is a locally incorporated company where the maximum number of shareholders is
limited to 50.

A private company is held under private ownership. It may issue shares and have
shareholders, but their shares do not trade on public exchanges and are not issue
through an initial public offering.

Exempt Private Company

This is a private company:
• which has not more than 20 shareholders, and none of the shareholders is a
corporation or
• that is wholly owned by the Government and which the Minister, in national
interest, declares by notification in the Gazette to be an exempt private company

Public Company limited by shares

A public company limited by shares is a locally incorporated company in which the
number of shareholders can be more than 50.

The company may raise capital by offering shares and debentures to the public. A public
company must register a prospectus with the Monetary Authority of Singapore before
making any public offer of shares and debentures.

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FINANCIAL REPORTING ANALYSIS

Public Company limited by guarantee

A public company limited by guarantee is one which carries out non-profit making
activities that have some basis of national or public interest, such as for promoting art,
or charity etc.

The above information are extracted from ACRA website:

http://www.acra.gov.sg/Company/Starting_a_Company/Types+of+Companies.htm.

Share Capital of A Company

Share Capital refers to the amount that a company can raise or has raised by issue of
shares. From accounting point of view, share capital can be classified as follows:

1. Authorised share Capital is stated in the Memorandum of association and is the

maximum share capital that a company can issue.

2. Issued share Capital is a part of share capital that is issued for subscription by the
company. It cannot exceed company’s authorized share capital.

3. Subscribed share Capital is a part of issued share capital, which is applied for
subscription.

4. Called-up share capital is the amount of nominal value of share that has been
called up by the company for payment by the subscribers towards the shares.

5. Paid-up Capital is a part of called –up capital that the members of the company
have paid.

6. Calls-in-arrears is that part of the called –up capital that remains unpaid by the
subscribers.

7. Calls-in-advance- a company, if its articles of association permit, may receive the

unpaid amount from the shareholders even when the amount has not been called.
The amount so received is known as Calls-in-advance.

When a company plans to raise funds for a start of a business or for future economic
development, it may offer or invite the public to subscribe to its company shares.

In order to issue shares, debentures or other securities must be accompanied by a

disclosure document known as a prospectus.

A prospectus contains all the information that potential investors and their professional
advisers reasonably require and expect for the purpose of making an informed
assessment of (a) the assets, liabilities, financial position, profits and losses and prospects
of the company, and (b) the rights attached to the securities being issued.

Formation costs and share issue costs

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