accounting for assets and depreciation - icb.org.au to assets and depreciation 2014.pdf ·...

Institute of Certified Bookkeepers Making you count

Accounting for Assets and Depreciation

July 2014

© 2014 Institute of Certified Bookkeeperswww.icb.org.au 1300 85 61 81 [email protected]

July 2014 All rights withheld by ICB. For use by ICB members and their clients.

Assets and Depreciation Table of Contents Introduction .........................................................................................................................................................................3 Current and Proposed Laws ...............................................................................................................................................4 Is it an Expense? ................................................................................................................................................................5 Is it an Asset? .....................................................................................................................................................................6 Business Turnover less than $2 million ..............................................................................................................................6 Motor Vehicles ....................................................................................................................................................................7

Business Turnover more than $2 million ............................................................................................................................8 Depreciation Rates Table ...................................................................................................................................................9 General Business Pool Records (<$2m turnover) ............................................................................................................10 Motor Vehicle Records .....................................................................................................................................................11 Low Value Pool Records (>$2m turnover) ........................................................................................................................12 Business Assets Records (>$2m turnover) ......................................................................................................................13 Bookkeeping checklist / Information of work performed in relation to Assets and Depreciation………………………………………………………………………………………………….………....……………14


Accounting for Assets & Depreciation (includes alternate methods of announced changes) July 2014 Introduction In theory we do have a “Simplified” good system for accounting for assets. You do not have to keep track of each individual asset. Today’s complication is knowing which thresholds apply for instant write off: Is it the law that actually exists or the law that the government have announced is to apply? Allegedly the change will apply as from 1 January 2014 ie last tax year. If it wasn’t for politics, the system of record keeping for assets IS simple. - Matthew Addison, Executive Director ICB What to do while the law is uncertain? The below explains the actual legal position. We have then provided comment as to how to apply the law that has been announced. The announced changes are to drop the immediate write off from the $6,500 back to the $1,000. It also removes the instant $5,000 write off for Motor Vehicles. These changes only apply to business with turnover of less than $2 m per annum. The concept in either case is you don’t need to keep a detailed listing of all assets! (Software companies take note – Pools apply!) Treat the purchase of the asset just like any other purchase: allocate the GST exclusive purchase cost to an account called, say, “Business Assets”. It is an account in assets on the balance sheet. The only records that need to be kept are the same as if it was an office stationery expense, or advertising bill: keep the detailed tax invoice in the same way that you do for other expenses. The individual asset enters a “pool” or an account that is the running balance of the (diminishing) value of those assets. If you sell an individual asset then the proceeds reduce the value of the running balance of the pool. Each individual asset sold does NOT require its own profit and loss calculation. It is all about the value of the pool. For BAS purposes everything above $1,000 capital has to be coded and reported to appear in G10. Don’t ask me why but that is the ATO requirement. For Income Tax it may be different, see below. Make sure you can reconcile the BAS Capital amounts to the Tax Return reported Capital Purchases! They may not be the same, as the law is different but you may need to explain it. It shouldn’t matter but there is evidence that the ATO triggers audits based on these matching. There is an argument that you should go back and alter the past BAS to match the Tax Returns when they are completed so that it all reconciles, however there is an argument that making any changes also triggers review and audit activity. Our recommendation for any review or audit by the ATO is to ensure a phone call happens to explain the differences logically. You may prevent a time consuming audit process for what is a difference in the law.


Current and Proposed Laws—Where to from here? Is the business using the “Small Business Concessions” for the purpose of the Uniform Capital Allowance (Depreciation of assets)? Assuming the answer is YES, i.e. the business has an annual turnover of less than $2 million (as of today)1:

1. Write off to an expense account all items that cost less than $6,500 (GST excl) 2. Allocate to a Balance Sheet account “Business Assets General” all items costing over $6,500 3. Calculate the depreciation to be charged and reduce the values of the accounts in #2 above in line with the worksheets provided,

see page 10 4. Advise the Tax Agent of exactly how you have kept the books and provide details

If the answer is NO, they aren’t a Small Business:

1. Write off to an expense account all items that cost less than $100 (GST incl) 2. Allocate to a Balance Sheet account “Business Assets (low Value)” all items that cost less than $1,000 (GST excl) 3. Allocate to a Balance Sheet account “Business Assets” all items that cost more than $1,000 (GST excl) 4. Calculate the depreciation to be charged and reduce the values of the account in #2 and #3 above and charge the depreciation

from #2 and #3 above to the accumulated depreciation account in line with the worksheets provided in the detail explanation, see page 12 and 13

5. Advise the Tax Agent of exactly how you have kept the books and provide details.

If the proposed law comes into effect then for a small business (less than $2m turnover) 1. Expense all items that cost less than $6,500 purchased before 31 Dec. 2013 and less than $1,000 (GST excl) for those purchased

after 31 Dec. 2013 2. Allocate all asset purchases over $6,500 (pre 31 Dec. 2013) or $1,000 (post) to a Balance Sheet account “Business Assets General” 3. Calculate the depreciation to be charged and reduce the values of the accounts in #2 above in line with the worksheets provided,

see page 10 4. Advise the Tax Agent of exactly how you have kept the books and provide details

If the answer is NO, they aren’t a Small Business then there is no change to the Accounting for Assets. Changing thresholds The thresholds keep changing. For the 2011/12 year it was $1,000 then for the 2012/13 year $6,500 and then for 2013/14 by law it is $6,500 but by announced law it will only be $1,000 from 1 January 2014. Below we discuss the $6,500 write-off and the changed law. 1 There is discussion about the definition of small business based on the turnover level of $2m. This threshold may change soon.


Yes

Is it an expense?

Is the payment for an item or service that is directly connected with producing my Taxable Income? Is it for “Business use”?

Will the value of the item or service be used up in the “day to day” running of the business (Consumable)? (unofficially: Will it be consumed in under a year?)

Is the payment a “Repairs & Maintenance” expense?

Yes

No

No

To repair something generally means to fix defects, including renewing parts. It does not mean totally reconstructing something or substantial improvements

Normal expense: Allocate to a P&L expense account and claim back GST if applicable. GST Code is “GST” or “FRE”

Yes

It is an Asset

Allocate the GST Inclusive cost to loan account or “Non-Deductible Asset” account or “Non-deductible expense” account GST code is “N-T” or not reportable


It is an Asset

Yes & / or No

Is the payment a “Replacement” of a previous item? If so then it is a NEW ASSET.

Claim back any allowed GST credit and claim the cost as an expense GST Code: GST or FRE

If it cost less than $100 (GST Incl) then claim immediate deduction. [$90.91 GST excl]

Is the business turnover (total income) more or less than $ 2 Million (GST Excl)?

Turnover is based on: a. your actual turnover last financial year or b. if the year before last was less and your

current year is likely to be less Excluding GST

Less than $2m More than $2m

PURCHASE Cost < $6,500 (<$1,000) (Excl GST) then immediate write off (“S1”)

PURCHASE Cost > $6,500 (>$1,000) (Excl GST) then “General Business Pool” (“S2”)

Claim back any GST credit and Claim the cost as an expense 100% GST Code: GST

Claim back any GST credit and Allocate the cost to Asset called “Business Assets (General)”* GST Code: CAP

&

Yes

No

Concept of it being a replacement of a previous asset is irrelevant to the new payment: If it is a new item, it is a new asset! It may however enable the write-off of the old asset.


More than $2m Less than $2m

Motor Vehicle Cost > $5,000 (Excl GST) then “Motor Vehicles” (“MV”) (Prior to 1 January 2014)

Motor Vehicles have an additional concession that is different to other assets, following 1 July 2012 (until 31 Dec. 13) — see page 9

Explanations: (for business with turnover less than $2m (GST excl): 1. Purchases of < $6,500 (<$1,000) we have said to expense to the P&L. Some accountants or business owners may still want these captured in assets on the Balance Sheet, in which case create a separate Asset account “Business Assets claimed”, enter the purchase against this account, and at the same time enter 100% depreciation against your “Accum Dep” account. 2. We have suggested classifying the assets into 3 accounts in the Balance Sheet a. Business Assets (General) b. Motor Vehicles (This account is probably not necessary) c. Business Assets (Claimed)

[we suggest this is optional as we would expense the items to the P&L] Businesses / Accountants may wish to see further breakdown of the assets into “Asset Categories” ie Business Assets (General) Plant & Equipment – WDV “WDV” stands for Written Down Value Office Equipment – WDV which is the old version of Assets at Cost $ Less Accum Dep ($ ) Motor Vehicles – WDV = WDV $ This is closer to what you normally see and would also be acceptable. 3. The “Pool” concept is an Income Tax concept and not necessarily for account reporting, however for

small business we recommend that the Accounting/Reporting treatment mirror the required Income Tax Treatment. Bookkeepers should allocate and seek guidance from the income tax adviser. “S1”, “S2” are the Income Tax classes”


PURCHASE Cost < $1,000 (Excl GST) then “Low Value Pool” (O2)

Claim back any GST credit and Allocate the cost to Asset called “Business Assets (Low Value)” GST Code: CAP

PURCHASE Cost > $1,000 (Excl GST) Are “normal” assets

Claim back any GST credit and Allocate the cost to Asset called “Business Assets - Cost” GST Code: CAP

More than $2m

or

Explanations: (for business with turnover greater than $2m (GST excl): 1. Purchases of < $1,000 (and >$100 (GST inc)) can be allocated to this “Low Value Pool” and classified on the balance sheet as such. Some Accountants may not want the dissection in the reports and hence the “pool” would only be considered by them in the income tax preparation. 2. We have suggested classifying the assets into 2 main accounts in the Balance Sheet a. Business Assets (Low Value) [which you may not see or be required] b. Business Assets - Cost Businesses / Accountants may wish to see further breakdown of the assets into “Asset Categories” ie Business Assets Plant & Equipment - Cost Office Equipment - Cost Motor Vehicles – Cost 3. The “Pool” concept is an Income Tax concept and not necessarily for account reporting, however for small business we recommend that the Accounting/ Reporting treatment mirror the required Income Tax Treatment. Bookkeepers should allocate and seek guidance from the income tax adviser.


Depreciation Rates

Depreciation Table for <$2 million turnover * Depreciation Table for >$2 million turnover

Asset Threshold Depreciation Period Depreciation Rate

Asset Threshold Depreciation Period Depreciation Rate

Asset Cost <$6,500 Expense at time of acquisition

100% write off Asset Cost <$90.91 Expense at time of acquisition

100% write off

Asset Cost >$6,500 Year of acquisition 15% of cost Asset Cost <$1,000 Year of acquisition 18.75% of cost Subsequent years

diminishing value 30% of WDV Subsequent years

diminishing value 37.5% of WDV

Motor Vehicle Cost

<$5,000 Expense at time of acquisition

100% write off Asset Cost >$1,000 Depreciation based on effective life

ATO TR 2014/4

Motor Vehicle Cost

>$5,000 Year of acquisition claim $5,000 + (15% of cost - $5,000)

$5,000 write off 15% of cost (less $5,000)

Subsequent years diminishing value

30% of WDV

* All thresholds may reduce to $1,000 due to change of law

If the value of assets falls below (<) $1,000 (Excl GST) Then shift to “Low Value Pool”

Explanations: (for business with turnover greater than $2m (GST excl): 1. Assets whose value reduces to below (<) $1,000 can be re-allocated to the “Low Value Pool” 2. This occurs for the year when the opening value of the asset for the year is below $1,000 3. This may or may not require an alteration to the place where the asset is listed in the accounts – seek

guidance from the business or the accountant. 4. Assets acquired that cost less than $1,000 can be immediately allocated to this pool.

More than $2m


The General Business Pool is created for all assets over $6,500 (<$1,000) (GST Excl) in cost

The Books and records of the pool: recorded in the account called “Business Assets General”

Opening value of the pool $ Depreciation of 30% of that value for the year 30% = ($ ) Closing value of existing pool $ Add Assets acquired during the year $ Depreciation of 15% of cost 15% = ($ ) Value of acquired assets at end of year $ $ Less any proceeds from sale of Pool ($ ) Total value of pool at end of year $

If the pool is negative then a profit has been made from sales &/or depreciation previously expensed has now been recouped and must be recognised as income. It is possible and correct for the historic “Cost” and the “Accum Dep” accounts to be merged.

History: Once upon a time all assets were kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. This was the requirement. This recording method still exists and is used significantly in business records. It is no longer required to this level of detail for small business. In those olden days assets & depreciation were accounted for in two different accounts: “Cost” and “Accum Depreciation” Current concept: For Small Business; the assets can be simply added to the pool and the recording grouped, however detailed records help prove any later disputes and may keep the accounts familiar. Note: the detailed depreciation schedule IS NOT required – simply the same invoice records. Last year’s Accounts

Value of the account Business Assets General $

Add purchases (the cost) Debit Business Assets General $ Credit Bank/Loans $

Less depreciation Debit Depreciation Expense $ Credit Business Assets General $

If pool value falls below zero Debit Business Assets General $ $ Credit Profit- Sale Assets (P&L) $ To bring balance up to $Nil

Less proceeds from sale Debit Bank/Loans etc $ Credit Business Assets General $

How to keep the books of the “General Business Pool”—Turnover of less than $2 million (GST excl)


The Books and records: recorded in the account called “Motor Vehicles” (Note previous comments about law change: this may only apply until 31 Dec., 2013) Opening value of Motor Vehicles $ Depreciation of 30% of that value for the year 30% = ($ ) Closing value of existing Motor Vehicles $ Add Assets acquired during the year $ Depreciation (for each vehicle) of

1) If new vehicles cost less than $5,000 then the total value & 2) If the new vehicle costs more than $5,000

a. $5,000 + b. 15% of (Cost less $5,000) or

3) If new law then only 15% of Cost Value of acquired assets at end of year $ $ Less Value of Vehicles sold (Cost – Accum Deprecn) ($ ) Total value of Motor Vehicles at end of year $ We note that an appropriate treatment would be that at the end of each year the balance of the Motor vehicles account is transferred into the General Business Pool. This treatment works as after year number one we have a written down value that is depreciated at 30% per year. Motor Vehicles are not required to be separated after that first year.

Add purchases (cost) Debit Motor Vehicles $ Credit Bank/Loans $

Less depreciation Debit Deprecn Expense $ Credit Accum Dep Motor Vehicle$

Less value of sold vehicles Debit Accum Dep $ Debit Profit – Sale of Assets Credit Cost of Vehicles $

Proceeds Debit Bank/etc $ Credit Profit- Sale Assets (P&L) $

Last year’s accounts Value of the account Motor Vehicles $

The Motor Vehicles Account is created for all MVs over $5,000 (GST Excl) in cost


The Low Value Pool is created for all assets with value under $1,000 (GST Excl) The Books and records of the pool: in account “Business Assets (LV)” Opening value of the pool $ + Value of assets shifted to LV Pool $ = Subtotal of opening value $ - Depreciation of 37% of that value for the year 37% = ($ ) Closing written down value of existing pool $ Add + Assets acquired during the year (cost <$1,000) $ - Depreciation of 18.75% of cost 18.75% = ($ ) Value of added assets at end of year $ Less any proceeds from sale of Pool ($ ) Total value of pool at end of year $ If the pool is negative then zero the pool by moving the negative into income Db Business Assets (LV) Cr Profit on Sale of Assets It is possible and correct for the “Cost” and the “Accum Dep” accounts to be merged.

History: Similarly once upon a time all assets were kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. Current concept: The low value pool could in effect be one line of a “Running Balance” of the value of “Low Value Pool” Assets. However detailed records help prove any later disputes.

Last year’s accounts Value of the account Business Assets (LV) $ Add purchases Debit Business Assets (LV) $ Credit Bank/Loans $

Less depreciation Debit Depreciation Expense $ Credit Business Assets (LV) $

Less Proceeds from sale Debit Bank/Loans etc $ Credit Business Assets (LV)$

If pool value falls below Zero Debit Business Assets (LV) $ Credit Profit- Sale Assets (P&L) $

Add Transfers into pool at WDV Debit Business Assets (LV) $ Credit Business Assets (cost) $ & Debit Bus. Assets (Accum Dep) $ Credit Business Assets (LV)

How to keep the books for the “Low Value Pool” - Turnover of more than $2m (GST Excl)


Items transferred Debit Business Assets Accum Dep $ Credit Business Assets (LV) $

A control account for Cost of Business Assets is created for over $1,000 (GST Excl) The books and records of the “Asset Cost” is recorded in account called “Business Assets–at cost” Opening Balance of Cost of the listed assets $ Add Assets acquired during the year $ Less Listed cost of any items sold during the year ($ ) Less Listed cost of any items transferred to “Low Value” Pool ($ ) Closing Balance of Cost of the listed assets at end of year $ A control account for Accumulated Depreciation of those Business Assets is created The Books and records of the “Accumulated Depreciation” This account is always a Credit balance recorded in the account called “Business Assets – Accumulated Depreciation” Opening Balance of Accumulation of the listed assets $ Add Depreciation charged on all individual assets per schedule $ Less Listed Accum Dep of items sold during the year ($ ) Less Listed Accum Dep of items transferred to “Low Value” Pool ($ ) Closing Balance of Accum Dep of the listed assets at end of year $

History & ALSO current: All assets are to be kept as individual assets, recorded individually and maintained on the detailed depreciation schedule as individual line items. This was the requirement & remains the requirement for this level of asset. The cost of Assets & Depreciation were accounted for in two different accounts: “Cost” and “Accumulated Depreciation” Note: the detailed depreciation schedule IS required for businesses with a turnover of >$2 million. WHAT’S new: Once an asset value decreases to below $1,000 it can be removed from this detailed list and allocated to the “Low Value Pool”

Last year’s accounts & the detailed schedule Business Assets - Cost $

Add purchases (the cost) Debit Business Assets - cost $ Credit Bank/Loans $

Less items sold Debit Profit on Sale Assets $ Credit Business Assets – Cost $

How to keep the books for the Normal Assets >$1,000 - Turnover of more than $2m (GST Excl)

Less items transferred to LV pool Debit Business Assets (LV) $ Credit Business Assets - Cost $

Add (Credit) depreciation Debit Depreciation Expense $ Credit Bus. Assets Accum Dep $

Items sold Debit Business Assets Accum Dep $ Credit Profit- Sale Assets (P&L) $

Last year’s accounts & the detailed schedule Business Assets – Accum Dep $


Bookkeeping checklist / Information of work performed in relation to Assets and Depreciation Business Name: _______________________________ Period Ended ___/___/___ ❏ For the purposes of the Uniform Capital Allowance system we understand that this business is considered to be/ not to be a

“Small Business” (turnover less than $2m)

Our review says that for this financial year turnover is $ _______________ ❏ All items that have been advised as private have been allocated to

o Sole Trader / Partnership Owners Drawings Account, or “Non Deductible Asset” Account or “Non-deductible expense account

o Companies / Trusts Loan Accounts (GST Inclusive costs) “Expenses subject to FBT” account Salary Packaged Items

❏ All items that were acquired as Replacements have been treated as new assets. ❏ All items that cost less than $100 GST Incl have been expensed Allocation of new assets Small Business: for year ended 6/13 threshold of $6,500 Subject to legislation change: threshold of $6,500 to Dec 31st and then $1,000 ❏ New Items with cost less threshold Expensed to account ____________ ❏ New Items with cost over threshold Allocated to account ____________ ❏ New Items with life of more than 25 years are Allocated to account ___________


Large Business ❏ New Items with cost less $1000 (GST Excl) Allocated to account ____________ ❏ New Items with cost over $1000 (GST Excl) Allocated to account ____________ Items for Tax Agent Review ❏ All “consumables” where they are not assets but operating expenses have been expensed. Accounts of note that may require

your review are: ❏ The Repairs & Maintenance account has items that were considered by us to be items that were not Assets. Depreciation Journals We have posted Depreciation Journals in accordance with the calculations shown on the next page (Attach the Information Sheet – How to keep records of Assets) ❏ Small Business:

Debit Depreciation Expense a/c no ___________for $_____________

Credit “Business Assets General” a/c no ___________for $ _____________

Credit “Business Assets (Long Life)” a/c no ___________for $ _____________ ❏ Large Business

Debit Depreciation Expense a/c no ___________for $ _____________

Credit “Business Assets (Low Value)” a/c no ___________for $ _____________

Credit “Business Assets – Accum Deprecn” a/c no ___________for $ _____________

Level 27, Rialto South Tower 525 Collins Street

Melbourne Vic 3000

1300 85 61 81www.icb.org.au

[email protected]

Institute of Certified Bookkeepers Making you count

ICB Strategic Partners

Bookkeepers helping Bookkeepers help Business

accounting for assets and depreciation - icb.org.au to assets and depreciation 2014.pdf ·...

Documents