Chapter 10 Flashcards
(34 cards)
PP&E
PP&E is assets that are
(1) held for use in the production of goods and services, for rental to others, or for administrative purposes (not for sale in normal course of business)
(2) used for more than one accounting period
(3) tangible
Major Spare Parts
as well as servicing equipment used only with a specific capital asset and useful for more than one period is classified as PP&E
[ASPE] PP&E Recognition Criteria
(1) it is probable that future economic benefits of the asset will flow to the entity
(2) its costs can be measured reliably
* costs are expensed where these criteria are not met (repairs and maintenance)
Capitalized Costs of PP&E
in general, all expenditures needed to acquire the asset an bring it to its location and ready it for use, specifically:
(1) price net of discounts plus any taxes and duties
(2) cost of bringing the asset to condition and location required for operation
(3) estimate of cost of future disposal
specifically EXCLUDED:
(1) operating losses
(2) training
(3) operations restructuring
(4) administrative and overhead
[IFRS]
costs or revenues of an unfinished asset are revenues to income if unnecessary to acquire and prep the asset
[ASPE]
costs and revenues prior to substantial completion of the asset are capitalized
Self-Constructed Assets’ Capitalized Costs
only direclty attributable costs are capitalized (no overhead)
Capitalization of Borrowing Costs
[IFRS]
costs directly attributable to the acquisition, construction or development of qualifying assets are capitalized
[ASPE]
such costs related to PP&E may be capitalized or expensed depending on the accounting policy used by the entity
Capitalization of Dismantling and Restoration Costs
[IFRS]
legal and constructive obligations are capitalized, but only for those costs related to the acquisition of the asset
[ASPE]
only legal obligations are capitalized, but costs related to the acquisition and its subsequent use are recognized
PP&E Costs, Cash Discount Not Taken
if a firm elects not to take advantage of discount terms on purchase, a reductiong in the asset cost is preferable; however most firms do not deduct discounts unless they are taken
PP&E Costs, Deferred Payment Terms
the cost is the present value of consideration, with the difference between the present value and the total payments recognized as interest expense
PP&E Costs, Lump-Sum Purchases
when assets are purchased together it is typical to allocate the total cost among the assets based on their relative fair values;
when a property is acquired consisting of land and a building, the relative property tax value of each is often used to allocate the cost between them
PP&E Costs, Non-Monetary Exchanges
[IFRS]
an asset purchased with share issuance should be measured at the asset’s fair value, and where this cannot be measured, at the fair value of the shares
[ASPE]
the more reliable of the two values should be used
PP&E Costs, Asset Exchanges
- when monetary assets are exchanged for non-monetary assets, the value of the monetary assets become the asset costs
- in nonmonetary assets exchanges, the cost of the acquired asset is the fair value of the non-monetary assets given up, unless the fair value of the asset received is more reliably measured
- the difference in value is reported to net income as a gain or loss
- nonmonetary asset exchanges are measured at fair value unless one of:
(1) transaction lacks commercial substance (change in firm’s expected cash flows)
(2) fair values are not reliabily measured
IN WHICH CASE the exchange is recorded at the carrying amount of the assets given up, adjusted for the inclusion of any cash
PP&E Costs, Contributed Assets and Government Grants
- generally, such assets must be recorded at fair value
[capital approach]
assets are credited to a “contributed surplus - donated capital” account, and is appropriate for an owner donation
[income approach]
donated assets are reflected in net income, Donation Revenue accountFre
- accounting standards suggest that gov’t assistance should be reflected in income, or as a reduction of expense, with the effect of the assistance deferred to the periods where the assets will be used
- deferral is achieved in two ways:
(1) the asset is reduced by the cost of assistance received, thereby decreasing future depreciation
(2) recording assistance as a credit to a “deferred revenue - government grants account” and amortizing the account to revenue of the life of the asset
Capitalized Land Costs
(1) purchase price
(2) closing costs (legal, obtaining title)
(3) costs to ondition land for its intended use (excavation and removal of old buildings)
(4) liens
(5) additional land improvements with indefinite life
(6) salvaged materials reduce land costs
Capitalized Building Costs
removal of a building a firm has used in its operations on land it owns are expensed as disposal costs
[ASPE]
carrying cost and demolition costs of building torn down for rental developments are capitalized as part of the redeveloped property to the extent such costs are recoverable from the project in the future
Capitalized Leasehold Improvements
the lessee charges the improvements to a separate capital asset account, Leasehold Improvements, and the cost is amortized as an operating expense over the remaining life of the lease or useful life of the improvements
PP&E Costs, Equipment
cots of such tangible assets includes purhcase price, freight, handling, transit insurance, assemblly and installation, testing, and adjustments to make it operate as intended
* GST/HST is not capitalized if eligible for a tax rebate
PP&E Costs, Investment Property
a property held to generate rentals and/or appreciate in value
* where the cost model is used, components are accounted for separately for depreciation purposes
* under IFRS, the fair value model can be used
PP&E Costs, Natural Resource Property
- costs associated with the exploration, evaluation, and development of the minerals/gas are capitalized
- the capitalized costs will make up the depletion base of the natural resource, which will later be amortized and form a significant part of the minerals inventory
[full cost method]
all exploration costs, including dry holes, are capitalized, and a loss is recognized if undiscounted cash flows from use and disposition are less than these costs
[successful efforts method]
costs are capitalized until exploratio is complete - if no reserves are found the costs are written off to expense as a “dry hole” and successful exploration costs are amortized to the relevan production
PP&E Costs, Biological Assets
[IFRS]
measured initially, and at each SFP date at the fair value less costs to sell, with changes recognized as gains or losses
[ASPE]
measured at cost, including development and bettering costs, then amortized and assessed for impairment similar to PP&E
Cost Model for PP&E
this is the most common model under IFRS, and the only acceptable measurement model under ASPE
Revaluation Model for PP&E
- the revaluation model is only possible on assets whose fair value can be reliably measured
- PP&E are carried after acquisition at their fair value at the date of revaluation less any subsequent depreciation or impairment
- between revaluation dates, depreciation is taken on the revalued amount
- the fair value is the selling price in an orderly transaction between market participants
- an increase in fair value is a credit to Revaluation Surplus (OCI) and accumulated in an equity account (AOCI) Revaluation Surplus
- changes in fair value are recorded in Revaluation Surplus (OCI), but the SFP cannot have a debit balance, so revaluations are recognized in profit or loss until the Revaluation Surplus (AOCI) would have a credit balance (there is no net increase to net income from revaluations)
- Revaluation Surplus can be booked to Retained Earnings each period, or remain in the Revaluation Surplus account until the asset is disposed of
- revaluations should be carried out often enough to ensure the carrying amount does not become materially different from fair value
Proportionate Method for Depreciating Asset Measured with Revaluation Model
adjusts both the asset’s carrying amount and its accumulated depreciation, so that the et balance is the fair value of the asset at the revaluation date
- depreciation is takenon the revalued amount that has been adjusted proportionately
- both the carrying amount and accumulated depreciation are adjusted (upward for increases in FV; downward for decreases) so that the net balance is the FV
- the factor by which depreciation and carrying amount are adjusted is determined by (fair value at measurement date / carrying amount net of depreciation prior to revaluation)
- for subsequent years a new depreciation charge is calculated based on the new carrying amount
Elimination Method for Depreciating Asset Measaured with Revaluation Model
elminates the balance in the Accumulated Depreciation account, writing it off against the asset itself; the asset is then addjusted to its new revalued amount
[IFRS]
Accumulated Depreciation [debit]
Asset Type [credit]
(to elminate the accumulated depreciation]
Asset Type [debit]
Revaluation Surplus (OCI) [credit]
(to adjust the asset account to fair value)
- use a Revaluation Gain or Loss account to recognize gains or losses in net income when necessary (where AOCI Revaluation Surpluls balance would otherwise be negative)
