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Flashcards in Property, Plant, and Equipment (PP&E) Deck (50)

what costs are included in acquisition costs?

All costs that prepare the asset for its intended use.
- purchase price
- legal fees
- delinquent taxes
- title insurance
- transportation (freight in)
- installation
- test runs
- sales taxes


What various costs are included in the cost of land, even if you later put a building on that land

- purchase price (including any building to be demolished)
- surveying
- clearing, grading and landscaping
- costs of razing or demolishing old building
- proceeds from the sale of any scrap on the land (or from bldg)


if 2 assets are purchased together with unknown individual costs, how is the relative fair value method used

determine the current fair value for each asset, then determine it's percentage of the total current fair value. Multiply each percent by the original cost to get the relative cost based on the fair market value.


what is an Asset Retirement Obligation (ARO)

ASC 420
estimated restoration costs that are expected to be paid at the end of the period of usage, which should be recorded as a liability at fair market value of what the obligation will be settled today. If this can't be determined, estimates are made based on the PV of the estimated future restoration costs.

Examples include oil derricks in the ocean that need to be removed, strip mines where the land needs to be graded and grass planted.


what disclosures are required for Asset Retirement Obligations (ARO)

- Description of the obligation and related asset
- description of how fair value was determined
- the funding policy
- A reconciliation of the beginning and ending carrying value


If a company has a building built, what interest expense can be capitalized?

ASC 835
Interest expense that could have been avoided if they had NOT built the building


can interest for inventory related items be capitalized?

no it must be expensed. (not that IFRS allows capitalized interest for inventory only if the period of time to prepare the inventory for sale is very long)


how much can a company capitalize in interest when it builds a building? (formula used)

weighted average accumulated expenditures * rate, but never more than the total interest amount


which types of costs incurred AFTER acquisition of an asset are capitalized and which are expensed

capitalized when the cost makes the asset BIGGER, BETTER or LONGER. Expensed when it is repairs or maintenance cost


what account is debited for capitalized post-acquisition asset costs for each case: bigger, better, longer

bigger = asset
better = asset
longer = accumulated depreciation


what are the x methods of depreciation

straight line
sum of years digits
double declining balance
units of production (activity)


formula for sum of years digits to get denominator

N*(N+1) / 2


under which depreciation method is salvage value ignored until towards the end

double declining balance


what are some benefits of an accelerated depreciation method? (aside from tax)

- better matching since asset is more productive in earlier years
- minimize loss due to obsolescence since more is depreciated early
- helps to even out expenses since repairs and maintenance are less in the beginning


what is depletion

similar to depreciation but for natural resources like petroleum, minerals and timber


are changes in depreciation estimates treated retroactively or currently and prospectively

currently and prospectively


what is an impairment

when the carrying amount of an asset falls and it it determined that it can not be recovered. At this point a write off is needed


examples of impairments

- a significant decrease in the market value of an asset
- a significant change in the extent or manner in which an asset is used
- a significant adverse change in legal factors or in the business climate that affects the value of the asset
- an accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset
- a projection or forecast that demonstrates continuing losses associated with an asset


what are the 2 categories of assets that are treated differently for impairment

assets held for use,
assets held for sale


what is the process of determining an impairment loss on assets held for use

1. review events or changes in circumstances for possible impairment
2. If the review indicates impairment, apply the recoverability test. If the sum of the expected future net cash flows is less than the carrying amount, an impairment loss has occurred
3. The impairment loss is the amount by which the carrying amount of the asset is greater than the fair value


can impairment losses be recovered?

not under US GAAP. Under IFRS, recovery is allowed


at what value are assets held for sale carried at

lower of cost or NRV similar to inventory.


should assets held for sale be depreciated?

no because depreciation expense will not match with income and the asset cost will be recovered with the sale


can an asset held for sale be written up

yes. because they are continually revalued at lower of cost or NRV, the asset CAN BE WRITTEN UP or down as long as the write-up is never greater than the carrying amount of the asset before the impairment


what account is hit on involuntary conversions (eminent domain, destruction, etc)

Involuntary conversion gain/loss


what is a nonmonetary exchange

when dissimilar assets are exchanged for each other, with or without cash "boot"


what are the 2 types of monetary exchanges

1. exchanges with commercial substance
2. exchanges that lack commercial substance


define commercial substance with regard to monetary exchanges

ASC 845
an exchange has commercial substance whenever the risk, timing, and/or amount of cash flows (these 3 elements together are called the configuration) are affected by the exchange. Nearly all exchanges result in some change in future cash flows


3 exceptions to the norm where nonmonetary exchanges lack commercial substance

1. The fiar value of the assets received/relinquished cannot be determined within a reasonable limit
2. The exchange is made purely to facilitate the sale of the product to a party that is not a party of the exchange (usually such exchanges take place with a competitor or vendor merely to facilitate future sales to unrelated customers)
3. The exchange lacks commercial substance. The question will state that the cash flows are expected to be substantially unchanged as a result of the exchange


are nonmonetary exchanges with commercial substance recognized at fair value or book value

fair value unless it cannot be determined, then use book value


what are the 3 methods of valuing nonmonetary exchanges

1. FMV given up + cash paid - cash received
2. FMV of asset received
3. Book Value (BV) given up + cash paid - cash received


at what value are nonmonetary exchanges WITHOUT commercial substance valued at

lower of:
1. FMV given up + cash paid - cash received
2. FMV of asset received
3. Book Value (BV) given up + cash paid - cash received


at what point are gains/losses taken for nonmonetary exchanges with commercial substance

both gains and losses are taken immediately


at what point are gains/losses taken for nonmonetary exchanges WITHOUT commercial substance

losses are taken immediately
gains are not taken at time of exchange since it is not complete (will be resold)


for nonmonetary exchanges WITHOUT commercial substance and WITH boot (

recognize gain up to the portion of the proceeds that are cash


for nonmonetary exchanges WITHOUT commercial substance and WITH boot (>= 25%), how much gain can be recognized

all gain is recognized


IFRS - what area of accounting has some of the most significant differences between US GAAP and IFRS

Fixed assets (PP&E)


IFRS - what are the 2 models used for subsequent measurement of PP&E

cost model (CM)
revaluation model (RM)


IFRS - can different valuations models (CM or RM) be used for individual assets, classes of assets or both

different classes of assets can use different valuation models, but not individual assets


IFRS - what is the equation for valuing fixed assets at the cost model (CM)

cost - accumulated depreciation - any accumulated impairment loss


IFRS - what is the equation for valuing fixed assets at the revaluation model (RM)

fair value - accumulated depreciation - any accumulated impairment loss


IFRS - what account do PP&E revaluations above original cost go to, and what financial statements do they show up on

Revaluation Surplus account
Balance Sheet under OCI


IFRS - what is the definition of Investment Property

property held to earn rentals, for capital appreciation, or both. It may not be used in the production or supply of goods or services or for admin purposes. Property under construction that will be future investment property does not qualify as investment property


IFRS - what valuation model(s) can be used for investment property

cost model (CM)
revaluation model (RM)


IFRS - what is differernt about using the revaluation model (RM) for investment property vs for fixed assets (PP&E)

investment property gains and losses go directly to the income statement, not to OCI


IFRS - can previously recognized impairments ever be reversed?

under IFRS, yes, but not under GAAP


IFRS - what are biological assets and what are they valued at on the statement of financial position (BS)

biological assets are animals, plants, etc. They must be disclosed separately on the statement of financial position (BS). Valuation is at the FMV - selling costs aka Net Realizable Value (NRV)


IFRS - when can borrowing costs (interest) be capitalized?

IFRS requires certain borrowing costs to be capitalized if they are related to acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use, including: inventory, PP&E, intangible assets, or investment property.
Borrowing costs that do not meet the rules for capitalization are expensed in the current period.
Under US GAAP, interest is generally expensed in the period incurred


IFRS - what must be done for a fixed asset that has individual component that have different useful lives?

Each major component must be depreciated separately under it's individual useful lives


An impairment loss on equipment held for use should be reported on the income statement under which section

ASC 360
income from continuing operations before income taxes