Chapter 10 Flashcards
encumbrance
a burden or impediment.
Law A lien or claim on property
To level to the ground; demolish
(2)
- tear down
- raze
Exchange of shares for an asset under IFRS
The asset should be measured at its FV
The cost of the new asset aquired is determined
(commercial substance)
…by the FV of the asset you aquire
any gains and losses that result are recognized in net income (with a Gain/Loss on disposal account)
to check the gain/loss:
your book value - fair value = gain/loss
(no commercial substance or not reliably measurable)
the cost of the new asset aquired is determined by
…the carrying amount (BV) of the asset given up.
NO GAIN IS RECOGNIZED
A LOSS IS RECOGNIZED if the FV of the new asset is less than the carrying amount of the asset given up
P10-7 (trick)
(no commercial substance cases)
the new machnery CAN NOT be recorded at a higher cost than the other asset’s FV
Normally, if there is no commercial substance, no gain (although you can record a loss) the trade should be simple:
Your machinery - Acc depreciated = New machinery cost
HOWEVER, if that cost results in a higher value than the FV of the asset aquired, you record the FV of the new asset and you will have a loss
LAND:
Land costs typically
include the purchase price; closing costs, such as
title to the land, legal fees, and registration fees;
costs incurred to condition the land for its intended
use, such as grading, filling, draining, and clearing;
the assumption of any liens, mortgages, or encumbrances
on the property; and any additional land
improvements that have an indefinite life
LAND costs
(If land is purchased with an old building on it, any demolition costs less salvage value is charged to Land)
Sale of salvaged materials reduces cost of land •Special assessments for local improvements (e.g., pavement) are part of land cost
- Permanent improvements to the land such as landscaping are added to the Land account
- Improvements with limited lives (such as driveways, walkways, fences, and parking lots) are recorded in a separate Land Improvements account.
These costs are separated from Land as they are depreciated over their estimated useful lives
Buildings,
including investment property
Includes all expenditures
related directly to their acquisition or construction.
These costs include materials, labour, and
direct overhead costs that are incurred during construction
and professional fees and building permits.
(excavation fees, arhitectural fees, building permit fee)
Costs related to the foundation for a new building
Equipment:
Includes the purchase price (less discount allowed), non-recoverable taxes (PST), freight, and
handling charges that are incurred; insurance on the
equipment while it is in transit; the cost of special
foundations if they are required; assembling and
installation costs; cost of trial runs; and the costs incurred in calibrating
the equipment so that it can be used as intended
Mineral resource properties
(1) acquisition costs,
(2) exploration and evaluation costs,
(3) development
costs, and
( 4) site restoration and asset retirement
costs.
There are three main measurement methods to account for property, plant, and equipment subsequent to acquisition:
- Cost Model (CM) - ASPE
- Revaluation Model (RM)
- Fair Value Model (FVM) - investment property - IFRS only
•Under IFRS, companies have the following choices:
–For investment property assets: CM or FVM
–For other PP&E assets: CM or RM
Revaluation method
•When carrying value of asset increases (debit):
Credit Revaluation Surplus (equity, OCI),
•When carrying value of asset decreases (credit)
Debit Revaluation Surplus (equity, OCI) to the extent the account has credit balance for that particular asset. Otherwise, debit is recognized as decrease in income. REVALUATION SURPLUS CAN’T HAVE A DEBIT BALANCE!
- There can be no net increase in net income from revaluing the asset over its life. Net increase in value results in a net increase in AOCI, and a net decrease in value is recognized through income
- Revaluation Surplus is transferred directly to Retained Earnings (either each period, or only at time of disposal)
FAIR VALUE METHOD
- Available as measurement option for investment properties (under IFRS only)
- Investment property measured at fair value subsequent to acquisition
- Changes in value reported in net income during period of change
- No depreciation is recognized over asset’s life
- Note that fair value must be disclosed in financial statements, even if cost model is chosen instead of fair value model
Understand and apply the cost model
The cost model is appropriate for all classes of
PP&E, including investment property. Under this
model, the assets are carried at cost less accumulated
depreciation and any accumulated impairment
losses.
