Chapter 10 (PPE) Flashcards
What is amortization, and how does it apply to different asset types?
Amortization spreads the cost of an asset over its useful life.
Depreciation applies to physical assets (PP&E).
Depletion applies to mineral resources.
Amortization applies to intangible assets.
What are long-lived assets, and why are they important?
Long-lived assets include physical (buildings, machinery) and intangible (patents) assets used for production or services.
They are important for generating future revenue, and a balance in investment is needed to avoid overcapacity or missed opportunities.
What criteria must be met to capitalize an asset? IFRS
The asset must meet the definition of an asset.
What criteria must be met to capitalize an asset? ASPE
Probable to bring future benefits
Cost must be measurable
What types of costs are not capitalized and must be expensed?
Costs like operating losses, employee training, overhead, and costs to open new facilities should be expensed, not capitalized
When should parts of an asset be capitalized separately?
Significant components (e.g., roof of a building) should be capitalized separately if they have different useful lives or depreciation patterns.
Smaller, similar items can be grouped into one asset.
What costs are included in the capitalized cost of PP&E?
Acquisition costs (purchase price, delivery, installation).
Preparation costs (site preparation, assembly).
Costs for disposal obligations (e.g., site restoration).
What costs are included in the capitalization of self-constructed assets?
Direct materials, labor, and overhead.
Abnormal waste and excess costs must be expensed.
How should revenue from using a property (e.g., parking lot income) before construction be treated?
The treatment of this revenue can differ between IFRS and ASPE. It may be deducted from the cost of the asset or recognized immediately in income.
What defines commercial substance in an asset exchange?
Commercial substance exists if there is a significant change in expected future cash flows, reflecting a change in value, amount, timing, or risk of those flows.
How should a gain or loss be recognized in an asset exchange with commercial substance?
Any difference between the carrying value of the asset given up and the fair value of the asset received results in a gain or loss, which should be recognized in net income.
What is a non-reciprocal transfer?
A non-reciprocal transfer is a transfer of assets in one direction only, where nothing is given in exchange.
Examples include donations, gifts, and government grants.
How should government assistance be recognized in income?
Government assistance can be recognized either as revenue or as a cost reduction. If it is related to an asset, it can be deferred and amortized over the asset’s life, or it can reduce the cost of the asset.
How should government grants for specific expenditures be treated?
For current expenditures, grants should be recognized in income in the same period as the related expenses. If the grant is conditional upon a future activity or event, the contingency should be disclosed in the financial statement notes.
What is the difference between the cost reduction method and the deferral method for government assistance?
The cost reduction method reduces the asset’s carrying value, affecting future depreciation. The deferral method records the grant as a deferred credit and amortizes it over the asset’s useful life, recognizing the amount in each year’s income.
