Chapter 11 Study cards

Question 1

What is PPE?

Answer 1

PPE refers to long-lived assets that a company owns for an extended period, which are used to generate goods and services.

Includes:

Physical assets: Buildings, machinery, equipment
Non-physical assets: Patents
Importance for Manufacturers:

Used in the production of goods or delivery of services.

Question 2

Capital Investment Balance

Answer 2

Balance between too many and too few assets is crucial.

Too many assets: Leads to unused capacity.
Too few assets: Results in missed profit opportunities.

Question 3

PPE and Future Cash Flows

Answer 3

Long-Lived Assets = Future Potential Cash Flow
To assess the potential for future cash flow:

Understand the investment in long-term assets.
Track how these investments change over time.
Evaluate the accounting methods used.

Question 4

PPE for Governments

Answer 4

Governments own many long-lived assets:

Buildings, roads, transit systems, service trucks, and water systems.
Challenges in Managing Assets:

Similar to those in businesses.
Four Infrastructure Priorities for Governments:

Public transport
Green projects
Community, culture, recreation
Rural and northern communities

Question 5

PPE Characteristics

Answer 5

Types of Long-Term Assets in PPE:

Buildings (office, factory, warehouse)
Equipment (machinery, tools, furniture)
Mineral resource properties
Investment property
Alternative Names for PPE:

Tangible capital assets
Plant assets
Fixed assets
Key Features:

Used for production or services.
Lasts for more than one accounting period.
Tangible in nature.

Question 6

Amortization of PPE

Answer 6

Amortization Process:
Spreading the cost of a long-lived asset over multiple accounting periods.

For PPE:

Depreciation for tangible assets.
Depletion for mineral resources.
Amortization for intangible assets.

Question 7

Capital Assets vs. Inventory

Answer 7

Inventory:

Has multiple uses.
Replaced within the accounting period.
Used regularly.
PPE:

Includes major spare parts and equipment used within a capital asset.
Used for more than one accounting period

Question 8

Biological Assets

Answer 8

Living plants and animals like fruit trees, grape vines, and livestock.
IFRS Vs. ASPE

Question 9

PPE Recognition Principle

Answer 9

Recognition (Capitalization) Principle:
IFRS: Asset is recognized if it meets the definition of an asset.
ASPE: Asset is recognized if:
Probable future economic benefits will flow to the entity.
Cost can be measured reliably.

Question 10

PPE Capitalization

Answer 10

Capitalization of Assets:

Assets with no direct economic benefit but needed to obtain benefits from other assets (e.g., pollution control equipment) should be capitalized as PPE.
Non-Capitalized Costs:

Expensed: Repair, maintenance, and operating costs.

Question 11

Componentization

Answer 11

Separate recognition of significant parts of a larger asset (e.g., roof of a building) if:
Represents a significant portion of the asset’s cost.
Has different useful lives.

Question 12

Aggregation:

Answer 12

Smaller items grouped together if:
Items are not significant individually.
Have similar useful lives and purposes.

Question 13

Cost Elements Included in PPE

Answer 13

Capitalized Cost Includes:

Acquisition: Purchase price, less discounts/rebates.

Preparation: Delivery, site prep, installation, professional fees.

Discharge obligations: Site restoration and disposal costs.

Question 14

Cost Elements Not Included in PPE

Answer 14

“Expensed”
Initial operating losses.
Employee training.
Reorganization costs.
Costs of new products/services or new locations.

Question 15

IFRS PPE Cost Elements

Answer 15

Capitalization stops once the asset is ready to use as intended.
Net revenue during construction is not capitalized.

Question 16

ASPE: PPE Cost Elements

Answer 16

Capitalization stops when the asset is substantially complete.
Net revenue before completion is included in the asset’s cost.

Question 17

Self-Constructed Assets

Answer 17

Assets built for a business’s own use.

Cost includes:
DM, DML, OH
Excessive waste expensed

Question 18

Borrowing Costs: IFRS

Answer 18

Must be capitalized if related to acquiring, constructing, or producing long-term assets.

Question 19

Borrowing Costs: ASPE

Answer 19

Can choose to capitalize or expense interest costs.

Question 20

Borrowing Costs

Answer 20

IFRS: Must be capitalized if related to acquiring, constructing, or producing long-term assets.
ASPE: Can choose to capitalize or expense interest costs.
Disclosure: Amount of capitalized interest must be disclosed.

Question 21

Dismantling and Restoration Costs

Answer 21

Asset Retirement Costs:

Costs for dismantling, removing, or restoring the site at the asset’s end of life.
Capitalization:

IFRS & ASPE: These costs are capitalized and recognized as a liability at the present value of future costs.

Question 22

Asset Retirement Costs - IFRS vs. ASPE

Answer 22

IFRS:

Recognizes both legal and constructive obligations for retirement costs.
ASPE:

Recognizes only legal obligations.

Question 23

General Concept of Cost for Nonmonetary Exchange

Answer 23

Cost Measurement:

Typically, cost is measured by the cash paid or the fair value of what was given to acquire the asset.

When Cash is Not Exchanged:

Issues arise, such as when assets are exchanged for shares, grants, or in lump-sum purchases.

Question 24

Common Issues When Cash is Not Exchanged

Answer 24

Cash Discounts Not Taken:

Early payment discounts not utilized affect cost measurement.
Deferred Payment Terms:

When payment is made over time, asset cost is recorded at present value.
Lump-Sum Purchases:

Multiple assets purchased for a single price require cost allocation.
Non-Monetary Exchanges (Share-based Payments):

Assets exchanged for shares or other non-cash consideration.
Non-Monetary Exchanges (Asset Exchanges):

Assets exchanged for other assets rather than cash.
Contributed Assets & Government Grants:

Assets received at no cost or as contributions.

Question 25

Cash for Non-Monetary Exchange - Cash Discounts

Answer 25

Methods for Handling Discounts:

Net of Discount Method (Conceptually Preferred):

Asset cost is reduced by the discount amount, even if not taken.
If the discount is not utilized, recognize the discount as financing expense.
Alternative Method (Common):

Discount is not deducted unless actually taken.
Discount may not be taken if terms are unfavorable.

Question 26

Deferred Payment Terms

Answer 26

Key Points for Deferred Payment Assets:

Recorded at Present Value:
Recognize interest based on the difference between fair value and cash paid.
Interest Recognition:
If no interest rate is specified, an appropriate rate is imputed.
Interest Expense:
Recognized during the periods in which the payments occur.

Question 27

Lump-Sum Purchases

Answer 27

Cost Allocation:

Total purchase price is allocated to individual assets based on their relative fair market values.
Fair Value Determination:

Use available information, such as insurance values, replacement costs, or independent appraisals.
Irrelevance of Carrying Amounts:

The carrying amounts of the assets being sold do not affect the allocation.

Question 28

Share-Based Payments IFRS Vs. ASPE

Answer 28

Acquiring Property with Shares:

IFRS:

Fair value of the asset acquired is used as the cost of the asset.
If the fair value is not easily determined, use the market value of shares given.
ASPE:

The asset cost is based on the more reliable of the fair value of the goods received or the equity instruments given up.

Question 29

Asset Exchange

Answer 29

Monetary and Non-Monetary Exchange:

Monetary Asset for Non-Monetary Asset (e.g., PPE):

Recognize gain or loss on disposal.
Non-Monetary Asset for Non-Monetary Asset:

The cost is the fair value of the asset given up, unless the asset received is more reliably measurable.

Question 30

Fair Value Standard for Non-Monetary Exchange

Answer 30

General Principle:

The cost of the acquired asset is based on the fair value of the asset given up unless the fair value of the asset received can be more reliably measured.
Gains or Losses:

Recognized in income when the asset is exchanged.
Exceptions:

Lack of Commercial Substance:
No significant effect on future cash flows.
Fair Value Cannot Be Reliably Measured:
In such cases, the exchange is recorded at the carrying amount of the asset given up.
Study Card 9: Commercial Substan

Question 31

Commercial Substance

Answer 31

Commercial Substance Exists When:

There is a significant change in expected future cash flows (change in amount, timing, or risk).
Significance:

The new asset’s value differs significantly from the asset given up.
Recognition of Gain/Loss:

The difference between the carrying value of the asset given up and the fair value of the asset received results in a gain or loss in net income.

Question 32

Asset Exchange Summary

Answer 32

If Exchange Has Commercial Substance & Fair Value Can Be Measured:

The cost of the received asset = Fair value of the asset given up, or more reliable fair value of the asset received.
Recognize gain or loss based on the difference between carrying amount and fair value.
If No Commercial Substance or Fair Value Cannot Be Reliably Measured:

The cost of the received asset = Carrying amount of the asset given up.
No gain is recognized. Loss is recognized if the fair value of the asset received is less than the carrying amount of the asset given up.

Question 33

Non-Reciprocal Transfers

Answer 33

Non-Reciprocal Transfers:

Assets transferred with nothing received in return (e.g., donations or government grants).
Examples:

Land, buildings, or equipment transferred.
Forgiveness of debt.
Fair Value of Transferred Asset:

Used to establish the cost of the asset received.
Accounting Approaches:

Capital Approach:
Use contributed surplus or donated capital (applied when the donor is an owner).
Income Approach:
Recognize the donation through net income (applied when the donor is a non-owner).

Question 34

Government Assistance

Answer 34

Recognition in Income:

Government assistance must be recognized as either:
Revenue, or
Cost reduction.
Cost Reduction Model:

Impact: Reduces future depreciation and increases net income.
Weakness: Asset reported at less than its fair value.
Deferral Method:

Government assistance recorded as deferred credit and amortized over the asset’s life.
Amortization recognized as income each year.

Question 35

Grants/Donations – Other Issues

Answer 35

Future Obligations:

If a grant or donation requires the company to fulfill future obligations, recognition is deferred and recognized when obligations are met.
Grants for Expenditures:

Current Expenditures: Recognize in income during the same period as the related expenses.
Disclosure Requirements:

Detailed disclosure on the nature of the grant, its conditions, and related obligations.

Question 36

Land Costs

Answer 36

Purchase Price: Amount paid to acquire the land.
Closing Costs: Title fees, legal fees, recording fees.
Preparation Costs: Removing old buildings, grading, draining.
Liens: Taxes or liabilities assumed in the purchase.
Permanent Improvements: Costs for landscaping or other lasting improvements.
Salvaged Materials: Proceeds from scrap materials reduce land cost.
Special Assessments: Local improvements like streetlights included in land cost.

Question 37

Building Costs

Answer 37

Demolition Costs: If removing old building, costs charged to land.
Removal for New Construction: Net removal costs expensed if old building removed for new construction.
ASPE: Demolition costs can be capitalized if property is redeveloped.

Question 38

Leasehold Improvements

Answer 38

Lessee-Paid Improvements: Typically become the property of the lessor after lease ends.
Separate Account: Recorded in a separate “leasehold improvement” account.
Depreciation: Over the shorter of remaining lease life or useful life.

Question 39

Equipment Costs

Answer 39

Types of Equipment: Delivery, office, factory equipment, machinery, furniture.
Included Costs: Purchase price, freight, installation, and trial run costs.

Question 40

Investment Property

Answer 40

Purpose: Held for rental income or appreciation.
Fair Value Model (IFRS): Measured at fair value, changes reported in income.
Costs: Same as PPE under IFRS and ASPE.

Question 41

Natural Resources Costs

Answer 41

Capitalized Costs: Acquisition, exploration, development, decommissioning.
Depletion Base: Capitalized costs used to calculate depletion charge.
Amortization: Depletion costs are moved into inventory over time.

Question 42

Biological Assets ASPE vs IFRS

Answer 42

ASPE: Measured at cost, including acquisition/development costs.
IFRS:
Bearer Plants: Valued using cost/revaluation methods.
Agricultural Assets: Fair value less costs to sell, changes reported in income.

Question 43

Measurement After Acquisition

Answer 43

Cost Model: Most common, measures at cost less depreciation.
Revaluation Model: Used when fair value can be measured reliably.
Fair Value Model: Used for investment properties (IFRS only), no depreciation.

Question 44

Costs Incurred After Acquisition

Answer 44

Capital Expenditures (CapEx): Costs that increase asset value or extend life.
Expense: Routine maintenance costs.
Cost-Benefit: Decision to capitalize or expense based on materiality.

Question 45

Types of Costs After Acquisition

Answer 45

Additions: Costs that enhance capacity or life of asset.
Replacements/Overhauls: Substituting parts or large-scale maintenance, capitalized.
Repairs: Maintain assets without improving or extending life, expensed.

Question 46

Revaluation of Asset Replacements and Major Overhauls (Revaluation Model for PP&E)

Answer 46

Add New Costs:
Add the cost of the new component or overhaul to the asset’s carrying amount.
Remove Replaced Asset’s Carrying Amount:
Remove the carrying amount of the replaced component or part from the asset’s value.
Gain or Loss on Disposal:
Recognize a gain or loss on the disposal of the replaced component (old part).

Question 47

Fair Value Model for Investment Property

Answer 47

Add Replacement Costs:
Add the cost of replacing components or overhauls to the asset.

Reassess and Adjust:
After replacement, adjust the asset to its fair value.

Question 48

ASPE: Replacements and Major Overhauls

Answer 48

When Cost & Accumulated Depreciation Are Known:
Capitalize the replacement cost and remove the old asset (including its accumulated depreciation).
When Carrying Amount Cannot Be Determined:
If Useful Life Is Extended:
Debit the accumulated depreciation (to recover past depreciation).
If Service Potential or Productivity Increases:
Capitalize the cost as part of the asset’s overall cost.

Question 49

Costs Incurred after aquistion: Rearrangement and installation

Answer 49

If Original Cost and Depreciation Are Known:
Treat rearrangement/reinstallation costs as a replacement and capitalize them.
If Original Installation Cost Is Unknown:
Not Material: Expense the costs.
Material (Under ASPE): Capitalize the costs as part of the asset’s carrying value.

Question 50

Costs Incurred After Acquisition: Repairs

Answer 50

Ordinary repairs are regular costs to maintain an asset in good condition without improving or extending its life.
Accounting Treatment:
These are treated as operating expenses, not capitalized.
Examples of Ordinary Repairs:
Minor part replacement (small components), lubricating, cleaning, and repainting.

Question 51

Asset/Liability Approach to Repairs

Answer 51

f the cost doesn’t add value to the asset, it is treated as an expense (ordinary repairs are not capitalized).