Chapter 9 (Week 5) Flashcards
Plant Assets
PPE, PE, fixed assets
They are resources that have three characteristics:
–> They have a physical substance (a definite shape and size)
–> They are used in the operations of a business
–> They aren’t intended for sale to customers
Cost of plant assets
Consists of all expenditures necessary to acquire the asset and make it ready for its intended use
Land
usually used as a site for a manufacturing plant or office building.
It isn’t amortised
Land improvements
Structural additions with limited lives that are made to land
–> Their cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use
–> Their costs are depreciated over their useful life
Buildings
Facilities used in operation
Equipment
Includes assets used in operations
Expenditures during useful life
During the useful life of a plant asset, a company may incur costs for ordinary repairs, additions or improvements
Ordinary repairs
expenditures to maintain the operating efficiency and productive life of the unit - they are usually small amounts that occur frequently
Often referred to as revenue expenditures
Additions and improvements
costs incurred to increase the operating efficiency, productive capacity or useful life of a plant asset - they are usually material in amount and occur infrequently
Often referred to as capital expenditures
Materiality
refers to the impact of an item’s size on a company’s financial operations
For this concept, some items are “negligible”
If a purchase doesn’t influence a business’ decision, they don’t have to follow IFRS in reporting that item
Depreciation
It’s the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner
Book vs Fair Value
Book: cost - accumulated depreciation
Fair: actual value of the asset
Obsolescence
The process of becoming out of date before the asset physically wears out
It doesn’t apply to land because its usefulness generally remains intact
Factors in computing depreciation
Cost: all expenditures necessary to acquire the asset and make it ready for intended use
Useful Life: estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence
Residual value: estimate of the assets value at the end of its useful life
Depreciable cost formula
Cost of the asset - Residual value
Straight line depreciation method
Companies expense the same amount for each year of the asset’s useful life - it is measured by the passage of time
Depreciable cost: Cost - Residual value
Annual depreciation expense: Depreciable cost / Useful life
- Best for assets that generate revenue evenly
Units of activity depreciation method
Companies depreciate an amount based on units produced by that asset
Depreciable cost per unit: Depreciable cost / Total units of activity
Annual Depreciation expense: Depreciable cost per unit x Units of Activity during the year
- Best for assets that wear out because of use
Declining balance depreciation method
Companies depreciate an asset based on its declining book value
Annual depreciation expense: book value at the beginning of the year x declining balance rate
- Best for assets that generate revenue early in useful life
Component depreciation
When a plant asset has parts with significantly useful lives they must be depreciated separately
Depreciation and income taxes
Many companies use straight-line in their financial statements to maximise net income. At the same time, they use an accelerated-depreciation method on their tax returns to minimise their income taxes.
Revaluation of plant assets gain
If Fair Value > Book Value:
Revaluation of plant assets loss
If Fair Value < Book Value
Retirement of plant assets
Arrived at the end of its useful life the asset is retired
What asset is still useful to the company?
Loss on disposal
The asset is retired before the end of its useful life
Book value > Proceeds form Sale
