F3 - M4 - PP&E (Cost)

Question 1

What are PPE or Fixed Assets?

Answer 1

Assets that are acquired for use in operations and are not for resale

• Physical Substance
• Long-Term (Non-Current)
• Depreciate (except Land)

Question 2

What are the main classes of Fixed Assets?

Answer 2

Land (Property) - NO depreciation
Buildings (Plant)
Equipment
Accumulated Depreciation (Contra-Asset Account)

Question 3

How are Fixed Assets valued (GAAP)?

Answer 3

Historical Cost

Purchase Price plus:

• Cost for bringing it to the location
• Cost to get it necessary for intended use

Question 4

How are donated Fixed Assets treated?

Answer 4

Recorded at Fair Market Value along with incidental costs incurred.

DR Fixed Asset
CR Gain on Nonreciprocal Transfer

Question 5

How are Fixed Assets valued (IFRS)?

Answer 5

Cost Model OR Revaluation

Question 6

What is the Cost Model?

Answer 6

Historical Cost
- Accumulated Depreciation
- Impairment
= Carrying Value

(Like US)

Question 7

What is the Revaluation Model?

Answer 7

Fair Value at Revaluation Date
- Subsequent Accumulated Depreciation
- Subsequent Impairment
= Carrying Value

Must be applied to all classes of fixed assets - cannot be applied to individual fixed assets

Historical cost equivalent must be disclosed
(Cost - Accumulated Depreciation - Impairment)

Question 8

How are Revaluation Losses treated?

Answer 8

If Fair Value < Carrying Value..
Reported on the Income Statement

Reval loss can reverse a previously recognized reval gain recognized in OCI

Question 9

How are Revaluation Gains treated?

Answer 9

If Fair Value > Carrying Value
Reported in OCI

Reval gain can reverse a previously recognized reval loss on income statement

Question 10

Impairment of Revalued Fixed Assets

Answer 10

Reduces any gain in OCI to zero. Anything leftover is reported on the income statement.

Question 11

Property (Land)

Answer 11

NOT depreciable

All costs incurred UP TO excavation

• Purchase Price
• Brokers Commissions
• Title and Recording Fees
• Legal Fees
• Draining of Swamps
• Clearing of brush and trees
• Site Development (i.e., leveling land)
• Mortgages, taxes, etc
• Demolition
• Less proceeds from sale of existing buildings, timber..

Question 12

Land Improvements

Answer 12

Can be depreciated
Have a finite useful life

• Fences
• Water Systems
• Sidewalks
• Paving
• Landscaping
• Lighting

Question 13

Plant (Building)

Answer 13

Cost of excavation (digging foundation) and forward

• Purchase Price
• Repairs “neglected” by previous owner
• Alterations and Improvements
• Architect Fees
• Construction Period Interest

Question 14

What if Land and Building are purchased together as one unit?

Answer 14

Allocate the purchase price based on the ratio of appraised values of individual items

Question 15

Equipment

Answer 15

All expenditures related directly to the acquisition or construction of the equipment

  Invoice Price
- Cash or Other Discounts
\+ Freight In
\+ Installation Charges (includes cost to rearrange)
\+ Sales and Excise Taxes
\+ Construction Period Interest

Question 16

Additions

Answer 16

Increase the quantity
Capitalized

DR Asset
CR Cash/AP

Question 17

Improvements (Betterments)

Answer 17

Improve the quality of the asset

Capitalized

Question 18

Replacements

Answer 18

A new similar asset is substituted for the old asset

Question 19

Treatment for Improvements/Replacements

Answer 19

If carrying value of old asset is KNOWN..
Remove the asset and recognize a gain or loss
Capitalize the cost of the improvement/replacement

If carrying value of old asset is UNKNOWN..
AND usefulness of asset is increased.. Capitalize

DR Accumulated Depreciation
CR Cash/AP

Question 20

When to expense equipment costs?

Answer 20

Ordinary repairs should be expensed as repair and maintenance

Question 21

Treatment of Repairs

Answer 21

Ordinary = Expense
Extraordinary = Capitalize

Question 22

Construction Costs to Capitalize

Answer 22

• Direct Materials and Direct Labor
• Repairs and Maintenance Expenses that add value
• Overhead
• Construction Period Interest

Question 23

Capitalization of Interest Costs

Answer 23

Interest costs are typically expensed as incurred (period cost)

Construction interest is capitalized based on weighted average of accumulated expenditures (not on the borrowed amount)

Question 24

Weighted Average Amount of Accumulated Expenditures

Answer 24

Calculates and applies an interest rate to the average amount of accumulated expenditures

Question 25

Interest Rate on Borrowings

Answer 25

Determines the amount of interest cost to be capitalized for the period

I.e., Construction Loan

Question 26

Interest Rate on Excess Expenditures (Weighted Average)

Answer 26

If average accumulated expenditures outstanding > the amount of the related specific new borrowing, interest cost should be computed on excess.

I.e., General Debt

Question 27

Interest Cap

Answer 27

Total capitalized interest costs for any period may not exceed the total interest costs actually uncured during that period

Do not reduce capitalizable interest

Question 28

Rules for Capitalizing Interest

Answer 28

1 - Only capitalize interest on money actually spent, not on total amount borrowed

2 - Amount capitalized is the lesser of:

         - actual interest cost incurred OR
         - computed capitalized interest

Question 29

What is the period for capitalizing interest?

Answer 29

• Expenditures have been made
• Activities (i.e., filing permits)
• Interest cost is being incurred
• Stops during intentional delays of construction
• Ends when asset is substantially complete and ready for use (does not have to actually be in use)

Question 30

Required Disclosures for Interest

Answer 30

• Total interest cost incurred during the period

- Capitalized interest cost for the period, if any