F3 - M4 - PP&E (Cost) Flashcards
What are PPE or Fixed Assets?
Assets that are acquired for use in operations and are not for resale
- Physical Substance
- Long-Term (Non-Current)
- Depreciate (except Land)
What are the main classes of Fixed Assets?
Land (Property) - NO depreciation
Buildings (Plant)
Equipment
Accumulated Depreciation (Contra-Asset Account)
How are Fixed Assets valued (GAAP)?
Historical Cost
Purchase Price plus:
- Cost for bringing it to the location
- Cost to get it necessary for intended use
How are donated Fixed Assets treated?
Recorded at Fair Market Value along with incidental costs incurred.
DR Fixed Asset
CR Gain on Nonreciprocal Transfer
How are Fixed Assets valued (IFRS)?
Cost Model OR Revaluation
What is the Cost Model?
Historical Cost
- Accumulated Depreciation
- Impairment
= Carrying Value
(Like US)
What is the Revaluation Model?
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)
How are Revaluation Losses treated?
If Fair Value < Carrying Value..
Reported on the Income Statement
Reval loss can reverse a previously recognized reval gain recognized in OCI
How are Revaluation Gains treated?
If Fair Value > Carrying Value
Reported in OCI
Reval gain can reverse a previously recognized reval loss on income statement
Impairment of Revalued Fixed Assets
Reduces any gain in OCI to zero. Anything leftover is reported on the income statement.
Property (Land)
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..
Land Improvements
Can be depreciated
Have a finite useful life
- Fences
- Water Systems
- Sidewalks
- Paving
- Landscaping
- Lighting
Plant (Building)
Cost of excavation (digging foundation) and forward
- Purchase Price
- Repairs “neglected” by previous owner
- Alterations and Improvements
- Architect Fees
- Construction Period Interest
What if Land and Building are purchased together as one unit?
Allocate the purchase price based on the ratio of appraised values of individual items
Equipment
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
Additions
Increase the quantity
Capitalized
DR Asset
CR Cash/AP
Improvements (Betterments)
Improve the quality of the asset
Capitalized
Replacements
A new similar asset is substituted for the old asset
Treatment for Improvements/Replacements
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
When to expense equipment costs?
Ordinary repairs should be expensed as repair and maintenance
Treatment of Repairs
Ordinary = Expense Extraordinary = Capitalize
Construction Costs to Capitalize
- Direct Materials and Direct Labor
- Repairs and Maintenance Expenses that add value
- Overhead
- Construction Period Interest
Capitalization of Interest Costs
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)
Weighted Average Amount of Accumulated Expenditures
Calculates and applies an interest rate to the average amount of accumulated expenditures
Interest Rate on Borrowings
Determines the amount of interest cost to be capitalized for the period
I.e., Construction Loan
Interest Rate on Excess Expenditures (Weighted Average)
If average accumulated expenditures outstanding > the amount of the related specific new borrowing, interest cost should be computed on excess.
I.e., General Debt
Interest Cap
Total capitalized interest costs for any period may not exceed the total interest costs actually uncured during that period
Do not reduce capitalizable interest
Rules for Capitalizing Interest
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
What is the period for capitalizing interest?
- 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)
Required Disclosures for Interest
- Total interest cost incurred during the period
- Capitalized interest cost for the period, if any
