FAR 4 Fixed assets

Question 1

Valuation of Fixed assets

US GAAP

Answer 1

a. Historical cost
b. Donated assets - FV

Fixed assets

         Gain on nonreciprocal transfer

Question 2

Valuation of fixed assets

IFRS

Answer 2

1. Cost model - historical cost - acc depr - Impairment

2. Revaluation model - FV- acc dep - impairment

• Revaluation losses - income statement
• Revaluation gains - OCI
• Impairment - first reducing revaluation surplus and then loss reported on income statement

Question 3

Capitalization of interest costs

Answer 3

• Capitalized based on weigthed average of accumulated expenditures
• Stated interest cost
• capitalize on special order inventory (not regular one)
• Capitalize interest on money actually spent not borrowed
• The amount of capitalized interest is lower of:

a. actual interest cost incurred
b. computed capitalized interest

Question 4

X was constructing fixed assets that qualified for interest capitalization. Debt:

$6 x 8%

$8 x 9%

What rate needs to be used to calculate capitalized interest?

Answer 4

6 +8 = 14

(6/14) x 8% + (8/14) x 9% = 8.571%

Question 5

Straight line depreciation

Answer 5

(Cost - Salvage value) / Estimated useful life

Question 6

Sum of the years digits deprection

Answer 6

• Find denominator

5 years useful life

1+2+3+4+5=15

• (Cost - Salvage value) x (Remianing life of asset / Sum of the years digits)

5/15* see above

4/15

3/15

2/15

1/15

Question 7

Declining balance

Ignore salvage value

Answer 7

• Double declining balance - ignore salvage value

10 years useful life

2*(1/10) x (Cost - accumulated depreciation)

2*(1/10) x remember to deduct previous depreciation

Question 8

Units of production

Answer 8

Step 1

(Cost - Salvage value) / Units of production = Rate per hour

Step 2

Rate per unit x # of units produced = depreciation exp

Question 9

Depletion

Answer 9

• Natural resources like oil, gas, timber etc
• Purchase cost = drilling, tunners or shafts (anything necessary that resources can be removed)
• Current est recoverable units / (Unrecovered cost - salvage value) = cost depletion rate x units produced = depreciation

Question 10

Fixed asset impairment

Answer 10

If the sum of undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized.

Question 11

Fixed assets impairment

No impairement

Answer 11

Undiscounted future net cash flows

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= Positive

Question 12

Fixed assets impairement

Impairement

Answer 12

Undiscounted future net cash flows

• Net carrying value

= Negative

Different treatement if assets held for use or for disposal

Question 13

Fixed assets impairement

Impairement of assets held for use

Answer 13

FV or PV future net cash flows

• Net carrying value

= Impairement loss

1. Write asset down
2. Depreciate new cost
3. Restoration not permitted under US GAAP

Question 14

Fixed assets impairement

Impairement of assets held for disposal

Answer 14

FV or PV future net cash flows

• Net carrying value

Impairement loss

+ Cost of disposal

Total impairement loss

1. Write asset down
2. No depreciation taken

*3. Restoration is permitted *

Question 15

Fixed assets impairement

IFRS

Answer 15

Carrying value - (the greater of: Recovereable amount or PV or FV of cash flows - cost to sell) = Impaired or not

Reversal of impairement losses is allowed