Fixed Assets Flashcards
Characteristics of fixed assets
- Acquired for use in operations and not for resale
- LT in nature and subject to depreciation
- Possess physical substance
Classification of fixed asset
- Land
- Buildings
- Equipment (machinery, tools, furniture and fixtures)
- Accumulated depreciation account
What is the basis for valuation of purchased fixed assets under US GAAP?
Historical cost (purchase price)
Historical cost
Cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
What is the basis for valuation of donated fixed assets under US GAAP?
Fair market value along with incidental costs incurred
Results in recognition of gain in IS
Dr. Fixed asset
Cr. Gain on nonreciprocal transfer
How are fixed assets valued under IFRS?
Initially recognized at the cost to acquire the asset
Then, can be valued using the cost model or the revaluation model
Cost model
Fixed assets are reported at historical cost adjusted for D/D and impairment
Cost model carrying value = Historical cost - A/D - Impairment
Same as US GAAP
Revaluation model
A class of fixed assets is revalued to FV and then reported at FV less subsequent A/D and impairment
Revaluation model CV = FV at revaluation date - Subsequent A/D - Subsequent impairment
How frequent should revaluations of fixed assets be?
Frequent enough to ensure that the CV does not differ materially from FV at the end of the reporting period
Can revaluation be applied to individual fixed assets?
No, revaluation must be applied to all items in a class of fixed assets
What must be disclosed when fixed assets are reported at FV?
The historical cost equivalent (cost - a/d - impairment)
Revaluation losses
Fir value < carrying value before revaluation
Reported on IS unless it reverses previously recognized revaluation gain (then would be recognized in OCI)
Revaluation gains
Fair value > carrying value before revaluation
Reported in OCI and accumulated in equity as revaluation surplus, unless reverses previously recognized revaluation loss (then reported on IS to extent of loss)
Impairment of revalued fixed asset
Recorded by first reducing any revaluation surplus to zero with further impairment losses reported on IS
Equipment
Office equipment, machinery, furniture, fixtures, and factory equipment
What is included in the cost of equipment?
All expenditures related directly to their acquisition or construction
- Invoice price
- Less cash discounts/other discounts
- Add freight-inn (and insurance while in transit and in construction)
- Add installation charges (including testing/preparation for use, cost to rearrange)
- Add sales and federal excise taxes
6 Possible addition of construction period interest
How are additions to equipment accounted for?
Capitalize
Dr. Assets
Cr. Cash/accounts payable
How are improvements and replacements accounted for?
Capitalize
CV of old asset known: remove it and recognize any gain/loss; capitalize cost of improvement/replacement to asset account
CV of old unknown and:
- Asset’s life is extended – Dr. A/D (increases NBV) for cost of improvement/replacement
- Usefulness (utility) of asset is increased – capitalize cost of improvement replacement
How are repairs for equipment accounted for?
Ordinary: expensed as repair and maintenance
Extraordinary: capitalized (treat as addition, improvement, replacement)
What is included in cost of land?
All costs incurred up to excavation (digging) for the new building
- Purchase price
- Brokers’ commissions
- Title and recording fees
- Legal fees
- Draining of swamps
- Clearing of brush/trees
- Site development
- Existing obligations assumed by buyer
- Costs of razing an old building
- Less: Proceeds from sale of existing building, timber, etc.
What is considered to be a land improvement?
- Fences
- Water systems
- Sidewalks
- Paving
- Landscaping
- Lighting
Depreciable
How are interest costs during construction period for land accounted for?
Added to cost of land improvement based on weighted average of accumulated expenditures
What is included in the cost of a building?
From excavation forward
- Purchase price, etc
- All repair charges neglected by previous owner (deferred maintenance)
- Alterations/improvements
- Architect’s fees
- Possible addition of construction period interest
How is a basket purchase of land and building accounted for?
Purchase price is allocated based on the ratio of appraised values of individual items
Investment property
IFRS only
Land or buildings held by an entity or by a lessee under a finance (capital) lease to earn rentals or for capital appreciation
Rental or to flip
Are owner-occupied property, property held for sale in ordinary course of business, or property being constructed or developed included in investment property?
No, unless it is under construction/development for future use as investment property
Cost of investment property
Initial cost = Purchase price + Expenses directly related to purchase, including legal services, professional fees, property transfer taxes, and other taxes
What costs are capitalized and added to the carrying value of investment property?
- Costs incurred to subsequently add to the property
- Costs to replace part of the property
- Costs to service the property
What are the investment property measurement models?
- Cost model
2. Fair value model
Cost model for investment property
Reported on BS at historical cost less A/D
FV must be disclosed
Fair value model
Reported on BS at FV and not depreciated
Need an active market
How long must the fair value measurement be applied once adopted for investment property?
Consistently until the asset is disposed of or no longer classified as investment property
Where are gains and losses from the fair value model for investment property measurement recorded?
Recognized in earnings in period in which it arises
Costs included in fixed assets constructed by a company
- Direct materials and direct labor
- Repairs and maintenance expenses that add value to fixed asset
- Overhead, including direct items of overhead (construction period interest)
- Do not include profit
How should interest be accounted for?
Expensed as incurred (period cost)
How is construction period interest accounted for?
Capitalized based on weighted average of accumulated expenditures
When do you not capitalize interest cost?
- On inventory routinely manufactured
- On fixed assets held before or after construction period
- During intentional delays in construction
How can you compute capitalized cost?
- Weighted average amount of accumulated expenditures (avoidable interest)
- Interest rate on borrowings (rate on construction loan)
- Interest rate on excess expenditures (weighted average) – general debt
- Not to exceed actual interest costs (cap/ceiling)
- Do not reduce capitalizable interest
Two rules concerning capitalized interest
- Only capitalize interest on money actually spent, not on the total amount borrowed
- The amount of capitalized interest is the lower of:
- — Actual interest cost incurred, or
- — Computed capitalized interest (avoidable interest)
When does the capitalization of interest period begin?
When the following conditions are present:
- Expenditures for the asset have been made (building decision made)
- Activities that are necessary to get the asset ready for its intended use are in progress (permits filed)
- Interest cost is being incurred
Continues as the three conditions are present
When does the capitalization of interest period end?
When the asset is substantially complete and ready for the intended use
How are interest costs incurred during the construction period of machinery to be used by a firm as a fixed asset accounted for?
Capitalized as part of the historic cost of acquiring the fixed asset
How should interest costs on fixed asset held for sale be accounted for?
Expenses in IS for period incurred
How are leasehold improvements accounted for?
Capitalized and then amortized over the lesser of the life of the improvements or the remaining term of the lease
In regards to land, what type of interest is capitalized?
Interest in connection with a “discrete manufacturing activity”
