Characteristics of Fixed Assets
- Fixed assets are acquired for use in operations and not for resale.
- They are long term in nature and subject to depreciation.
- They possess physical substance.
Classification of Fixed Assets
Shown separately on BS at original cost (historical).
- Land
- Buildings
- Equipment
- Accum. Depreciation (contra-asset): Cost - AD = NBV
Cost Model (both IFRS and GAAP)
Cost model CV = Historical cost - AD - Impairment
Revaluation Model (IFRS)
A class of fixed assets is revalued to FV and then reported at FV less subsequent AD and impairment. Revaluations made frequently. Revaluation applied to all items in a class of fixed assets, not individual fixed assets.
Revaluation model CV = FV at reval date - subsequent AD - subsequent impairment
Revaluation Losses
Fair value < CV before revaluation
revaluation losses reported on the income statement
Revaluation Gains
FV > CV before revaluation
revaluation gains reported in other comprehensive income and accumulated in equity as revaluation surplus
Revaluation Impairment
Recorded by first reducing any revaluation surplus to zero with further impairment losses reported on the income statement.
Investment Property (IFRS only)
- Rental or to flip
- GAAP does not include a specific definition or rules for investment property.
Cost of Investment Property
- Purchase price
- Expenses directly related to purchase
Cost Model - Investment Property
Reported on the balance sheet at historical cost less accumulated depreciation. When used, the fair value of the investment property must be disclosed.
Fair Value Model - Investment Property
Reported on the balance sheet at fair value and is not depreciated. Need an active market to get fair value price.
Once adopted, fair value measurement must be applied consistently until the asset is disposed of or can on longer be classified as investment property.
Gains or Losses - Investment Property
Revalued regularly so that the carrying value does not differ materially from fair value. Gain or loss is recognized in earnings in the period in which it arises.
Capitalization of Interest Costs
- An exception as interest is generally expensed as incurred (period cost).
- Construction period interest should be capitalized (based on weighted avg of accumulated expenditures) as part of the cost of producing fixed assets.
Do NOT Capitalize Interest Costs
- On inventory routinely manufactured
- On fixed assets held before or after construction period
- During intentional delays in construction (waiting for market to improve); but do capitalize interest cost during ordinary delays (waiting for permit) in construction.
Important 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)
Capitalization of Interest Period
Begins when 3 conditions met:
- expenditures for the asset have been made
- activities that are necessary to get the asset ready for its intended use are in progress
- interest cost is being incurred
