Fixed Assets Flashcards
Characteristics
used in operations and are not for resale so not inventory
long term in nature and depreciation
substance so you can touch it
can be shown separately in the b/s or in notes
land(property)
buildings (plant)
equipment
acc dep
basis of purchased fixed assets
US GAAP
historical cost
cost - acc dep - impairment
historical cost
basis for valuation of fixed assets: cash or cash equ (payments over time so promissory note; stock issued; notes) price of obtaining the asset + bringing it to location for intended use
basis
inventory: lcm
a/r: nrv
fixed assets:nbv
nbv
cost-acc dep
acc dep
contra assets; can be combined for two or mroe categories
donated fixed assets
bill gates donates a building for his company to use
recorded at fmv + incidental costs occured
donated fixed assets result in the recognition of a gain on the income statement
dont credit cash because you are not paying for it
dr. fixed asset
cr. gain on nonreciprocal transfer (unusual or infrequent -> gift)
IFRS Valuation
initially recognized at the cost to acquire the asset
subsequent to acquisition fixed assets can be valued at cost or revalutation
cost
JUST LIKE US GAAP:
historical cost - acc dep - impairment
revaluation model
IFRS Only
Class
1) class of fixed assets is revalued to fair value
2) then reported at fair value - acc dep - impairment
must be made frequently throughout the year to make sure that the carrying amount does not drastically differ from fair value at the end of the reporting period; if fair value differs materially from carrying value further revaluation required
revaluation model carrying value = fair value at revaluation date - subsequent accumulated dep - sub impairment
must be applied to all items in a class of fixed assets and not to an individual fixed asset
when assets reported at revaluated value
historical cost - acc dep - impairment must be disclosed
revaluation losses
income statement
1) if fair value < carrying value before revaluation) = loss on i/s
2) if loss is reversing a previously recognized revaluation gain, OCI
AND
reduced revaluation surplus in ACOCI
Revaluation gains
1) fv > carrying value before revaluation
then OCI AND AOCI as revaluation surplus
2) if reverses previously recognized revaluation loss -> that portion in I/S
Impairment
if revalued fixed assets sub. become impaired then
1) reduce any revaluation surplus to 0 if you had previously recognized a gain
2) any excess impairment loss reported on the i/s
asset class
land and building, machinery, equipment, etc
Example! F4-36
cannot net classes against each other
if in the last one impairment of equipment by 400 then first 300 take out of oci adn then remain 100 you report as a loss on i/s
cost of equipment
office equipment, machinery, furniture, fixtures, factory equipment
CAPITALIZE
invoice price - cash and other discounts + (freight in and insurance while in transit and construction; installment charges (cost to rearrange); sales and federal excise tax, construction period interest)
capitalize or expense
based on the purpose of disbursements
additions CAPITALIZE
increase the quantity of fixed assets
dr. assets
cr. cash/a/p
improvement and replacement
CAPITALIZE
improvement -> betterment
replacement -> new similar asset sub. for old asset
1) if carrying value of old asset is known, remove it and replace it with the new cost and recognize any gain or loss.
carrying value of old asset is unknown
1) if life is extended -> increase nbv -> reduce acc dep
dr. accu dep
cr. cash/a/p
2) if the usefulness or utlitilty of the asset is increased as a result; capitalize the cost of the improvement to the asset account
repairs
expensed
extraordinary repairs
capitalize (treat it as an addition, improvement, or replacement as appropriate)
Summary!
F4-37
Cost of Land
ALL COST UPTO EXCAVATION (digging of the land for the foundation of building and after that will be under building)
purchase price
broker’s commission
title and recording fees
legal fees; draining swamps; filling in or leveling; site development etc; assume existing obligations like mortgages, back taxes, etc; cost of tearing down an old building
LESS: proceeds from sale of existing building, standing timber etc. if the old building is knocked down and then the scrap metal etc. is sold that is less
land improvements
Depreciable
Fences, water systems, sidewalks, paving, landscaping, lighting etc.
interest costs
interest costs during construction period added to cost of land improvement
cost of building
excavation forward
purchase price + (repair charges ignored by previous owner so deferred improvements, alterations and improvements, architect’s fees, possible addition of construction period interest)
Land cost
till filling in a hole or levelling
building cost
digging a hole for foundation
basket purchase of land and building
ratio ->allocate purchase price based on the ratio of the appraised values of individual items
investment property
IFRS only in GAAP part of PPE
building held to to earn rentals or to flip it so sell it for more
includes property under construction or development for future use as investment property
DOES NOT INCLUDE: owner occupied prop; prop held for sale in ord course of business; property being constructed or developed unless it is for use as investment property in the future
cost
purchase price + expenses directly related to purchase so legal, professional fees, prop transfer taxes, other taxes
capitalize
costs to sub. add to the property
to replace part of the property
to service the prop
expense
day to day servicing, repairs, maint cost, labor and minor parts; expensed in the period occurred
cost model
initially reported at cost or revaluation
hist cost - acc dep
should also disclose fv of investment
fv model
*** investment reported at FV and NOT DEPRECIATED
reflects market price
Once adopted must be applied consistently until the asset is disposed or can no longer be classified as investment property
when is it not investment prop
owner occupied; developed for sale under ordinary course of business
gain or loss arising from change in fv of investment prop
** recognized in earnings earnings in the period in which it occurs
fixed assets constructed by a company
im going to build my own building
direct material and labor; r&m expenses that add value to the fixed asset; overhead including direct overhead like idle plan capacity; **construction period interest; NOT profit
capitalization of interest costs- based on weighted average accumulated expenditures
Is an exception as interest is generally expensed as incurred but in this case it is capitalized as a cost of producing fixed assets (buildings and ppe; fixed assets intended for sale lease or discrete project; land improvements)
do not capitalize interest cost -> expense
1) if youre borrowing money to buy inventory
2) if youre borrowing money to construct inventory
3) before construction or after
4) if you’re waiting for market to improve or if there is an INTENTIONAL delay in construction
can capitalize interest cost
when you’re borrowing money to construct a building for use in your business- a factory, warehouse, office building
2) can capitalize during construction period only
3) capitalize interest cost during ordinary delays in construction - waiting for some kind of permit, inspection before you can proceed
computing capitalized cost
not amount borrowed -> amount of interest you can capitalize is based on the amount of money you’ve paid for materials, labor, overhead = based on average amount of accumulate expenditures
i dont care about the amount of money that you borrowed
interest rate on borrowings
use rate on construction loan if the loan is specifically for asset construction -> just do the interest rate * accumulated expenditures
*capitalized expenditure during the construction period only
if you dont have a specific construction loan
using general debt
if youre using various sources -> general weighted interest rate * expenditure
interest cap
actual interest you can capitalize can NEVER exceed the actual interest cost
problem on f4-42
1) upto actual interest cost is capitalized
2) rem is expensed
3) can expense remainder of actual interest costs
capitalization of interest period
during period of construction
building decisions have been made and architectures hired
activities necessary to get assets ready for intended use are in progress -> permits filed
if you’re actually incurring interest costs
Summary!!
borrowed funds that are not used:
expense always
borrowed funds (weighted average acc expense) -> capitalize during construction; expense after construction
expenditures above amount borrowed (weighted avg interest rate): capitalize during construction; expense after construction
