Lecture 8: PPE (Fixed Assets ASC 360) Flashcards
PPE
ASC 360
tangible assets acquired for LT use in normal course of business. Not for resale and are subject to depreciation
PPE Acquisition Costs:
For Intended Use, Costs are capitalized:
- purchase price
- legal fees
- Delinquent taxes
- title insurance
- transportation (freight in)
- installation
- test runs
- sales taxes
Land Costs
+Purchase price + existing buildings to be demolished or “razed”
-surveying
+clearing, grading, landscaping
+costs of razing or demolishing an old building are added to land cost
-proceeds from sale of any scrap are subtracted from land cost.
Lump Sum Purchases/Relative FV Method
Purchase of land and building: use the the Relative FV Method to allocate the value between both assets. Typically in problems will be given the tax value and calculate the percentage to apply to the purchase price.
If land is acquired with a depleting asset (oil) then the land is normally allocated at its ___________ assuming all of depleting asset has been removed and the remainder is allocated to the oil.
estimated residual value.
Asset Retirement Obligations (ASC 410)
estimated restoration costs, expected to be paid at the end of the period of usage, should be recorded as a liability at FMV, the amount the obligation could be settled today. If estimate cannot be determined, they will be made based on the PV of the expected future costs.
ARO accretion expense
a form on interest expense, the ARO liability will have to be increased each year based on the discount rate and reported as accretion expense.
Example of ARO: oil field acquired for 100K, estimated the oil extraction will cost 20K, and will be completed in 12 years. The land will have a value of 30K at that point. The discount rate is 6%.
Dr. Land 30K
Dr. Oil Reserves 80K (PLUG)
Cr. Cash 100K (Given)
Cr. Est Rest Costs 10K ( 20K X (PV of 1) 0.5)
The estimated Restoration costs are classified at LT Liabilities, since they wont be paid until 12 years from now. The estimated restoration costs are increased each year by the rate of 6%, so $600 in first year
Dr. Accretion Expense 600
Cr. ARO Liability 600
Asset Donation
Treated as ordinary income for FMV of asset plus any acquisition costs.
Capitalization of Interest (ASC 835)
Interest costs incurred during the construction period needs to be capitalized. The amount capitalized is considered the avoidable interest (Could have been avoided had you not built the building) This amount is added to the cost of the building the asset.
Capitalize interest on construction loan if asset is:
- constructed for company’s own use
- asset is manufactured for resale resulting from a special order (ships)
Do not capitalize interest on construction loan if asset:
- costs are incurred after completion of construction (Interest expense)
- inventory manufactured in the ordinary course of business
The amount to be capitalized for construction loan:
- weighted average accumulated expenditures X interest rate= capitalized portion of interest
- interest on other debt that could have been avoided by repayment of debt,
- never exceed actual interest cost.
Costs incurred after acquisition of Fixed Asset
Repairs and maintenance
Capital Expenditure
Refurbishment
Repairs and maintenance expense (revenue expenditure)
costs incurred to keep or restore an asset to its normal operating condition, Costs are expensed as incurred.
Capital Expenditure
if costs make the asset Bigger, Better, or Longer that is good.
Bigger= Additions, dr. asset cr. cash
Better= improve efficiency, Dr Asset Cr. Cash
Longer: extend useful life of asset, costs are subtracted from accum depreciation to increase the CV
Refurbishment
Replace a part of the asset
Can be 1. Identifiable: account for as if sold the old part and are replacing with new part
2. Not Identifiable: bigger or better then you dr. asset, cr. cash and if makes it longer dr. accum dep cr. cash
Straight Line Depreciation:
used when asset gives equal benefits to the company throughout their useful life. Dep Expense is the same each year. 1/useful life. (Cost-Salvage Value)/useful life = depreciation expense
Dr. DE
Cr. AD
Accelerated Methods of Depreciation:
Used when an asset gives greater benefits in earlier years than in later years (office equipment
Sum of the Years Digits
Double Declining Balance
Sum of the Years Digits
N(N+1)/2 = depreciation expense N= the number of useful life years
Double Declining Balance
twice the straight line rate applied against the book value of the asset.
Salvage Value is ignored.
Depreciation expense should not be reduced below the salvage value. In the final year, calc depreciation expense in the last year as the amount to reduce the CV to the Salvage Value (switch to SL or SYD)
Exg. 1/5= 20% SL Rate X2= 40% the DD Balance Rate.
Year 1: Cost (1/#years)X2= depreciation expense Yr 1
Year 2: (Cost - Depreciation Expense yr 1) X %= Dep Expense for Year 2
Units of Production: Activity Method:
Assumes depreciation is a function of use or productivity instead f time passage
(Cost-SV)X (Hours this year/total estimated hours) = Depreciation expense
Benefits of Accelerated Depreciation:
- Better matching since asset is more productive in earlier years
- Minimize loss due to obsolescence. Since the asset was depreciated more quickly, the CV is lower and therefore the loss is smaller
- Helps to even out expenses. Since repairs and maintenance in early years is lower, if we take more depreciation early the total expenses would be more consistent over time.
Charting the Depreciation Results
Sometimes this will be tested. DDB = curve SYD=angle \
SL= —— Productive: random dots
Selling an asset that is apart of a group
Assume the cash received is the BV and there is no G/L The plug is Accumulated Depreciation
Dr. Cash
Dr. Accum Dep (PLUG)
Dr. Loss (NONE)
Cr. Asset
Cr. Gain (NONE)Depletion:
Assets that get used up, natural resources.
1. The total Volume of the resource is estimated (units, barrels, tons, cubic feet etc. In the first period, the estimate will be the total of the estimated reserves. The next periods will be the estimated amount remaining as of the beginning of the period which includes the amount extracted during the period plus the amount estimated to be remaining at the end of the period.
- The total volume is divided into the remaining cost, referred to as the depletion base to get a cost per unit. The first period is calculated by:
(Cost + additional costs + restoration costs - Salvage/Residual Value) - The amount per unit is multiplied by the amount extracted during the period to determine the depletion for the period.
Depletion= (Depletion base/Total Volume @ beginning of year) X Units extracted
Impairments of Long Lived Assets: held for Use
PPE that is not to be sold. Occurs when the carrying amount of an asset is not recoverable and a write off is needed.
Do not recover the impairment for held for use.
Losses reported on IS on income from continuing operations.
Determine Impairment Loss:
- Review events or changes in circumstances for possible impairment ( decrease in Market Value, change in physical condition, legal factors, costs to construct/acquire asset are too large, losses, asset will be disposed of before the end of life)
- Apply Recoverability Test, sum of Expected Future CF are less than the CV of the asses
- Calculate the impairment loss: FMV - CV
Impairment of Long Lived Assets to be Disposed (Held for Sale):
Assets are no longer being used for operations, reclassify them from PPE to other assets. Assets are no longer depreciated. Asset will be recorded lower of its CV or NRV. Increases and Decreases in NRV are recognized as G/L and can be written up or down as long as the the write up is never greater than the carrying amount of asset before impairment.
Dr. Loss
Dr. Equipment to be disposed (NRV)
Dr. Accumulated Depreciation
Cr. Equipment
Disposal of Fixed Assets
company will dispose of asset, remove original cost and accumulated depreciation, record amounts due to them and recognize G/L in continuing operations on IS.
Involuntary Conversion
disposals includes destruction of property as well as by seizure by govt. GAAP does not allow a deferral of G/L as a result of subsequent replacement property
Non monetary exchanges
exchange of assets between entities that does not involve cash or cash equivalents, receivables or payables, generally recognized at FV.
Exchanges with Commercial Substance to record new asset….
Recognize all G/L, record new asset at FMV, if 1 not known use 2, and use 3 if both not known:
- FMV given up + cash paid (-cash received)
- FMV of asset received
- BV given up + cash paid (-cash received)
Exchanges lacking commercial substance: On Exam
- FV of assets received cannot be determined within reasonable limit
- exchange made to facilitate sale of product to party that is not a normal party, competitor or vendor for future sales to unrelated customers
- exchange lacks commercial substance, cash flows are expected to be substantially unchanged as a result of exchange.
Exchanges lacking commercial substance new asset amount:
recognize all losses
defer all gains, unless boot is received
Record at the LOWER OF:
1. FMV given up + cash paid (-cash received)
2. FMV of asset received
3. BV given up + cash paid (-cash received)
If new asset acquired lacks commercial substance and BOOT is Received:
Recognize the gain up to the proportionate share of the boot to total consideration received.
If the boot received is 25% of the total consideration, recognize the full gain:
FMV Received 8000 \+Cash (boot) Received 2000 = Total consideration 10000 (Book Value) (6000) =Gain 4000 X % (boot total/consideration) 20% = Portion of gain to recognize 800
Dr. New Asset (Plug) 4800
Dr. Cash received 2000
Cr. Old 6000
Cr. Portion of Gain 800
There are 6 situations that need to be distinguished in determining if gains (FMV exceeds Carry Amount) and losses (carrying amount exceeds FMV) are recognized:
Commercial Subst Y Y Y N N N
Boot N/a Paid Rec N/a Paid Rec
Gain Y Y Y No, N Portion cash to total Consideration
Loss Y Y Y Y Y Y
Major differences between GAAP and IFRS for Fixed Assets
-FA are accounteed for under the Cost Model or when FV is readily determinable, the revaluation Model in which asset is reported at revalued amount (FV) less depreciation and impairments since the most recent revaluation.(GAAP accounts for under cost model under which asset is depreciated to salvage value)
-Fixed assets accounted for under COST model use component depreciation, each significant part is depreciated seperately. (GAAP does not require)
-Property held for investment or rental considered investment property and may be measuered using (GAAP does not seperate):
~Revaluation of FV Model, with changes recognized in PL except revaluation gains in excess of previously recognized losses which are in OCI
~Cost Mdel, under which the asset is reported at initial cost less accum depreciation and impairment loss.
-Biological assets are recognized at FV less disposal costs at harvest (NRV) unless FV cannot be reliably measured with gains and losses recognized in Income (Not recognized in GAAP)
- Previously recognized impairment losses may be reversed if an impaired asset recovers its value up to previously recognized losses.
-impairment losses are calculated using a 1 step approach comparing the CV and FV not 2 step like GAAP
- Depreciation factors are to be reevaluated each year (Salvage value, useful life etc)
Revaluation Model under IFRS
- The asset is periodically adjusted to its estimated fair value.
- DENT-R in OCI on BS
- increases in value are initially recognized in OCI, then decreases in value are first the offset to OCI then goes to the IS as a loss, the next increase offsets the amount on the IS loss and as an IS gain and then it goes to OCI
Impairment loss under IFRS
when an assets CV exceeds its recoverable amount, it is recognized in the period it occurs (CM goes to P/L, Revaluation Model the impairment loss is a revaluation decrease.)
Investment property under IFRS
IFRS considers this property held for capital appreciation or to earn rentals to be investment property, recognized at cost
Biological asset IFRS
living things such as plants animals etc. recognized at FV less costs to sell at “harvest” (NRV) on each BS date but for agricultural items only until point of harvest because they then become assets. G/L from changes in NRV are recognized in income
Borrowing Costs under IFRS
when an asset takes substantial amount of time to get ready for its intended use, the borrowing costs are capitalized, only those that are directly attributable to obtaining of the asset through acquisition, construction or produciton. Ends when the entity is no longer preparing the asset for its intended use or for sale
Non Monetary Exchanges under IFRS
Just terminology differences:
- Exchanges are characterized as similar and dissimilar assets vs having commercial substance and lacking commercial substance
- Exchanges that are dissimilar are accounted for same way as with commercial substances; g/l recognized
- Exchanges of similar assets losses are recognized and gains are not. “boot” RECEIVED for IFRS does not affect
