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FAR - JET > PP&E > Flashcards

PP&E Flashcards

1
Q

Define Plant Assets

A
  1. Be currently used in operations;
  2. Have a useful life extending more than one year beyond the balance sheet date; and
  3. Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.
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2
Q

Plant Asset Examples

A

Plant & Equipment
Land
Land Improvements
Natural Resources

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3
Q

Capitalized Costs

A
  1. Get ready for intended use (condition and location)

2. Extend useful life or improve productivity (Bigger, Better, Longer)

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4
Q

Capitalized Costs Examples

A

Additions
Improvements
Rearrangements
Replacements

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5
Q

Rule to apply to determine expenditure treatment.

A

Applying the general rule helps (Intended location and use) in classifying expenditures.

KEY: Think What is it for or What does it benefit

For example, the cost to train employees to use equipment benefits the employees, not the equipment. Razing an old building on land just purchased is part of the process of preparing the land for its use. However, the cost to raze a building already owned by the firm increases the loss on disposal of the building.

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6
Q

Valuation of Plant Asset

A

FV of given in exchange or FV of Asset Received

Whichever is MORE readily DETERMINABLE

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7
Q

Valuation of Constructed Assets

A
  1. Labor, Material, Overhead and CAP Interest

2. Limited to Market Value of Asset at completion

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8
Q

Rationale for Cap Interest

A
  1. Matching (see cost via Depreciation once Asset in Production and making Revenues)
  2. Avoidable Interest Cost (would pay off Debt otherwise)
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9
Q

Rules for Interest Capitalization

A
  1. Interest Cost being incurred.
  2. Construction taking place
  3. Construction Expenditures occurring

A. MAX of total actual Interest
B. Use specific or Wt Avg rate
C. Interest compounds into AAE (avg accum exp) until placed INTO service

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10
Q

Methods to determine rate in Cap Interest

A
  1. Specific Method Specifc Construction Loans then average)

2. Wt Avg Method (Wt avg of ALL Debt)

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11
Q

Types of Capitalization post acquisition

A
  1. Addition - Extension or Enlargement of existing asset (shorter of useful life or remaining life of larger asset)
  2. Modification - Improvement, Replacement, rearrangement,
  3. Revenue Expenditure - simply maintain services as intended in original useful life.
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12
Q

How are Cap. Expenditures recorded?

A
  1. Substitution - Remove Cost, A/D and recognize Loss and record New
  2. Increase Basis of Larger Asset - when productivity vs life is improved or don’t have details on components.
  3. Debit to A/D - when life is increased (turn back clock)
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13
Q

Depreciation Methods

A 
SL
Service Hours
Units of Output
Sum of Years Digits (SYD)
Double Declining Balance (DDB)
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14
Q

Straight Line depreciation

A

Cost - Salvage / Years

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15
Q

Service Hours Method

A

Depreciation rate = (Cost − Salvage Value) / (Useful Life in Service Hours)

Get the Rate and apply to Hours used

Rate is Constant, but Volume will flux

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16
Q

Units of Output Method

A

Depreciation rate = (Cost − Salvage Value) / (Useful Life in Units of Production)

Get the Rate and apply to Output

Rate is Constant, but Volume will flux

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17
Q

Sum of Years Digits Method

A

Years Left / Sum of Years * (Cost - Salvage)

5 Years = 5+4+3+2+1 = 15 so 5/15…4/15…3/15

Formula: ( N * (N+1) ) / 2

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18
Q

Double Declining Balance

A

NO SALVAGE

DEPR based off BEG BALANCE each year (NOT COST)

Calc normal SL Method (say 1/5 = 20%)

Apply the Acceleration Factor (2x or 1.5x) to get % used each year (40% etc)

Apply % against NBV each year

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19
Q

Appraisal Method of Depreciation

A

Inventory Appraisal Method

Group or Composite Method

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20
Q

Inventory Appraisal Method

A

This method is applied to groups of smaller homogenous assets. At the end of each year, the assets are appraised and recorded at market value. The appraisal is for the entire group which saves accounting costs. The decline in market value from the previous year is depreciation expense for the year. If assets were sold during the year, the proceeds from sale reduce depreciation expense.

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21
Q

Group / Composite Methods

A

This system applies the straight-line method to groups of assets rather than to assets individually. Accumulated depreciation records are not maintained by asset; rather, only a control account is used to accumulate depreciation. Gains and losses are not recorded. The entry to dispose of an asset plugs the accumulated depreciation account

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22
Q

Natural Resource

A

Natural Resource : A noncurrent asset that contains the cost of acquiring, exploring, and developing a natural resource deposit (e.g., timber, oil and minerals). It does not include the cost of extracting the resource.

Land acquired for Natural Resource is not booked as LAND (Natural Resource)

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23
Q

Accounting Method for Exploration Costs

A

Successful efforts method – Only the cost of successful exploration efforts is capitalized to the natural resources account; unsuccessful efforts are expensed.

Full costing method – All costs of exploring for the resource are capitalized to the natural resources account. (The total amount capitalized cannot exceed the expected value of resources to be removed.)

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24
Q

Categories of Impaired Assets

A

HFU
HFS
Asset to be disposed other than Sale (Spin off, Exchange, Abandonment)

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25
Q

Indications of Impairment

A
  1. Significant decrease in market value
  2. Change in way asset used or physical change in asset
  3. Legal factors / change in business climate or adverse action / assessment by regulator
  4. Asset costs incurred greater than planned
  5. Operating or CF flow losses from the asset.
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26
Q

HFU Journal Entries

A

Dr Impairment Loss in Continuing Ops
Cr A/D

Disclose as well
No Restoration of impairment in HFU

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27
Q

HFS Criteria

A

a. Management commits to a plan to sell the asset or group of assets;
b. The asset must be available for immediate sale in its present condition subject only to terms that are usual and customary for such sales. This criterion does not preclude a firm from using the asset while it is held for sale nor does it require a binding agreement for future sale;
c. An active program to locate a buyer has been initiated;
d. The sale is expected to take place within one year. In limited cases, the one-year rule is waived for circumstances beyond the firm’s control (for example, due to a new regulation or law, environmental remediation, or deteriorating market);
e. The asset is being actively marketed for sale at a price that is reasonable in relation to its current value;
f. Sale of the asset must be probable.

28
Q

HFS Accounting

A
  1. The asset is written down to NRV (fair value - cost to sell) - here the test for impairment and the measurement of the loss are the same. The term ‘recoverable cost’ is not used for assets for sale. If sale is expected beyond one year, the cost to sell is discounted.
  2. Only direct incremental costs are used in the computation of cost to sell.
  3. The impairment loss recorded equals the difference between the asset’s BV and its (FV - cost to sell). The estimated cost to sell increases the loss. The loss is not extraordinary.
  4. The asset is removed from plant assets because it is no longer in use.
  5. Depreciation is no longer recognized on the asset.
  6. The results of operating the asset during the holding period are recognized in period of occurrence - estimated future operating losses or gains are not recognized until they actually occur. Note that although these assets are held for disposal, they may require maintenance and other cash expenditures. These are expensed as incurred.
  7. The asset can be written up or down if held for another period - gains are limited to the amount of the initial impairment loss (BV cannot exceed the amount immediately before recording the initial impairment loss).
29
Q

Impairment in US GAAP (v IFRS)

A
  1. Two Step Proces
  2. Undiscounted cash flows from use establish recoverability (step one)
    Fair value is used for the impairment calculation (step two)
  3. No Discounting of CF in Step 1
  4. No Recoverability
30
Q

Impairment in IFRS (v GAAP)

A
  1. One Step Process
  2. Recoverable amount is the higher of
    − Fair value less cost to sell or
    − Value in use
  3. Discounting required in evaluation stage
  4. Impairment losses can be reversed if circumstances change (except for Goodwill)

Under IFRS, impairment compares the carrying value to the greater of net selling price (market value less disposal) or value in use (discounted cash flows).

31
Q

PPE in US GAAP (v IFRS)

A
  1. Estimated useful life and depreciation method reviewed when events or circumstances change
  2. No requirement for component depreciation
  3. Revaluation to fair value is not permitted
  4. Interest earned on construction funds are not allowed to offset the interest costs
32
Q

PPE in IFRS (v GAAP)

A
  1. Estimated useful life and depreciation method reviewed annually
  2. Component depreciation required in some cases
  3. PPE can be revalued to fair value
  4. Interest earned on construction funds can offset the interest costs
33
Q

Some B/S Categories for Land

A

Plant Asset
Investment (Speculative)
Natural Resource

34
Q

Plant Asset Disclosures Required

A

useful life
depreciation methods
accumulated depreciation of plant asset.

35
Q

Interest and Financing for PPE Valuation

A

Interest is NOT included (UNLESS Cap Interest for CONSTRUCTED Asset), but the AMOUNT financed is included in the Valuation

36
Q

Condemnation and Compensation with Repurchase

A

The two transactions are not related. The land account is decreased by the book value of the land condemned and increased by the cost of the land purchased. The relative magnitudes of the book values are shown below:

37
Q

Post-Acquisition Expenditures and Land v Building

A

The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction.

Assessments generally to Land (even Sewer)

38
Q

Sale of Asset with Replacement

A

The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.

39
Q

Stated vs. Market Rate on Purchase of Equipment

A

Market Rate used to compute the Value

40
Q

PPE purchased with Shares

A

The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.

41
Q

Two situations where Cap Interest is the same regardless of Method.

A

When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.

42
Q

When is Interest Expensed for Assets Constructed for Sale vs For Use

A

Interest during construction on assets constructed for a firm’s own use is capitalized until construction is complete. Thus, only the interest incurred after completion is expensed.

Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments. The equipment constructed for sale does not appear to be a discrete item in that sense and, thus, none of the interest is capitalized. It is all expensed.

43
Q

Rate to use if specific Construction Loans

A

Use Construction specific until used up and then Wt Average of non-construction Debt Outstanding

44
Q

Steps in Calculating Cap Interest

A
  1. Calc AAE (Avg Accumulated Expenditures)**
  2. Use Simple method unless given dates
  3. Apply Correct Rate to get Cap Interest subject to Max.
  4. Use Construction specific until used up and then Wt Average of non-construction Debt Outstanding

**Get Avg of AAE first rather than Cap Interest for each tranche to simplify

45
Q

Debt incurred for Purchase vs Construction of Asset

A

Interest on debt incurred when purchasing a plant asset, is incurred after the asset has reached its intended condition and location. Therefore, it is expensed as incurred. Debt incurred during the construction of plant assets is considered avoidable and also incurred before the asset has reached its intended condition and location. Therefore, it is capitalized to the asset in the same way material, labor, and overhead are capitalized. The interest is expensed as part of depreciation during the service life of the asset.

46
Q

Land v. Building for Cap Interest

A

The average accumulated expenditures for purposes of capitalizing interest during construction of the warehouse includes the land cost, but the interest is capitalized to the warehouse only. The land is not under construction.

47
Q

AAE over multiple years

A

Average accumulated expenditures is the amount of debt for the annual period that could have been avoided.

Total Spend of PRIOR Years plus AAE for CURRENT Year (Total Spend for Current / 2 if Evenly distributed)

48
Q

Replacement of Asset

A

When the cost and accumulated depreciation of a component or portion of a larger asset is identifiable, and that component or portion is replaced, the replacement is treated as two separate transactions:
(1) disposal of the old component (for zero proceeds in this case, due to the fire damage) and
(2) purchase of the new component.
Thus, a loss equal to the book value of the old component is recognized for (1) and the amount paid to purchase the new component is capitalized as a separate purchase for (2).

49
Q

Regular Maintenance vs. Overhaul

A

Post-acquisition expenditures, which increase the useful life (assuming normal maintenance) or the utility (usefulness or productivity) of the asset, are capitalized. Such expenditures provide value for more than one year. The original useful life of an asset assumes regular maintenance. Therefore, regular maintenance does not increase the intended useful life of the asset.

50
Q

Another way of saying PV of a Note

A

Cash Equivalent Price (already includes Down Payment)

51
Q

Composite Method of Depreciation

A

And under composite methods of depreciation, individual assets do not have a separately recorded book value. When sold, accumulated depreciation is debited for the difference between original cost and proceeds. No gain or loss is recognized.

52
Q

Components of Carrying Value

A

Undepreciated Amount PLUS Salvage OR Cost less A/D

53
Q

Depletion Rate Calculation

A

depletion rate is the sum of the cost incurred to acquire the mineral rights, find the minerals, and develop the site less the salvage value, all divided by the estimated number of units of resource expected to be removed from the site.

54
Q

Goal of Depletion

A

Ratably apply a cost to resource extracted.

Extraction costs and Production Costs are added on top (Labor etc) to get total Inventory Cost

Both then part of COGS and EI or Cost of the Product (Inventory)

When the inventory of resource is sold, the costs that have been debited to it (depletion, extraction, production) are recognized as expense through cost of goods sold.

55
Q

Successful Efforts Basis and Conceptual Framework

A

The successful efforts method capitalizes only the cost of exploration efforts that locate the resource. As such, only those efforts that yield a probable future benefit are capitalized. This is a direct application of the asset definition, which requires that an asset have a probable future benefit.

56
Q

Other Costs Involved in Natural Resource Extraction

A

Extraction costs: Depreciation on removable assets, wages, and material costs pertaining to the extraction effort - these costs are debited to the inventory of resource, not to the natural resources account.

Production costs: Additional processing costs after extraction - this cost also is debited to the inventory of resource, not to the natural resources account.

57
Q

Depreciation related to Depletion

A

Depreciation on Assets Used in Extraction – Depreciation on equipment used in the extraction effort is a component of total extraction costs. It does not contribute to depletion. The entry for extraction costs generally includes a debit to extraction costs and a credit to accumulated depreciation for depreciation on the cost of assets used in extraction. How the equipment is depreciated depends on whether it can be moved from one site to another.

a. Equipment that can be used at more than one natural resource site - depreciate as usual over its useful life.
b. Equipment dedicated to one site (often not movable or removable) - depreciate over the shorter of useful life or life of natural resource site. The most efficient method in this case is to use the units-of-production method with the same denominator as the depletion base.

58
Q

Financial Statement Presentation of Natural Resources

A

A. The natural resource account is presented as a noncurrent asset. The property associated with the natural resource is not classified as land because the land is not held as a building site, but rather to utilize the natural resource on the land.
B. Some firms classify the natural resource as an intangible asset because they have purchased the rights to utilize the land and do not own the land itself. These mineral rights are an intangible asset.
C. Once extracted, the natural resource noncurrent asset is transferred to resource inventory a current asset.

59
Q

HFS Asset and Cap on Write Up Example

A

An asset held for disposal is written down and an impairment loss recognized in period 1. In period 2, the fair value of the asset increased above the book value at the time the impairment loss was recognized. There was no change in the estimated costs to sell. The asset has not been sold as of the end of period 2. The book value of the asset at the end of period 2 is the book value immediately preceding the recognition of the impairment loss.

60
Q

Destruction of Asset and Insurance

A

NET Recovery is the key Value (Insurance recovery compared less any costs) less NBV or Carrying Value to determine Gain or Loss.

Costs included are only those associated with the destroyed asset, NOT the new asset (if replaced).

The sum of the carrying value ($520,000) and removal/cleanup cost ($10,000) is the amount to compare to the insurance proceeds when computing the loss. The fire caused the latter costs to be incurred; therefore, the cleanup costs should be included in the loss.
The fair value of the property would not figure into the recorded loss because the building account does not reflect this amount.

61
Q

When are assets tested for Impairment.

A

Long-lived assets need to be tested for impairment when facts or circumstances indicate that the carrying amount may not be recoverable. An indication that the carrying value is no longer recoverable includes innovations in technology which may make the product or process obsolete.

62
Q

IFRS Value in Use vs Discounted Cash Flows

A

They are the Same

63
Q

IFRS FV Remeasurement

A

Under IFRS, PPE can be remeasured to fair value if fair value can be reliably measured. If remeasurement is used, it must be applied to the entire class or components of PPE, such as land, buildings, or equipment. Increases in an assets fair value above original cost are recorded in a revaluation surplus account. Any decreases in an assets fair value below the original cost are recorded as losses to the income statement. When revaluation results in an increase in the asset, a debit is made to increase the assets value and a credit is made to an equity account (part of OCI) called revaluation surplus. If the asset is subsequently decreased during revaluation, then the previously established revaluation surplus is reduced to zero and a loss is recognized for any excess. If the fair value of the asset declines below its original cost a loss is recognized. If the fair value subsequently increases, a gain can be recognized to the extent of the loss and any additional gain is recognized in revaluation surplus.

64
Q

IFRS and Component Depreciation

A

Must divide Asset into components with different lives if possible to calculate Depreciation.

KEY: If Component is part of the $100k Asset just purchased and the Cost to replace that in 5 years is $20k then $20k of the $100k is over 5 years.

65
Q

IFRS Revaluation Model for PPE Example

A

Under IFRS an increase in an assets fair value above original cost are recorded in a revaluation surplus account and any decreases in an assets fair value below the original cost are recorded as losses to the income statement. Therefore, the 10,000 decrease in year 1 would have been recorded as a loss to the income statement and the 15,000 increase in year 2 would be recorded as a 10,000 gain to the income statement and 5,000 gain in revaluation surplus (OCI).

FAR - JET (22 decks)

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