PP&E Flashcards
Acquisition Costs
Acquisition costs, which are capitalized as part of the cost of the asset, include not only the purchase price of the asset, but also costs associated with obtaining it and preparing the asset for its intended use.
- Include all costs of acquisition or construction as well as preparation for use.
- Purchase price
- Legal fees
- Delinquent taxes
- Title Insurance
- Transportation (freight-in)
- Installation
- Test Runds
- Sales Taxes
- The cost of land includes:
- purchase price (including any existing building that is to be demolished)
- surveying
- clearing, grading, and landscaping
- costs of razing or demolishing an old building are added to the land cost
- proceeds from the sale of any scrap (old bricks) are subtracted from the land cost.
Lump Sum Purchases
If the land and building are purchased for a lump sum, use the Relative Fair Value method to allocate the value between both assets.
- If land/building purchased for $600,000 and the only info available is the tax appraisal of $100,000 to the land and $400,000 to building then use the proprotionate of tax amount to allocate purchase price. (i.e 100/500 or 20% for Land and 400/500 or 80% for building.
- For oil and gas properties, the cost of property includes cost of acquisition and preparation of the property for drilling, as well as any estimated restoraction cost for the property following the completion of drilling (ARO).
Asset Retirement Obligation (ARO)
- Liability recorded at FMV for expected restoration costs expected to be paid at the end of period of usage.
- If not able to determine then should use the PV of the expected future costs.
- The liabliity will have to be increased each year based on the discount and reported as accreation expense (a form of interest expense)
- considered long-term and is amoritzed using the effective interest method.
Disclosures:
- Description of the obligation and related asset
- Description of how fair value was determined
- The funding policy
- A reconciliation of the beginning and ending carrying value
Capitalization of Interest
- Interest cost incurred during the construction period needs to be capitalized. The amount capitalized is considered the avoidable interest (could have avoided had you not built the building). This amount is added to the cost of building the asset.
- Capitalize interest cost if asset is:
- Constructed for company’s own use (built by self or oursider)
- Assets manufactured for resale resulting from a special order (ships)
- Do not capitalize interest if:
- Costs are incurred after completetion of construction
- inventory manufactured in the ordinary course of business
- Amount to be capitalized is:
- Weighted average accumulated expenditues 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
- Capitalize interest cost if asset is:
Costs incurred After Acquisition
- Repairs and maintenance expense - costs incureed to keepor restore an asset to its nomral operating condition. These costs are expensed as incurred.
- If the cost makes the asset BIGGER, BETTER, or LONGER that’s GOOD, since one would rather capitalize the cost than expense it.
- Bigger or Better
- Asset X
- Cash X
- Longer (subtract from accum depre to increase carrying value)
- Accum Dep X
- Cash X
- Bigger or Better
- Refurbishment - replace part of the asset
- Identifiable- account as if sold old part and replacing with new part
- Acc Dep X
- Loss X
- Asset X
- Asset X
- Cash X
- Not Identifiable
- Enhances the asset
- Asset X
- Cash X
- Asset X
- Increases the assets useful life
- Acc Dep X
- Cash X
- Acc Dep X
- Enhances the asset
- Identifiable- account as if sold old part and replacing with new part
Depreciation Methods
- Straight Line Method
- Sum of the Years Digit
- Double Declining Balance
- Units of Production
Straight Line Method
- Used when assest give equal benefits to the company throughout their useful lives (example a building)
- depreciation expense is the same amount each year
- depreciation rate = 1/useful life
- (Cost - Salvage Value) / Useful Life
- considers depreciation as a function of time instead of a function of usage
Sum of Years Digits
- an accelerated depreciation method that is considered less aggressive than the double declining method.
- numerator = the number of years left in the asset’s useful life. For example, if it was a 3-year asset then in the first year would be 3, then 2, then 1.
- denominator = the sum of the years in the assets useful life N (N+1)
2
Double Declining Balance
- a depreciation rate that is twice the straight-line rate is 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 either:
- calculate depreciation expense in the last year as the amount to reduce the carrying value to the salvage value.
- switch from DDB to either SYD or S/L toward the end of the asset’s useful life, depreciating the asset to its Salvage value.
- Balance declines, rate stays the same
- Never get to zero, so eventually must switch over to another method.
Accelerated Depreciation Expense Benefits
- Assumes depreciation is a functionof use (machine hours) or productivity (finished widgets) instead of the passage of time.
-
Benefits of accelerated methods
- Better matching since asset is more productive in earlier years
- Minimize loss due to obsolescence. Since the asset was depreciated more quickly, the Carrying value is lower therefore the loss is smaller.
- Helps to even out expenses. Since Repairs and Maintenance in the earlier years is lower, if we take more depreciation earlier on, the total expenses would be more constant over time.
Units of Production (UOP) - Activity Method
- Assumes depreciation is a function of use (machine hours) or productivity (finished widgets) instead of the passage of time.
- Depreciation Expense:
(Cost - Salvage Value ) X (Hours this year/Total Est Hours)
Group or Composite
- Depreciate as a group (e.g. a fleet of trucks)
- Group refers to a collection of assets that are similiar in nature and have approx same useful life.
- Composite refers to a collection of assets that are dissimilar in nature and have different lives.
- Problems occurs when you sell one of the assets in the group. Accum. depreciation is not known.
- assume cash received = carrying value
- assume no gain/loss
- Plug Accum Deprec
Cash 20
Acc Depre 80 (Plugged)
Loss 0
Asset 100
Gain 0
Appraisal or Inventory Method of Depreciation
This method is rarely used. Under this approach, an estimate is made at the end of each year of the value of the assets, and sufficient depreciation expense is recorded to reduce the CV to that amount. Since this approach doesn’t systematically match costs to benefits, it is only used when the loss in value is directly related to productivity, such as for property being rented to others.
Depletion
When assets like PP&E have limited useful lives, some assets actually get used up. Mining companies and others in what are referred to as extractive industries will buy or otherwise obtain rights to real property that is expected to have some natural resource, such as oil, minerals, precious metals, or other commodities.
When property with a natural resources is acquired, the cost is allocated to the property and the natural resource based on their relative estimated fair values. As the natural resource is extracted from the property, the cost is transferred from the natural resource to inventory and ultimately to cost of sales when the inventory is disposed of.
Three step method:
- The total volume of the resource is estimated
- Total volum is divided into the remaining cost, referred to as the depletion base
- The amt per unit is multiplied by the amount extracted during the period to determine the depletion for the period
Depletion = (Depletion Base / Total Vol at Beg of Year) X Units Extracted
Impairments Examples
Examples of impairments include:
- a significant decrease in market value of asset
- significant change in assets physical condition or manner in which it’s used
- signifcant advese change inlegal facors or in the business climate that affects the value of the asset
- accumulation of costs signifcantly in excess of the amount originally expectd to acquire or construct the access
- projection or forecast that demonstrates continuing losses associated with an asset.
- an expectation that is more likely than not that the asset will be disposed of before the end of its expected useful life
Lacks Commercial Substance - BOOT Received
One type of exchange lacking commercial substance in which gain IS recognized.
- defer all gains unless boot is received, then recognized the gain up to the proprortionate share of boot received to total consideration received. The Ratio to use is: total boot receied/total consideration received (boot + FV of asset received), multipied by the gain
- when the boot recieved is > 25% of the total consideration received (including the boot), the transaction is viewed as a monetary exchange and all of the gain is recognized.
Fixed Assets under IFRS
Non-Monetary Exchanged Under IFRS
