Property, Plant, and Equipment Flashcards
Property, Plant, and Equipment
PPE are assets that produce revenue for the business, and so their cost is allocated over time through depreciation.
PPE includes what?
Buildings
Machinery and Equipment
Land- only asset that is not depreciated
Land improvements- these have a finite life, so they are depreciable
Natural resources- oil well, coal mine. Instead of “depreciation” , these assets are “depleted”.
Carrying amount
Historical cost (includes capitalized costs)
LESS: Accumulated depreciation
LESS: Any impairment losses
= Carrying amount
Capitalized costs: two categories
Costs to get the asset ready to use
Costs to extend the asset’s useful life or increase productivity
Costs to get the asset ready to use
Usually any cost necessary to bring the asset to its intended use and location, so it would include: sales tax, testing costs, shipping costs, etc.
Costs to extend the asset’s useful life or increase productivity
If a cost just maintains the asset, like an oil change, this is a regular expense and is NOT capitalized
Disposal of PPE Assets
When a PPE item is sold, a gain or loss is recognized based on the amount realized from the sale compared to the carrying amount of the asset sold.
Sample J/E
Cash
Accumulated Depreciation
Machinery
Gain on Sale
Impairment Losses
An asset’s value should be written down if its fair value becomes less than carrying value. When an asset’s value is written down, this is an impairment loss.
J/E
Impairment Loss
Accumulated depreciation
Impairment test
Is the carrying value greater than the sum of the future net cash flows from the asset?
If this is the case, then the carrying amount is considered to be “not recoverable”, and an impairment loss is recognized.
Assets held in use
Impaired when carrying value is greater than fair value. Impairment loss is CV - FV
Non-monetary Exchanges
When one asset is exchanged for another asset.
Commercial Substance
If the asset acquired will significantly change the cash flows to the company, or if the asset acquired in the exchange is significantly different than the item exchanges.
Lacks commercial substance
If the asset received in the exchange doesn’t really change anything.
Accounting treatment for Exchanges with Commercial Substance
Valuation should be its fair value and gains/losses are recognized on the exchange. If neither asset’s fair value can be determined, then no gain or loss is recognized, and the new asset is recorded at the Book Value of the old asset plus cash paid or less cash received.
Determining gain or loss on the exchange
When the transaction has commercial substance, you treat it as if the asset was sold for its fair value.
Determining the value of the new asset
The rule is that the value assigned to the property received in the exchange is equal to the fair value given up. If no cash is involved then both parties value the incoming asset at the fair value of the asset they exchanged.
If cash is involved, then the giver of cash adds that to their fair value given up, and the receiver of cash subtracts the cash from their fair value given up.
J/E for the non monetary exchange
Equipment (received) Accumulated Depreciation Equipment (exchanged) Cash Gain on Exchange
Switch cash account depending on which side of the exchange you are on
Exchanged without commercial substance
If there is a loss, record the loss and then record the new asset at its fair value.
If there is a gain but no cash is received, then no gain is recognized, but you record the new asset at the BV of the asset exchanged + any cash you paid.
If there is a gain and you received cash, recognize the gain in proportion to the cash received and the new asset is recorded at FV less the unrecognized portion of the gain.
IF the proportion of cash received to total consideration is more than 25%, record the gain in full and the asset acquired at FV.
Assets held for sale criteria
Management has an active plan to sell the asset
The sale is highly probable within a year
The asset is available for sale in its current condition
The company is marketing the asset for sale
How are Assets being held for sale or disposal kept on the books
Lower of the carrying amount or the fair value less any costs to sell.
No longer depreciated once listed as held for sale and listed under “other assets” on the balance sheet and not included with PPE.
If carrying value is greater than fair value less costs to sell, then a write down of the value is performed and a loss is recognized.
Assets held for sale gain/loss
Fair value less cost to sell is the NRV
If CV > NRV then record a loss
If CV < NRV then record a gain but only to the extent of losses previously recognize on write-downs.
Assets to be disposed of other than a sale
Continue to treat as a regular asset
It’s depreciated like normal
Apply impairment if applicable
Depreciation methods
Non-accelerated methods
Straight line
Service hours method
Units of output
Accelerated methods
Sum of years digits
Double declining
Straight line depreciation
(Cost - salvage value) / number of years
Service hours method
(Cost - salvage / total service hours) * hours used
Units of output
(Cost - salvage / total units) * units produced
Sum of years digits
(# years remaining * (cost - salvage)) / sum of the years
Double declining
2 * straight line rate * (cost - acc depreciation)
Acquisition costs
Costs to acquire natural resources such as a land or a cost to lease a property
Exploration costs
Costs to locate the natural resources
Successful efforts
Only costs of successful exploration are capitalized. Unsuccessful are expensed
Full cost
All exploration costs are capitalized
Depletion
Allocation of the natural resource to inventory. Depletion is denoted to inventory and credited to a contra account for the natural resource asset.
Fixed Assets GAAP/IFRS Differences
Under GAAP, you cannot reverse impairment of assets. Under IFRS reversal of impairment is permitted if circumstances change but not on goodwill
Under IFRS, an annual review of the estimated useful life and depreciation method is required. Under GAAP this is only required if circumstances change or there is a reason to re-evaluate.
IFRS uses component depreciation: different components of an asset that has different useful lives should be depreciated by their respective useful lives
