Property, Plant, and Equipment Flashcards
Self-constructed assets
Capitalize: direct material direct labor direct overhead variable overhead interest during construction
Capitalized interest
self-constructed assets
Interest cost incurred during the construction period for assets built for your OWN use, or for a discrete project for sale/lease (e.g. a ship, or real estate development)
Lower of:
- weighted average accumulated expenditure interest rate
- actual interest cost incurred
NOT capitalized:
- before start of construction
- after completion of construction
- amount borrowed in excess of actual expenditures
- during extraordinary or intentional construction delays
- on asset purchased
- on goods/inventory manufactured in OCB
Capitalized interest - steps
Calculate the average accumulated expenditures during the period. E.g. Y1 BB = 0, EB = 500; avg = 250
Multiply by the interest rate. If the period is not a full year, be sure to prorate.
Capitalize lower of actual interest rate payable/expense and the interest on the weighted expenditures. Balance of interest is expensed.
Basket purchase
Purchase of land and building together. Allocate basis between using relative fair value method.
Subsequent expenses
Expense: Normal costs to bring the asset back to original condition (normal operating condition).
- factory equipment: add to cogs
- office equipment: add to G&A
- selling equipment: add to selling exp
Capitalize: enhance quality or increase the life of the asset
- enhance quality: increase value of asset
- increase life: decrease A/D (A/D DR, cash CR)
Depreciation types
Straight line
- pro: consistent expense
- con: does not match actual use of asset (wear/tear)
Double declining balance
- pro: better matching of asset use (wear/tear)
- con: inconsistent expense
Sum of years of digits method Units of production method Group depreciation Composite depreciation Appraisal/inventory method
Double declining balance
DDB = [ (historical cost - A/D) / useful life ] X 2
To calculate the DDB % = (1 / useful life) X 2
salvage value is ignored in the calculation, but you never depreciate below than salvage value
Double declining balance - attributes
- depreciation base decreases as A/D increases with time
- depreciation rate is constant
- depreciation amount decreases as depreciation base decreases
- ignores salvage value in calc, but A/D never goes below salvage value
Sum of years of digits method
Sum of years of digits =
(historical cost - salvage value) X (# years remaining / sum of the years)
To calculate the annual depreciation % = # years remaining / sum of the years formula: n(n+1) / 2
example:
depreciable value 10,000 (12k cost - 2k salvage)
useful life 5 years
sum of years: 1+2+3+4+5 = 15 [5(5+1)] / 2
year 1 = 10k x 5/15 = 3,333
Units of production method
units of prod method =
(historical cost - salvage value) X (units produced in current year / total estimated units)
this is basically depletion
formula:
Component depreciation - IFRS mandatory
Separate components of a fixed asset with different estimated lives are recorded and depreciated separately
allocate the original cost to the various components and depreciate each one separately
Group depreciation
group/component depreciation
Collection of similar assets with same useful lives depreciated together
e.g. fleet of delivery vans
Composite depreciation
group/component depreciation
Collection of dissimilar assets with different useful lives depreciated together. e.g. building w/ furniture and electrical installations
On disposition, no gain or loss is recognized. A/D is reduced to the extent that the cost exceeds sale value
Composite depreciation - steps
1) calculate composite deprecation rate
calc Y1 SL dep of indiv assets; sum together
total Y1 SL dep of assets / total COST of assets
= composite depreciation rate
2) calculate composite depreciation life
sum the DEPRECIABLE base of all the assets
total dep base / total Y1 dep exp
= composite dep life
3) calculate depreciation expense
depreciation rate x total asset cost
4) depreciate the composite group over the composite dep life, using the composite rate
e. g. 12.15% for 7 years on 500k of assets
Appraisal or inventory method of depreciation
Under this method, asset value is estimated at year end. Depreciation expense is the difference between the carrying value and the estimated value at year-end.
Typically used for low-cost tangible assets
BB PPE + purchases - EB PPE = depreciation
Depletion
Used for natural resources like timber, minerals, petroleum
Capitalize:
purchase cost
developmental costs (exploring, drilling, evacuating) to
prepare the land for extraction
PV of anticipated restoration costs
less: residual value of the land after the resources
are extracted
Depletion = base x (units extracted / total expected recoverable units)
Depletion is allocated between units sold (COGS) and unsold (inventory)
Impairment
Fair value of the asset is less than the carrying value of the asset on the books. Then the asset is considered impaired. FV < CV = impaired
Only impair if decline is permanent (US GAAP)
Circumstances indicating impairment:
- decline in demand
- changes in technology
- net operating loss
- negative cash flow
- change in regulatory or legal environment
FV can be measured using market approach, income approach, or cost approach
Tangible assets - held for use
impairment US GAAP
Step 1) test for impairment
CV > non-discounted* future cash flows?
yes: impairment exists, proceed to step 2
no: no impairment
*non-discounted cash flows are always higher than discounted, so used as a proxy for FV in initial test for ease.
Step 2) calculate impairment loss
CV - FV (aka…DISCOUNTED future cash flows)
Impairment loss XXX
A/D XXX (OR)
Asset XXX
if impairment to life, book to A/D; if quality, book to asset
REVERSAL NOT ALLOWED
Tangible asset - held for sale
impairment US GAAP
Step 1) test for impairment
CV > net realizable value (FV - cost to sell)
yes: impairment exists, proceed to step 2
no: no impairment
Step 2) calculate impairment loss
CV - NRV
reversal allowed only to extent of previous write-downs
Impairment loss XXX
A/D XXX (OR)
Asset XXX
if impairment to life, book to A/D; if quality, book to asset
Impairment - IFRS
Calculate using one-step model
CV - recoverable amount = impairment
recoverable amount = higher of…
asset value if sold: NRV
asset value in use: PV future cash flows
reversal is allowed to extent of previously recognized impairments
Asset retirement obligation
“ARO”
Legal obligations associated with retirement of long-lived asset.
Recognize liability for ARO at FV or PV of expected future restoration cost using adjusted risk-free rate
Asset XXX (purchase + ARO)
Cash XXX (purchase price)
ARO XXX
Increase liability each year with accretion expense based on discount rate.
see example in fixed asset spreadsheet
Investment property
defined as property held to earn rental income, capital appreciation, or both
initially recorded at acquisition cost. can be subsequently reported using either cost model or fair value model (FV is IFRS only)
cost model: CV = historical cost - A/D - impairment
FV must be disclosed if cost model is used
FV model: report at FV; no depreciation (IFRS ONLY)
gains and losses from changes in FV of investment
property are reported on the income statement
asset 100
cash 100
asset 20
unrealized gain on asset 20
Fixed assets acquired by foreclosure
General fixed assets acquired by foreclosure are recorded at lower of:
1) amount due for taxes, assessments, penalties/int, forclosure costs
2) appraised fair market value
