Section 8 - Property, Plant & Equipment Flashcards
What are characteristics of “fixed assets” aka PPE?
- fixed assets acquired for use in operations and not for resale
- long term in nature and subject to depreciation
- tangible and physical substance
What are included in “fixed assets” aka PPE?
- Land (property)
- Buildings (plant)
- Equipment
**accumulated depreciation is a “contra-asset” account on the B/S related to PPE
What are acquisition costs included with equipment to get it into “working condition” and ready for use that should be capitalized?
- PURCHASE PRICE + liabilities assumes
- shipping/transportation (freight in)
- legal fees
- insurance (title)
- installation
- taxes (sales, delinquent)
- testing/test runs
- construction loan interest
What are the costs included with land?
- purchase price (include existing building that is to be demolished)
- title and county fees
- surveying
- clearing, grading, and landscaping
- costs of razing or demolishing an old building
- proceeds from any sale of any scrap (old bricks) are subtracted from the land cost
***Capitalized land costs are NOT depreciated
What are Asset Retirement Obligations (ARO) recognized at?
Fair value of liability
OR
PRESENT VALUE of estimated future restoration costs using credit adjusted risk-free rate
What is ARO - estimated restoration costs classified as?
Long-term liabilities
What type of interest can be capitalized?
Construction loans for company’s own use (build by self or outside) on money actually spent and not the entire borrowed amount
**do not capitalized interest if costs are incurred after completion of construction
What is the amount of capitalized interest the lower of?
1) actual interest cost incurred
OR
2) computed capitalized interest (avoidable interest)
What are the three types of cost you can capitalized with the asset after you have acquired it?
If cost makes asset..
BIGGER - additions, new capacity, new functions (new hospital wing)
BETTER - improving efficiency (betterment/improvement), such as a rearrangement or improving a concrete floor
LONGER - extension of an asset’s useful life
JE for BIGGER and BETTER
Asset XXX
Cash XXX
JE for LONGER
Accumulated depreciation XXX
Cash XXX
What concept does the depreciation method address?
Matching concept
What are the four depreciation methods?
1) straight-line method (S/L)
2) sum of the years digits (SYD)
3) double declining balance
4) units of production (UOP) Activity Method
How do you calculate depreciation using the straight-line method?
(Cost - salvage value) / useful life = depreciation expense
JE depreciation expense (I/S) accumulated depreciation (B/S contra account)
- used when assets give equal benefits to the company throughout their useful lives
- depreciation expense is the SAME each year
How do you calculate Sum of the Years Digits (SYD)?
(Cost - salvage value) * # of years left in asset’s life/ sum of years in asset’s life = depreciation expense
Sum of years in asset’s life formula = N(N+1)/2
N is estimated useful life
How do you calculate double declining balance (DDB)?
Year 1
Cost* (1/ # of years) * 2.0 = year 1 depreciation expense
Year 2
(cost - year 1 depreciation expense) * (%) = year 2 depreciation expense
- IGNORE salvage value
- depreciation expense should not be reduced below salvage value
- switch from DDB to SL method in the last year
How do you calculate Units of Production (UOP) Activity Method?
(Cost - Salvage Value) * (hours this year/total estimated hours) = depreciation expense
What are the benefits of the accelerated methods (DDB and SYD)?
- better MATCHING since assets is more productive in earlier years
- minimize loss due to OBSOLESCENCE
- helps to even out expenses. repairs and maintenance lower in earlier years, taking out depreciation early on helps keep total expenses more constant over time
What is partial year depreciation?
When an asset is placed in service during the year, the depreciation expense is taken only for the portion of the year that the asset was used.
How do you calculate depletion in natural resources property?
(depletion base/total volume at beginning of year)*units extracted = depletion
How do you determine impairment loss on assets held for use?
1) expected future net cash flows
How to determine “fair value” for exchanges with commercial substance (nonmonetary exchanges - asset for asset)?
- recognize ALL gains and losses
- record new asset at FMV. determine by first step below. then move on to step 2 if step 1 info not available
1) FMV given up + cash paid (-cash received)
2) FMV of asset received
3) BV given up + cash paid (-cash received)
-Cash flow is DIFFERENT aka has commercial substance
IFRS characterize as “DISSIMILAR”
How to determine “fair value” for exchanges LACKING commercial substance (nonmonetary exchanges - asset for asset)?
- recognize all losses
- defer all gains unless boot (cash) is RECEIVED
- record at lower of:
1) FMV given up + cash paid (-cash received)
2) FMV of asset received
3) BV given up + cash paid (-cash received)
-lacking substance also means “cash flow NOT significantly different”
IFRS characterize as “SIMILAR”
What is PPE valuation under IFRS?
Use one of two options
1) Cost Model
Asset carried at Cost less Accumulated Depreciation and Impairment Loss
2) Revaluation Model
What is the Revaluation Model under IFRS?
- Asset is adjusted to FV less accumulated depreciation
- increases in value prior to any decreases from adjustment are reported in current period as OCI
- decreases in value first offset cumulative amounts of increase in OCI with excess reported in income
- asset must be able to be reliably measured
- must be applied to whole class of assets, not just one asset
- no guidance on how often assets should be revalued under IFRS
How are impairment loss recognized under IFRS?
Cost Method - loss is recognized immediately in profit or loss
Revaluation Method - loss is a revaluation decrease
