Week 4 Flashcards
What is property, plant, and equipment?
Tangible items that:
- are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes
- are expected to be used during more than one period
When should cost of PPE be recognized?
- It’s probable that future economic benefits will flow to the company; and
- cost can be measured reliably
What is included in the initial cost of PPE?
- Purchase price (net of GST/HST, trade discounts, etc…)
- Directly attributable costs:
- Costs of bringing to current location and condition
- Initial delivery and handling costs
- Installation costs
- Professional fees (e.g., architect’s and legal fees)
- Testing costs (less net proceeds of sale of any products produced)
- Dismantling, removal and restoration for which there is an obligation when incurred.
Note: general overhead allocation is excluded from the cost base, as it not directly attributable to the PPE.
What are considerations for costing self-made assets?
- Profit element on internal labour should not be included
- Costs of abnormal amounts of wasted labour should not be included. Cost should be no more than fair value of the asset.
- Qualifying interest costs should be capitalized.
What are borrowing costs?
Interest and any other costs (such as arrangement fees) than an entity incurs in connection with the borrowing of funds.
- Borrowing costs need to be capitalized
When does capitalization end?
When it is ready for use, whether or not it is actually being used.
- Depreciation starts when it is ready for use.
What should not be capitalized?
- Administrative and general overheads
- For self-constructed assets: profit element on internal labour and costs of abnormal wasted material and labour
- Initial operating losses
- Relocation or reorganizing costs
Where is the cost of decommissioning recorded?
As a liability
- It is for the best estimate of the future obligation discounted by an appropriate interest rate the reflects the risk of the obligation.
With respect to decommissioning, what is different for ASPE?
- Obligation is refered to as an asset retirement obligation (ARO)
- Interest expense on the ARO is charged to accretion expense (rather tha interest expense)
- It is the best estimate of the expenditure required to settle the present obligation
What to do about bundled purchases?
Must allocate the purchase price to each asset based on its relative fair values.
How is PPE initially measured in a non-monetary exchange?
PPE acquired is normally measured at fair value unless the exchange lacks commercial substance.
- The cost is the FV of the asset given up (adjusted for cash paid or received)
- If no FV is available for the asset given up, then the cost of the new asset is the FV of the asset received.
- Any difference between the FV of assets exchanged results in a gain/loss being recognized.
When is there commercial substance?
The cash flows from the new asset differ from those of the old asset (in risk, timing, and amount)
If there is no commerical substance, how is PPE measured in an exchange?
The carrying value of what is given up is used.
- This also applies when there is no FV for either asset given up or the asset received (and there is commercial substance)
Are replacements and repairs capitalized or expensed?
- Replacements (day-to-day costs of maintaining) are expensed
- Repairs are capitalized (as long as recognition criteria is met)
What are the models for subsequent measurement of PPE?
- Cost model (more common): asset carried at its original cost less accumulated depreciation and any accumulated impairment losses.
- Revaluation model (not applicable for ASPE): asset carried at fair value at the revaluation date less subsequent accumulated depreciation less subsequent accumulated impairment losses.
What is the most commonly revaluated asset?
Land
How frequently are assets revaluated?
Depends on volatility of asset’s fair values.
How are revaluation gaines and losses handled?
Revaluation gains:
- First credit to profit or loss to the amount of cumulative losses previously charged; and
- Any remaining amount is credited to OCI
Revaluation losses:
- First debited to OCI to the extent of cumulative gains previously recognized; and
- Any remaining amount to profit or loss
Revaluation surplus in OCI may be transferred to retained earnings either systematically over live of asset or on derecognition.
What are the 2 methods of revaluation?
- Elimination method
- Removes the pre-valuation amounts for accumulated depreciation and replaces the pre-valuation gross cost with the new revaluated amount.
- Accumulated depreciation becomes nil at each time a revaluation is made.
- Proportional method
- Adjusts the cost and accumulated depreciation proportionally by the change in the revaluation amount so that the adjusted net book value is equal to the new revaluated amount.
Both methods will result in the same net book value being reported on the statement of financial position for the revaluted asset. The gain or loss will also be the same.
What is the impact of the timing in the year with respect to depreciation and revaluation?
- Start of year: revaluate and depreciate on revaluated amount
- End of year: depreciate for year on opening balance, then revaluate
- During the year: depreciate on opening amount to date of revaluation, then revalue and depreciate on revalued amount for remainder of year.
When can the transfer of revaluation surplus to retained earnings be done?
- The entire surplus can be transferred when the asset is derecognized; or
- Transfer a portion on an ongoing basis (amount is difference between the depreciation expense based on the revaluated carrying amount and the depreciation expense based on the original cost)
Notes p. 21
Does a transfer of revaluation surplus to retained earnings show up as a gain on the statement of comprehensive income?
No
The transfer is made directly and does not flow through profit or loss or in other comprehensive income.
What is the difference between deprecation, depletion, and amortization?
- Depreciation: for tangible assets other than natural resources
- Depletion: for tangible natural resources
- Amortization: for intangible assets
What is net book value?
Net book value is the original cost of an asset, less any accumulated depreciation, accumulated depletion, or accumulated amortization, and less any accumulated impairment.
What is fair value?
The price that two parties are willing to pay for an asset or liability, preferably in an active market.
What is depreciation?
The systematic allocation of the depreciable amount of an asset over its useful life.
- It is not an attempt to ensure that the asset is reported at its fair market value on the statement of financial position
What is residual value?
The estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, at the end of its useful life.
What is depreciable amount?
The cost (or revalued amount if using the revaluation model) less residual value.
What is useful life?
The period over which an asset is expected to be available for use or number of production units expected to be obtained from the asset.
When does deprectiation begin and end?
- Begins when asset is first available for its intended use.
- Ends at the earlier of when:
- Asset is fully depleted (e.g., when net book value equals residual value)
- Asset is classified as held for sale
- Asset is derecognized
- If a usage-based method of depreciation is used, depreciation can be suspended if there is no production.
