Far 2-Property, Plant and Equipment(PP&E)
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what makes assets part of PP&E?
PP&E are tangible assets acquired for long-term use in the normal course of business. They are not for resale and are generally subject to depreciation. General entry is as follows:
What costs are included in the asset when its part of PP&E?
- the acquisition costs(intended use)- include all costs of acquisition or construction as well as preparation for use. These include:
- -purchase price
- -legal fees
- -delinquent taxes
- -title insurance
- -transportation(freight in)
- -test runs
- -sales taxes
whats included in the cost of land?
- the cost of land includes:
- -purchase price(including any existing building that is to be demolished)
- -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.
When looking at these factors these are included in cost of land. Look to the example above.
What happens when you have a lump sum purchases with land and a building?
So if acquire land and building for lump sum, use the relative fair value method to allocate the value between both assets. For example,
If property is acquired for $600,000 and the only available info to allocate is the tax appraisal, which allocates $100,000 to the land and $400,000 to the building, for a total of $500,000 tax value. Then the cost of the property will be allocated 100,000/500,000, or 20% to land, and 400,000/500,000, or 80% to building. The entry to record acquisition of the property is:
- Land 120,000
- Building 480,000
- Cash 600,000
What is an asset retirement obligation? and how are they accounted for?
- pursuant to ASC 410, asset retirement obligations, such as estimated restoration costs, that are expected to be paid at the end of the period of use, should be recorded as a liability at its fair value market, which is the amount at which the obligation could be settled today. If this cannot be determined, estimates should be made based on the present value of the expected future cost. The liability will have to be increased each year based on the discount rate and reported as accreating expense(form of interest). The liability is considered long term and is amortized using the effective interest method. Recognize at either:
- 1. FV of Liability or
- 2. Present Value of estimated future restoration costs using credit adjusted risk free rate.
what is capitalization of interest(ASC 835) and when is capitalization of interest method used?and how are they accounted for?
When looking at capitalization of interest. Interest cost incurred during the construction period needs to be capitalized. The amount capitalized is considered the avoidable interest had the building not been built. This amount is added to the cost building the asset.
Make sure to include interest incurred on construction loans, but only to the extent the funds have been spent on construction:
- -Capitalize interest cost if asset is:
- -construction for company's own use
- -assets manufact for resale for order
- -Do no capitalize interst if:
- -Costs after completion of construction
- -Inventory manufact in ordinary business.
- -Amount to be capitalized is:
- -Weighted avg accumulated expenditures x interest rate = Capitalization portion. -Interest on other debt that could have been avoided by repayment of debt.
- -Never exceed actual interest cost.
- For Example look below.
- Calculation is below:
- Annual Expenditure 600,000
- Prorated over year x 50%
- Avg current expenditure = 300,000
- Prior year spending +200,000
- Avg Accumulated Expenditures= 500,000
- Interest Rate x 50%
- Capitalization of Interest=250,000
- Journal entry below
- Building 250,000(cap of interest)
- Interest exp. 150,000(plug)
- Cash 400,000
what are the types of costs incurred after acquisition and how are costs incurred after acquisition accounted for?
1. Repairs and maintenance expense- costs incurred to keep or restore and asset to its normal operation are expensed normally. for example journal entry
2. Bigger-additions, new capacity, new functions. Journal entries
3. Better-improving efficiency, such as a rearrangement or improving floor in place ect. journal entries
4. Longer-extension of the assets useful life. Costs should be extended by attacking accumulated depreciation. journal entries
- Accumulated Depreciation x
- Cash x
What are the depreciation methods and how are they used to calculated depreciation expense?
the depreciation methods are as follows:
- 1. Straight-line depreciation:
- -used when assets give equal benefits to the company throughout their useful lives. Ex. A building Calculation is:
(Cost-Salvage value)/useful life = Dep Exp.
- Journal Entry:
- Depreciation expense x
- Accumulated Depreciation x
- 2. Sum of Years Digits
- -an accelerated depreciation method that is considered less aggressive that double declining balance. Calculation is:
(Cost-Salvage Value) x (number of years left in assets life/sum of years) = Dep Exp.
*Sum of years = n(n+1)/2
- 3. Double Declining balance
- -Salvage value ignored.
- -a depreciation rate that is twice at the rate of straightline
- -depreciation expense reduces the amount depreciated next year. Calculation is:
Cost/useful life x 2 = depreciation exp.
- 4. Units of production
- -assumes depreciation is a function of use such as hours for machines. Calculation is:
(Cost-Salvage Value) x (hours this year/total estimated hours) = depreciation expense
what happens when we depreciate as a group?
depreciation as a group, means that we don't known accumulated depreciation so when we sell an asset we have to use this as a plug and no loss or gain can occur. Journal entry below:
- Cash x(assume CV)
- Accum. Dep. x(plug)
- Asset x(initial cost of asset)
what is impairment and how do we impair long-lived assets HELD FOR USE?
- Impairment occurs when the carrying value of the asset is not recoverable and a write-off is needed. Several factors can cause impairments such as the following:
- -a significant decrease in the market value of asset
- -a significant change in the extent or manner in which an asset is used.
- -a significant adverse change in legal factors or in the business climate that affects its value
- The process for determining an impairment loss for HELD FOR USE assets is as follows:
- 1. Review events causing the possible impairment.
- 2. Compare the CV vs Expected future net cash flows and if CV is greater then we have an impairment.
- 3. Next we compare CV vs FV of asset to get impairment amount. The asset is written down to FV. journal entry is as follows:
- Loss x
- Accumulated Depreciation x
how do we account for the impairment of long lived assets HELD FOR SALE?
A HELD FOR SALE asset is one that a company decides to get rid of and will sell in the future.
If assets are intended to be disposed of in a future reporting period rather than held for use, a loss is recognized if the NRV is less than the CV.
After distinguishing a loss has occurred, now need to write down asset to the lower of CV or NRV(FV-costs to sell). The loss will be recognized in the Continuing Operations section of the I/S. These assets also should not be depreciated during the period held because they are for sale. Since the asset cost will be recovered through sale rather than through operations they are continually revalued. Journal entry is as follows:
- Loss x
- Accumulated Depreciation x
how do we account for disposal of fixed assets?
when a company disposes of a fixed asset, they will normally remove the original cost and depreciation, and record a gain/loss difference. example below
For example, if a client owns a machine with a cost of 10,000 and a carrying value of 3,000 and it is sold for 2,500 cash, the entry is:
- Cash 2,500
- Accumulated Dep. 7,000
- Loss 500
- Equipment 10,000
*G/L go to nonoperations section of I/S
what is a involuntary conversion and how do we account for them?
involuntary conversion includes destruction of property as well as government takeover. So u don't voluntary sell asset they are taken from you. The accounting for these is identical to voluntary sales. Journal entry below:
- Due from Insurance 1,200,000
- Accumulated Dep. 225,000
- Warehouse 1,000,000
- Cash 20,000
- Gain 405,000
*gain/loss goes to Nonoperations section of I/S.
What are NONMONETARY exchanges and how do we account for them?
The most complicated disposal is nonmonetary exchanges which are disposals of property for property. So essentially trade an asset for another asset. ASC 845 provides input on what to do when we have nonmonetary exchanges. There are two types of exhanges ones with commercial substance and those without.
- Exchanges with commercial substance:
- -Recognize all gains and losses
- -Record new asset at FV. If know number 1 use it to record asset value, if not use 2, and if not again use 3.
- 1. FMV given up + cash paid
- 2. FMV received
- 3. BV given up + cash paid
- Journal entry is the following:
- New asset 30(at one of 3 above)
- Old asset 15
- Cash 10
- Gain 5
Exchanges that lack commercial substance: commercial substance is when you trade assets it will change the risk, timing, and/or amount of cash flows. Most cases will have commercial substance, however, if none of these factors are changed, then we lack commercial substance. and we use the same 3 rules above however, we take the lowest number to value the new asset. Journal entry below:
- New Asset 25(lowest of 1,2,3)
- Old Asset 15
- Cash 10
*notice no gain was recognized as is the case unless boot is received then we can recognize some if not all the gain. So if we receive cash and its less than 25% of consideration received then we recognize gain using ratio of boot to total consideration. If more than 25% is received in cash then the whole gain is recognized.
- Example below:
- FV Received 8,000
- +Cash Received 2,000
- =Total Consideration 10,000
- -BV given up 6,000
- =Gain 4,000
- So we have a 2,000/10,000 = 20% so we recognize 20% of gain. that is
- -4,000 x 20% = 800
- Now our journal entry looks different.
- New asset 4,800(plug)
- Cash 2,000
- Old 6,000
- Gain 800
how do we account for PP&E under IFRS?
PP&E are initially recorded at cost with all costs of getting the asset ready for intended use just like GAAP, however, they are subsequently measured using either the cost method or revaluation method.
Cost Model(CM)-Provides that the asset is carried at cost less an accumulated depreciation and less and accumulated impairment loss.
Revaluation Model(RM)- The carrying amount of the asset is the fair value at date of revaluation less any subsequent accumulated depreciation and less any impairments that have taken place. When revaluations take place a revaluation surplus account is debited or credited and this goes directly under OCI. As part of DENT-R. Now when the asset is sold or disposed of and balance in the revaluation surplus account is transferred directly to R/E.
how do we account for Investment Property under IFRS?
Investment property is defined as property held for earn rentals, for capital appreciation or both. Investment property can't be held for sale in normal course of business. Also property under construction doesn't qualify as Investment property.
Investment property is measured at cost initially. The property investment can be measured under 2 methods.
1. Cost Method(CM)-Requires investment property to be carried on the B/S at cost less accumulated depreciation and less impairments recorded. under this method the FV of the asset must be disclosed in the notes of the company.
2. Fair Value Model(FVM)- Changes in fair value are recognized in the profit and loss in the period of the change. under this method no depreciation is recorded.
how are intangible assets accounted for under IFRS?
- Intangibles are categorized as either identifiable or unidentifiable. Identifiable intangibles assets(patents, copyrights, customer list, brand name, ect) must meet one of the two criteria:
- 1. Based on contractual or legal rights or
- 2. it can be separated from the entity and sold transferred, licensed, rented, or exchanged.
- While looking at R&D under IFRS. Research is never capitalized, however, development can be capitalized if they meet the following 6 criteria are met:
- 1. Tech feasibility or completing asset for use or sale has been achieved.
- 2. The entity intends to complete and use or sell the asset.
- 3. the entity has the ability to use or sell the asset.
- 4. the entity understands how the asset will generate probable future economic beneifits.
- 5. technical, financial, and other resources are available to complete development of the asset.
- 6. the entity has the ability to reliably measure the expenditures.
Intangibles may use the CM method or RM method. If RM is used then revalution surplus to OCI as usual.
Impairment testing under IFRS?
Basically when looking at impairments surrounding IFRS, we look at the CV vs NRV. if the CV is less than NRV(FV-costs to sell) then impairment occurred and write the asset down. However, just cause the asset is written down doesn't mean it has to stay that way they can be written up under IFRS as opposed to GAAP.
what are biological assets under IFRS?
Biological assets(living animals or plants) and agricultural assets(harvested product) must be disclosed as a separate item on the B/S. Both are recognized when:
- 1. Control: the entity controls the asset.
- 2. Future economic benefits: it is probable to receive future economic benefits
- 3. Measurement: fair value or cost of the asset can be reliably measured.
Biological assets are measured at fair value minus estimated costs to sale(NRV), And agricultural measured at fair value less costs to sell(NRV).
How are non-monetary exchanges measured under IFRS?
they are measured the same as GAAP refer to the GAAP flashcard.
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