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ACCO 310 NOTES_Chapters 10_11_12_Part 1.docx

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ACCO 310
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ACCO 310 Notes Chapters 10 1112Part I Acquisition or Construction of Longlived Assets Initial RecognitionPertains toProperty PlantEquipment IFRS and ASPEInvestment Property IFRSBiological Assets IFRSIntangible Assets IFRS and ASPEGoodwill IFRS and ASPENB As you read these pages remember the FAIR VALUE CAPIN NO INSTANCE SHOULD AN ASSET EVER BE ON THE BOOKS HIGHER THAN ITS FAIR VALUE Judgement callIn practice the decision to capitalize or expense is a matter of judgement Ethical issues may ariseCompanies who have cash flow prediction as a major reporting objective may opt to expense as much as possible that way net income will be closer to cash flows Section I Acquisition Construction of Tangible Assets PPE Investment Properties and Biological AssetsINITIAL RecognitionGeneral Recognition PrincipleProperty plant and equipment are defined as tangible items that IAS166Are held for use in the production or supply of goods and services for rental to others or for administrative purposes andAre expected to be used during more than one periodThe general recognition principle applies tothe initial recognition of an assetwhen parts of that asset are replaced andWhen costs are incurred relative to that asset during its useful life The standard does not distinguish between costs capitalized atzed postacquisition acquisition and costscapitaliIt specifies that the cost of an item of property plant and equipment shall be rcognized as an easset if and only if IAS 167aIt is probable that future economic benefits associated with the item will flow to the entity and1bThe cost of the item can be measured reliablyAssets acquired for safety or environmental reasons should be capitalized as property plant and equipment even though these do not meet the strict general recognition principle This is because these expenditures have to be incurred in order for the productive assets to generate future benefits IAS 1611Capital assets should be recorded at cost Cost should be interpreted fairly broadly and is meant to include all costs incurred in order to put the asset to productive use For example this would include in addition to the cost of acquiring the asset freight installation costs and testing of equipmentInitial RecognitionGeneral rule Value at cost on acquisition This will usually equal fair value at acquisitionThere are three components of the initial cost of an asset1The purchase pricethe amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire the asset If the asset is acquired in exchange for a note payable the asset is recorded at the present value of the note Purchases of groups of assets are allocated to the assets based on their relative fair market values2Directly attributable coststhese are defined as costs necessary to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management IAS 1616bExamples of directly attributable costs IAS 1617Costs of employee benefits arising from the construction or acquisition of the item of property plant and equipmentCosts of site preparationInitial delivery and handling costsInstallation and assembly costsCosts of testing whether the asset is functioning properlyProfessional feesDecommissioning Retirement Costssee in class discussionMandatory environmentalsafety costsMAJOR InspectionsOverhaulsNote the use of the words necessary which implies that in order to be capitalized these costs could not have been avoided An additional cost that can be capitalized is borrowing costs This is discussed further in this sectionThe following costs are specifically excluded IAS 1619 and 1620Costs of opening a new facility such as an open house These costs are incurred after the asset is capable of being used2
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