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RSM220H1 (54)
Chapter 10

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University of Toronto St. George
Rotman Commerce
Dragan Stojanovic

Chapter 10: PPE: Accounting Model Basics RECOGNITION AND COST ELEMENTS  PPE is also called tangible capital assets, plant assets, or fixed assets include o Long term resources such as  Office  Factor  Warehouse buildings  Investment property  Equipment (machinery, furniture, tools)  Mineral resource properties o Under IFRS;  Depreciation is used to refer to Amortization of PPE  Depletion for the amortization of mineral resource properties  Amortization is used for intangibles  Term may be used in general sense to refer to the allocation of the cost of any long lived asset to diff acc periods o PPE is defined as  Held for use in the production of goods and services, for rental to others, or for admin purposes  Not intended for sale  Are used over more than one accounting period and depreciated usually  Are intangible o Diff btwn inv and PPE  If multiple and regular usage; inv  Used only w specific capital asset and useful for more than one period; PPE o Biological assets  Under GAAP = PPE  Under IFRS= specific standard  IAS 41 agriculture Recognition Principle  Assuming the item meets definition of PPE o Accounting standards require that the following 2 reco criteria be met  It is probable that the items associated future economic benefits will flow to the entity  Its cost can be measured reliably  If both met, item is capitalized (included in the assets cost) and reco as PPE asset  If not met, then its an exp o Costs are considered PPE if they are required in order to obtain the economic benefits from other assets Asset Components  Standards do not specify what level of asset should be reco; unit of measure issue o Left to pro judgment  Consideration is the  Significance of the individual parts to the whole asset  Differing useful lives  Diff patterns of delivering economic benefits o Etc Cost Elements  Cost of PPE includes o All expenditures needed to acquire the asset and bring it to its location and ready it for use  Costs capitalized include o Purchase price (net of any discounts, rebates, plus non-refundable taxes and duties) o Expenditures necessary  Employee costs  Delivery  Site preparation  Installation …. o Est of the costs of disposal  Decommissioning  Site restoration, etc  Costs not included o Initial operating losses o Costs of training employees to use the asset o Reorganization of operations o Operating in new location, etc Self-Constructed Assets  Have to review numerous expenditures that were incurred to arrive at its cost  Only directly attributable costs are capitalized o No fixed OH Borrowing Costs  Considers any avoidable borrowing costs to be added to cost of PPE Dismantling and Restoration Costs  These asset retirement costs meet the reco criteria for capitalization and are added to the PPE asset cost  Because wont be incurred for long time, asset measured using PV of future costs  Under IFRS o Reco costs of both legal and constructive obligations o Costs include only those related to the acquisition of asset (not use)  Under GAAP o Reco costs associated with legal obligations only o Costs include both retirement obligations resulting from acquisition and its use Measurement of Cost  Cost is measured by o Amount of cash or cash equivalents paid or o The FV of the other consideration given to acquire an asset when it is acquired  Cost = cash cost when asset is reco  Issue when cash is not exchanged at date of acquisition: A- F A) Cash Discounts  If discount is taken it is a reduction in purchase price o If not,  Reco of asset at its lower “cash cost” is preferred  Can either consider the cost to be net of discount amount  Or not deduct discount B) Deferred Payment Terms  Cost of an asset whose payment is deferred beyond normal credit terms is its cash price equivalent  Cost is the PV of the consideration that is exchanged at the transaction date o E.g. Price = 10,000  4 years note  Interest is 12%  (1.12)^ -4 = .63552 o 0.63552 x 10000 = $6355.20  this is the recognized cost  If installment payments, do it bit by bit (1.1^ -5, 1.1^ -4…)  The difference btwn cost and cash that is eventually payable is the discount or interest  To figure out interest exp at end of year; multiply cost by the interest rate o Next years is the carrying amount x interest  CA: cost + interest exp – installment payment  If interest not taken into account, then asset recorded at amount higher than FV C) Lump-Sum Purchases  Allocate the total cost among the various assets based on their FVs o To determine FV can use  An appraisal for insurance purposes  Assessed valuation for property taxes  Estimates of replacement costs o Carrying amount on books are irrelevant bc not rep of FVs D) Non-Monetary Exchanges – Share-based payment o IFRS: the FV of the asset acquired should be used to measure its acquisition cost o GAAP: more flexible, the more reliable of the FV of the goods received or the entity instruments given up is the asset cost E) Non-Monetary Exchanges – Asset Exchanges o When nonmonetary assets like PPE are acquired for cash or other monetary asses, the cost of the acquired asset is measured by the FV (PV) of the cash or other monetary assets that are given up  Monetary assets are money or claims to  Future cash receipts that are fixed or determinable in amount and  Timing  Non monetary assets are assets that are not claims to fixed or determinable cash flows  E.gs inventory, long lived plant assets, equity investments in other companies o When disposed and company receives monetary assets in exchange  A gain/loss on disposal is reco in income o When nonmonetary asset is exchanged for a new nonmonetary asset like PPE;  Reco losses in all cases but defer gains o General principle – the FV standard  Nonmonetary exchanges are measured at FV, unless one of the following is true 1) The transactions lacks commercial substance 2) FVs are not reliably measureable  In these situations, exchange is recorded at the carrying amount of the assets given up (including cash or other monetary assets) o Commercial substance: entity derecognizes the carrying value of the assets given up, reco the FV of the assets received in exchange, and the reports the diff (g/l) in NI o This term means that there is a significant change in the company’s expected future cash flows and therefore its value o Exchange transactions has commercial substance if  The amount, timing, or risk of future cash flows associated w received assets is diff from ones given up  Specific value of the part affected by the transaction has changed as a result  Must be signi relative to the FVs of exchanged assets o Ability to measure FV: if cant reliably measure, then cant record o Acquired asset cannot be reco at more than its FV  Does the exchange meet both^? o Yes  Apply FV standard  Cost of assets received = FV of what is given up, or what is acquired  Difference btwn carrying amount and FV of assets given up is reco in income as a gain/loss o No  Exception to the FV standard  Cost of assets received = carrying amount of assets given up  No gain is reco; loss is reco if FV of assets received is less than the carrying amount o
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