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Chapter 10

RSM220H1 Chapter Notes - Chapter 10: Book Value, Capital Asset, European Cooperation In Science And Technology

Rotman Commerce
Course Code
Dragan Stojanovic

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Chapter 10: PPE: Accounting Model Basics
PPE is also called tangible capital assets, plant assets, or fixed assets include
o Long term resources such as
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
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;
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

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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
o Expenditures necessary
Employee costs
Site preparation
Installation ….
o Est of the costs of disposal
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

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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
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
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
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
Measurement of Cost
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