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Chapter 10

RSM220H1 Chapter Notes - Chapter 10: Deferral, Cash Flow, Retained Earnings


Department
Rotman Commerce
Course Code
RSM220H1
Professor
Dragan Stojanovic
Chapter
10

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Chapter 10: Property, Plant and Equipment – Accounting Model Basics
March 17th 2014 (pgs624-651)
THE IMPORTANCE OF PROPERTY, PLANT AND EQUIPMENT FROM A BUSINESS PERSPECTIVE
Long lived assets allow manufacturers to produce goods & services
Too much investment in long lived assets = costly over capacity
Too little investment = lost opportunities for profits & future cash flows
Above situations cause lower rate of return
DEFINITION AND COST ELEMENTS
Property, Plant, and Equipment Assets
Aka tangible capital assets, plant assets, fixed assets
Depreciation used for amortization of PPE
Amortization used for intangibles
Depletion used for amortization of mineral resource properties
Amortization also can be used in general sense to refer to allocation of cost of any long lived asset to different
accounting period
PPE defined in IAS as:
oHeld for use in production of goods & services, for rental to others or for administrative purpose; not
intended for sale in ordinary course of business
oUsed over > 1 accounting period & are depreciated
oTangible
Inventory: multiple use, regularly used, replaced within accounting period
PPE: standby/servicing equipment used only with specific asset, useful for >1 periods
Biological assets are PPE
Recognition Principle
Can be recognized as PPE if it meets definition of PPE and:
oIf probable that item’s future economic benefits will flow to entity
oCost can be reliably measured
If all requirements met, item is capitalized (included in asset’s cost & recognized as PPE)
If requirements not met, recognized as expenses
Asset Components
Unit of measure issue: when recognition clear, standards do not specify what level of asset should be recognized
Degree of componentization is up to judgement
Must consider significance of the individual parts to whole asset
Consider:
oWhether items have differing useful lives
oDifferent patterns of delivering economic benefits
Cost Elements
Cost of PPE includes expenses to acquire asset, bring it to its location, make it ready for use, and disposal
Costs not capitalized: operating losses, costs of training employees, costs associated with reorganization of
operations, general OH

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Self-Constructed Assets
Manufactured inventories require that a portion of all production OH costs be applied to an inventory asset
Only directly attributable costs are capitalized, no fixed OH is capitalized
Borrowing Costs
Borrowing costs requires capitalization of avoidable borrowing costs that are directly attributable to the cost of
acquiring, constructing, or producing qualifying assets that take a substantial period of time to get ready for use,
added to PPE
ASPE allows management to choose between capitalizing interest or expensing costs
Dismantling and Restoration Costs
In order to use a long lived asset, companies must assume responsibility for costs associated with dismantling
item, removing it, restoring the site at end of useful life
Asset retirement costs use recognition criteria for capitalization, are added toe PPE asset cost
MEASUREMENT OF COST
Generally measured by amount of cash or cash equivalents paid or FV of other consideration given to acquire an
asset when it is acquired
Determining Asset Cost when Cash Is Not Exchanged at Acquisition
Cost is cash cost when recognized
Next paragraphs discuss how several common issues are resolved when cash is not exchanged at date of
acquisition (all bolded & in italics)

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Cash Discounts
If discount taken, reduction in assets purchase price; not recognized as purchase discount
Purchase discounts relate to inventory purchases that are included in COGS
Issue: should assets cost be reduced when discount is not taken?  two views
1) Net-of-discount amount is considered assets cost regardless of whether discount is taken
Asset’s cost = cash/cash equivalent price
If discount is lost, the cost of not paying it at an earlier date should be recognized according
to its nature as financing or interest expense
2) Discount should not always be deducted from assets costs
Terms may be unfavourable because it might not be prudent for company to take discounts
Recognition of asset at its lower cash cost is preferred on conceptual grounds
Deferred Payment Terms
The cost of an asset whose payment is deferred beyond normal credit terms is its cash equivalent price
Fair value – total payments = interest
Asset’s cost is PV of consideration that is exchanged on transaction date
i.e. equipment bought in exchange for $10k non-interest bearing note to be paid 4 years from now is recorded at
10k b/c 5 years exceeds normal credit terms
when no interest stated, or specified rate unreasonable, appropriate rate is imputed
objective is to approximate interest rate that buyer & seller would negotiate in similar arms length borrowing
transaction
Lump-Sum Purchases
Occurs when cost of specific capital assets are purchased together for 1 price
To determine individual FV of parts making up purchase the following might be used:
oAppraisal for insurance purposes
oAssessed valuation for property taxes
oEstimates of replacement costs
oIndependent appraisal by engineer or someone else
Asset’s carrying amounts on seller’s books are irrelevant
Nonmonetary Exchanges
Share Base Payments
Issue: measure at cost or fair value of shares given up, or measure at FV of assets acquired?
IFRS 2:
oFV of asset acquired should be used to measure its acquisition costs
oIf FV cannot be determined reliably, then FV and cost are determined by using FV of shares given
exchange
oFV of shares are widely traded, the FV is good indication of current cash equivalent price of PPE acquired
ASPE
oFlexible
oOnly reliable of the FV of goods received or equity instruments given up is asset cost
oAsset FV is more likely to be used
Asset Exchanges
When nonmonetary assets i.e. PPE are acquired for cash/ other monetary assets, the cost of the acquired asset is
measured at FV ( PV) of cash or other monetary assets that are given up
Monetary assets: money/claims to future receipts that are fixed or determinable in amount and timing i.e. A/R,
N/R
Nonmonetary assets: assets that are not claims to fixed or determinable cash flows i.e. inventory, long lived plant
assets
When nonmonetary assets i.e. PPE are disposed of and company received monetary assets in exchange, gain/loss
on disposal is recognized in income
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