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Chapter 10

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 10: Indirect Costs, European Cooperation In Science And Technology, Income Approach

Management and Organizational Studies
Course Code
MOS 3360A/B
Stacey Hann

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Chapter 10 Property, Plant, and Equipment
Property, Plant, and Equipment (PPE) Characteristics
PPE include long term resources such as office, factory, and warehouse buildings,
investment property, equipment (including machinery, furniture, and tools) and mineral
resource properties
PPE are commonly referred to as tangible capital assets, plant assets, or fixed assets
The term amortization may be used in a general sense to refer to the allocation of the cost
of any long-lived asset to different accounting periods
Characteristics include:
1. They are held for use in the production of goods and services
2. They are used over more than one accounting period
3. They are tangible
Recognition principle
1. It is probable that the item’s associated future economic benefits will flow to the
2. Its cost can be measured reliably
o If both items are met, the item is capitalized and recognized as a PPE asset
o If costs are incurred but recognition criteria are not met, the costs are recognized
as an expense
This is referred to as a unit of measure issue
o The degree of componentization is left up to professional judgment
A primary consideration is the significance of the individual parts to the
“whole” asset
Cost all expenditures needed to acquire an item of property, plant, and equipment and
bring it to its location and ready it for use
Costs that are capitalized include:
o The item’s purchase price net of trade discounts and rebates, plus any non-
refundable purchase taxes and duties
o The expenditures necessary to bring the asset to its required location and
condition to operate as management intended
o The estimate of the cost of obligations associated with the assets eventual disposal
Costs that are not capitalized as a part of PPE asset include initial operating losses, the
costs of training employees to use the asset, costs associated with a reorganization of
operations, administrative costs and general overhead costs, the cost of opening a new
facility, introducing a new product or service, and operating in a new location
Self-Constructed Assets
Self-constructed assets assets built by a company and assigned all relevant costs to be
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Without a firm purchase or contract price, the company has to review numerous
expenditures that were incurred to arrive at its cost
Indirect costs, called overhead or burden, include power, heat, light, insurance, property
taxes on factory buildings and equipment, factory supervisory labour, depreciation of
fixed assets, and supplies
Only directly attributable costs costs directly related to the specific activities involved
in the construction process are capitalized
o NO fixed overhead is usually charged to the PPE asset account
Borrowing Costs
Dismantling and Restoration Cost
o In order to be able to use the long-lived asset, companies often assume
responsibility for the costs associated with dismantling the item, removing it, and
restoring the site at the end of its useful life
o Asset retirement costs costs recognized at the same time that the liability
associated with the retirement of an asset is recognized
o Under both ASPE and IFRS, the original cost estimates and any changes in them
are capitalized in the asset account and a credit is made to an asset retirement or
restoration liability
Determining Asset Cost When Cash is Not Exchange at Acquisition
Cost is the cash cost when an asset is recognized not always so obvious
Cash Discounts
o Under one approach, the net-of-discount amount is considered the asset’s cost,
regardless of whether the discount is taken or not
The discount, it if not lost, is the cost of not paying at an earlier date and
should be recognized according to its nature as a financing or interest
o Under the other approach, supporters argue that the discounts should not always
by deducted from the asset’s cost because the terms may be unfavourable or
because it might not be prudent for the company to take the discount
Deferred Payment Terms
o The cost of an asset whose payment is deferred beyond normal credit terms is its
cash price equivalent
o Any difference between this fair value and the total payments made is recognized
as interest
o That is, the assets cost is the present value of the consideration that is exchanged
at the transaction date
Lump-Sum Purchase
o Lump-sum price the price paid when several assets are purchased together for
a single price
o When this occurs, and it is not at all unusual, the practice is to allocate the total
cost among the various assets based on their relative fair value
o The assumption is that costs will vary in direct proportion to those values
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