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Business Perspective - Property Plant and Equipment

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Linda Batch

on 15 June 2015

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Transcript of Business Perspective - Property Plant and Equipment

Intermediate Accounting 2
Deeper Dive into Property Plant and Equipment

May be referred to as:
Tangible Capital Assets,
Plant Assets, or
Fixed Assets
Depreciation - Amortization of PPE
IAS 16 and CICA Section 3061
Held for use in the production of goods and services
Capital Assets vs. Supplies or Inventory
Business Perspective - Property Plant and Equipment
Too much investment - lost opportunities
Too little investment - lower returns
Government - Public Sector
Industry - Private Sector
Depletion - Amortization of mineral products, or renewable assets such as trees
Amorization - General term used to refer to the allocation of costs to specific accounting periods or is used for intangible assets
Used in more than one accounting period
They are tangible
Biological Assets
Componentization of Assets
Cost Elements
Self-Constructed Assets
Borrowing Costs
Dismantling and Resortation Costs
Measurement of Cost
Cash Discounts
Deferred Payment Terms
Lump Sum Purchases
Non-Monetary Exchanges
Contributed Assets and Government Grants
Costs Associated
with Specific Assets
Leasehold Improvements
Investment Property
Natural Resource Property
Biological Asset
- purchase price,
- closing costs
- title, legal fees, recording fees
- costs incurred to condition the land for its intended use such as grading, filling, draining, clearing
- costs of liens, taxes in arrears, mortgages, incumberances on the property
- any additional land improvements that have indefinite life
- special amounts for local improvement such as pavements, street lamps, sewers, drainage
- proceeds that are obtained in the process of getting land ready for its intended use.
- if the land is purchased with the intent to tear down an existing building then the cost of demolition is included with the cost of the land
- if the land is currently owned and an old building is replaced the cost of demolition net of recoveries is expensed. This increases the loss on disposal of the old asset. The remaining book value is depreciated in the final year of use of the old building.
- Under ASPE there is an exception if the redevelopment is for rental property.
- Long-term leases ordinarily specify that leasehold improvements revert to the lessor at the end of the lease
- The lessee charges the facilities' costs to a separate capital account, Leasehold Improvements, and the cost is amortized as an operating expense over the remaining life of the lease or the useful life of the improvements, whichever is shorter.

- Investment Property or Rental real estate - property held to generate rentals and/or appreciate in value rather than to sell or use in the ordinary course of business. It includes property that is under development for rental purposes.
- IAS 40 covers this separate category of PPE.
- complexities aries when:
- the property is used for more than one purpose (partially owner occupied, and partially rented
- an owner provides a variety of services
- judgement may be required to identify whether this is an investment property.
- the cost of the property under IFRS and ASPE is determined in the same way as for PPE.
- if the property continues to be accounted for at cost then the components are accounted for separately for purposes of depreciation.
- includes delivery equipment, office equipment, machinery, furniture and fixtures, furnishings, factory equipment, and similar tangible assets.
- costs include:
- purchase price
- freight and handling charges
- insurance while equipment is in transit
- cost of special foundations, assembly, and installation costs, testing (less proceeds from the sale of the product produced during testing, costs of making and adjustments to the equipment of make it operate as intended.
- HST, GST, and QST are recoverable taxes so these are not included in the cost of the purchase
- under ASPE follow the same rules as for PPE
- under IFRS follow IAS 41 Agricultural assets
- measured at
fair value less cost
to sell at each statement of financial position date date, with value changes recognized in the statement of income and comprehensive income as the values change.
- in rare situations where fair value cannot be determined they are measured at cost, less accumulated depreciation and impairment losses.
- Mineral resources are sometimes referred to as wasting assets, generally refer to minerals and oil and gas resources that do not regenerate.
- Mineral resource properties are capitalized costs associated with the acquiring rights, and the exploration, evaluation, and development of these minerals.
- Natural resource properties are consumed physically over the period of use and do not retain their original physical characteristics
- the Depletion Base is made up of :
- acquisition cost of the property +
- the cost of exploration and evaluation of the reserves +
- the cost of development +
- the cost of decommissioning and site restoration
- The cost of depletion (usually use the units of production method) become part of the value of the inventory as it is produced from the site
- Accounting for natural resources is a specialized area of study that is beyond the scope of an intermediate accounting text.

Chapter 10
Intermediate Accounting - Volume 1
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Tenth Canadian Edition

Measurement After Acquisition
Cost Model - CM
Revaluation Model - RV
Fair Value Model - FVM
In the case of all assets a period cost must be calculated:
Linda Batch
Professor of Accounting
Sheridan College
Mississauga, Brampton, and Oakville,
Ontario, Canada
Revaluation model is not commonly used so just be aware of its existence
Cost Model
Most widely used model

It measures PPE at:
Cost - Accumulated Depreciation - Impairment Losses
Revaluation Model
Not commonly used

PPE is measured at:
Fair Value - Accumulated Depreciation - Impairment Losses
Fair Value Model
In this approach PPE are measured at fair value and no depreciation recognized over the life of the asset.

Changes in fair value are taken into net income in the period of the revaluation.
Costs Incurred
After Acquisition
replacements, major overhauls, and inspection
rearrangement and installation
How do we determine which period in which to allocate the costs.

Do we expense the cost in the current period
Do we capitalized and expense it in future periods using depreciation
If there is a future economic benefit expected to arise from the expenditure then it should be capitalized.
For costs after acquisition, to capitalized, there has to be an increase in future economic benefits
Chapter 10 - Property Plant and Equipment

Intermediate Accounting - Volume 1
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Tenth Canadian Edition
Full transcript