Kế toán, kiểm toán - Chapter 10: Property, plant, and equipment: accounting model basics

CHAPTER 10:PROPERTY, PLANT, AND EQUIPMENT: ACCOUNTING MODEL BASICSChapter 10: Property, Plant, and Equipment: Accounting Model BasicsAfter studying this chapter, you should be able to:Identify the business importance and characteristics of property, plant and equipment and explain the recognition criteria.Identify the costs to include in the measurement of property, plant and equipment at acquisition.Determine asset cost when the transaction has delayed payment terms or is a lump-sum purchase, a nonmonetary exchange, or a contributed asset.Identify the costs included in the specific types of property, plant and equipment.Understand and apply the cost model and the revaluation model using the asset adjustment method.Understand and apply the fair value model.Explain and apply the accounting treatment for cost incurred after acquisition.8. Identify the differences in accounting between ASPE and IFRS, and what changes are expected in the near future.34Property, Plant, and Equipment: Accounting Model BasicsProperty, Plant, and EquipmentAlso known as tangible capital assets, plant assets, and fixed assetsExamples: land, building, equipment, and natural resource propertiesMajor characteristics include:1. Acquired and held for use in operations and not for resale2. Long-term in nature and usually subject to depreciation3. Possess physical substance (tangible)5Asset ComponentsEntities can incur many costs, but how do they know which ones should be recognized as an item of PP&E?Probable that the item’s future economic benefits will flow to the entityCost can be reasonably measuredIf both conditions are met, the item is capitalized and recognized as a PP&E asset6Asset ComponentsBoth IFRS and ASPE require componentization, although IFRS guidance is more detailedComponents of a single asset (e.g. roof of a building) should be recognized separately if they make up a relatively significant portion of the asset’s total costSignificant professional judgment is required in applying componentization, and other factors to consider include differing useful lives and differing patterns of economic benefits 7Cost ElementsCapitalized cost of property, plant, and equipment includes all expenditures needed to: acquire the asset (purchase price, net of discounts and rebates) bring it to its location and to state where it is ready for use (including delivery, site preparation, installation, assembly, professional fees, etc)discharge obligations associated with asset’s eventual disposal (e.g. site restoration)IFRS and ASPE share the above approach, but sometimes differ in specific application8Self-Constructed AssetsThese are assets constructed by the business for use in operationsThe cost of self-constructed assets includes:Direct materials,Direct labour,Directly attributable overhead (e.g. variable manufacturing overhead)9Borrowing CostsUnder IFRS, borrowing costs that are incurred during acquisition, construction or production of qualifying assets must be capitalized as part of the asset’s cost ASPE allows a choice of capitalizing or expensing such interest costsMost common approach is explained in Appendix 10A10Measurement of CostCompanies are often responsible for costs associated with dismantling the asset, removing it, and restoring the site at the end of its useful life, theoreticallyThese costs are often referred to as asset retirement costs and meet the recognition criteria for capitalization as part of PP&E asset costsIFRS and ASPE share the above approach, but sometimes differ in specific application11Measurement of CostWhen cash discounts are offered on the purchase of plant assets, the Net-of-Discount Method is the preferred methodThe asset cost is reduced by the discount amount even if discount is not taken12Measurement of Cost Deferred Payment ContractsAssets, purchased through long-term credit, are recorded at the present value of the consideration exchangedWhen no interest rate is stated, the cash price of the purchased asset is used to determine imputed interest rateInterest expense is recognized over the term of the deferred payment contract13Measurement of CostExample:Sutter Corporation, given:Five-year, $100,000 non-interest bearing note issued in exchange for new equipmentMarket interest rate = 10%Payable over 5 years—$20,000 per yearRecord acquisition of equipment14Measurement of Cost15Calculate Present Value (PV) of Note:Annuity Payment = $20,000, n=5, i=10%PVA (Present Value of an annuity) = $75,816Entry at date of purchase:Equipment 75,816 Notes Payable 75,816Entry to record interest expense at end of year:Interest Expense (75,816 x 10%) 7,582 Notes Payable 7,582Measurement of Cost16Lump Sum PurchaseCost of assets, acquired at a single lump sum price, is allocated to assets on the basis of their relative fair market valuesExample: Inventory, land, and building purchased for lump sum of $80,000Fair market values for these assets are:Measurement of Cost17100%50%25%25%Proportion$80,00040,00020,00020,000Cost Allocation$100,000Total 50,000Building 25,000Land$ 25,000InventoryFair Market ValueAsseti.e. $80,000 x .25Measurement of CostShare-Based PaymentsWhen property is acquired by issuing shares, the fair value of the asset received or the fair value of the shares given up is used for the cost of the asset ASPE and IFRS have slightly different application of this general approachIf the fair value of the asset received cannot be readily determined, and the shares given up are actively traded, the market value of publicly traded shares is used 18Measurement of CostAsset ExchangeMonetary exchange of assets occurs when:Non-monetary assets (e.g., PP&E) are acquired for cash or other monetary assets (e.g., accounts and notes receivable), orNon-monetary assets are disposed of in exchange for monetary assetsNon-monetary transaction or exchange of assets occurs when:Non-monetary asset is exchanged for another non-monetary asset19Measurement of CostThe basic ASPE standard is that the non-monetary exchange is valued at:the fair value of the asset given up, orthe fair value of the asset received whichever is more reliably measurable, andgain or loss on the exchange is recognized in incomeMonetary transactions are accounted for on the same basis 20Measurement of CostException to standard:If one or more of the following conditions exist: transaction lacks commercial substance, fair values are not determinable, Then:new asset cost equals book value of assets given up, andno gain is recognized (but losses are recognized) 21Measurement of Cost22Example: Information Processing Inc. (IPI) exchanges a used machine for a new modelFair value of used machine: $ 6,000Book value of used machine: $ 8,000(Cost=$12,000; Accum. Depreciation=$ 4,000) Cash paid to seller: $ 7,000Record the purchase in IPI’s books:Equipment (new) 13,000Accumulated Depreciation (old) 4,000Loss on Disposal 2,000 Equipment (old) 12,000 Cash 7,000Measurement of Cost23Cathay Corp. exchanges a number of trucks for land:Fair value of trucks: $ 49,000Book value of trucks: $ 42,000(Cost=$64,000; Accum. Depreciation= $ 22,000) Cash paid to seller: $ 4,000Record purchase in Cathay’s books:Land 53,000Accumulated Depreciation – Trucks 22,000 Trucks 64,000 Cash 4,000 Gain on Disposal of Trucks 7,000Measurement of CostWestco Ltd. exchanges a commercial property in Ontario for almost identical one in Alberta from Eastco Ltd. (assume no commercial substance)Fair value of Westco property $615,000Book value of Westco property: $420,000(Cost=$520,000; Accum. Depreciation=$ 100,000)Book value of Eastco property: $395,000(Cost=$540,000, Accum. Depreciation=$145,000)Cash paid to seller: $ 30,000Record transaction on Westco books:Building (new) 450,000Accumulated Depreciation (old) 100,000 Building (old) 520,000 Cash 30,000 Measurement of CostReferred to as non-reciprocal transfers: transfer of assets where nothing is given up in exchange (e.g., donations, gift, government grants)Asset’s fair market value used as cost of assetTwo approaches:Capital Approach: credit Donated Capital; used for shareholder contributions only; otherwise not GAAPIncome Approach: credit represents income; used for non-owner contributions; Cost Reduction Method: credit the respective asset account (benefit recognized through reduced depreciation expense)Deferral Method: credit Deferred Revenue (benefit amortized into revenue)25Measurement of CostLand costs include:Purchase priceClosing costs (title, legal, and recording fees)Costs of getting land ready for use (such as removal of old building, clearing, grading, filling and draining)Assumption of liens or encumbrancesAdditional improvements with an indefinite lifeSale of salvaged materials reduces cost of landSpecial assessments for local improvements (e.g., pavement) are part of land cost26Measurement of CostPermanent improvements to the land such as landscaping are added to the Land accountImprovements with limited lives (such as driveways, walkways, fences, and parking lots) are recorded in a separate Land Improvements accountThese costs are separated from Land as they are depreciated over their estimated useful lives27Measurement of CostBuilding costs include all costs directly related to buying or constructing the buildingThe removal of an old building previously owned and used increases loss on the disposal of the old buildingIf land is purchased with an old building on it, any demolition costs less salvage value is charged to Land28Measurement of CostIn long-term lease contracts, the lessee may pay for improvements on the leased propertyExamples: construction of building on leased land, improvements to leased buildingThese costs are recorded in a separate account called Leasehold ImprovementsLeasehold improvements are depreciated over the lesser of the remaining lease life and the useful life29Measurement of CostIncludes delivery equipment, office equipment, factory equipment, machinery, and furnitureCost of equipment includes all necessary and reasonable costs incurred to get asset ready for its intended useIncludes:Purchase priceFreight and handling chargesInsurance while in transitCosts of special foundation, assembly and installationCost of trial runs30Measurement of CostProperty that is held to generate rental revenue and/or appreciate in value, rather than sell as part of ordinary business or use in production, administration, or supplying of goods and servicesIFRS allows for special accounting under IAS 40 subsequent to acquisition (discussed further below)31Measurement of CostAlso known as wasting assetsExamples: oil and gas resources, and mineral depositsMain characteristics:Asset is completely removed or consumedAsset does not retain original characteristicsCosts to be capitalized relate to four activities:Acquisition of propertiesExplorationDevelopmentRestorationCapitalized costs make up the depletion base, and are depreciated through depletion charge into inventory32Measurement of CostExamples: fruit trees, grapevines, livestockSpecial standard under IFRSMeasure at fair value less costs to sell, with changes in values going through income statement33Measurement after AcquisitionThere are three main measurement methods to account for property, plant, and equipment subsequent to acquisition: Cost Model (CM)Revaluation Model (RM)Fair Value Model (FVM)Under ASPE, CM must be usedUnder IFRS, companies have the following choices: For investment property assets: CM or FVMFor other PP&E assets: CM or RM34Revaluation ModelPP&E assets carried at fair value at the date of revaluation, lessany subsequent accumulated depreciation and impairment lossesAvailable only for PP&E assets whose fair value can be measured reliablyRevaluation must be frequent enough so that carrying value is not materially different from assets’ fair value (not necessarily every year)35Revaluation ModelWhen carrying value of asset increases (debit)Credit Revaluation Surplus (equity, OCI), unless increase reverses previous declines recognized in income (in this case, recognize increase in income to extent of prior declines)When carrying value of asset decreases (credit)Debit Revaluation Surplus (equity, OCI) to the extent the account has credit balance for the asset. Otherwise, debit is recognized as decrease in income. There can be no net increase in net income from revaluing the asset over its lifeRevaluation Surplus is transferred directly to Retained Earnings (either each period, or only at time of disposal)36Revaluation Model: Example – Convo CorpConvo Corp (CC) purchased $100,000 building on January 2013 (fiscal year end December 31)Revaluation: every 3 yearsDepreciation: straight-lineUseful life: estimated 25 years at purchase (no residual)Fair value at December 31, 2015: $90,000Fair value at December 31, 2018: $75,000Required: Prepare all journal entries needed at revaluation dates noted above.37Revaluation Model: Example – Convo CorpRevaluation entries at December 31, 2015 Before After Revaluation Adjustment RevaluationBuildings 100,000 (12,000) 90,000 2,000Accumulated Depreciation - Buildings (12,000) 12,000 nilCarrying amount 88,000 2,000 90,000Accumulated Depreciation 12,000 Building 12,000Building (90,000 – 88,000) 2,000 Revaluation Surplus (OCI) 2,000Depreciation for 2013-2015(100,000–0)/25yrs = 4,000/yrX 3 years = 12,000Revaluation Model: Example – Convo CorpCopyright John Wiley & Sons Canada, Ltd.39Revaluation entries at December 31, 2018 Before After Revaluation Adjustment RevaluationBuildings 90,000 (12,273) 75,000 (2,727)Accumulated Depreciation – Buildings (12,273) 12,273 nilCarrying amount 77,727 (2,727) 75,000Depreciation for 2016-2018(90,000 – 0) / 22yrs = 4,091/yrX 3 years = 12,273Accumulated Depreciation 12,273 Building 12,273Revaluation Surplus (OCI) 2,000Revaluation Loss (to income) 727 Building 2,727Fair Value ModelAvailable as measurement option for investment properties (under IFRS only)Investment property measured at fair value subsequent to acquisitionChanges in value reported in net income during period of changeNo depreciation is recognized over asset’s lifeNote that fair value must be disclosed in financial statements, even if cost model is chosen instead of fair value model40Fair Value Model: ExampleErican Corp (EC) purchases shopping mall on February 2, 2011Purchase price: 1,000,000Property transfer fee: 40,000Legal fees: 3,000Empty store painting (before rent): 2,000Mortgage financing assumed (rest in cash): 730,000Tenant damage deposits acquired: 37,000Fair values: February 02, 2017: 1,040,000December 31, 2017: 1,028,000December 31, 2019: 1,100,000REQUIRED: Prepare all necessary journal entries to December 31, 201941Fair Value Model: Example42February 2, 2017 (acquisition)Investment Property – Mall 1,043,000Maintenance Expense 2,000 Mortgage Payable 730,000 Tenant Deposits Liability 37,000 Cash 278,000Fair Value Model: Example43December 31, 2017Loss in Value of Inv. Property 3,000 Investment Property – Mall 3,000(1,043,000 – 1,040,000)December 31, 2018Loss in Value of Inv. Property 12,000 Investment Property – Mall 12,000(1,040,000 – 1,028,000)December 31, 2019Investment Property – Mall 72,000 Gain in Value of Inv. Property 72,000(1,100,000 – 1,028,000)Costs Subsequent to AcquisitionIf costs incurred achieve greater future benefits, capitalize costs (Capital expenditure)If costs maintain a specific level of service, expense costs (Revenue expenditure)Major types of expenditures are:Additions: Increase or extension of existing assetsReplacements, major overhauls, and inspections: Substitution of a new part/component for an existing asset, and overhauls/inspections whether or not physical parts are replacedRearrangement and reinstallation: Moving an asset from one location to anotherRepairs: Costs that maintain assets in good operating condition44Replacements, Major Overhauls, and InspectionsGenerally meet definition for capitalization, and costs added to carrying amountHowever, replaced assets or previous overhauls and/or inspections already have a depreciated carrying value on booksTherefore, original asset’s carrying value should be removedIf original cost and accumulated depreciation are not known, they must be estimatedASPE is less strict than IFRS and allows for new cost to be debited to Accumulated Depreciation or simply added to asset’s carrying value45Rearrangement and ReinstallationAccounting treatment for rearrangement and reinstallation costs:If the original installation cost is known, record as a replacementIf the original installation cost is not known, cost is expensedIf the original installation cost is not known and amount is material, capitalize cost (ASPE)46RepairsOrdinary repairs are costs that keep asset in good operating conditionOrdinary repairs are treated as an expenseExamples: replacement of minor parts, repainting, lubricating equipment47Looking AheadThere are two significant projects under way by IASBDevelopment of new and comprehensive accounting standards for extractive industries (e.g. mining, oil, gas)Updating standards relating to government grants and assistanceThe IASB paused a project to update IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, however it eventually intends to update IAS 20 to improve the information provided to uses of financial statements by “eliminating inconsistencies with the Framework”48Looking AheadIAS 16 was updated in June 2014 relating to account for Agriculture: Bearer Plants, effective for annual periods beginning on or after January 1, 2016The new requirements state that bearer plants are to be accounted for similar to self-constructed property, plant and equipment items that are not yet in the location and condition needed to operate in the way intended by management49