Chapter 23 - summary of discussion notes PDF

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Summary

Chapter 23: Property, Plant and Equipment Property, Plant and Equipment o Are tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period o Major characteristics: a. ...

Description

Chapter 23: Property, Plant and Equipment Property, Plant and Equipment o Are tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period o Major characteristics: a. Tangible assets – with physical substance b. Used in business – used in production or supply of goods or services, for rental purposes and for administrative purposes c. Used over a period of more than one year Examples: o Motor vehicle o Land o Furniture and fixtures o Land improvements o Office equipment o Building o Patterns, molds and dies o Machinery o Tools o Ship o Bearer plants o Aircraft Recognition of PPE, when: a. It is probable that future economic benefits associated with the asset will flow to the entity; b. The cost of the asset can be measured reliably. Spare Parts and Servicing Equipment o Usually carried as inventory and recognized as an expense when consumed o Major spare parts and stand-by equipment qualify as PPE when the entity expects to use them during more than one year Measurement at Recognition of PPE o Asset shall be measured at cost Cost o

o

the amount of cash or cash equivalent paid and the fair value of the other consideration given to acquire an asset at the time of acquisition or construction. Elements of cost: a. Purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates b. Cost directly attributable to bring the asset to the location and condition necessary for it to be capable of operating in the manner intended by management c. Initial estimate of the cost of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs

Examples: Directly Attributable Costs o Cost of employee benefits arising directly from the acquisition of PPE o Cost of site preparation o Initial delivery and handling cost o Installation and assembly cost o Professional fees o Costs of testing whether the asset is functioning properly Cost not Qualifying for Recognition: (expensed) o Cost of opening a new facility o Cost of introducing a new product or service, including cost of advertising and promotion o Cost of conducting business in a new location or with a new class of customer, including costs of staff training o Administration and other general overhead costs o Cost incurred while an item capable of operating in the manner intended by management has yet to be brought into use or is operated at less than full capacity o Initial operating losses o Costs of relocating or reorganizing part or all of an entity ’s operations Subsequent Measurement of PPE  An entity shall choose either the cost model or the revaluation model as the accounting policy for PPE  The entity shall apply such accounting policy to an entire class of PPE Cost Model  Cost – any accumulated depreciation and impairment loss Revaluation Model  Revalued carrying amount  Fair value at date of revaluation – any subsequent accumulated depreciation and impairment loss Acquisition of Property (1) Cash Basis  Cost of PPE = cash price equivalent at the recognition date Cash Price equivalent = cash paid plus directly attributable costs such as freight, installation cost and other cost necessary in bringing the asset to the location and condition for the intended us Lump sum price or Basket price acquisition  Apportion the single price to the assets acquired on the basis of relative fair value

(2) On account subject to cash discount  Cost of asset = invoice price – discount, regardless of whether the discount is taken or not  If discount is not taken, it is charged to pruchase discount loss (other expenses) Cash discounts are generally considered as reduction of cost and not as income. Transaction:

Gross Method

Net Method

record acquisition record payment within discount period

Equipment Accounts Payable Accounts payable Cash Equipment

xx

record payment beyond discount period

Accounts payable xx Purchase discount lost xx Cash xx Equipment xx

xx xx xx xx

Equipment Accounts Payable Accounts payable Cash

xx xx xx xx

Accounts payable xx Purchase discount lost xx Cash xx

*ultimately, recorded cost of asset should be the net amount. (3) Installment basis  Cost of asset = cash price equivalent  Excess of the installment price over the cash price is treated as an interest to be amortized over the credit period Journal Entries: a. Record acquisition of the machinery Machinery (cash price) Discount on note payable Note payable Cash b. Record first installment payment Note payable Cash c. Amortize the discount on note payable Interest expense Discount on note payable #Pro-rata

xx xx xx xx xx xx xx xx

In case of no available cash price:  Cost of asset = present value of all payments using an implied interest rate

Journal Entries: a. Record acquisition of the machinery Machinery (present value) Discount on note payable (implied interest) Note payable Cash b. Record first installment payment Note payable Cash c. Amortize the discount on note payable Interest expense Discount on note payable #Effective interest method Year Payment Interest expense Principal *Interest expense = PV x interest rate% *Principal = Payment – Interest expense *Done until PV = zero (reduction)

xx xx xx xx xx xx xx xx Present Value

Statement classification and presentation: notes payable  Includes the subsequent years: a. Current liabilities – within 12 months b. Noncurrent liabilities – exceeds 12 months  Carrying amount = regular payment less interest expense (4) Issuance of share capital  Measured at an amount equal to the ff. order of priority: a. Fair value of the property received b. Fair value of the share capital c. Par value or stated value of the share capital Journal Entries for acquisition of land: a. Fair value of the property received *preferred in terms of land Land xx Share capital (unit shares x par or stated value) xx Share premium xx b. Fair value of the share capital Land (unit shares x fv og share) xx Share capital (unit shares x par or stated value) Share premium c.

Par value or stated value of the share capital Land xx Share capital (unit shares x par or stated value)

xx xx

xx

(5) Issuance of bonds payable  Measure financial liability at fair value plus transaction cost that are directly attributable to the issue of the financial liability  Asset is measured in the ff. order: a. Fair value of bond payable b. Fair value of asset received c. Face amount of bonds payable Journal Entries for acquisition of building: a. Fair value of bond payable *preferred in terms of building Building xx Bond payable xx Premium on bond payable xx b. Fair value of asset received Building Bond payable Premium on bond payable c.

Face amount of bonds payable Building Bonds payable

xx xx xx

xx xx

(6) Exchange  Cost of asset is measured at fair value  Exchange is recognized at carrying amount under the ff: a. Transaction lacks commercial substance b. FV of asset given or received is not reliably measurable. Commercial substance  a new notion and is defined as the event or transaction causing the cash flows of the entity to change significantly by reason of the exchange  exchange transaction has commercial substance when the cash flows of the asset received differ significantly from the cash flows of the asset transferred  cosiders: amount, timing and risk of cash flow from the new asset and old asset Entity-specific value  present value of the cash flows an entity expects to arise from the continuing use of an asset and from the disposal at the end of useful life or expects to incur when settling a liability  … of the portion of the entity’s operations affected by the transaction changes as a result of the exchange.

Exchange with commercial substance  Cost of property is equal to the ff: a. FV of asset given + any cash payment (on the part of the payor) b. FV of asset given – cash received (on the part of the recipient) Exchange without commerical substance  Item acquired is measured at carrying amount of the asset given  No gain or loss is recognized  Any cash involved is added to the carrying amount (on the part of the payor) and deducted from the carrying amount (on the part of the recipient) Trade in (form of exchange)  Property is acquired by exchanging another property as part payment and the balance payable in cash or any other form of payment in accordance with agreed terms  Involves a nondelaer acquiring the asset from a dealer  Usually involves a significant amount of cash (transaction is with commercial substance)  Asset is recorded at the ff. order of priority: a. FV of asset given + cash payment b. Trade in value of asset given + cash payment Fair value approach Equipment – new xx Accumulated depreciation xx *Loss on exchange xx Equipment – old Cash #cost of new asset = FV of asset given + cash payment *Loss on exchange = FV of asset given – carrying amount

xx xx

Trade in approach Equipment – new xx Accumulated depreciation xx Equipment – old xx Cash xx *Gain on exchange xx #cost of new asset = Trade in value of asset given + cash payment *Gain on exchange = Trade in value of asset given – carrying amount Note: List price is often bloated to permit the seller to increase the trade in value for a used asset. Cash price of the new asset is believed to be fair value.

(7) Donation  Local GAAP (reference) as IFRS do not address donation  Contributions received from shareholders shall be recorded at the fair value with the credit going to donation capital  Expenses incurred in connection to donation are charged to donated capital account  Directly attributable costs incurred subsequently to bring donated asset to the location and condition for the intended use shall be capitalized  Contributions received from nonshareholders gifts or grants of funds or other asset that are restricted for Property and Equipemnt additions: Capital gifts or grants  are recorded at fair value when received or receivable;  generally subsidies and is recognized as income;  if not subsidies, the offsetting credit is a liability account until the initial restrictions are met; when met, the liability is transferred to income (8) Government grant  IFRS explicitly addressed government gran ts (9) Construction  Cost of self-constructed PPE shall include: a. Direct cost of materials b. Direct cost of labor c. Indirect cost and incremental overhead specifically identifiable or traceable to the construction Note: If incremental overhead is not specifically identifiable, allocation of overhead may be done on the basis of direct labor cost or hours

Materials Labor FOH

Const. A FG

Constructed asset xx xx xx xx ====

Finished goods xx xx xx xx ====

Total xx xx xx xx ====

Direct Labor xx xx xx ====

Fraction DL of const. A/TDL DL of FG/TDL

Overhead xx xx xx ====

Saving or loss on construction  Actual cost < If asset is purchased = savings Saving is realized in future periods by reason of lower depreciation charges on the asset *Any internal profit is eliminated in arriving at the cost of self-constructed asset.  Actual cost > If asset is purchased : recorded at actual cost The difference is not loss on the construction *If there is clear evidence that actual cost is materially excessive due to construction inefficiencies or failures (temporary, idle capacity or industrial dispute), excess shall be treatedas loss chargeable against management. *Future periods shall bot be burdened with management inefficiencies or errors. Note: Cost of abnormal amount of wasted material, labor or overhead incurred in the production of self-constructed asset is not included in the cost of the asset. Intervening operations  Income and related expenses of incidental operations are recognized in profit or loss Dercognition of PPE  Removal of cost of PPE + accumulated depreciation from the accounts  Carrying amont of an item of PPE shall be derecognized on disposal or when no future economic benefits are expected from the use or disposal  Gain or loss from derecognition is part of profit or loss = net disposal proceeds – carrying amount of the item Fully depreciated property  When the carrying amount is equal to zero or to its residual value  The asset account and the related accumulated depreciation account are closed and the residual value is set up in a separate account  Cost remaining in service and the related accumulated depreciation ordinarily shall not be removed from the accounts  Entities are encouraged to disclose fully depreciated property

Property classified as held for sale  If asset is available for immediate sale in the present condition within one year from the date of classification as held for sale  Such item shall be excluded from PPE and presented separately as ‘current asset ’  Entity shall measure such item at the lower of carrying amount and fair value less cost of disposal  Writedwon to Fv less cost of disposal = impairment loss  Once classified, such item will not be depreciated Idle or Abandoned property  Entity shall not classify as held for sale a noncurrent asset that is to be abandoned (CA will be recovered through continuing use)  Temporary Idle activity or abandonment does not preclude depreciating the asset as future benfits are consumed not only through usage but also through wear and tear and obsolescence.  Noncurrent assets to be abandoned includes item of PPE that is to be used until the of the economic life Optional disclosures Entites are encouraged to disclose the ff.: a. T he carrying amount of temporarily idle Property, Plant and Equipment b. The gross carrying amount of any fully depreciated property, plant and equipment still in use. c. The carrying amount of property, plant and equipment retired from active use and classified as held for sale. d. When the cost model is used, the fair value of property, plant and equipment when this is materially different from the carrying amount....