Capital Assets

How is PPE accounted for under IFRS and ASPE

Valuation of Long-Lived Assets

• Cost model (NBV) - most common

  • Cost less accumulated depreciation less accumulated impairment = NBV

• Revaluation model - choice for PP&E, intangible assets with an active market, mineral resources

  • Fair value is used as the measurement base

  • If adopted, it must be used for entire asset class

  • Not many companies use - it is a bit strange - it is a choice to use it

  • You measure at fair value, but then take depreciation on that fair value amount

• Fair value model - required for biological assets expect bearer plants, choice for investment property 

Under ASPE:

• Historical cost accounting, only cost model allowed (no revaluation model or investment property)

what type of costs can be capitalized to an asset

Subsequent costs of PP&E

• Maintance or ordinary repairs

  • Expense

• Additions

  • If major part or betterment (such as replacement or renewal), capitalize costs and any remaining carrying amount of what is being replaced is loss

  • Major inspection - for large assets (i.e. airplane), major inspections/overhauls required to ensure asset will continue to work as intended - capitalize costs and any remaining carrying amount of what is being replaced is loss

What are the accounting steps for decommisioning obloigations

• When to recognize?

  • Legal, statutory, contractual, or constructive obligation to incur site restoration / decommissioning costs when an asset is retired

• Inital recognition

  • Measure liability at PV using rate that reflects risks

  • Credit liability and debit related asset

    • Ex. removal and disposal costs of $100,000, 8%, 5 years, PV = $68,058

    • Gasoline storage tanks    68,058

Provision 68,058

• Each period:

  • Amount of decommissioning obligation is amortized to income on a rational basis

  • Interest expense is recognized which increases the value of the retirement obligation (amortize discount to interest expense until provision becomes 100,000)

  • Review estimates annually

  • Remeasurement if change in cash flows or discount rate

Depreciation expense 13,612

Accumulated depreciation 13,612

Interest expense 5,445

Provision 5,445

Capital Asset Exchange

If there is commercial substance

Record at fair value of asset given up. Deduct any cash received add any cash paid

Capital Asset Exchange

If there is no commercial substance

• If no commercial substance, record at book value of asset given up

  • No gain or loss recorded

  • Fair market value cap - if new asset is recorded at book value of old asset, highest value that can be recorded for new asset is fair value of acquired asset

  • Whenever cash is involved in a transaction without commercial substance, the new asset is always recorded at book value of the old asset, minus any cash received or plus any cash paid. Fair values are irrelevant. No gain or loss is recognized

How to account for a government grant

• Government assistance for PP&E - cash grant/tax credit received from government

• Accounting for government grants for PP&E:

  • Deduct from related asset with amortization taken on net amount, OR

Ex. gov’t grant $1M to help construct building $5M. Useful life 20 yrs

Cash 1,000,000

Building 1,000,000

Depreciation expense 200,000

Accumulated depreciation 200,000

• Defer liability and amortize to income on same basis as related asset is amortized

Ex. gov’t grant $1M to help construct building $5M. Useful life 20 yrs

Cash 1,000,000

Deferred liability 1,000,000

Depreciation expense 250,000

Accumulated depreciation 250,000

Deferred liability 50,000

Depreciation expense 50,000

Government grant not related to PPE

• Choices if gov’t assistance is not related to PP&E (i.e. for expense like research costs)

  • If in current period

    • Net from associated costs (deduct from expense), OR

Cash 1,000,000

Research expense 1,000,000

• Other income

Cash 1,000,000

Other income 1,000,000

If in future period – defer until related costs actually incurred

How to account for investment property

Investment Property

• Criteria - land/building held to earn rental income or capital appreciation (not owner occupied property)

  • Property held for use in active business or for admin purposes cannot be investment property (i.e. land for golf course not considered investment property)

  • Company could use minor portion of property for company’s operations and the rest rented out

  • Similar to PP&E initial recognition

  • Measurement after recognition:

    • Cost model OR

    • Fair value model

      • Gain or loss recognized in net income

      • No depreciation

      • No impairment testing

  • Transfer between inventory and PP&E if use of property changes

research and developement criteria

“EARMIF”

• Technical feasibility — is it something people will actually buy, ex. Prototype or trials in market to prove technical feasibility

• Intention to complete and available for use or sale - ex. already have advance orders for product

• Ability to use or sell

• Generate probable future economic benefits (ex. Market or usefulness) - ex. Is their a marketplace for product, in which product is coveted and desired

• Have the technical, financial, and other resources to complete - ex. Do we have the resources, money, to develop product

• Ability to measure costs reliably