In-Depth Notes on Property, Plant, and Equipment (PPE) and Intangible Assets

Property, Plant, and Equipment (PPE)

Overview of WestJet's Aircraft Investments

Significant Investment: In July 2014, WestJet Airlines announced plans to significantly enhance its service offerings to Hawaii by purchasing four Boeing 767-300ERW aircraft. This strategic decision highlights the airline's commitment to expanding its international reach and improving customer experience.

Approximate cost: The financial commitment for each aircraft is approximately $191 million, demonstrating WestJet's considerable investment in upgrading its fleet and service capabilities.

Fleet Expansion Goals: WestJet is targeting a total fleet size of 120 aircraft by mid-2014, with aggressive projected growth aiming to reach 200 units by 2027. This expansion strategy is crucial for increasing operational capacity and meeting future travel demand.

Total Carrying Value: The total value of WestJet's property and equipment is around $2.7 billion, with a substantial 66% of this attributed to aircraft, totaling $1.9 billion, alongside aircraft deposits of $0.5 billion. This indicates a strong capital commitment to aircraft as a core asset within the company's operational framework.

Key Components of Aircraft Equipment

Aircraft equipment encompasses several critical components, vital for safe and efficient operation:

• Engine, airframe, landing gear: These are the primary functional components of an aircraft that determine its airworthiness and performance.

• Satellite television equipment: Enhancing passenger experience through in-flight entertainment systems, catering to the growing demand for onboard entertainment.

Depreciation: The useful lives of these components vary significantly, ranging from 5 to 20 years, depending on the specific part of the aircraft. This varied depreciation reflects the distinct operational considerations associated with different aircraft components. Other properties, such as spare engines and ground property, may have varying lifespans ranging from 3 to 40 years, indicating a comprehensive approach to asset management.

Accounting Policies

Component Identification: The identification of components is based on management's judgment regarding significant costs and the expected life of each component, highlighting the need for careful assessment in capital management.

Capitalization: Most major overhaul expenditures are capitalized and depreciated over time, which aligns with accounting best practices to ensure accurate reporting of the company's financial position.

Reporting on Financial Statements: A robust understanding of asset components is crucial for accurate income reporting and compliance with accounting standards to reflect true financial performance.

Learning Objectives

2. Distinguish Characteristics of property, plant, and equipment (PPE) from other assets: Understanding the unique aspects of PPE helps in proper asset classification.

3. Recognition Criteria for PPE assets: Knowing the criteria for asset recognition ensures adherence to accounting principles.

4. Measurement Costs included in acquisition: Insight into the costs associated with asset acquisition aids effective budgeting and financial planning.

5. Valuation in different purchasing scenarios (lump-sum, deferred payment, non-monetary exchange): Grasping various purchase scenarios plays a key role in strategic asset management decisions.

6. Government Grants impact on asset cost: Understanding how grants affect asset pricing is essential for accurate financial reporting.

7. Self-Constructed Asset cost accounting: Knowledge of accounting for self-constructed assets supports transparency in financial statements.

8. Asset Retirement Obligations and treatment: Proper handling of liabilities associated with asset retirement is necessary to ensure compliance with regulations.

9. Cost Model Application: Familiarity with how to apply the cost model enhances asset management practices.

10. Revaluation Model Application: Understanding how to apply the revaluation model aids in establishing fair asset values within financial statements.

11. Fair Value Model Application: Knowing how to navigate the fair value model is important for altering asset valuations based on market conditions.

12. Post-Acquisition Costs Treatment: Recognizing how to treat post-acquisition costs impacts future financial reports and assessments.

13. IFRS vs. ASPE Differences: Comprehending the differences between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) is crucial for accurate and compliant financial reporting across different jurisdictions.

Definition and Recognition of PPE

Intangible Assets vs. Fixed Assets:

PPE is categorized as a tangible asset, utilized in business operations and expected to provide economic benefits lasting more than one accounting period. Examples include land, buildings, and machinery. In contrast, intangible assets lack physical substance and encompass items such as intellectual property and patents.

Recognition Criteria for PPE

Future Economic Benefits: Entities must ascertain that the asset will result in probable future cash inflows.

Measurable Cost: The cost of the asset must be reliably measurable to ensure accurate accounting and financial reporting practices.

Measurement of Costs Upon Acquisition

Components Include:

• Purchase price (net of discounts, taxes, and duties) must be accounted for in total acquisition costs.

• Delivery, installation, and testing costs are inherently necessary to bring the asset into operational use.

• Professional fees directly attributable to the acquisition process are included in the capitalized cost.

• Any costs directly connected to making the asset operational must also be considered.

Exclusions from Capitalization:

Certain costs such as initial operating losses, employee training, and administration overhead should not be capitalized, as they do not directly contribute to the asset's operational capability.

Example of Land and Building Costs

Acquisition costs must encompass grading and preparation for use to ensure the asset is ready for operational implementation. Additionally, costs incurred for demolishing existing structures can be included in new land acquisition costs, whereas the demolition of an old building when already owned may need to be expensed as a separate cost.

Self-Constructed Assets

Cost Accounting: It is vital to ensure that only directly attributable costs related to asset construction are capitalized. This includes direct labor and materials used during the construction process.

Drawing Debts: According to IAS 23, interest costs connected to the construction of self-constructed assets should also be capitalized to reflect a more accurate representation of asset values.

Asset Retirement Obligations

Definition: Entities must include costs associated with dismantling and restoring sites in asset costs when there are legally enforceable obligations to incur such costs in the future.

Example: In the case of oil platforms, obligations for site cleanup require recognizing a liability on the balance sheet, representing the present value of anticipated future costs associated with the retirement of the asset.

Lump Sum Purchases and Exchanges

Lump Sum Purchase Accounting

Method: In accounting for a lump sum purchase, the total cost must be allocated based on the fair values attributed to individual components, such as land and buildings. This is essential for accurately reflecting each asset's true value in financial records.

Non-Monetary Exchanges

Asset Transfers: The fair value of any assets relinquished in a non-monetary exchange must be used for valuation purposes unless the fair value is not readily measurable, in which case the book value of the asset is utilized instead.

Government Grants Impact on Asset Costs

Recognition in Profit: Any government grants received must be systematically recognized as income over the periods when the associated expenses are incurred, ensuring alignment with respective cost recognition.

Offset Methods: Grants may either reduce the initial costs of an asset or be recognized as deferred income, depending on the arrangement and financial strategy of the business.

Post-Acquisition Costs

Expenditures and Capitalization: Routine repairs should be expensed as they occur; however, any substantial upgrades or replacements that extend the useful life or enhance the value of the asset can be capitalized and included within the asset valuation.

IFRS vs. ASPE Key Differences

Component Accounting: Under IFRS, component accounting is mandatory while it is less prevalent within ASPE, highlighting the importance of detail in financial reporting.

Borrowing Costs: Capitalizing borrowing costs is a mandatory requirement in IFRS accounting, whereas ASPE allows for optional capitalization, leading to potential discrepancies in reported asset values.

Summary of Objectives and Key Concepts

Understanding the distinction between tangible PPE and intangible assets is fundamental for accurate financial management. Moreover, recognizing and accurately measuring elements of PPE is crucial for reliable financial reporting. It is also vital to comprehend how different reporting standards impact asset accounting to ensure compliance and consistency in financial statements.

Conclusion

A thorough understanding of the nature, recognition, and implications of property, plant, and equipment, alongside intangible assets, is critical for precise financial reporting and effective decision-making for organizations managing significant capital investments. This knowledge forms the backbone of sound financial strategy and operational planning for companies in capital-intensive industries.