Property, Plant and Equipment
Long0lived resources that
Are controlled by the company
Are tangible
Are used in the operation of a business
Are not intended for sale to customers
Provide economic benefits over many years
Reported as non-currents assets
Determining the Cost of Property, Plant and Equipment
Recorded at cost, which includes
Purchase price, including non-refundable taxes and duties, less discounts or rebates
Expenditures necessary to bring asset to its intended location and make it ready for its intended use
Estimated cost of future expenditures to dismantle, remove, or restore the asset at the end of its useful life
Usually subdivided into classes, such as land, land improvement, buildings, and equipment
Land
Cost of land includes
Purchase price
Closing costs such as survery, title search, and legal feeds
Additional costs to prepare land for its intended use (minus any proceeds from salvage)
Land has an unlimited life there it is not deprecaited
Land Improvements
The costs to structural additons made to a property
These decline in service potential over time
They are recorded separately from land
Depreciated over their useful lives
Does not include costs of getting the land ready to use
Equipment
All expenditres related to the purchase or construction of a building
When a buildingis prucahsed such costs include
Purcahse price
Closing costs
Costs required to make building ready for its intended use
When a building is contructed its cots consits of
Contract price
Archietects feeds
Building permits
Excation costs
Interest costs during construction
Equipemtn
Costs include
Purcahse price
Frieght charges, sales tax or cost of insurance during transit paid by the purchaser
Assumbling
Installing and tseting
Expenditures during useful life
After acqustion
Operating expenditures
Benefit only the current period
Required to maintain asset in normal operating conditions
Captial expenditures
Capitalized as an asset (increases the cost of the asset)
Increases life of an asset, its productivity or efficiency
Buy or Lease?
Advantages of leasing
Little or no down payment
Reduced risk of obsolesence
Csh outlays for asset (over time instead of up front)
100 percent financing
Income tax advantages
Terminology
Lessor
Owner of asset for lease (landlord)
Lessee
Party leasing asset from owner
IFRS Lease Rules
Lease is considered to be for an asset purchase financed with a loan proided by the lessor
Risk and rewards of ownership transfer to lessee even if legal title has not passed
Lessee is required to reported leased asset (as a right of use asset) and related liabilitiy
Exceptions where lease is treated a period expense are
Lease terms of less than 12 months
Leases for low value assets
ASPE Lease rules
2 types of leases
Capital lease
Substantially all benefits and risk of ownership are transferred from lessor to lessee
Lessee required to recordleased asset and related liability at present value of minimum lease payments
Operating lease
Benefits and risk of ownership not transferred to lessee
Lease (rental ) payments recorded as expensive by lessee and as revenue by lessor
Depreciation
Systematic allocation of the cost of property, plant, and equipment over the asset's useful life
A process of cost allocation, not determining an asset's current value
DOES NOT USE OR PROVIDE CASH to replacethe asset
Factors in calculating depreciation
Cost
Purchase price plus costs required to get the asset ready for use plus estimated asset retirement costs
Useful life
The time period that the asset is expected to be avilable for use, or
The numbr of uniters that the assets is ecpected to produce or the units of output value
Residual value
Estimated amount to be received from the disposal at the end of th asset's useful life
Depreciation Methods
Straightline
Diminsihing-balance
Units of produciton
Management chooses the method that best reflects the pattern of use of the ecnomic benefits from that asset
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Straight line Method
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Diminising- Balance method
Produces a decreasing annual depreciation expense over an asset's useful life
Depreciation is calculated based on the assets carrying amoung, which decline each year as accumulated depreciation increases
Annual depreciaiont expense is culaculated by multiplying the carrting amount at the beginning of the year by the depreciation rate
Resdiaul value is not included in the calculation-expceptin not for final year
Can be applied using different rates
Depreication rate = straight line line rate * multiplier
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Unit of production method
Useful life is expressed in terms of total units of production or activity expected from the asset
Such as units produced or machine hours worked
Useful for factory machinery, vehicles, airplanes, or any asset whose usage varies over time
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Other issues- revising depreciaiton
Revisions needed if
Change in estimated useful life or residual value
Capital expenditures (additions) during useful life
Impairment
Change in the pattern in which the asset's economic benefits are consumed
Accounted for as change in estimate
Change made in current and future years, but not to prior periods (prospective, not retrospective)
Other issues - Accounting for natural resources
Long lived tangible assets that are consumed physicall over time
Often called wasting assets
Depreciation of natural recources is called depletion
Units of production method is usually used
As productino can vary from year to year
Reserve values are the fiar value of the resources
Impairment will arise if reserve value < carrying amount
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Presentation of long-lived assets
Statement of Financial position
Reported as non-current assets under headings:
Property, plant and equipment
Intangible assets
Goodwill
Disclose cost and accumulated depreciation (amortization) of each major class of assets
Either in statement or in notes
Disclose depreciation/amortization methods and useful lives or rates
Statement of income
Depreciation expense, amortization expense, gains and losses on disposal, and impairment losses are included in the operating expenses section
Statement of cash flows
Cash flows form the purcahse and sale of long-lived assets are reported in the investing section
Return on Assets
Measures overall posfitability
Return on Assets = Net income/ Average total assets
Higher is better because it indicates that for every dollar invested in assets, more net incoem is being generated
Asset turnover
Measures how efficiently a company uses its assets
Assets Turnover = Sales/ Average Total Assets
Higher is better because it indicates that for every dollar invested in assets, more sales are being generated
Profit Margin revisted
Together, profit margin and asset turnover explain the return on assets ratio
Profit margin * asset turnover = return on assets
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