9.7 Chapter Summary

LO 1: Describe the characteristics of property, plant, and equipment assets that distinguish them from other assets.

PPE assets are tangible items that are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes. It is presumed that they are expected to be used for more than one period. The distinguishing features are in their nature (they are tangible) and in their use (production, rather than resale).

LO 2: Identify the criteria for recognizing property, plant, and equipment assets.

PPE assets should be recognized when it is probable that future economic benefits associated with the item will flow to the entity and the item’s cost can be measured reliably. As the definition of PPE does not identify what specific, physical element should be measured, it is important for accountants to apply good judgment in identifying the specific components of an asset that need to be reported separately.

LO 3: Determine the costs to include in the measurement of property, plant, and equipment at acquisition.

PPE costs should include any cost required to purchase the asset and bring it to its intended location of use. As well, any further costs incurred to prepare the asset for its intended use should also be capitalized.

LO 4: Determine the cost of a property, plant, and equipment asset when the asset is acquired through a lump-sum purchase, a deferred payment, or a non-monetary exchange.

When an asset is acquired through a lump-sum exchange, the purchase price should be allocated based on the relative fair value of each asset acquired. When an asset is acquired through a deferred payment, the asset cost should be recorded at the present value of the future payments, discounted at either the interest rate implicit in the contract, or at a reasonable market rate if the contract does not include a reasonable interest rate. When a PPE asset is obtained through the issuance of the company’s own shares, the asset should be recorded at its fair value. When a PPE asset is obtained by exchange with another, non-monetary asset of the company, the new asset should be reported at the fair value of the assets given up. However, if the fair values are not reliably measurable, or if the transaction lacks commercial substance, then the new asset should be recorded at the carrying value of the assets given up. The only exception to this occurs when a transaction lacks commercial substance, but the fair value of the asset acquired is less than the carrying value of the asset given up. In this case, the transaction should be reported at the fair value of the asset acquired, in order to avoid overstating the value of the new asset.

LO 5: Identify the effect of government grants in determining the cost of a property, plant, and equipment asset.

IAS 20 says that, “Government grants [should be recognized] in profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate.” In the case of grants received to assist in the purchase of PPE assets, the grant can either be deducted from the initial cost of the asset, which will reduce future depreciation, or the grant can be deferred and amortized into income on the same basis as the asset’s depreciation. The net effect on income of these two methods will be exactly the same.

LO 6: Determine the cost of a self-constructed asset, including treatment of related interest charges.

For self-constructed assets reported under IFRS, only direct costs, and not overheads, should be allocated to the PPE asset. When borrowing is incurred to construct an asset over a substantial amount of time, any interest that is directly attributable to the construction should be included in the asset cost.

LO 7: Identify the accounting treatment for asset retirement obligation.

When the company has a legal or constructive obligation to dismantle, clean up, or restore the asset site at the end of its useful life, the present value of those asset retirement costs should be included in the capital cost of the asset.

LO 8: Apply the cost model.

Under this model, PPE assets are reported at their acquisition cost, less any accumulated depreciation. No attempt is made to adjust the value to reflect current market conditions.

LO 9: Apply the revaluation model.

Under this model, PPE assets may be adjusted to their fair values on a periodic basis, assuming the fair values are both available and reliable. Increases in value are credited to the other comprehensive income account titled revaluation surplus. If the increase reverses a previous decrease that was expensed, the increase should be reported as part of profit or loss. Decreases in value are applied to first reduce any existing revaluation surplus, and then reported as expense, if any balance remains. Adjustments to the asset value can be made either by eliminating the accumulated depreciation and adjusting the asset cost, or by adjusting the asset cost and accumulated depreciation proportionally.

LO 10: Apply the fair value model.

This model can only be used for investment properties, which are land and buildings held primarily for the purpose of earning rental income or capital appreciation. With this model, the carrying value of the investment property is adjusted to its fair value every reporting period. Any gains and losses resulting from the revaluation are reported directly in profit or loss. As well, no depreciation is reported on investment properties under this model.

LO 11: Explain and apply the accounting treatment for post-acquisition costs related to property, plant, and equipment assets.

Costs incurred after acquisition can either be expensed immediately or added to the carrying value of the PPE asset. Costs incurred for the normal, day-to-day maintenance of PPE asset are usually expensed, as these costs do not add to the service life or capacity of the asset. Costs that improve the asset by increasing future economic benefits, either by extending the useful life or improving the efficiency of operation, are usually capitalized. When a significant component of the asset is replaced, the cost and accumulated depreciation of the old asset should be removed and the cost of the new asset should be capitalized.

LO 12: Identify key differences between IFRS and ASPE.

The concept of component accounting is not as explicitly articulated in ASPE. ASPE requires revenues or expenses incurred prior to asset completion to be included in the asset cost, whereas IFRS takes these items to profit or loss. IFRS requires capitalization of borrowing costs, whereas ASPE leaves the choice to management. ASPE only requires capitalization of legal obligations for asset retirement, whereas IFRS also includes constructive obligations as well. ASPE does not allow the use of the revaluation model or the fair value model.