CHAPTER -2: Long-term Operating Assets

1. Property, plant, and equipment are assets of a durable nature.

Other terms commonly used are plant assets, fixed assets, and
capital assets.
 Includes:
 Major characteristics:
Land,
 “Used in operations” and not for resale/investment.
Building
 Include standby assets (in non-continuous use)
structures
 Exclude idle assets (land or building)-investment (offices,
 Revenue producing assets-productive purpose factories,
 Long-term/long-lived in nature and usually depreciated. warehouses),

 Long-term prepayments and

 Bundle of future services Equipment

(machinery,
 Possess physical substance. furniture,
 Tangible in nature-fixed in nature tools).
 Conversion (indirect) cost to a product
 Not directly incorporated/become part of a product
 1. NATURE OF PROPERTY, PLANT, AND EQUIPMENT
Assets

Current Assets Non-Current Assets

Operating Assets Investments

Tangible Assets Intangible Assets

PPE Natural Resources

Depreciable Non-Depreciable
 Cost Elements
Cost Components/Elements [Subject to Mode of Acquisition]
 Cost of Land
All expenditures made to acquire land and ready it for use.
Costs typically include:
(1) purchase price;
(2) closing costs, such as title (fees) to the land, attorney’s fees,
recording fees, sales taxes, broker’s commission
(3) costs of surveying, grading, filling, leveling, draining, and clearing;
(4) Razing or removing unwanted buildings, less the salvage value
(5) assumption of any liens (delinquent real estate taxes),
mortgages, or encumbrances on the property; and
(6) additional land improvements that have an indefinite life (Paving a
public street bordering the land)
 Cont.

 Historical cost [Cost principle] measures the cash or cash

equivalent price of obtaining the asset and bringing it to the
location and condition necessary for its intended use.

 Cost consists of all expenditures necessary & reasonable to

acquire an asset and make it ready for its intended use.

 Companies value property, plant, and equipment in

subsequent periods using either the
 cost method or
 fair value (revaluation) method.
Cont.

 Cost of Land
 Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.

 Land acquired and held for speculation is classified as an

investment.

 Land held by a real estate concern for resale should be

classified as inventory.
2. ACQUISITION COST OF PP&E [INITIAL VALUATION]

Required: Determine amount to be reported as the cost of the

land.
Land
Cash price of property (Br.100,000) Br.100,000
Net removal cost of warehouse (Br.7,500-Br.1,500) 6,000
Attorney's fees (Br.1,000) 1,000
Real estate broker’s commission (Br.8,000) 8,000
Cost of Land Br.115,000
Illustration 10-2
Computation of cost of land
Directly Attributable Costs

 Costs that can be directly linked to the production of a specific asset or

service.
 Materials used in construction
 Labor costs directly involved in the creation of the asset
 Illustration of Directly Attributable Costs
 Asset: Building a warehouse
 Direct Costs:
 Construction materials: $150,000
 Labor: $100,000
 Total Directly Attributable Costs: $250,000
Self-Constructed Assets

 Self-Constructed Assets
 - Assets built by a company for its own use rather than purchased.
 -Key Considerations
 - Capitalization of cost
 - Recognition of various cost elements
 -Examples:
 - Buildings, machinery, specialized equipment
Borrowing Costs

 Borrowing Costs
 Interest and other costs incurred when borrowing funds for construction.
 Capitalization Criteria:
 Directly attributable to construction
 Incurred during the construction period
 Example:
 Loan of $200,000 at 5% interest over 1 year
 Interest Expense: $10,000 (can be capitalized)
 Dismantling and Restoration Costs

 Dismantling costs refer to the expenses incurred by an entity to dismantle or

remove an asset from its location at the end of its useful life. This may
include costs related to:

 Decommissioning: Safely taking apart machinery or structures.

 Disposal: Properly disposing of materials and components.
 Transportation: Moving dismantled parts to a different location for disposal
or recycling.
 According to IFRS, dismantling costs are typically recognized as part of the
cost of the asset if there is a legal or constructive obligation to incur these
costs.
Cont.

 Restoration costs are the expenses associated with restoring a site or asset
to its original condition after the asset has been removed or has reached
the end of its useful life. This may involve:

 Site Clean-Up: Removing contaminants or debris from the site.

 Rehabilitation: Returning the land to its natural state or preparing it for
future use.
 Under IFRS, restoration costs are recognized as part of the asset's cost if
there is an obligation (legal or constructive) to restore the site. These costs
should be measured at their present value, reflecting the future cash
outflows expected to settle the obligation.
Measurement of Cost for Nonmonetary
Exchange
 Cash Discounts Not Taken
 Cash discounts are reductions in the amount payable if payment is
made within a specified period.
 Cash discounts are reductions in the invoice price offered to encourage
early payment. If a company does not take advantage of these discounts,
the total cost of the asset may be higher.
 Accounting Treatment:
 Under IFRS 15, entities must recognize the revenue at the transaction price, which
includes any discounts not taken.
 The cost of the asset should reflect the amount actually paid, which may be
higher if cash discounts are not utilized.
 Cash Discounts
Cash Discounts — whether taken or not — generally considered a
reduction in the cost of the asset. The Net-of-Discount Method is
the preferred method
Example: ABC Co purchased equipment for Br 60,000 on account
under the term 2/10, n/30. Record the purchase:
Equipment ………………………………… 58,800
Accounts Payable…………………………………… 58,800
 Deferred Payment Terms

 Deferred payment terms allow a buyer to pay for an asset at a later

date, often with interest.

 Impact on Cost:
 The cost may include interest or financing charges if the payment is
extended over time.
 The present value of future payments may be considered to reflect the true
cost.
 Accounting Treatment:
 According to IFRS 16, the cost of an asset acquired under deferred payment terms
is the cash price equivalent at the time of acquisition.
 Any interest expense associated with the deferred payments is recognized as a
financing cost over time.
Lump-Sum Purchases

 Valuation of Fixed Assets

When a company acquires multiple fixed assets at a single lump-sum price:
 It faces the challenge of valuing each asset individually.
 The total cost must be allocated among various assets based on their relative fair
values.
 This assumes that costs vary directly with fair value.
 This allocation principle is similar to how costs are distributed among different
inventory items.
 Illustration: If a company buys machinery, tools, and equipment for $60,000, and their fair
values are $30,000, $10,000, and $10,000 respectively, allocate the lump sum based on these
values
 Cont.
Asset Book Fair Allocation Allocated To illustrate, Norduct Homes, Inc.
Value Value Percentage Purchase decides to purchase several assets of a
Price
Inventor $30,000 $25,000 25,000 $20,000 small heating concern, Comfort
y 100,000 Heating, for $80,000. Comfort
Land $20,000 $25,000 25,000 $20,000
100,000
Heating is in the process of liquidation
Building $35,000 $50,000 50,000 $40,000
100,000
Total $85,000 $100,000 $80,000
Explanation of the Table:
1.Book Value: The original cost of the asset as
recorded in the company's books.
2.Fair Value: The market value of the asset, reflecting
what it could be sold for.
3.Allocation Percentage: The percentage of the total
fair value that each asset represents, calculated as
the asset's fair value divided by the total fair value of
all assets.
4.Allocated Purchase Price: The portion of the total
purchase price allocated to each asset based on its
fair value percentage.
 Lump-sum (Basket) Purchases
Lump-Sum Purchases — Allocate the total cost among the various
assets on the basis of their relative fair market values.
Example: A company pays $120,000 for equipment and a building.
The land and building are appraised at $50,000 and $75,000,
respectively.
Appraisal Relative Total Allocated
Assets Value Fair Value Cost Cost
Equipment 50,000 50,000/125,000 120,000 48,000
Building 75,000 75,000/125,000 120,000 72,000
Total 125,000 120,000

Equipment 48,000
Building 72,000
Cash 120,000
 Non-Monetary Exchanges
Exchanges of Non-Monetary Assets
Ordinarily accounted for on the basis of:
 the fair value of the asset given up or
 the fair value of the asset received,
whichever is clearly more evident.
Companies should recognize immediately any gains or losses on
the exchange when the transaction has commercial substance
(future cash flows change as a result of the transaction).
For example, ABC Co. exchanges some of its equipment for Building
held by XYZ Co. It is likely that the timing and amount of the cash
flows arising for the building will differ significantly from the cash
flows arising from the equipment. As a result, both ABC Co. and XYZ
Co. are in different economic positions. Therefore, the exchange has
commercial substance, and the companies recognize a gain or loss on
the exchange.
 Cont.

• In some cases, an enterprise acquires a new asset

by exchanging or trading existing nonmonetary
assets.

• Monetary assets are those assets whose amounts

are fixed in terms of currency, by contract, or
otherwise (cash, accounts receivable).

• Nonmonetary assets include all the other assets

(inventories, land).
 Cont.

Accounting for Exchanges

* If cash is 25% or more of the fair value of the exchange,

recognize entire gain because earnings process is complete.
 Cont.

Summary of Gain and Loss Recognition on Exchanges of

Nonmonetary Assets Lacks Commercial Substance
 Cont.

Exchange – Gain Situation Illustration: ABC Company exchanged

equipment used in its manufacturing operations for similar equipment used
in the operations of XYZ Company plus $3,000 in cash . The following
information pertains to the exchange.

ABC XYZ
Equipment (cost) $28,000 $28,000
Accumulated Depreciation 19,000 10,000

Fair value of equipment 15,500 12,500

Cash given up 3,000

Instructions: Prepare the journal entries to record the exchange on the books
of both companies.
 Cont.

Calculation of Gain or Loss

ABC XYZ
Fair value of equipment received $12,500 $15,500
Cash received / paid 3,000 (3,000)
Less: Bookvalue of equipment
($28,000-19,000) (9,000)
($28,000-10,000) (18,000)
Gain or (Loss) on Exchange $6,500 ($5,500)

When a company receives cash (sometimes referred to as “boot”)

in an exchange that lacks commercial substance, it may
immediately recognize a portion of the gain.
Cont.

Has Commercial Substance

ABC:
Equipment 12,500
Cash 3,000
Accumulated depreciation 19,000
Equipment 28,000
Gain on exchange 6,500

XYZ:
Equipment 15,500
Accumulated depreciation 10,000
Loss on exchange 5,500
Equipment 28,000
Cash 3,000
 Cont.

Lacks Commercial Substance

ABC:
Equipment (12,500 – 5,242) 7,258
Cash 3,000
Accumulated depreciation 19,000
Equipment 28,000
Gain on exchange 1,258

Cash Received Total Recognized

x =
Cash Received + FMV of Assets Received Gain Gain

$3,000
x $6,500 = $1,258
$3,000 + $12,500
Deferred gain = $6,500 – 1,258 = $5,242
 Cont.

Lacks Commercial Substance

XYZ (no change):

Equipment 15,500
Accumulated depreciation 10,000
Loss on exchange 5,500
Equipment 28,000
Cash 3,000

Companies recognize a loss immediately whether the

exchange has commercial substance or not.
 Contributions
Contributions: Nonreciprocal transfers: transfer of assets
where nothing is given up in exchange (e.g. donations, gift, grants)
Companies should use:
 the fair value of the asset to establish its value on the books and
 should recognize contributions received as revenues in the period
received.
 When a company contributes a non-monetary asset, it should
record the amount of the donation as an expense at the fair value
of the donated asset.
 Two approaches to valuing and recording such transfer:
1. Capital Approach: credit contributed surplus account (donated
capital)
2. Income Approach: credit represents income and the gain is
deferred over the life of the asset (exception being land)
a) Cost Reduction Method: credit the respective asset account
b) Deferral Method: credit Deferred Revenue
 Contributions/Grants

Illustration: Kline Industries donates land to the city of Los

Angeles for a city park. The land cost $80,000 and has a fair
value of $110,000. Kline Industries records this donation as follows.

Donor’s Book:

Contribution Expense 110,000

Land 80,000
Gain on Disposal of Land 30,000
Donee’s Book:
Land 110,000
Contribution Revenue 110,000
 Contributions/Grants

Government Grants are assistance received from a government

in the form of transfers of resources to a company in return for
past or future compliance with certain conditions relating to the
operating activities of the company.

IFRS requires grants to be recognized in income (income

approach) on a systematic basis that matches them with the
related costs that they are intended to compensate.
Contributions/Grants

Example 1: Grant for Lab Equipment. AG Company received a

€500,000 subsidy from the government to purchase lab
equipment on January 2, 2015. The lab equipment cost is
€2,000,000, has a useful life of five years, and is depreciated on
the straight-line basis.

IFRS allows AG to record this grant in one of two ways:

1. Credit Deferred Grant Revenue for the subsidy and amortize

the deferred grant revenue over the five-year period.

2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.
 Contributions/Grants

Example 1: Grant for Lab Equipment. If AG chooses to record

deferred revenue of €500,000, it amortizes this amount over the
five-year period to income (€100,000 per year). The effects on the
financial statements at December 31, 2015, are:

ILLUSTRATION 10-17
Government Grant
Recorded as Deferred
Revenue
Contributions/Grants

Example 1: Grant for Lab Equipment. If AG chooses to reduce

the cost of the lab equipment, AG reports the equipment at
€1,500,000 (€2,000,000 - €500,000) and depreciates this amount
over the five-year period. The effects on the financial statements
at December 31, 2015, are: ILLUSTRATION 10-18
Government Grant Adjusted to Asset
 Measurement of Costs Associated with Specific Assets

 Cost of Land Improvements

Structural additions made to land. Cost includes all
expenditures necessary to make the improvements ready for
their intended use.

 Examples: driveways, parking lots, fences, landscaping,

and underground sprinklers, trees and shrubs, outdoor
lighting, concrete sewers and drainage.
 Limited useful lives.

 Expense (depreciate) the cost of land improvements over

their useful lives.
 Cont.

COST OF BUILDINGS
Includes all costs related directly to purchase or construction.

Purchase costs:
 Purchase price, closing costs (attorney’s fees, title insurance, etc.) and
real estate broker’s commission.
 Remodeling, and replacing or repairing the roof, floors, electrical wiring,
and plumbing. Reconditioning (purchase of an existing building)
Construction costs:
 materials, labor, and overhead costs incurred during construction and
professional fees and building permits.
 Contract price plus payments for architects’ fees, Engineers’ fees,
building permits, and excavation costs.
 Companies consider all costs incurred, from excavation to completion,
as part of the building costs.
 Insurance & interest costs incurred during construction
 Walkways to and around the building
Valuation of PPE-Interest Capitalization

Interest Costs During Construction

Three approaches have been suggested to account for the
interest incurred in financing the construction.

$0
Increase to Cost of Asset $?

Capitalize no Capitalize
interest during Capitalize actual all costs of
construction costs incurred during funds
construction

ILLUSTRATION 10-1
Capitalization of Interest
Costs IFRS
Valuation of PPE-Interest Capitalization

 IFRS requires — capitalizing actual interest (with

modification).

 Interest should be capitalized on all “pre-

earning” assets
 Consistent with historical cost.

 Capitalization considers three items:

1. Qualifying assets.

2. Capitalization period.

3. Amount to capitalize.
Valuation of PPE-Interest Capitalization

Qualifying Assets
Require a substantial period of time to get them ready for their
intended use or sale.
Two types of assets:
 Assets under construction for a company’s own use.
 Assets intended for sale or lease that are constructed or
produced as discrete projects.
Non-qualifying assets include:
Inventories that are routinely manufactured.
Assets that are in use or ready for their intended use.
Assets that are not being used in the earning activities of the
company and are not undergoing the activities necessary to
get them ready for use.
 Valuation of PPE-Interest Capitalization
Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.
2. Activities for readying the asset for use or sale are in progress .
3. Interest costs are being incurred.
 Capitalization continues for as long as these three conditions exist or
ceases when any one of the three conditions is not met or when the
asset is substantially completed.
 If the first condition is not met, the conceptual basis for interest
capitalization is absent.
 If the second condition is not met, construction activities are not the
cause of the opportunity cost.
 If the third condition is not met, there is no interest to capitalize.

Ends when:
The asset is substantially complete and ready for use
 Valuation of PPE-Interest Capitalization
Interrupted when:
 Brief & inherent in normal construction work (e.g. labor disputes)-
Capitalization continues
 Intentional delays (e.g. customer choice of fixtures)-Capitalization
discontinued.

 Capitalization period: time between the expenditure date and the

date interest capitalization stops or year-end (whichever comes first)

 If the construction period covers more than one fiscal period,

accumulated expenditures include prior years’ capitalized
interest. (See comprehensive illus #2)
Valuation of PPE-Interest Capitalization

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred [both on the specific & general or other loans].
2. Avoidable interest (Interest Potentially Capitalizable =IPC): the amount of
interest cost during the period that a company could theoretically avoid if it had
not made expenditures for the asset. Or Avoidable interest is the amount that
could have been avoided, if expenditures for the asset had not been made. It is a
function of AAE.
 Average Accumulated Expenditures [AAE]-is a measure of the debt that could
have been retired and is the average cash investment during the construction
period.
Valuation of PPE-Interest Capitalization

Illustration: Assume a company borrowed $200,000 at 12% interest

from State Bank on Jan. 1, 2015, for specific purposes of constructing
special-purpose equipment to be used in its operations. Construction on
the equipment began on Jan. 1, 2015, and the following expenditures
were made prior to the project’s completion on Dec. 31, 2015:

Actual Expenditures during 2015: Other general debt existing on

January 1 $ 100,000 Jan. 1, 2015:
April 30 150,000
$500,000, 14%, 10-year
November 1 300,000
bonds payable
December 31 100,000
Total expenditures $ 650,000 $300,000, 10%, 5-year
note payable
Valuation of PPE-Interest Capitalization

Step 1 - Determine which assets qualify for capitalization of

interest.
Special purpose equipment qualifies because it requires a period of
time to get ready and it will be used in the company’s operations.

Step 2 - Determine the capitalization period.

The capitalization period is from Jan. 1, 2015 through Dec. 31, 2015,
because expenditures are being made and interest costs are being
incurred during this period while construction is taking place.
Valuation of PPE-Interest Capitalization

Step 3 - Compute weighted-average accumulated expenditures

(WAAE).
Weighted
Average
Actual Capitalization Accumulated
Date Expenditures Period Expenditures
Jan. 1 $ 100,000 12/12 $ 100,000
Apr. 30 150,000 8/12 100,000
Nov. 1 300,000 2/12 50,000
Dec. 31 100,000 0/12 -
$ 650,000 $ 250,000

A company weights the construction expenditures by the amount of time

(fraction of a year or accounting period) that it can incur interest cost on the
expenditure.
Valuation of PPE-Interest Capitalization

Step 4 - Compute the Actual and Avoidable Interest.

Selecting Appropriate Interest Rate:

1. For the portion of weighted-average accumulated expenditures
that is less than or equal to any amounts borrowed specifically to
finance construction of the assets, use the interest rate incurred
on the specific borrowings.

2. For the portion of weighted-average accumulated expenditures

that is greater than any debt incurred specifically to finance
construction of the assets, use a weighted average of interest
rates incurred on all other outstanding debt during the period.
Valuation of PPE-Interest Capitalization

Step 4 - Compute the Actual and Avoidable Interest.

Actual Interest
Interest Actual
Debt Rate Interest Weighted-average
Specific Debt $ 200,000 12% $ 24,000 interest rate on
general debt
General Debt 500,000 14% 70,000 $100,000
= 12.5%
300,000 10% 30,000 $800,000
$ 1,000,000 $ 124,000

Accumulated Interest Avoidable

Avoidable Interest Expenditures Rate Interest
$ 200,000 12% $ 24,000
50,000 12.5% 6,250
$ 250,000 $ 30,250
Valuation of PPE-Interest Capitalization

Step 5 – Capitalize the lesser of Avoidable interest or Actual

interest.

Avoidable interest $ 30,250

Actual interest 124,000

Journal entry to Capitalize Interest:

Equipment 30,250
Interest Expense 30,250
Valuation of PPE-Interest Capitalization

Comprehensive Illustration 1: On November 1, 2014, ABC

Company contracted Pfeifer Construction Co. to construct a building
for $1,400,000 on land costing $100,000 (purchased from the
contractor and included in the first payment). ABC made the
following payments to the construction company during 2015.
Valuation of PPE-Interest Capitalization

ABC Construction completed the building, ready for occupancy, on

December 31, 2015. ABC had the following debt outstanding at
December 31, 2015.
Specific Construction Debt
1. 15%, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2014, with
interest payable annually on December 31 $750,000
Other Debt
2. 10%, 5-year note payable, dated December 31, 2011, with
interest payable annually on December 31 $550,000
3. 12%, 10-year bonds issued December 31, 2010, with
interest payable annually on December 31 $600,000

Compute weighted-average accumulated expenditures for 2015.

Valuation of PPE-Interest Capitalization

Compute weighted-average accumulated expenditures for 2015.

ILLUSTRATION 10-4
Computation of Weighted-Average
Accumulated Expenditures
Valuation of PPE-Interest Capitalization

ILLUSTRATION 10-5
Compute the avoidable interest. Computation of
Avoidable Interest
Valuation of PPE-Interest Capitalization

Compute the actual interest cost, which represents the maximum

amount of interest that it may capitalize during 2015.

ILLUSTRATION 10-6
Computation of Actual
Interest Cost
The interest cost that Shalla capitalizes is the
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.
Valuation of PPE-Interest Capitalization

ABC records the following journal entries during 2015:

January 1 Land 100,000

Buildings (or CIP) 110,000
Cash 210,000
March 1 Buildings 300,000
Cash 300,000
May 1 Buildings 540,000
Cash 540,000
December 31 Buildings 450,000
Cash 450,000
Buildings (Capitalized Interest) 120,228
Interest Expense. 119,272
Cash 239,500
Valuation of PPE-Interest Capitalization

At December 31, 2015, ABC discloses the amount of interest

capitalized either as part of the income statement or in the notes
accompanying the financial statements.

ILLUSTRATION 10-7
Capitalized Interest
Reported in the Income
Statement

ILLUSTRATION 10-8
Capitalized Interest
Disclosed in a Note
Cont.

 Cost of Equipment
Include all expenditures incurred in acquiring the equipment
and preparing it for use. Costs include:
 Cash purchase price,
 freight and handling charges,
 insurance on the equipment while in transit,
 cost of special foundations if required,
 assembling and installation costs, and
 costs of conducting trial runs.
 Sales taxes
 Repairs (purchase of used equipment)
 Reconditioning (purchase of used equipment)
 Modifying for use
 2. ACQUISITION COST OF PP&E [INITIAL VALUATION]

Illustration: Lenard Company purchases a delivery truck at a cash

price of Br.22,000. Related expenditures are sales taxes Br.1,320,
painting and lettering Br.500, motor vehicle license Br.80, and a
three-year accident insurance policy Br.1,600. Compute the cost of
the delivery truck.
Truck
Cash price Br.22,000
Sales taxes 1,320
Painting and lettering 500

Illustration 10-4
Computation of cost of
delivery truck Cost of Delivery Truck Br.23,820
Cont.

Illustration: Lenard Company purchases a delivery truck at a

cash price of Br.22,000. Related expenditures are sales taxes
Br.1,320, painting and lettering Br.500, motor vehicle license
Br.80, and a three-year accident insurance policy Br.1,600.
Prepare the journal entry to record these costs.

Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500
 2. ACQUISITION COST OF PP&E [INITIAL VALUATION]

 Cost of Acquiring Fixed Assets Excludes:

Vandalism (deliberate destruction of property)
Mistakes in installation
Uninsured theft
Damage during unpacking and installing
Fines for not obtaining proper permits from
government agencies
 Investment Property ( IAS40)

 Key Measurement Requirements (IAS 40)

1. Initial Measurement
Land or building held to earn
Measured at cost, including: rental income or capital appreciation
Purchase price Rather than use
Transaction costs: Legal fees, taxes, etc. In production, supply of goods or service
or administrative purpose
2. Subsequent Measurement:
Fair Value Model:
Measured at fair value at each reporting date.
Gains or losses recognized in profit or loss.
Cost Model:
Measured at cost less accumulated depreciation and impairment losses.
Similar to accounting for Property, Plant, and Equipment (IAS 16).
Investment Property (IAS 40)
Example
ABC Company purchases an office building:
Purchase Price: $1,000,000
Transaction Costs: $50,000
Initial Recognition: $1,050,000 (Purchase Price + Directly Attributable
Costs)
 Subsequent Measurement Options
1. Fair Value Model:
End of Reporting Period: Fair value increases to $1.2 million.
Recognized Gain: $150,000 (in profit or loss).
2. Cost Model:
 Depreciation: The building is depreciated over its useful life (e.g., 40 years).
Depreciation expense is recorded annually.
 Impairment Review: The building’s value is assessed for impairment
annually. If its recoverable amount falls below the carrying amount, an
impairment loss is recognized.
.
 Natural Resource Properties ( IFRS 6)

 Example:
 Company XYZ is exploring an oil field. The exploration cost is $2 million,
including costs for drilling and seismic surveys.
 Initially, these costs are capitalized as exploration and evaluation assets at
$2 million.
 Later, the company tests the field for impairment. If the recoverable
amount is found to be $1.5 million, an impairment loss of $500,000 is
recognized.
 Biological Assets ( IAS 41)

 Example:
 A farm owns 500 apple trees. The fair value of each tree is estimated to be
$100, and the costs to sell each tree are $10.
 Initially, the biological asset is valued at $45,000 ($100 - $10 per tree,
multiplied by 500 trees).
 At the end of the reporting period, if the fair value of each tree increases to
$120 and the costs to sell remain $10, the value is now $110 per tree. The
new total value is $55,000, and a gain of $10,000 is recognized in profit or
loss.
 Subsequent Costs

Additions
 New components or extensions that enhance an asset's capacity or efficiency.
 Capitalization Criteria:

 Costs are capitalized if they increase the economic benefits beyond the asset's original
performance.
Example:

Adding a new wing to a building that increases its rental capacity.

 Replacements, Major Overhauls, and Inspections
 Replacements:
 Significant parts replaced are capitalized.
 Carrying amount of replaced parts is derecognized.
 Major Overhauls:
 Major maintenance restoring asset to original performance.
 Costs are capitalized if recognition criteria are met.
 Inspections:
 Regular inspections to keep asset functional.
 Capitalized if benefits last beyond one period.
 Previous inspection costs are derecognized.
Example: Replacing a building roof or overhauling machinery.
 Rearrangement and Reinstallation
 Costs to reorganize layout or relocate an asset.

 Capitalization Criteria:
 Costs are capitalized if they provide future economic benefits like increased
efficiency or cost savings.
Example: Moving machinery in a factory to optimize production.
 Repairs
Definition:
 Costs incurred to maintain an asset in its current condition.
 Accounting Treatment:
 Expensed in the period incurred, as they do not increase future economic
benefits.
Example: Fixing a broken window or repainting a wall.
 Measurement Subsequent to Acquisition

 Depreciation and Impairment

 Depreciation:
 Systematic allocation of an asset’s cost over its useful life.
 Impairment:
 Recognized when an asset's carrying amount exceeds its recoverable amount.
 Impairment losses are recorded in profit or loss.
 Subsequent Measurement Models
 After initial recognition, assets can be measured using different models:
 Cost Model
 Revaluation Model
 Fair Value Model (specific to Investment Property)
 Cost Model
 Asset is carried at cost, less accumulated depreciation and impairment losses.
 Consider a company that purchases a building for $1,000,000 with an estimated
useful life of 40 years. The company uses the straight-line method for
depreciation. After 5 years, the accumulated depreciation is calculated, and it
is determined that the building has an impairment loss of $100,000 due to market
conditions.

 Calculate the annual depreciation expense for the building.

 Determine the carrying amount of the building after 5 years before considering
impairment.
 Calculate the final carrying amount of the building after accounting for the
impairment loss.
 Revaluation Model
 Definition:
• Asset is carried at revalued amount (fair value at revaluation date).
 Frequency:
 Regular revaluations ensure that the carrying amount does not differ materially
from fair value.
Example: Properties revalued periodically under IAS 16.
 Fair Value Model – Investment Property
 Fair Value Model (specific to IAS 40):
 Investment property measured at fair value at each reporting date.
 Gains or losses from changes in fair value are recognized in profit or loss.
 De-recognition

 Reporting Non-Current Assets Held for Sale

 Definition:
 Non-current assets classified as held for sale if their carrying amount will be
recovered primarily through sale, not continued use.
 Criteria:
 Must be available for immediate sale in its present condition.
 Sale is highly probable within 12 months.
 Measurement:
 Measured at the lower of carrying amount and fair value less costs to sell.
 Discarding, Sale, Exchange
 Discarding:
 When an asset is discarded, it is removed from the books.
 Any remaining carrying amount is recognized as a loss.
 Sale:
 When an asset is sold, the carrying amount is removed, and the difference between the sale proceeds
and carrying amount is recognized as a gain or loss.
 Exchange:
 When an asset is exchanged for another, the asset given up is de-recognized, and the fair value of the
new asset received is recognized.
 Any difference between the carrying amount and the fair value is recognized in profit or loss.
 Presentation and Disclosure

 Presentation of Non-Current Assets

 Classification:
 Non-current assets should be presented separately in the financial statements.
 Common classifications include:
 Property, Plant, and Equipment (PPE)
 Investment Property
 Intangible Assets
 Biological Assets

 Current vs. Non-Current:

 Distinguish between current and non-current assets based on their expected
realization within one year.
 Disclosure Requirements
 Key Information:
 Entities must disclose:
 Accounting policies for measuring non-current assets.
 Methods used for depreciation and amortization.
 Any changes in estimates that affect the carrying amounts.

 Fair Value Measurement:

 For assets measured at fair value, disclose:
 The valuation techniques and inputs used.
 Any significant unobservable inputs if applicable.

 Impairment:
 Disclose details regarding impairment losses recognized during the period.
 Indicate the reasons for impairment and how recoverable amounts were determined.
 Non-Current Assets Held for Sale
 Disclosure:
 Describe the nature and carrying amounts of non-current assets held for sale.
 Indicate the reasons for classifying assets as held for sale.
 Disclosure Example:
 Company XYZ has classified the following non-current assets as held for sale as of December 31,
2023:
 Nature of Assets:
 Building: An office building located at 123 Main St., with a total area of 10,000 square feet.
 Machinery: Industrial machinery that is no longer needed for production.
 Carrying Amounts:
 Building: $500,000
 Machinery: $150,000
 Total Carrying Amount: $650,000
 Intangible Assets
 Intangible assets are non-physical assets that provide a long-term economic benefit to a
company.
 Characteristics of Intangible Assets
 Lack of Physical Substance: Cannot be touched or seen.
 Identifiability: Can be distinguished from goodwill; capable of being sold or licensed.
 Non-Monetary Asset: Does not have a physical form and is not a financial instrument.
 Long-term: Expected to provide economic benefits over a period longer than one year.
 Common Types of Intangible Assets
 Goodwill: The excess amount paid over the fair value of identifiable net assets
during an acquisition. It represents the value of a company’s brand, customer
relationships, employee relations, and other factors.
 Patents: Exclusive rights granted for an invention or a process that prevents others
from making, using, or selling the invention for a certain period (typically 20 years).
 Trademarks: Brand names, logos, or symbols that distinguish a company's products
or services from those of others. Trademarks can last indefinitely as long as they
are in use and properly renewed.
 Copyrights: Legal rights that grant the creator of original works (such as music,
literature, and art) exclusive rights to use and distribute their work for a specified
period (typically the life of the author plus 70 years).
 Licenses: Permissions granted by a licensor to a licensee to use certain rights, such
as technology, software, or intellectual property.
 Customer Lists: Databases containing information about a company's customers,
which can be valuable for marketing and sales strategies.
 Software: Proprietary software developed or purchased by a company for its own
use, which can include both application software and operating systems.
 Recognition and Measurement of Intangible Assets at Acquisition
 Acquired Intangible Assets
 Intangible assets purchased from external sources.
 Initial Measurement: Recognized at cost, which includes:
 Purchase price
 Directly attributable costs to prepare the asset for use.
 Internally Developed Intangible Assets
 Intangible assets developed within the organization.
 Recognition Criteria:
 Must meet criteria for recognition (e.g., feasibility, resource availability).
 Measurement: Generally expensed unless specific criteria are met for capitalization (e.g., development
costs).
 Recognition and Measurement of Intangible Assets after Acquisition
 Impairment and De-recognition
 Impairment:
 Assess for impairment annually or whenever there is an indication of impairment.
 Recognize impairment losses when carrying amount exceeds recoverable amount.

 De-recognition:
 Remove an intangible asset from financial statements when it is disposed of or when no future economic benefits
are expected.
 Measurement and Impairment of Goodwill
 Goodwill is recognized when a business is acquired for more than the fair value of its identifiable net
assets.
 Measurement:
 Goodwill is not amortized but tested for impairment annually or more frequently if necessary.
 Impairment:
 If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.
 Presentation and Disclosure

 Presentation:
 Intangible assets should be presented separately on the balance sheet.
 Disclosure Requirements:
 Description of intangible assets and their useful lives.
 Method used for amortization.
 Impairment losses recognized during the period.
 Any significant judgments and estimates made in determining the carrying amounts.