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b. A loss results when the book value is greater than the fair value of the
asset given up.
3. Gains on exchange of plant assets are recognized by crediting Gain on
Disposal of Plant Assets.
a. The cost of the new asset received is equal to the fair value of the
old asset exchanged plus cash paid.
b. A gain results when the fair value is greater than the book value of
the asset given up.
A Look at IFRS
IFRS follows most of the same principles as GAAP in the accounting for property,
plant, and equipment. There are, however, some significant differences in the
implementation: IFRS allows the use of revaluation of property, plant, and
equipment, and it also requires the use of component depreciation. In addition,
there are some significant differences in the accounting for both intangible assets
and impairments.
KEY POINTS
The definition for plant assets for both IFRS and GAAP is essentially the
same.
Both IFRS and GAAP follow the historical cost principle when accounting
for property, plant, and equipment at date of acquisition. Cost consists of all
expenditures necessary to acquire the asset and make it ready for its
intended use.
Under both IFRS and GAAP, interest costs incurred during construction are
capitalized. Recently, IFRS converged to GAAP requirements in this area.
IFRS, like GAAP, capitalizes all direct costs in self-constructed assets such
as raw materials and labor. IFRS does not address the capitalization of
fixed overhead although in practice these costs are generally capitalized.
IFRS also views depreciation as an allocation of cost over an asset’s useful
life. IFRS permits the same depreciation methods (e.g., straight-line, accel-
erated, and units-of-activity) as GAAP. However, a major difference is that
IFRS requires component depreciation. Component depreciation specifies
that any significant parts of a depreciable asset that have different
estimated useful lives should be separately depreciated. Component
depreciation is allowed under GAAP but is seldom used.
IFRS uses the term residual value, rather than salvage value, to refer to an
owner’s estimate of an asset’s value at the end of its useful life for that
owner.
IFRS allows companies to revalue plant assets to fair value at the reporting
date. Companies that choose to use the revaluation framework must follow
revaluation procedures. If revaluation is used, it must be applied to all
assets in a class of assets. Assets that are experiencing rapid price
changes must be revalued on an annual basis, otherwise less frequent
revaluation is acceptable.
Under both GAAP and IFRS, changes in the depreciation method used and
changes in useful life are handled in current and future periods. Prior
periods are not affected. GAAP recently conformed to international
standards in the accounting for changes in depreciation methods.
The accounting for subsequent expenditures, such as ordinary repairs and
additions, are essentially the same under IFRS and GAAP.
The accounting for plant asset disposals is essentially the same under
IFRS and GAAP.
Initial costs to acquire natural resources are essentially the same under
IFRS and GAAP.
The definition of intangible assets is essentially the same under IFRS and
GAAP.
As in GAAP, under IFRS the costs associated with research and
development are segregated into the two components. Costs in the
research phase are always expensed under both IFRS and GAAP. Under
IFRS, however, costs in the development phase are capitalized as
Development Costs once technological feasibility is achieved.
IFRS permits revaluation of intangible assets (except for goodwill). GAAP
prohibits revaluation of intangible assets.
IFRS requires an impairment test at each reporting date for plant assets
and intangibles and records an impairment if the asset’s carrying amount
exceeds its recoverable amount. The recoverable amount is the higher of
the asset’s fair value less costs to sell or its value-in-use. Value-in-use is
the future cash flows to be derived from the particular asset, discounted to
present value. Under GAAP, impairment loss is measured as the excess of
the carrying amount over the asset’s fair value.
IFRS allows reversal of impairment losses when there has been a change
in economic conditions or in the expected use of the asset. Under GAAP,
impairment losses cannot be reversed for assets to be held and used; the
impairment loss results in a new cost basis for the asset. IFRS and GAAP
are similar in the accounting for impairments of assets held for disposal.
The accounting for exchanges of nonmonetary assets has recently
converged between IFRS and GAAP. GAAP now requires that gains on
exchanges of nonmonetary assets be recognized if the exchange has
commercial substance. This is the same framework used in IFRS.
LOOKING TO THE FUTURE
With respect to revaluations, as part of the conceptual framework project, the
Boards will examine the measurement bases used in accounting. It is too early to
say whether a converged conceptual framework will recommend fair value
measurement (and revaluation accounting) for plant assets and intangibles.
However, this is likely to be one of the more contentious issues, given the long-
standing use of historical cost as a measurement basis in GAAP.
The IASB and FASB have identified a project that would consider expanded
recognition of internally generated intangible assets. IFRS permits more
recognition of intangibles compared to GAAP. Thus, it will be challenging to
develop converged standards for intangible assets, given the long-standing
prohibition on capitalizing internally generated intangible assets and research
and development costs in GAAP.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. The cost of equipment consists of the cash purchase price plus certain related costs such
as sales taxes and freight charges.
True False
2. Cost to construct a plant includes the contract price, architect’s fees, building fees, excavation
True False
True False
4. Under the declining-balance method of depreciation, an asset may not be depreciated below
its estimated salvage value.
True False
5. Ordinary repairs are expenditures to increase the operating efficiency, productive capacity,
True False
True False
7. Unlike other assets that can be sold individually in the marketplace, goodwill can be identified
only with the business as a whole.
True False
8. The process of allocating the cost of natural resources to expense is called amortization.
True False
True False
*10. When plant assets are exchanged, the cost of the new equipment is always equal to the
fair value of the new equipment plus the cash paid.
True False
Multiple Choice
1. The cost of a factory machine includes all of the following costs except
a. invoice price less discount taken.
b. sales tax and insurance during shipping.
c. three-year insurance policy on the machine.
d. testing and installation cost.
2. On January 1, a machine with a useful life of 5 years and a salvage value of $8,000 was
declining-balance method?
a. $38,400
b. $36,480
c. $25,600
d. $24,320
3. An asset that cost $80,000 and has accumulated depreciation of $60,000 is sold for $12,000.
The journal entry would include a
d. credit to Accumulated Depreciation for $60,000.
4. The exclusive right to reproduce and sell an artistic or published work is called a
a. patent.
b. trademark.
c. license.
new equipment would include a debit to
a. Equipment (new) for $210,000.
b. Equipment (old) for $150,000.
d. Equipment (new) for $219,000.
ANSWERS TO QUIZ
True/False
Multiple Choice
