978-1118334324 Chapter 9 Lecture Note Part 3

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

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

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

*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