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Financial Accounting

with IFRS 5^th Edition

Chapter 9�Plant Assets, Natural Resources, and Intangible Assets

Weygandt ● Kimmel

Ch 9 Plant Assets, Natural Resources, and Intangible Assets

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Wiley Custom Edition

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Chapter Outline

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Learning Objective 1�Explain the Accounting for Plant Asset Expenditures

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9.1

Plant Asset Expenditures

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Plant Asset Expenditures

Plant assets are resources that

have a physical substance (a definite size and shape)
are used in the operations of a business
are not intended for sale to customers
are expected to be of use to the company for a number of years (unlike land, plant assets decline in service potential over their useful lives)

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Plant Asset Expenditures

They are also called property, plant, and equipment; plant and equipment; and fixed assets.
These assets are expected to be of use to the company for a number of years.
Except for land, plant assets decline in service potential over their useful lives.

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Historical Cost Principle

Requires that companies record plant assets at cost
Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use
The cost of factory machinery includes the purchase price, freight costs paid by the purchaser, and installation costs. Once cost is established, the company generally uses that amount as the basis of accounting for the plant asset over its useful life

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The Cost of Plant Assets – Land

All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.

Costs typically include:

cash purchase price
closing costs such as title and attorney’s fees
real estate brokers’ commissions
accrued property taxes and other liens on land assumed by purchaser

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Land Example

Illustration: Lew Ltd. acquires real estate at a cash cost of HK$2,000,000. The property contains an old warehouse that is razed at a net cost of HK$60,000 (HK$75,000 in costs less HK$15,000 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, HK$10,000, and the real estate broker’s commission, HK$80,000. Determine the amount to be reported as the cost of the land.

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Plant Asset Expenditures

Plant assets play a key role in ongoing operations.

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ILLUSTRATION 9.1 Percentages of plant assets in relation to total assets

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Land Example – Solution

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

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ILLUSTRATION 9.2 Computation of cost of land

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Land Improvements

The cost of a new parking lot for a Hero Supermarket (IDN) includes the amount paid for paving, fencing, and lighting.
Land improvements have limited useful lives. When well-maintained, they will eventually be replaced.

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Land Improvements

Structural additions with limited lives that are 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
Limited useful lives
Expense (depreciate) cost of land improvements over their useful lives

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Building Construction Costs

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

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Building Construction Costs

Construction costs:

Contract price
Payments for architects’ fees
Building permits
Excavation costs

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Buildings

Charge certain interest costs to the Buildings account. Interest costs incurred to finance the project are included in the cost of the building when a significant period of time is required to get the building ready for use.
The inclusion of interest costs in the cost of a constructed building is limited to interest costs incurred during the construction period.

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Equipment

Include all costs incurred in acquiring the equipment and preparing it for use.

Costs typically include:

Cash purchase price
Sales taxes
Freight charges
Insurance during transit paid by purchaser
Assembling, installing, and testing

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Equipment

Does not include motor vehicle licenses and accident insurance on company vehicles in the cost of equipment.
These costs represent annual recurring expenditures and do not benefit future periods.
Treated as expenses as they are incurred

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Cost of Factory Machinery Example - Cost

Illustration: Assume Zhang Ltd. purchases factory machinery at a cash price of HK$500,000. Related expenditures are for sales taxes HK$30,000, insurance during shipping HK$5,000, and installation and testing HK$10,000. The cost of the factory machinery is HK$545,000,

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Cost of Factory Machinery Example - Cost

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ILLUSTRATION 9.3 Computation of cost of factory machinery

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Cost of Plant Assets Example - Journal

Illustration: Assume that Huang Group purchases a delivery truck at a cash price of HK$420,000. Related expenditures consist of sales taxes HK$13,200, painting and lettering HK$5,000, motor vehicle license HK$800, and a three-year accident insurance policy HK$16,000. The cost of the delivery truck is HK$438,200.

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Cost of Plant Assets Example - Journal

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ILLUSTRATION 9.4 Computation of cost of delivery truck

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Expenditures During Useful Life

Ordinary Repairs are expenditures to maintain the operating efficiency and productive life of the unit.

Debit to Maintenance and Repairs Expense
Referred to as revenue expenditures

Additions and Improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.

Debit plant asset affected
Referred to as capital expenditures

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Expenditures During Useful Life

Companies must use good judgment in deciding between a revenue expenditure and capital expenditure.
This practice is justified on the basis of materiality.
The materiality concept states that if an item would not make a difference in decision-making, the company does not have to follow IFRS in reporting that item.

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DO IT! 1 Cost of Plant Assets

Assume that Jing Feng Heating and Cooling purchases a delivery truck for ¥150,000 cash, plus sales taxes of ¥9,000 and delivery costs of ¥5,000. The buyer also pays ¥2,000 for painting and lettering, ¥6,000 for an annual insurance policy, and ¥800 for a motor vehicle license. Explain how each of these costs would be accounted for.

Solution

The first four payments (¥150,000, ¥9,000, ¥5,000, and ¥2,000) are included in the cost of the truck (¥166,000)
The payments for insurance and the license are operating costs and therefore are expensed

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Learning Objective 2�Apply Depreciation Methods to Plant Assets

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9.2

Depreciation Methods

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Depreciation

Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

Process of cost allocation, not asset valuation
Applies to land improvements, buildings, and equipment, not land
Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life

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Depreciation

Cost allocation enables companies to properly match expenses with revenues in accordance with the expense recognition principle

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ILLUSTRATION 9.5 Depreciation as a cost allocation concept

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Depreciation

During a depreciable asset’s useful life, its revenue-producing ability declines because of wear and tear.
Revenue-producing ability may also decline because of obsolescence. Obsolescence is the process of becoming out of date before the asset physically wears out.

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Depreciation

Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset.
The balance in Accumulated Depreciation represents the total amount of the asset’s cost that the company has charged to expense. It is not a cash fund.

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Depreciation

Three factors affect the computation of depreciation:

Cost.
Useful life.
Residual value.

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Depreciation Methods

Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets.

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ILLUSTRATION 9.6 Three factors in computing depreciation

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Depreciation Methods

Management selects the method it believes best measures an asset’s contribution to revenue over its useful life.

Examples include:

Straight-line method.
Units-of-activity method.
Declining-balance method.

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Depreciation Methods

Each method is acceptable under IFRS.
Management selects the method(s) it believes to be appropriate.
Apply it consistently over the useful life of the asset.
Depreciation affects the statement of financial position through accumulated depreciation and the income statement through depreciation expense.

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Depreciation Methods

Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2020.

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

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ILLUSTRATION 9.7 Delivery truck data

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Straight-Line Method

Expense is same amount for each year
Depreciable cost = Cost less residual value

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ILLUSTRATION 9.8 Formula for straight-line method

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Straight-Line Method

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ILLUSTRATION 9.9 Straight-line depreciation schedule

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Do It! 2a Straight-Line Depreciation

On January 1, 2025, Iron Mountain Ski purchased a new snow-grooming machine for €50,000. The machine is estimated to have a 10-year life with a €2,000 residual value. What journal entry would Iron Mountain Ski make at December 31, 2025, if it uses the straight-line method of depreciation?

Solution

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Units-of-Activity Method

Companies estimate total units of activity to calculate depreciation cost per unit
Expense varies based on units of activity
Depreciable cost is cost less salvage value
Often referred to as units-of-production method

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Units-of-Activity Method

Assume that Barb’s Florists drives its delivery truck 15,000 miles in the first year. The units-of-activity formula and the computation of the first year’s depreciation expense

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ILLUSTRATION 9.10 Formula for units-of-activity method

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Units-of-Activity Method

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ILLUSTRATION 9.11 Units-of-activity depreciation schedule

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Declining-Balance Method

Compute annual depreciation expense by multiplying the book value at the beginning of the year by the declining-balance depreciation rate
A common declining-balance rate is double the straight-line rate
Ignores residual value in determining the amount to which the declining-balance rate is applied.
Depreciation stops when the asset’s book value equals expected residual value.

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Declining-Balance Method

Accelerated method
Decreasing annual depreciation expense over asset’s useful life
Double declining-balance rate is double the straight-line rate
Rate applied to book value

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Declining-Balance Method

A common declining-balance rate is double the straight-line rate. The method is often called the double-declining-balance method. If Barb’s Florists uses the double-declining-balance method, it uses a depreciation rate of 40% (2 × the straight-line rate of 20%).

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ILLUSTRATION 9.12 Formula for declining-balance method

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Declining-Balance Method

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ILLUSTRATION 9.13 Double-declining-balance depreciation schedule

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Comparison of Methods

Annual depreciation expense varies, but total depreciation expense is the same (€12,000) for the five-year period.

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ILLUSTRATION 9.14 Comparison of depreciation methods

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Comparison of Methods - Graph

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ILLUSTRATION 9.15 Patterns of depreciation

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Component Depreciation

IFRS requires component depreciation for plant assets
Any significant parts of a plant asset that have significantly different estimated useful lives should be separately depreciated

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Component Depreciation Example

Illustration: Lexure Construction builds an office building for HK$4,000,000, not including the cost of the land. If the HK$4,000,000 is allocated over the 40-year useful life of the building, Lexure reports HK$100,000 (HK$4,000,000 ÷ 40) of depreciation per year, assuming straight-line depreciation and no residual value. However, assume that HK$320,000 of the cost of the building relates to a heating, ventilation, and air conditioning (HVAC) system and HK$600,000 relates to flooring. Because the HVAC system has a depreciable life of five years and the flooring has a depreciable life of 10 years, Lexure must use component depreciation. It must reclassify HK$320,000 of the cost of the building to the HVAC system and HK$600,000 to the cost of flooring.

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Component Depreciation – Example Calculated

Assuming that Lexure uses straight-line depreciation, the following shows the computation of component depreciation for the first year of the office building.

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ILLUSTRATION 9.16 Component depreciation computation

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Depreciation and Income Taxes

Tax laws do not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Many companies use straight-line in their financial statements to maximize net income.
They also use an accelerated depreciation method on their tax returns to minimize their income taxes.

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Revaluation of Plant Assets

IFRS allows companies to revalue plant assets to fair value at the reporting date.
If revaluation is used, it must be applied to all assets in a class of assets.
Losses are reported in net income, whereas gains are reported in other comprehensive income

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Gain Situation

Illustration: Pernice Ltd. applies revaluation to equipment purchased on January 1, 2025, for HK$1,000,000. The equipment has a useful life of five years and no residual value. On December 31, 2025, Pernice makes the following journal entry to record depreciation expense, assuming straight-line depreciation.

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Gain Situation

At the end of 2025, independent appraisers determine that the asset has a fair value of HK$850,000. To report the equipment at its fair value of HK$850,000 on December 31, 2025, Pernice eliminates the Accumulated Depreciation—Equipment account, reduces Equipment to its fair value of HK$850,000, and records Revaluation Surplus of HK$50,000. The entry to record the revaluation is as follows.

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Revaluation of Plant Assets – Example

Pernice reports

Depreciation expense of HK$200,000 in the income statement
HK$50,000 in other comprehensive income
HK$850,000 is the new basis of the asset

Assuming no change in the total useful life, depreciation in 2026 will be HK$212,500 (HK$850,000 ÷ 4).

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Presentation of Equipment and Surplus

In this example, the revaluation surplus is HK$50,000, which is the difference between the fair value of HK$850,000 and the book value of HK$800,000. Revaluation surplus is an example of an item reported as other comprehensive income, as discussed in Chapter 5. Pernice now reports the following information in its statement of financial position at the end of 2025 as shown in Illustration 9.17.

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ILLUSTRATION 9.17 Statement presentation of plant assets (equipment) and revaluation surplus

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Loss Situation

Illustration: Pernice’s equipment has a carrying amount of HK$800,000 (HK$1,000,000 − HK$200,000). However, at the end of 2025, independent appraisers determine that the asset has a fair value of HK$775,000, which results in an impairment loss of HK$25,000 (HK$800,000 − HK$775,000). The entry to record the equipment and report the impairment loss is as follows.

* Impairment loss is reported on the income statement.

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Revising Periodic Depreciation

Management should periodically review annual depreciation expense.
When a change in an estimate is required, the company makes the change in current and future years.
It does not change depreciation in prior periods.

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Revising Periodic Depreciation

Accounted for in period of change and future periods (Change in Estimate)
No change in depreciation reported for prior years
Not considered an error
Use a step-by-step approach:

determine new depreciable cost
divide by remaining useful life

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Revising Periodic Depreciation

Illustration: Barb’s Florists decides on January 1, 2028, to extend the useful life of the truck by one year (a total life of six years) and increase its residual value to €2,200. The company has used the straight-line method to depreciate the asset to date. Depreciation for the first 3 years is as follows.

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ILLUSTRATION 9.18 Revised depreciation computation

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Revising Depreciation Example

Net book value at date of change in estimate (after 3 years).

Journal entry for 2028 and future years.

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Depreciation Expense

1,200

Accumulated Depreciation

1,200

Plant Assets:
Equipment	€13,000
Accumulated depreciation	7,200
Net book value	€ 5,800

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DO IT! 2b Revised Depreciation

Chambers Landscaping purchased a piece of equipment for £36,000. It estimated a 6-year life and £6,000 residual value. Thus, straight-line depreciation was £5,000 per year [(£36,000 − £6,000) ÷ 6]. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new residual value to be £2,000. Compute the revised depreciation.

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DO IT! 2b Revised Depreciation

Solution

Original depreciation expense = [(£36,000 − £6,000) ÷ 6] = £5,000

Accumulated depreciation after 2 years = 2 × £5,000 = £10,000

Book value = £36,000 − £10,000 = £26,000

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Learning Objective 3�Explain How to Account for the Disposal of Plant Assets

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9.3

Plant Asset Disposals

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Plant Asset Disposals

Companies dispose of plant assets that are no longer useful to them.

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ILLUSTRATION 9.19 Methods of plant asset disposal

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Plant Asset Disposals

Companies dispose of plant assets in three ways:

Retirement: Equipment is scrapped or discarded
Sale: Equipment is sold to another party
Exchange: Equipment is traded for new equipment

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

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Retirement of Plant Assets

No cash is received
Assume asset is fully depreciated
Decrease (debit) Accumulated Depreciation for full amount of depreciation taken over life of asset
Decrease (credit) asset account for original cost of asset

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Retirement of Plant Assets

Illustration: Hobart Publishing retires its computer printers, which cost €32,000. The accumulated depreciation on these printers is €32,000. Prepare the entry to record this retirement.

Question: What happens if a fully depreciated plant asset is still useful to the company?

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Retirement of Plant Assets

Illustration: Sunset Company discards delivery equipment that cost €18,000 and has accumulated depreciation of €14,000. The journal entry is?

Companies report a loss on disposal in the “Other income and expense” section of the income statement.

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Sale of Plant Assets

Compare the book value of the asset with the proceeds received from the sale.

If proceeds exceed the book value, a gain on disposal occurs
If proceeds are less than the book value, a loss on disposal occurs

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Gain on Sale

Illustration: On July 1, 2025, Wright Interiors sells office furniture for €16,000 cash. The office furniture originally cost €60,000. As of January 1, 2025, it had accumulated depreciation of €41,000. Depreciation for the first six months of 2025 is €8,000. Prepare the journal entry to record depreciation expense up to the date of sale.

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Sale of Plant Assets – Computing Gain

Wright records the sale and the gain on disposal of the plant asset as follows.

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ILLUSTRATION 9.20 Computation of gain on disposal

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Sale of Plant Assets – Computing Loss

Illustration: Assume that instead of selling the office furniture for €16,000, Wright sells it for €9,000.

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ILLUSTRATION 9.21 Computation of loss on disposal

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Sale of Plant Assets

Wright records the sale and the loss on disposal of the plant asset as follows.

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DO IT! 3 Plant Asset Disposal

Overland Trucking has decided to sell an old truck that cost £30,000 and which has accumulated depreciation of £16,000. (a) What entry would Overland Trucking make to record the sale of the truck for £17,000 cash?

Solution

a. Sale of truck for cash at a gain:

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DO IT! 3 Plant Asset Disposal

Overland Trucking has decided to sell an old truck that cost £30,000 and which has accumulated depreciation of £16,000. (b) What entry would Overland Trucking make to record the sale of the truck for £10,000 cash?

Solution

b. Sale of truck for cash at a loss:

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Learning Objective 4�Describe How to Account for Natural Resources and Intangible Assets

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9.4

Natural Resources and Intangible Assets

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Natural Resources and Depletion

Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.

Distinguishing characteristics:

Physically extracted in operations
Replaceable only by an act of nature

Cost is the price needed to acquire the resource and prepare it for its intended use.

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Natural Resources and Depletion

The allocation of the cost to expense in a rational and systematic manner over the resource’s useful life.

Companies generally use units-of-activity method
Depletion generally is a function of the units extracted

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ILLUSTRATION 9.22 Computation of depletion cost per unit

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Natural Resources and Depletion

Accumulated Depletion is a contra asset similar to Accumulated Depreciation.
Credits Inventory when it sells the inventory and debits Cost of Goods Sold.
The amount not sold remains in inventory and is reported in the current assets.
Some companies credits the amount of depletion directly to the natural resources account.

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Natural Resources and Depletion

Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. Compute the depletion cost per unit.

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ILLUSTRATION 9.22 Computation of depletion cost per unit

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Natural Resources and Depletion

Illustration: Lane Coal Company invests HK$50 million in a mine estimated to have 10 million tons of coal and no residual value. In the first year, Lane extracts and sells 250,000 tons of coal. Lane computes the depletion as follows:

HK$50,000,000 ÷ 10,000,000 = HK$5.00 depletion cost per ton

HK$5.00 x 250,000 = HK$1,250,000 annual depletion

Journal entry:

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Environmental, Social, and Governance Insight

Sustainability reports identify how the company is meeting its social responsibilities.
The following is an adapted section of a recent BHP Billiton (AUS) sustainability report on its environmental policies

(1) take action to address the challenges of climate change

(2) set and achieve targets that reduce pollution

(3) enhance biodiversity by assessing and considering ecological values and land-use aspects

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BHP Billiton has sections in its sustainability report that discuss people, safety, health, and community.

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Intangible Assets

Rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.
Record at cost.
Can have limited life or an indefinite life.
Common types of intangibles:

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Patents	Trademarks
Copyrights	Trade names
Franchises and Licenses	Goodwill

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Intangible Assets

Intangibles may arise from the following sources:

Government grants, such as patents, copyrights, licenses, trademarks, and trade names.
Acquisition of another business, in which the purchase price includes a payment for goodwill.
Private monopolistic arrangements arising from contractual agreements, such as franchises and leases.

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Intangible Assets

Limited-Life Intangibles:

Amortize to expense
Credit asset account or accumulated amortization

Indefinite-Life Intangibles:

No foreseeable limit on time asset is expected to provide cash flow
No amortization

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Intangible Assets

Company increases (debits) Amortization Expense and decreases (credits) the specific intangible asset.
Alternatively, some companies choose to credit a contra account, such as Accumulated Amortization.
Intangible assets are typically amortized on a straight-line basis.

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Patents

Amortize to expense
Exclusive right to manufacture, sell, or otherwise control an invention for 20 years from date of grant
Capitalize costs of purchasing a patent and amortize over 20-year life or its useful life, whichever is shorter
Expense any R&D costs in developing a patent
Legal fees incurred successfully defending a patent are capitalized to Patents account

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Accounting for Intangible Assets Example

Illustration: National Labs purchases a patent at a cost of NT$720,000. National estimates the useful life to be eight years. Prepare the journal entry to record the annual amortization for the year ended December 31.

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Cost	NT$720,000
Useful life	÷ 8
Amortization	NT$ 90,000

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Copyrights

Gives owner exclusive right to reproduce and sell an artistic or published work
Granted for life of creator plus 70 years
Capitalize costs of acquiring and defending
Amortized to expense over useful life

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Trademarks and Trade Names

Word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product

Big Mac, Coca-Cola, and Jetta

Legal protection for indefinite number of 20 year renewal periods
Capitalize acquisition costs
No amortization

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Franchises

Contractual arrangement between a franchisor and a franchisee

CPC, Subway, and Europcar are franchises

Franchise (or license) with a limited life should be amortized to expense over its useful life
If life is indefinite, cost is not amortized

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Goodwill

Represents the value of all favorable attributes that relate to a company that is not tied to any other specific asset.
Include exceptional management, desirable location, good customer relations, skilled employees, high-quality products, and harmonious relations with labor unions
Can be identified only with the business as a whole.

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Goodwill

Companies record goodwill only when an entire business is purchased.
Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired.
Goodwill is not amortized because it is considered to have an indefinite life.
Must be written down if a company determines that its value has been permanently impaired.

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Research and Development Costs

Research and development costs are expenditures that may lead to patents, copyrights, new processes, and new products.

Costs in the research phase are always expensed as incurred.
Costs in the development phase are expensed until specific criteria are met, primarily that technological feasibility is achieved.
Development costs incurred after technological feasibility has been achieved are capitalized to Development Costs, which is considered an intangible asset.

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Research and Development Costs

Illustrate: Assume that Laser Scanner Ltd. spent NT$1 million on research and NT$2 million on development of new products. Of the NT$2 million in development costs, NT$400,000 was incurred prior to technological feasibility and NT$1,600,000 was incurred after technological feasibility had been demonstrated

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DO IT! 4 Classification Concepts

Match the term most directly associated with each statement.

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Copyrights	Depletion
Intangible assets	Franchises
Research costs

Depletion

The allocation of the cost of a natural resource in a rational and systematic manner.
Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

Intangible assets

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DO IT! 4 Classification Concepts

Match the term most directly associated with each statement.

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Copyrights	Depletion
Intangible assets	Franchises
Research costs

An exclusive right granted by the government to reproduce and sell an artistic or published work.

Copyrights

A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area.

Franchises

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DO IT! 4 Classification Concepts

Match the term most directly associated with each statement.

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Copyrights	Depletion
Intangible assets	Franchises
Research costs

Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.

Research costs

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Learning Objective 5�Discuss How Plant Assets, Natural Resources, and Intangible Assets are Reported and Analyzed

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9.5

Statement Presentation and Analysis

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Presentation

companies combine plant assets and natural resources under “Property, plant, and equipment” in the statement of financial position.
Intangible assets are shown separately

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Statement Presentation

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ILLUSTRATION 9.23 Presentation of property, plant, and equipment, and intangible assets

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Analysis

The asset turnover analyzes the productivity of a company’s assets.
This ratio is computed by dividing net sales by average total assets for the

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Analysis

Illustration: LG’s net sales for a recent year were ₩58,140 billion. Its total ending assets were ₩35,528 billion, and beginning assets were ₩34,766 billion.

Each won invested in assets produced ₩1.65 in sales. If a company is using its assets efficiently, each investment in assets will create a high amount of sales.

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ILLUSTRATION 9.24 Asset turnover formula and computation

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DO IT! 5 Asset Turnover

Paramour Company reported net income of $180,000, net sales of $420,000, and had total assets of $460,000 on January 1, 2025, and total assets on December 31, 2025, of $540,000 billion. Determine Paramour’s asset turnover for 2025.

Solution

The asset turnover for Paramour Company is computed as follows.

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Learning Objective 6�Explain How to Account for the Exchange of Plant Assets

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Appendix 9A

Exchange of Plant Assets

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Exchange of Plant Assets

Companies record a gain or loss on exchange of plant assets

Most exchanges have commercial substance
Commercial substance if future cash flows change as a result of exchange

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Exchange of Plant Assets

In recording an exchange at a loss, four steps are required:

eliminate the book value of the asset given up,
record the cost of the asset acquired,
recognize the loss on disposal of plant assets, and
record the cash paid or received.

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Exchange of Plant Assets

In recording an exchange at a gain, the following four steps are involved:

eliminate the book value of the asset given up,
record the cost of the asset acquired,
recognize the gain on disposal of plant assets, and
record the cash paid or received.

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Loss Treatment

Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000.

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ILLUSTRATION 9A.1 Cost of semi-truck

ILLUSTRATION 9A.2 Computation of loss on disposal

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Loss Treatment

Illustration: Roland NV exchanged old trucks (cost €64,000 less €22,000 accumulated depreciation) plus cash of €17,000 for a new semi-truck. The old trucks had a fair market value of €26,000. Prepare the entry to record the exchange of assets by Roland.

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Gain Treatment

Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000.

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ILLUSTRATION 9A.3 Cost of new delivery equipment

ILLUSTRATION 9A.4 Computation of gain on disposal

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Gain Treatment

Illustration: Mark Express trades its old delivery equipment (cost €40,000 less €28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of €19,000. Mark also paid €3,000.

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Learning Objective 7�Compare the Accounting For Long-lived Assets Under IFRS and U.S. GAAP

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A Look at U.S. GAAP

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Similarities

The definition for plant assets for both GAAP and IFRS is essentially the same.
GAAP, like IFRS, capitalizes all direct costs in self-constructed assets. IFRS does not address the capitalization of fixed overhead although in practice these costs are generally capitalized.
GAAP, like IFRS, also capitalizes interest costs incurred during the construction period for self-constructed assets such as buildings.
GAAP also views depreciation as an allocation of cost over an asset’s useful life. GAAP permits the same depreciation methods as IFRS.

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Similarities

The accounting for subsequent expenditures are essentially the same under GAAP and IFRS.
Under both GAAP and IFRS, changes in the depreciation method used and changes in useful life are handled in current and future periods.
The accounting for plant asset disposals is essentially the same under GAAP and IFRS.
Initial costs to acquire natural resources are recorded in essentially the same manner under GAAP and IFRS.
The definition of intangible assets is essentially the same under GAAP and IFRS.

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Similarities

GAAP now requires that gains on exchanges of non-monetary assets be recognized if the exchange has commercial substance. This is the same framework used in IFRS.
Both IFRS and GAAP record property, plant, and equipment at historical cost when the asset is acquired. Acquisition cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.
Under both GAAP and IFRS, interest costs incurred during construction are capitalized.

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Differences

Under GAAP, component depreciation is generally not used
GAAP uses the term salvage value, rather than residual value.
While both IFRS and GAAP capitalize interest costs, the method used to determine the amount of interest capitalized is different.
IFRS allows companies to revalue plant assets to fair value at the reporting date.

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Differences

Costs in the research phase are always expensed under both GAAP and IFRS. Under IFRS, however, costs in the development phase are capitalized as Development Costs once technological feasibility is achieved. Under GAAP, all development costs are expensed as incurred.
IFRS permits revaluation of intangible assets. GAAP prohibits revaluation of intangible assets.

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Differences

IFRS requires an impairment test at each reporting date. 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.

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Copyright

All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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