Operational Assets: Acquisition, Disposal and
Exchange
OPERATIONAL ASSETS
Basic characteristics – Actively used in primary operations– Expected to benefit future periods (long-term)– Generally not held for resale
Grouping of operational assets– Tangible = have physical substance– Intangible = value not tied to physical substance
OPERATIONAL ASSETS
Classification– Property, plant, and equipment• Buildings• Machinery, furniture and fixtures• Land• Land improvements
– Natural resources– Intangibles
ASSET ACQUISITION
With cash On credit In exchange for equity securities of the acquiring company Through donation from another entity Through construction In exchange for nonmonetary assets
ACQUISITION COST
General Rule
“The historical cost of acquiring an assetincludes the costs necessarily incurred to bring it
to the condition and location necessary for itsintended use.”
SFAS No. 34
ACQUISITION COST BUILDINGS
Architectural fees Cost of permits Excavation costs Construction costs Purchase price
ACQUISITION COSTMACHINERY, FURNITURE & FIXTURES
Net purchase price Transportation costs Installation Costs Modification to building
necessary to install equipment
Purchase price Real estate commissions Title search Title transfer fees Title insurance premiums
Land is not depreciable.Land is not depreciable.
ACQUISITION COST LAND
ACQUISITION COSTLAND IMPROVEMENTS
Driveways
Parking lots
Fencing
Landscaping
PURCHASE ON CREDITThe asset acquired is recorded at the
Cash equivalent price (market value)Cash equivalent price (market value)oror
Present value of future cash payments Present value of future cash payments using the prevailing market interest using the prevailing market interest
raterate
Whichever is more objective and reliable (APB Opinion No. 21)
Purchased With Equity Securities
Asset acquired is recorded at the fair market value of the asset or the fair market value of the securities, whichever is more objective and reliable.
If the securities are actively traded, fair market value can be determined.
If no objective and reliable value can be determined, board of directors assigns a “reasonable value.”
DONATED ASSETS
Municipalities may donate land and/or buildings to induce a company to locate in the area.
SFAS No. 116 defines a contribution as“an unconditional transfer of cash or other assets
to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfernonreciprocal transfer. .”
LUMP-SUM PURCHASE
Several assets may be acquired for a single lump-sum price that may be lower than the sum of the individual asset prices.
Portions of the lump-sum directly attributable to particular assets are assigned to those assets.
The remainder is allocated on the basis of relative value of the assets.
SELF-CONSTRUCTED ASSETS
Capitalize all costs directly associated with the construction including materials, labor and overhead.
In certain cases a company can capitalize– General overhead– Interest expense
SELF-CONSTRUCTED ASSETS
The asset’s recorded cost must never exceednever exceed its fair market value.
If costs actually incurred exceed fair market value, a loss must be recognized.
INTEREST CAPITALIZATION
In some cases a company may capitalize “avoidable interest” incurred on “qualifying assets.”– Avoidable interest -- interest that could have
been avoided if the asset were not self-constructed and the money used to retire debt.
Key questions to be answered– What are “qualifying assets?”– What is the capitalization period?– What amount should be capitalized?
PP&E - val - 17
INTEREST CAPITALIZATION
Qualifying assets– Self-constructed and required a period of time to
“get them ready for use” Capitalization period
– Begins when all following conditions exist• Expenditures have been made• Asset is being prepared for use• Interest cost is being incurred
– Ends when asset is ready for intended use Amount capitalized
– Lower of “actual interest incurred” or “avoidable interest”
PP&E - val - 18
AVOIDABLE INTEREST
Computation of amount– Interest rate x Weighted-average accumulated expenditures (WAAE)
Appropriate interest rates– For WAEE < or = to amount actually borrowed for
construction --- Use actual rate on specific borrowings for construction
– For portion of WAEE > than amount actually borrowed for construction --- use weighted average rate for all other outstanding debt during the capitalization period
DISPOSAL OF PLANT ASSETS
Update depreciation to date of disposal.
Original cost of asset and accumulated depreciation are removed from the accounts.
The difference between book value of the asset and the amount received in the disposal process is recorded as a gain or lossgain or loss.
NONMONETARY EXCHANGESGeneral Principle
Accounting for the exchange of nonmonetary assets should be based on:
• Market value of assets transferred
oror• Market value of assets acquired
Whichever is more readily determinable
PP&E - val - 21
NONMONETARY EXCHANGES
Exchange situation Accounting Fair values determinable
&
Assumes commercial substance
Record new asset using FMV & recognize gain or loss
FMV of either asset received or given up is not determinable
OR
Lacks commercial substanceOR
Exchange to facilitate sales
Record new asset using BV & no gain or loss recognized
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NONMONETARY EXCHANGESCommercial Substance
Exchange has “commercial substance” if the entity’s future cash flows are expected to change significantly as a result of the transaction
– Configuration of future cash flows changes
– Value of assets received differs from value of assets transferred
POST-ACQUISITION EXPENDITURES
Maintenance and ordinary repairs. Improvements (betterments),
replacements, and extraordinary repairs.
Additions. Rearrangements and other
adjustments.
Normally we debit an expense expense account for amounts spent on:
Maintenance and Ordinary RepairsMaintenance and Ordinary Repairs
Concept: keep assets in proper working order.
POST-ACQUISITION EXPENDITURES
Normally we debit the asset asset account for amounts spent on:
Improvements, Replacements,Improvements, Replacements,
and Extraordinary Repairsand Extraordinary Repairs
Concept: increase useful life or productivity of the original asset.
POST-ACQUISITION EXPENDITURES
Normally we debit the asset asset account for amounts spent on:
AdditionsAdditions
Concept: expansion of an existing asset.
POST-ACQUISITION EXPENDITURES
Normally we debit an other asset other asset account for amounts spent on:
Rearrangements and Other AdjustmentsRearrangements and Other Adjustments
Concept: increase efficiency of operations.
POST-ACQUISITION EXPENDITURES
INFORMATION GLUT!INFORMATION GLUT!
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