Fixed assets

Fixed assets include land, land development, buildings, and equipment (machinery, furniture, and tools).

Its main characteristics include:

  • "used in operations" and not for resale.
  • long-term in nature and usually depreciated
  • have a physical substance.

Fixed Asset Acquisition Price Determination

Land

Covers all costs to acquire the land and until the land is ready for use. These costs, in particular, include:

(1) purchase price;

(2) Closing costs, such as attorney fees

(3) Real estate broker commissions

(4) Cost of leveling the land, filling, draining, and cleaning

(5) assumed a lien, mortgage, or encumbrance on property.

Land Development

All expenditures necessary to develop it and make it ready for its intended use

  • Driveways, parking lots, fences, landscaping, and underground sprinklers
  • limited economic life.
  • Expense (depreciation) of land development costs over the useful life

Building

All costs directly related to the purchase or construction of the building

Purchase fee:

  • Purchase price, closing costs, and the real estate broker's commission
  • Renovation and replacement or repair of roofs, floors, electrical cables, and pipes

Construction costs:

  • Contract price plus payments for architect's fees, building permits, and excavation costs.

Equipment

All costs incurred to acquire the equipment and get it ready for its intended use

Fees usually include:

  • Purchase price,
  • Sales tax,
  • Shipping and handling fees,
  • Equipment insurance during transit,
  • assembly and installation costs, and
  • The cost of conducting trials

depreciation

Depreciation is the process of allocating the acquisition cost of tangible assets into expenses in a systematic and rational manner over a period that has been estimated from benefit to use.

  • the process of allocating costs, not valuing assets.
  • Applied for the development of land, buildings, and equipment, not land.
  • depreciable because the ability to generate income from the asset will decrease over the economic life of the asset.

Factor in the calculation of depreciation

  • Cost: All costs incurred All costs incurred to acquire the equipment and get it ready for its intended use
  • Economic life: estimated useful life based on need for repair, period based on need for repair, service life, and vulnerability to expiration

Residual value is the estimated value of the asset at the end of its economic life.

Depreciation Method

The goal is to choose the best method that measures the asset's contribution to income over its economic life.

An example is:

(1) Straight-line method

(2) Activity unit method

(3) declining balance method

Straight line

  • Expenses are the same every year.
  • Depreciable cost: cost less residual value.

Activity Units

  • Companies estimate total activity units to calculate depreciation expense per unit.
  • Expenses vary by activity unit.
  • Depreciable cost: cost less residual value

Decreased balance

  • decrease in annual depreciation expense over the economic life of the asset.
  • The declining balance rate is equal to twice the straight-line rate.
  • Rates are applied to book value.

Depreciation and income tax

Tax laws often do not require taxpayers to use the same depreciation method on tax returns that is used in preparing financial statements.

Many companies use the straight-line method in their financial statements to minimize profits. At the same time, they use the double-declining balance method for their tax returns to minimize their income taxes.

Change in depreciation period

  • Calculated in the period of change and in the future (estimated change).
  • not handled retrospectively.
  • not considered an error

Fixed Assets Revaluation

IFRS permits the revaluation of fixed assets to fair value.

If revaluation is used, it must be applied to all assets in the asset class.

Assets that experience rapid price changes should be revalued on an annual basis; otherwise, infrequent revaluations are accepted.

Expenditures during the Benefit Period

Typical repairs are expenses to maintain operating efficiency and productive unit life.

  • Debit: Repair (or Maintenance) Expenses
  • What is meant by income expenditure"?

Additions and Improvements: costs incurred to increase operating efficiency, productive capacity, and the useful life of fixed assets

  • Debt-affected fixed assets
  • What is meant by capital expenditure"?

Fixed Asset Disposal

Companies dispose of fixed assets in three ways: termination, sale, and exchange.

Record depreciation up to the date of disposal.

Eliminate assets through (1) debiting accumulated depreciation and (2) crediting the asset account.

Fixed Asset Sales

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

  • If the funds exceed the book value, a profit will be obtained from the disposal that occurs.
  • If the funds are less than the book value, then there is a loss on the disposal that occurs.

Natural resources

Natural resources consist of trees that grow and resources taken from the ground, such as oil, gas, and minerals.

Growing trees is considered a biological asset under IFRS. In the year before they produce, the recorded value of the biological assets is adjusted to their fair value in each period.

IFRS defines extractive industries as businesses engaged in discovering and extracting natural resources located in or near the earth's crust.

Acquisition cost: the price required to acquire a resource and prepare it for use.

Depletion is the allocation of costs to expenses in a rational and systematic way over the useful life of the resource.

  • Depletion in natural resources equals depreciation in fixed assets.
  • Companies generally use the unit activity method.
  • Depletion is generally a function of the units extracted.

Presentation of Financial Statements

Unsold extracted natural resources are reported as inventory in the current assets section.

Intangible Assets (Intangible Assets)

Intangible assets are rights, privileges, and competitive advantages that do not have physical substance.

Intangible assets are categorized as having a limited life or an indefinite life. Common types of intangible assets:

  • Patent
  • Copyrights
  • Franchises or licenses
  • Trademarks and trade names
  • Goodwill

Types of Intangible Assets

Patent

  • exclusive right to manufacture, sell, or control an invention for a specified number of years from the grant date
  • The legality period in many countries is 20 years.
  • Capitalize on the cost of purchasing a patent and amortize its legal or useful life, whichever is shorter.
  • Legal fees incurred for successful patent defense are capitalized in the patent account.

Accounting for Intangible Assets

Intangible assets are usually amortized on a straight-line basis.

Copyrights

  • Grants the owner exclusive rights to reproduce and sell the artwork or publication.

plays, literary works, musical works, pictures, photographs, videos, and audiovisual materials.

  • bestows the life of the creator plus a special number of years. where it can vary between countries but is generally 70 years.
  • capitalize on acquisition and maintenance costs.
  • Amortize expenses over their useful lives.

Trademarks and trade names

  • words, phrases, jingles, or symbols that identify a particular company or product.

Wheaties, Game Boy, Frappucino, Kleenex, Windows, Coca-Cola, and Jetta

  • Registration provides for a certain number of years of protection, which may vary from country to country but is generally 20 years.
  • capitalize on acquisition costs.
  • extended indefinitely, not amortized.

Franchises and licenses

  • contract agreement between franchisor and franchisee.

BP (GBR), Taco Bell (USA), or Rent-A-Wreck (USA) are franchises.

  • A franchise (or license) with a limited life must be amortized as an expense over the useful life of the franchise.
  • Francise with unlimited useful life must be recognized at cost and not amortized.

Goodwill

Including excellent management, a desirable location, good customer relations, skilled employees, high-quality products, etc.

only recorded when the entire business is purchased.

Goodwill is recorded as the excess of the purchase price over the fair value of the identifiable net assets acquired.

Goodwill created internally does not need to be capitalized.

Research and development costs

Often produces something that the company patents or copyrights, such as:

  • New product,
  • process,
  • idea,
  • formulas,
  • composition, or
  • Changed work

Costs in the research phase are always expensed as incurred.

Costs in the development phase are expensed until certain criteria are met, especially

that technological feasibility is achieved.

Understanding U.S. GAAP

Fixed assets, natural resources, and intangible assets

  • As under IFRS, under GAAP, costs related to research and development are segregated into two components. Fees in the research phase are always charged under IFRS and GAAP. Under GAAP, however, costs under development are always expensed. As shown in this chapter, under IFRS, development costs can be capitalized when technological feasibility is achieved.
  • IFRS permits the revaluation of intangible assets (except for goodwill).
  • GAAP prohibits the revaluation of intangible assets. GAAP does not require component depreciation.
  • GAAP does not permit the use of revaluation accounting for property, plant, and equipment where it is permitted under IFRS.
  • Under GAAP and IFRS, changes to the depreciation method used and changes in useful lives are handled in the current and future periods. Previous periods are not affected. GAAP recently adjusted IFRS in accounting for changes to depreciation methods.
  • IFRS permits the reversal of an impairment loss when there is a change in economic conditions or in the expected use of the asset. Under GAAP, an impairment loss is not refundable for an asset that will be held and used; an impairment loss creates a new cost basis for the asset. IFRS and GAAP are the same in accounting for the impairment of assets held for disposal.
  • Accounting for the exchange of non-monetary assets has recently moved to a meeting point between IFRS and GAAP.