KODE MATA KULIAH: EA 33401

NAMA MATA KULIAH: TEORI AKUNTANSI

PERTEMUAN KE: 16 SC&C; CH-9 LT ASSETS I

 CHAPTER 9
LONG TERM ASSETS I:
PROPERTY, PLANT AND
EQUIPMENT
 Property, Plant, and Equipment

• Represent a major source of

future service potential
• Valuation is important
because
– indication of physical resources
available to the firm
– and may give some indication of
future liquidity and funds flow.
 Accounting Objectives
1 Accounting and reporting to investors on stewardship
2 Accounting for the use and deterioration of plant and
equipment
3 Planning for new acquisitions
through budgeting
4 Supplying information for
taxing authorities
5 Supplying rate-making
information for
regulated industries
 Accounting for Cost
• Initial cost: sacrifice of resources given up now to
accomplish future objectives

 Preferred measurement technique:

discounted present value of future
receipts
 Indicates future services potential
Accounting for Cost
• Some problems
– Group purchases
– Self constructed assets
– Removal of existing assets
– Non-monetary exchange
– Donated or discovery values
 Group Purchases

• Total acquisition cost must

be allocated to the
individual assets
• Usual method:
– base the allocation on the
relative fair market values
 Self Constructed Assets
• What is cost?
– Include all incremental costs

 Allocation of fixed overhead

 None
 Incremental
 Same basis as other products

 Interest
 SFAS No 34 issues
 The concept of qualified assets
 The amount to capitalize
 Removal of Existing Assets

• Charge removal cost less

proceeds to cost of land
 Assets Acquired in Noncash
Transactions
• APB No. 29
– Fair value for most
– Book value when the exchange is not the
culmination of the earnings process
• Recording gains and losses on similar
productive assets
– Recognize all losses
– Recognize a proportional gain to the
extent boot is received
 Donated and Discovery
Values
• How they occur

 Recording gains and losses on

nonmonetary assets with
Commercial substance under
SFAS 153
 Definition
 Record at book value
 Financial Analysis of Property
Plant and Equipment
• The impact of PP & E on the return on
assets ratio
– Sustainability of earnings
– Evaluating a company’s replacement of
assets policy
 Financial Analysis
of Property Plant and Equipment
PP&E Acquisitions
(in millions)
182 181
200
150
100
50 18 15
0
2004 2005

Hershey Tootsie
 Financial Analysis of
Property Plant and Equipment
PP&E Acquisitions
(As % of total assets)
5,4% 5,6% 5,2%
6,00%
4,5%
4,00%

2,00%

0,00%
2004 2005

Hershey Tootsie
Financial Analysis of Property , Plant
and Equipment
• The companies’ return on assets
percentages are not being
distorted by a failure to
systematically replace their long-
term assets
• Hershey is replacing its assets over
twice as fast as is Tootsie
 Cost Allocation
• Capitalization implies future
service potential
• Matching concept requires
expiration of future service potential to be recorded in
the period incurred
– “cost allocation”
• Actual expiration of future service potential difficult to
ascertain
– method of cost allocation should be systematic and rational
• Depreciation is a form of cost allocation
 The Depreciation Process

• Issues:
1 Establishing the proper depreciation
base
2 Determining useful service life
3 Choosing a cost allocation method
Straight-line
Accelerated
Units of Activity
 Capital Vs. Revenue
Expenditures

Whether to capitalize
or charge to expense
expenditures required for an existing
long-term asset
 Criteria
 Prolong life or increase efficiency Capitalize

 Ordinary and necessary

Expense
 Recognition and Measurement
Issues

• User needs are currently not being satisfied

• Suggests a current value approach
 Impairment of Value
• Long-term asset accounting should be similar to
accounting for other assets
– Asset should be written down when value diminishes

• SFAS No.121
– Impairment occurs when carrying amount is not recoverable

Future cash flows < Book value

 Recognize loss when book value is not recoverable
 SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived
Assets

• Issued because SFAS No. 121 did not address accounting for a
segment of a business accounted for as a discontinued operation
under APB Opinion 30.
– Consequently, two accounting models existed for
long-lived assets to be disposed of.
• The Board decided to establish a single accounting model
– based on the framework established in SFAS No. 121, for long-
lived assets to be disposed of by sale.
 SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived
Assets
• Applies to all dispositions of long-term
assets
– Excludes current assets, intangibles and
financial instruments because they are
covered in other releases.
– According to its provisions assets are to
be classified as:
1. Long-term assets held and used
2. Long-lived assets to be disposed of other
than by sale
3. Long-Lived Assets to Be Disposed Of by
Sale
 SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived
Assets
• Long-term assets held and used are to be
tested for impairment using the SFAS No. 121
criteria if events suggest there may have been
an impairment.
• The impairment is to be measured at fair
value by using the present value procedures
outlined in SFAC No. 7.
• For long-term assets held and used, it might
be necessary to review the original
depreciation policy to determine if the useful
life is still as originally estimated.
 SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived
Assets
• Next the assets are grouped at the lowest level for which
identifiable cash flows are independent of cash flows from other
assets and liabilities
• Losses are allocated to the assets in the group on a pro-rata basis.
• Any losses are disclosed in income
from continuing operations
 SFAS No. 143: Accounting for Asset
Retirement Obligations

• Objective: to provide accounting

requirements for all obligations associated
with the removal of long-lived assets

 For each asset retirement obligation

 Initially record the fair value (present value) of the liability to
dispose of the asset when a reasonable estimate of its fair value is
available.
 Required to use SFAC No. 7 criteria for recognition of the liability
 Present value of the asset at the credit adjusted rate.
 Defined as the amount a third party with a comparable credit standing
would charge to assume the obligation.
 SFAS No. 143: Accounting for Asset
Retirement Obligations

• Capitalized asset retirement cost

– allocated in a systematic and rational manner
as depreciation expense over the estimated
useful life of the asset.
• Initial carrying value of the liability
– increased each year by use of the interest
method
• using the credit adjusted rate
– classified as accretion expense
and not interest expense.
 International Accounting
Standards
• The IASC has issued
pronouncements on the
following issues:
1. The overall issues associated with accounting for property, plant, and
equipment assets in a revised IAS No. 16, "Property, Plant and
Equipment."
2. Interest capitalization in IAS No. 23, “Borrowing Costs.
3. Impairment of Assets in IAS No. 36, “Impairment of Assets.”
4. Accounting for Investments in Property in IAS No 40, “Investment
Properties.”
5. The accounting treatment for assets held for disposal in IFRS No. 5, “Non-
Current Assets Held for Sale and Discontinued Operations.”
 IAS #16: Property, Plant and Equipment

• Revised IAS No. 16 did not change the fundamental

approach to accounting for property plant and equipment.
– Recognize items as assets when economic benefit will flow to enterprise
and cost can be measured
– Preference is to depreciate historical cost of assets
– Allows revaluations to current market value
– Requires recording of impairments
– Depreciation charge should reflect pattern
of benefits
– If change in pattern of benefits is noted,
change depreciation method to reflect
new pattern
 IAS #16: Property, Plant and
Equipment
• The major clarifications in revised IAS No. 16:
1. Requiring a components approach for
depreciation
2. The acquisition cost of property, plant, and
equipment should include
 Amount of an IAS 37 provision for the estimated cost
of dismantling and removing the asset and restoring
the site
 Include both provisions when the asset is acquired and incremental provisions
recognized while the asset is used
3. Accounting for incidental revenue (and related expenses) during
construction or development of an asset will depend on
 Whether the incidental revenue is a necessary activity in bringing the asset to
the location and
 Working condition necessary for it to be capable of operating in the manner
intended by management
 IAS #16: Property, Plant and
Equipment
4. Measurement of residual value defined:
• the current prices for assets of a similar age and
condition to the estimated age and condition of the
asset when it reaches the end of its useful life.

5. Exchanges of similar items of property, plant, and equipment

 recorded at fair value
 gain or loss will be recognized
 unless neither the fair value of the asset given up
nor the fair value of the asset acquired can be
measured reliably
 Subsequent expenditure is capitalized
only if the expenditure increases
the asset's future economic benefits above
those reflected in its most recently assessed
level of performance
 IAS No. 23: Borrowing Costs
• Benchmark treatment:
recognize interest cost in
period incurred
• Alternative treatment:
capitalize avoidable interest
 IAS No. 23: Impairment of
Assets
• Requires:
– an impairment loss to be recognized on items of property, plant and
equipment
– whenever the recoverable amount of an asset is less
than its book value
• The recoverable amount is the higher of
– asset’s selling price
– or value in use (present value of future cash flows)
• An impairment loss is recognized as an expense on the income statement
 IAS No. 40: Investment Property
• Defined as land or buildings held to
earn rentals or for capital appreciation
• May account by either:
– Fair value with changes
reflected in income
– Cost and depreciated
IFRS No. 5: Non-Current Assets Held for
Sale and Discontinued Operations
• Establishes a classification for non-current
assets 'held for sale'
– using the same criteria as those contained in US FASB
Statement 144 Accounting for the Impairment or
Disposal of Long-Lived Assets.
• The assets need to be disposed of through sale.
• Therefore, operations that are expected to be
wound down or abandoned would not meet the
definition
– but may be classified as discontinued once
abandoned.
 IFRS No. 6: Exploration & Development
Assets
 Required to be measured initially at cost.

• Typical allowable expenditures:

– Topographical, geological,
geochemical, and geophysical studies
– Exploratory drilling, trenching,
sampling