Operational assets acquisition disposal and exchange
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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

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Operational assets acquisition disposal and exchange

Operational Assets: Acquisition, Disposal and Exchange


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 acquisition disposal and exchange

OPERATIONAL ASSETS

  • Classification

    • Property, plant, and equipment

      • Buildings

      • Machinery, furniture and fixtures

      • Land

      • Land improvements

  • Natural resources

  • Intangibles


Operational assets acquisition disposal and exchange

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


Operational assets acquisition disposal and exchange

ACQUISITION COST

General Rule

“The historical cost of acquiring an asset

includes the costs necessarily incurred to bring it

to the condition and location necessary for its

intended use.”

SFAS No. 34


Acquisition cost buildings

ACQUISITION COSTBUILDINGS

  • Architectural fees

  • Cost of permits

  • Excavation costs

  • Construction costs

  • Purchase price


Operational assets acquisition disposal and exchange

ACQUISITION COSTMACHINERY, FURNITURE & FIXTURES

  • Net purchase price

  • Transportation costs

  • Installation Costs

  • Modification to buildingnecessary to install equipment


Operational assets acquisition disposal and exchange

ACQUISITION COST

LAND

  • Purchase price

  • Real estate commissions

  • Title search

  • Title transfer fees

  • Title insurance premiums

Land is not depreciable.


Acquisition cost land improvements

ACQUISITION COSTLAND IMPROVEMENTS

  • Driveways

  • Parking lots

  • Fencing

  • Landscaping


Purchase on credit

PURCHASE ON CREDIT

The asset acquired is recorded at the

Cash equivalent price (market value)

or

Present value of future cash payments using the prevailing market interest rate

Whichever is more objective and reliable

(APB Opinion No. 21)


Purchased with equity securities

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

DONATED ASSETS

  • Municipalities may donate land and/or buildings to induce a company to locate in the area.

  • SFAS No. 116defines 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 transfer. .”


Lump sum purchase

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

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 assets1

SELF-CONSTRUCTED ASSETS

  • The asset’s recorded cost must never exceedits fair market value.

  • If costs actually incurred exceed fair market value, a loss must be recognized.


Interest capitalization

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?


Interest capitalization1

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”


Avoidable interest

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

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 loss.


Nonmonetary exchanges general principle

NONMONETARY EXCHANGESGeneral Principle

Accounting for the exchange of nonmonetary assets should be based on:

  • Market value of assets transferred

    or

  • Market value of assets acquired

    Whichever is more readily determinable


Nonmonetary exchanges

NONMONETARY EXCHANGES


Nonmonetary exchanges commercial substance

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

POST-ACQUISITION EXPENDITURES

  • Maintenance and ordinary repairs.

  • Improvements (betterments), replacements, and extraordinary repairs.

  • Additions.

  • Rearrangements and other adjustments.


Post acquisition expenditures1

POST-ACQUISITION EXPENDITURES

Normally we debit an expense account for amounts spent on:

Maintenance and Ordinary Repairs

Concept: keep assets in proper working order.


Post acquisition expenditures2

POST-ACQUISITION EXPENDITURES

Normally we debit the asset account for amounts spent on:

Improvements, Replacements,

and Extraordinary Repairs

Concept: increase useful life or productivity of the original asset.


Post acquisition expenditures3

POST-ACQUISITION EXPENDITURES

Normally we debit the asset account for amounts spent on:

Additions

Concept: expansion of an existing asset.


Post acquisition expenditures4

POST-ACQUISITION EXPENDITURES

Normally we debit an other asset account for amounts spent on:

Rearrangements and Other Adjustments

Concept: increase efficiency of operations.


Operational assets acquisition disposal and exchange

INFORMATION GLUT!


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