Table of Contents

Chapter 1 - Introduction to Fixed Assets.................................................................................................................................. 1

What are Fixed Assets?............................................................................................................................................................. 1

The Fixed Asset Designation.................................................................................................................................................... 2

Fixed Asset Classifications...................................................................................................................................................... 2

Applicable Accounting Frameworks...................................................................................................................................... 4

Accounting for Fixed Assets..................................................................................................................................................... 4

Accounting for Intangible Assets............................................................................................................................................ 5

Accounting for Not-for-Profit Fixed Assets.......................................................................................................................... 5

Fixed Asset Disclosures............................................................................................................................................................. 5

Fixed Asset Controls.................................................................................................................................................................. 5

Fixed Asset Policies and Procedures..................................................................................................................................... 6

Fixed Asset Record Keeping.................................................................................................................................................... 6

Fixed Asset Auditing.................................................................................................................................................................. 6

Fixed Asset Measurements........................................................................................................................................................ 7

Chapter 2 - Capital Budgeting Analysis................................................................................................................................... 9

Overview of Capital Budgeting............................................................................................................................................... 9

Bottleneck Analysis................................................................................................................................................................. 10

Net Present Value Analysis.................................................................................................................................................... 10

The Payback Method............................................................................................................................................................... 12

Discounted Payback............................................................................................................................................................ 13

Capital Budget Proposal Analysis....................................................................................................................................... 14

The Outsourcing Decision...................................................................................................................................................... 15

The Capital Budgeting Application Form.......................................................................................................................... 16

The Post Installation Review................................................................................................................................................. 19

The Lease or Buy Decision..................................................................................................................................................... 20

Leasing Concerns.................................................................................................................................................................... 21

Leasing Advantages................................................................................................................................................................ 22

Capital Budgeting with Little Cash..................................................................................................................................... 22

Chapter 3 - Initial Fixed Asset Recognition.......................................................................................................................... 25

The Capitalization Limit........................................................................................................................................................ 25

The Base Unit............................................................................................................................................................................ 26

GAAP: The Initial Measurement of a Fixed Asset.............................................................................................................. 28

Patent Measurement.......................................................................................................................................................... 28

Interpretive Commentary.................................................................................................................................................. 28

GAAP: The Measurement of Assets Acquired in a Business Combination.................................................................... 30

GAAP: The Measurement of Assets Acquired in a Finance Lease.................................................................................. 30

GAAP: Non-Monetary Exchanges........................................................................................................................................ 31

GAAP: Internal-Use Software................................................................................................................................................ 35

GAAP: Website Development Costs...................................................................................................................................... 36

IFRS: Initial Inclusions in a Fixed Asset............................................................................................................................. 37

IFRS: Initial Cost of a Fixed Asset....................................................................................................................................... 39

IFRS: The Measurement of Assets Acquired in a Business Combination...................................................................... 40

IFRS: The Measurement of Assets Acquired in a Finance Lease.................................................................................... 41

IFRS: Non-Monetary Exchanges.......................................................................................................................................... 42

IFRS: Website Development Costs........................................................................................................................................ 43

IFRS: Internally Developed Intangible Assets................................................................................................................... 44

Chapter 4 - Interest Capitalization.......................................................................................................................................... 47

Why and When Do We Capitalize Interest?........................................................................................................................ 47

Assets for Which Interest Must be Capitalized................................................................................................................... 48

Assets for Which Interest is Not Allowed............................................................................................................................. 48

The Interest Capitalization Period....................................................................................................................................... 48

The Capitalization Rate......................................................................................................................................................... 50

Calculating Interest Capitalization..................................................................................................................................... 51

Derecognizing Capitalized Interest..................................................................................................................................... 52

Interest Capitalization under IFRS...................................................................................................................................... 53

Chapter 5 - Asset Retirement Obligations............................................................................................................................. 56

The Liability for an ARO........................................................................................................................................................ 56

The Initial Measurement of an ARO..................................................................................................................................... 57

Subsequent Measurement of an ARO................................................................................................................................... 58

Settlement of an ARO.............................................................................................................................................................. 59

Overview of Environmental Obligations............................................................................................................................. 60

Measurement of Environmental Obligations..................................................................................................................... 62

Recoveries Related to Environmental Obligations........................................................................................................... 63

AROs Under IFRS..................................................................................................................................................................... 64

Chapter 6 - Depreciation and Amortization......................................................................................................................... 66

The Purpose of Depreciation................................................................................................................................................. 66

Depreciation Concepts........................................................................................................................................................... 66

Accelerated Depreciation...................................................................................................................................................... 67

Straight-Line Method.............................................................................................................................................................. 68

Sum-of-the-Years’ Digits Method.......................................................................................................................................... 68

Double-Declining Balance Method..................................................................................................................................... 69

Depletion Method.................................................................................................................................................................... 71

Units of Production Method.................................................................................................................................................. 72

MACRS Depreciation.............................................................................................................................................................. 73

The Depreciation of Land...................................................................................................................................................... 75

The Depreciation of Land Improvements............................................................................................................................ 75

Group Depreciation................................................................................................................................................................ 76

Composite Depreciation......................................................................................................................................................... 76

Depreciation Accounting Entries......................................................................................................................................... 77

Accumulated Depreciation.................................................................................................................................................... 78

Depreciation Under IFRS....................................................................................................................................................... 78

Other Depreciation Topics..................................................................................................................................................... 79

Impact on Cash Flow Analysis............................................................................................................................................ 79

Depreciation and Market Value........................................................................................................................................ 79

Chapter 7 - Subsequent Fixed Asset Measurement.............................................................................................................. 81

The Capitalization of Additional Expenditures................................................................................................................ 81

Asset Revaluation for Tangible Assets................................................................................................................................. 83

Asset Revaluation for Intangible Assets.............................................................................................................................. 85

Chapter 8 - Fixed Asset Impairment....................................................................................................................................... 89

Asset Impairment Under GAAP.............................................................................................................................................. 89

GAAP: Measurement of Asset Impairment..................................................................................................................... 89

GAAP: Impairment Testing Exemption for Intangible Assets....................................................................................... 90

GAAP: The Impact of Asset Retirement Obligations...................................................................................................... 90

GAAP: Measurement of Disposal Losses on Assets Held for Sale............................................................................... 90

GAAP: The Asset to be Tested.......................................................................................................................................... 90

GAAP: Timing of the Impairment Test.............................................................................................................................. 91

GAAP: Accounting for the Impairment of an Asset Group........................................................................................... 91

GAAP: Reversing an Impairment Loss.............................................................................................................................. 92

GAAP: Reversing a Disposal Loss...................................................................................................................................... 92

Asset Impairment Under IFRS................................................................................................................................................ 92

IFRS: The Impairment Test................................................................................................................................................. 92

IFRS: The Asset to be Tested............................................................................................................................................. 93

IFRS: Goodwill and Impairment Testing........................................................................................................................... 94

IFRS: Corporate Assets and Impairment Testing............................................................................................................ 95

IFRS: Timing of the Impairment Test................................................................................................................................. 95

IFRS: Indications of Impairment........................................................................................................................................ 95

IFRS: Intangible Asset Measurement............................................................................................................................... 96

IFRS: Determining Value in Use......................................................................................................................................... 96

IFRS: Determining the Fair Value less Costs to Sell........................................................................................................ 98

IFRS: Accounting for the Impairment of an Asset.......................................................................................................... 99

IFRS: Accounting for the Impairment of a Cash-Generating Unit................................................................................ 99

IFRS: Reversing an Impairment Loss.............................................................................................................................. 100

Chapter 9 - Fixed Asset Disposal........................................................................................................................................... 105

Asset Derecognition.............................................................................................................................................................. 105

The Held-for-Sale Classification........................................................................................................................................ 105

Reclassification from Held for Sale................................................................................................................................... 108

Discontinued Operations..................................................................................................................................................... 110

Abandoned Assets.................................................................................................................................................................. 111

Idle Assets................................................................................................................................................................................ 111

Asset Disposal Accounting.................................................................................................................................................. 111

Asset Disposal under IFRS................................................................................................................................................... 113

Chapter 10 - Fixed Asset Disclosures.................................................................................................................................... 115

GAAP Disclosures.................................................................................................................................................................. 115

GAAP: General Fixed Asset Disclosures........................................................................................................................ 115

GAAP: Asset Retirement Obligations............................................................................................................................. 116

GAAP: Capitalized Interest Disclosures......................................................................................................................... 117

GAAP: Change in Estimate Disclosures.......................................................................................................................... 117

GAAP: Intangible Asset Impairment Disclosures......................................................................................................... 118

GAAP: Intangible Asset Disclosures............................................................................................................................... 118

IFRS Disclosures.................................................................................................................................................................... 119

IFRS: General Fixed Asset Disclosures........................................................................................................................... 120

IFRS: Capitalized Interest Disclosures............................................................................................................................ 121

IFRS: Change in Estimate Disclosures............................................................................................................................. 121

IFRS: Estimates of Recoverable Amounts...................................................................................................................... 122

IFRS: Held for Sale Disclosures....................................................................................................................................... 123

IFRS: Impairment Disclosures.......................................................................................................................................... 124

IFRS: Intangible Asset Disclosures.................................................................................................................................. 125

IFRS: Revaluation Disclosures......................................................................................................................................... 126

IFRS: Optional Disclosures............................................................................................................................................... 127

Chapter 11 - Not-for-Profit Fixed Asset Accounting........................................................................................................ 129

Initial Recognition of Fixed Assets.................................................................................................................................... 129

Restrictions on Contributed Assets.................................................................................................................................... 130

Valuation of Contributed Assets........................................................................................................................................ 131

Valuation of Contributed Services.................................................................................................................................... 131

Valuation of Art and Similar Items.................................................................................................................................... 132

Depreciation of Fixed Assets............................................................................................................................................... 132

Recordation of Fixed Assets................................................................................................................................................ 132

Fixed Asset Controls in a Not-for-Profit Entity............................................................................................................... 133

Chapter 12 - Fixed Asset Record Keeping........................................................................................................................... 135

Fixed Asset Accounts............................................................................................................................................................ 135

Construction Project Record Keeping.............................................................................................................................. 137

Building Record Keeping.................................................................................................................................................... 138

Equipment Record Keeping................................................................................................................................................. 139

Land Record Keeping........................................................................................................................................................... 140

Lease Record Keeping.......................................................................................................................................................... 141

Operating Lease Record Keeping.................................................................................................................................. 142

Finance Lease Record Keeping...................................................................................................................................... 142

Document Retention.............................................................................................................................................................. 143

Fixed Asset Reports............................................................................................................................................................... 143

Depreciation Report......................................................................................................................................................... 143

Audit Report...................................................................................................................................................................... 145

Responsibility Report....................................................................................................................................................... 146

Asset Replacement Report.............................................................................................................................................. 147

Maintenance Report........................................................................................................................................................ 148

Chapter 13 - Fixed Asset Controls......................................................................................................................................... 151

Controls for Fixed Asset Acquisition................................................................................................................................. 151

Controls for Fixed Asset Construction.............................................................................................................................. 152

Controls for Fixed Asset Theft............................................................................................................................................ 153

Controls for Fixed Asset Valuation................................................................................................................................... 154

Controls for Fixed Asset Depreciation.............................................................................................................................. 154

Controls for Fixed Asset Disposal...................................................................................................................................... 155

The Control of Laptop Computers..................................................................................................................................... 155

Chapter 14 - Fixed Asset Policies and Procedures............................................................................................................ 158

Capital Budgeting Policies and Procedures................................................................................................................... 158

The Capital Request Form................................................................................................................................................... 160

Asset Recognition Procedures............................................................................................................................................ 161

Asset Revaluation Policies and Procedures..................................................................................................................... 163

Asset Exchange Policies and Procedures......................................................................................................................... 164

Depreciation Policies and Procedures............................................................................................................................. 165

Impairment Policies and Procedures................................................................................................................................. 166

Asset Retirement Obligation Policies and Procedures.................................................................................................. 167

Intangible Asset Policies and Procedures........................................................................................................................ 168

Transfer Policies.................................................................................................................................................................... 168

Disposal Policies and Procedures..................................................................................................................................... 169

The Asset Disposal Form...................................................................................................................................................... 169

Record Keeping Policies...................................................................................................................................................... 170

Tracking Policies and Procedures..................................................................................................................................... 171

The Fixed Asset Manual....................................................................................................................................................... 172

Chapter 15 - Fixed Asset Tracking....................................................................................................................................... 175

Tag Tracking.......................................................................................................................................................................... 175

Bar Code Tracking................................................................................................................................................................ 176

RFID Tracking – Active Transmission............................................................................................................................... 176

RFID Tracking – Passive Transmission............................................................................................................................. 177

Wireless Monitoring............................................................................................................................................................. 177

Chapter 16 - Fixed Asset Measurements.............................................................................................................................. 180

Sales to Fixed Assets Ratio.................................................................................................................................................. 180

Repairs and Maintenance Expense to Fixed Assets Ratio............................................................................................. 181

Accumulated Depreciation to Fixed Assets Ratio........................................................................................................... 182

Cash Flow to Fixed Asset Requirements Ratio................................................................................................................ 183

Return on Assets Employed.................................................................................................................................................. 184

Return on Operating Assets................................................................................................................................................. 185

Bottleneck Utilization........................................................................................................................................................... 186

Unscheduled Machine Downtime....................................................................................................................................... 187

Chapter 17 - Fixed Asset Auditing......................................................................................................................................... 190

Fixed Asset Audit Objectives............................................................................................................................................... 190

Fixed Asset Audit Procedures............................................................................................................................................. 190

Auditor Requests.................................................................................................................................................................... 193

Answers to Chapter Questions................................................................................................................................................ 196

Appendix - Journal Entries..................................................................................................................................................... 214

Glossary....................................................................................................................................................................................... 219

Index............................................................................................................................................................................................. 223

 

Final Examination………………………………………………………………………………………………….228