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