BU8101

Accounting: A User Perspective

Lecture 5
Property, Plant and Equipment,
Intangible Assets and Investments

© Lau Yin Kheng

 Property, Plant and Equipment,
Intangible Assets and Investments

Barry: Do these Prof: You will need to Best: Are there

investing activities acquire property, plant other assets that
have an impact on our and equipment to produce we need to
profitability. and sell the biscuits. acquire?
Prof: Yes, depreciation Prof: You may also make Prof: You may want
on plant assets have investments that will to protect your
an effect on profits. provide you with financial recipes and brand
You can earn revenues resources when you need name with patents
and incur expenses on them in the future. and trademarks.
your investments.
Barry and Best have decided that they should first examine these
investing activities and their effects on financial statements before
making any decisions.
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 Non-Current Assets

Property, Plant and Land, buildings,

Equipment equipment, etc.

Patents, trademarks,
Intangible Assets Goodwill, etc.
Major Categories
of Non-Current
Assets
Long-Term Debt or Equity
Investments Investments

Other Non-Current LT receivables or LT

Assets prepaid assets, etc.

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 Learning Outcomes
Once you have completed this lesson, you should be able
to:
1. Apply appropriate measurement rules for the purchase,
use and disposal of plant assets and discuss plant
assets disclosure on financial statements.
2. Account for intangible assets.
3. Apply appropriate measurement rules for the purchase,
valuation, and sale of long-term and short-term
investments.

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 Learning Objectives
1. Describe plant assets and account for the cost,
depreciation and disposal of plant assets.
2. Explain additional issues relating to accounting for plant
assets.
3. Explain the nature of intangible assets.
4. Describe Investments and discuss why companies
Invest.
5. Explain the accounting for the different types of
investments.
6. Indicate how investments are reported on the financial
statements.
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 Learning Objective 1
DESCRIBE PLANT ASSETS AND
ACCOUNT FOR THE COST,
DEPRECIATION AND DISPOSAL OF
PLANT ASSETS

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LO 1

Nature of Plant Assets

Have Physical Substance

Actively Used in Operations

Expected to Benefit Future Periods

Not intended for resale to customers

Called Property, Plant, & Equipment

Distinguish between:

Inventory Plant asset Supplies

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LO 1

Nature of Plant Assets

Use
Acquisition Disposal
Accounting for
Accounting for depreciation of the Accounting for
acquisition of asset and the disposition
the asset. subsequent of the asset.
expenditures.
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LO 1

Cost of Plant Assets

Asset price
(net of discount)

Cost = +
Reasonable and
necessary costs . . .
Interest on a loan
to purchase an
asset is expensed.
Interest on a
construction loan . . . for getting . . . for getting
is capitalised. the asset to the the asset ready
desired location. for use.

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LO 1

Costs of Plant Assets

Land
Land
Improvements
Purchase price, Fencing, paving,
commissions, survey & security systems &
legal fees, and back lighting
property taxes paid;
grading and removing
unwanted buildings
Building – Building –
Equipment
Constructed Purchased
Architectural fees, Purchase price, Purchase price,
contractors’ charges, broker’s commission, transportation,
materials, labor, and taxes paid and all insurance in transit,
overhead; interest on costs to repair and sale tax, installation
funds borrowed renovate building and testing

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LO 1
Costs of Plant Assets
Lump Purchase

Allocation of a Lump-Sum Purchase

The total cost must The allocation is based on

be allocated to the relative Fair Market
separate accounts Value of each asset
for each asset. purchased.

I think I’ll buy the

whole thing;
building and land.

© Lau Yin Kheng

LO 1
Costs of Plant Assets
Special Considerations
On 2nd January 2016, Barry Best Biscuit Company buys a
small parcel of property for $800,000 with $300,000 cash
and bank loan of $500,000. An appraiser determines that
60% of the cost should be allocated to the building and 40%
to the land.

Date Description Debit Credit

Land [40% of $800,000] (A+) 320,000
Building [60% of $800,000] (A+) 480,000
Cash (A-) 300,000
Note Payable (L+) 500,000

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LO 1
Costs of Plant Assets
Special Considerations

Farrer Court sold for record $1.3b

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LO 1
Capital Expenditures
and Revenue Expenditures
Capital Revenue
Expenditure Expenditure

Expenditure to
Expenditure to extend
maintain productive
the life or enhance the
life and operating
value of existing
efficiency of existing
assets.
assets.

To expense an
To capitalize an
expenditure
expenditure
means to charge it to
means to charge it to
an expense account.
an asset account
E.g. Replacing car
E.g. Major overhaul.
battery

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LO 1
Capital Expenditures
and Revenue Expenditures
 WorldCom, a global telecommunication provider,
transferred a total of US$3.1b of operating expenses to a
capital account between 2001 and 2002.
 To meet Wall Street earnings expectations
• Effect on financial statements:
• Understated expenses, overstated net income and
assets.
• Management incentives:
• Stock options and huge bonuses

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LO 1

Depreciation
Depreciation is the systematic allocation of cost of a plant asset
to expense in the periods benefiting from its use.

Balance Sheet Contra-asset

Cost of account
Assets:
plant Plant and equipment XX
assets Less: Accumulated depn. (XX)
Net book value XX
as the
services are
Income Statement received
Revenues:
Expenses:
Depreciation
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LO 1

Depreciation Methods
 Three variables required to compute depreciation:
• Acquisition cost
• Useful life – Estimated
• Residual or salvage value – Estimated selling price of
the asset at the end of its useful life
 Three popular depreciation methods:
• Straight-line
• Units-of-production
• Double-declining balance

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LO 1

Straight-Line Depreciation
Assume on 2nd January 2016, Barry Best Biscuit Company buys
baking equipment for $55,000. The equipment has an estimated
residual value of $5,000 and an estimated useful life of 5 years.

Depreciation Cost - Residual Value

=
Expense per Year Years of Useful Life

$55,000 - $5,000
=
5

= $10,000 per year

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LO 1

Straight-Line Depreciation
Depreciation Accumulated Accumulated Undepreciated
Expense Depreciation Depreciation Balance
Year (debit) (credit) Balance (book value)
$ 55,000
2016 $ 10,000 $ 10,000 $ 10,000 45,000
2017 10,000 10,000 20,000 35,000
2018 10,000 10,000 30,000 25,000
2019 10,000 10,000 40,000 15,000
2020 10,000 10,000 50,000 5,000
$ 50,000 $ 50,000 Residual Value

Date Description Debit Credit

2016 Depreciation (E+)(OE-) 10,000
Accumulated depreciation (A-) 10,000
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LO 1

Revising Periodic Depreciation

Estimated Estimated
residual value useful life

So depreciation
is an estimate.

Over the life of an asset, the original depreciation estimates

may need to be revised because of new information.

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LO 1

Revising Periodic Depreciation

When our estimates change, depreciation is:
Book value at
– Residual value at
date of change date of change ?

Remaining useful life at date of change

Asset cost (100 months from Jan 2015) $ 25,000

Accumulated depreciation, 31/12/2015
($250 per month × 12 months) 3,000
Remaining book value at 1/1/2016 $ 22,000
Remaining book value (net of residual value of $880) 21,120
Divide by remaining life ÷48
Revised monthly depreciation 440
Revised annual depreciation for 2016 $ 5,280

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LO 1

Disposal of Plant Assets

Cost $ 100,000
Accum. Depr. at date of disposal 46,000
Book value at date of disposal $ 54,000
Cash received 60,000
Gain $ 6,000

If proceeds from disposal > BV = gain (credit).

If proceeds from disposal < BV = loss (debit).
If proceeds = BV = no gain no loss.
If an asset is traded in for a new asset, the disposal value of the
old asset is the trade-in fair value. The gain or loss is the
difference between the trade-in fair value and the book vale of
the old asset at the date of trade-in.
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LO 1

Disposal of Plant Assets

Update depreciation
to the date of disposal.

Journalize disposal by:

Recording cash Recording a gain

received (debit). (credit) or loss
(debit).

Removing accumulated Removing the

depreciation (debit). asset cost (credit).

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LO 1

Disposal of Plant Assets

Date Account Titles and Explanation Debit Credit

Cash (A+) $60,000
Accumulated depreciation (A+) 46,000
Asset cost (A-) 100,000
Gain on disposal (R+)(OE+) 6,000
Disposal of asset

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 Learning Objective 2

EXPLAIN ADDITIONAL ISSUES

RELATING TO ACCOUNTING FOR
PLANT ASSETS

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LO 2

Impairment of Plant Assets

If the cost of an asset cannot be

recovered through future use or
sale, the asset should be written
down to its net realizable value.

Date Description Debit Credit

Impairment loss (E+) (OE-)
Accumulated impairment loss (A-)

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LO 2

Impairment of Plant Assets

 Events that can cause impairments are:
 A substantial decline in market value, physical
change, or usage of fixed assets;
 Significant legal or business climate change;

 Excessive costs associated with their operations;

 Expected operating losses or lower than expected

profitability stemming from these assets.

Microsoft's announced
a $7.6 billion write
down on Nokia assets
in early July 2015.
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LO 2
Measurement Subsequent
to Initial Recognition
 An entity elects one out of two measurement models for each
class of assets
 Cost model:
• carried at cost less any accumulated depreciation and any
accumulated impairment losses.
 Revaluation model
• carried at a revalued amount, less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses.
• fair value of asset must be able to be measured reliably.
• Increase in value from initial revaluation will be classified
as revaluation reserve under shareholders’ equity section
on the balance sheet and in other comprehensive income.
• Decrease in value from initial revaluation will be charged to
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income statement.
LO 2

Revaluation Model - Example

Assume the fair value of a plot of land that cost $800,000 a
year ago is now $850,000
$850,000.
Date Description Debit Credit
Land (850,000 – 800,000) (A+) 50,000
Revaluation Reserve (OE+) 50,000
Balance Sheet Comprehensive Income
Non-current assets Income Statement
PPE Revenue
Land $850,000 Less Expenses
Net income xxx
Shareholders’ equity Other comprehensive income
Revaluation reserve $50,000
Revaluation reserve $50,000
Total comprehensive income
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LO 2
Presentation and Disclosures
on Financial Statement
Sing Post Limited 31 March 2014

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LO 2
Presentation and Disclosures
on Financial Statement

 Judgment in Depreciation - Methods of Depreciation,

Estimates of Useful Life and Residual Value
• May differ from company to company.
• The reasonableness of management’s estimates is
evaluated by external auditors.
• Need to review useful life and residual value at every
year-end.
 Principle of Consistency
• Companies should avoid switching depreciation
methods from period to period.

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 Learning Objective 3

EXPLAIN THE NATURE OF

INTANGIBLE ASSETS

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LO 3

What are Intangible Assets?

Intangible assets are rights, privileges, and competitive
advantages that result from ownership of long-lived
assets that do not possess physical substance.
 It can be identifiable, has control over a resource,
 It is probable that future economic benefits
attributable to the assets will flow to the entity; and
 The cost can be measured reliably.

Patents Trademarks,
Examples are: Patents, Trademarks Copyrights,
Licenses/Franchise, Goodwill

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LO 3

What are Intangible Assets?

Debit: expense

Example: research and development costs

Why are these recorded as an expense rather
than an intangible asset?

Microsoft Notes 1:
Research and development expenses include ….. expenses associated
with product development. …. Such costs related to software development
are included in research and development expense until the point that
technological feasibility is reached, which for our software products, is
generally shortly before the products are released to manufacturing. Once
technological feasibility is reached, such costs are capitalized and
amortized to cost of revenue over the estimated lives of the products.
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LO 3

What are Intangible Assets?

Debit: Intangible Asset

FINITE LIFE? INFINITE LIFE?

• Amortize over the shorter Test annually for

of useful life or legal life. possible impairment
• Test annually for possible and write down.
impairment and write
down.

Amortization is the systematic write-off to expense of the

cost of intangible assets over their useful life or legal life,
whichever is shorter.

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LO 3
Types of Intangible Assets
Finite Life
 Trademark or trade name – Brand name or symbol that
identifies a product or service. No other party may use
the trademark or trade name without the permission of
the holder. Example: “Mercedes-Benz”
Mercedes-Benz and “Coca Cola.”
Coca Cola

 The cost of trademark is normally amortize over a short

period of time using the straight-line method.

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LO 3
Types of Intangible Assets
Definite Life
 Patent – an exclusive legal right granted by a government
to produce and sell a product or an invention.

Example: Microsoft acquired a patent at a cost of

$100,000 on 1st January. The legal life of the patent is 20
years but the anticipated useful life is 5 years. How
should the amortization expense be recorded at Dec 31.

Date Description Debit Credit

Dec 31 Amortization expense (E+) 20,000
Accumulated Amortization
expense (A-) 20,000
100,000/5 = 20,000
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LO 3
Types of Intangible Assets
Infinite Life
 Goodwill – Is the excess of the purchase price over the
fair market value of net assets acquired.
 Not amortized but tested for impairment loss annually.

Original purchase
Investment value
price

Goodwill account to be written down

Date Description Dr Cr
Impairment loss (E+)(OE-)
Accumulated Impairment loss (A-)
 Internally created goodwill should not be capitalized.
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LO 3
Types of Intangible Assets
Infinite Life

Extracted from CNN(Money) By Julianne Pepitone @julpepitone August 9, 2013: 1:03 PM ET

$'Million
FMV of net assets (FMV of assets less liabilities) 239
Purchase price 990
Difference = Goodwill 751

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 Learning Objective 4
DESCRIBE INVESTMENTS AND
DISCUSS WHY COMPANIES
INVEST

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LO 4

Investments on the Balance Sheet

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LO 4

Why Companies Invest?

Investments are sold
Marketable as cash is needed Cash
securities Cash payment
(short-term
investment) Excess Cash is
Invested temporarily
Repayment
of own debts
Long-term Future
investments cash needs
Future employee
retirement benefits

Investments
Gain access to markets,
with control or
significant resources, and technology
influence controlled by these companies

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LO 4

Types of Investments
Amortised Cost FVOCI
Debt 1. Collect Debt 2. Collect contractual
Debt or contractual cash
Investments Equity? cash flows and to sell;
flows; and and contractual cash
contractual cash flows are SPPI*.
flows are SPPI*.
Equity
Debt
Subsidiary Yes FVPL
(usually hold Has 3. Others not
> 50% of control? falling under
voting rights) 1 or 2 above.
No

FVPL FVOCI
Associates Yes Has No Default option for Investors may
(usually hold significant trading and non- irrevocably elect
20%-50% of influence? trading equity FVOCI for non-trading
voting rights) instruments equity instruments

Gains and losses

SPPI stands for “solely for payment of principal and interest” in OCI are never
Investment in debt instruments not covered in this course recycled to profit
and loss
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 Learning Objective 5
EXPLAIN THE ACCOUNTING FOR
THE DIFFERENT TYPES OF
INVESTMENTS

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LO 5

Accounting Methods for Investments

Types of Investments Accounting Treatment
No control or significant
influence
Marked to market-Fair value gain or loss
FVPL through profit or loss (P/L)
Expensed transaction costs to P/L
Marked to market-Fair value gain or loss
through other comprehensive income
FVOCI Gains and losses in OCI never recycled to P/L
Capitalized transaction costs
Significant influence
Associates Equity Method
Control
Subsidiaries Consolidation
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LO 5
Fair Value Through Profit
or Loss (FVPL) Investments
Default option for trading and
non-trading securities

Related expenses to Profit

Recorded at cost
or loss (income statement)

Recording acquisition:
On 1st June 20x8, Pan Co. bought 10,000 shares in SIA for
$10 per share. Transaction cost amounted to $2,000.
Date Description Debit Credit
Jun 1 FVPL Investments (A+) 100,000
Investment Expense (E+) (OE-) 2,000
Cash (A-) 102,000
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LO 6

Valuation of FVPL Investments

At its accounting year end on 31 December 20x8, Pan Co.’s FVPL
Investments are as follows:

Investments Cost Fair Value Gain/(Loss)

SIA $100,000 $110,000 $10,000

Date Description Debit Credit

Dec 31 FVPL Investments (A+) 10,000
Fair Value Gain/(Loss) (R+) 10,000

Balance Sheet, 31st December 20x8 Income Statement for 20x8

Current assets Other income/(expenses)
Short-term investments Fair value gain on FVPL
FVPL investments $110,000 investments $10,000
Investment expense (2,000)
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LO 5
Fair Value Through Other
Comprehensive Income (FVOCI)
Irrevocable election
at initial recognition

Can be classified as Recorded at cost plus

current or long term assets related expenses

Recording acquisition:
On 1st June 20x8, Pan Co. bought 10,000 shares in SIA for
$10 per share. Transaction cost amounted to $2,000.
Date Description Debit Credit
Jun 1 FVOCI investments (A+) 102,000
Cash (A-) 102,000
FVOCI investments = $100,000+$2,000 = $102,000
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LO 6

Valuation of FVOCI Investments

Pan Co.’s FVOCI Investments at 31 December 20x8
Investments Cost Fair Value Gain/(Loss)
SIA $102,000 $110,000 $8,000

Date Description Debit Credit

Dec 31 FVOCI Investments (A+) 8,000
FVOCI Reserve (OCI) 8,000

Balance Sheet, 31st December 20x8 Comprehensive Income for 20x8

Non-current assets Net income xx
Long-term investments Other comprehensive income
FVOCI investments $110,000 FVOCI reserve $8,000
Total comprehensive income
Shareholders’ equity
Share capital
FVOCI reserve $8,000

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