FINANCIAL ACCOUNTING

THEORY AND ANALYSIS:

TEXT AND CASES
11TH EDITION

RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY
CHAPTER 9
LONG TERM ASSETS I:
PROPERTY, PLANT AND
EQUIPMENT
 Property, Plant, and Equipment

 Represent a major source

of future service potential
 Valuation is important
because
 Indication of physical
resources available to the firm
 May give some indication of
future liquidity and funds flow.
 Accounting Objectives
 Accounting and reporting to investors on stewardship
 Accounting for the use and deterioration of plant and
equipment
 Planning for new acquisitions
through budgeting
 Supplying information for
taxing authorities
 Supplying rate-making
information for
regulated industries
 Accounting for Cost
 Initial cost: sacrifice of resources given up now to
accomplish future objectives

 Preferred measurement technique:

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

 Total acquisition cost must

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

 Allocation of fixed overhead

 None
 Incremental
 Same basis as other products

 Interest
 SFAS No 34 (FASB ASC 835-20) issues
 The concept of qualified assets
 The amount to capitalize
 Removal of Existing Assets

 Charge removal cost less

proceeds to cost of land
Assets Acquired in Noncash Transactions

 APB No. 29 (FASB ASC 845)

 Fair value for most
 Book value when the exchange is not

the culmination of the earnings process

 Recording gains and losses on
nonmonetary assets with Commercial
substance under SFAS 153
 Definition

 Record at book value

Donated and Discovery Values
 How they occur
 Accounting Under SFAS No. 116
(FASB ASC 605-10-15-3)
 Financial Analysis of Property
Plant and Equipment
 The impact of PP & E on the return on
assets ratio
 Sustainability of earnings
 Evaluating a company’s replacement of
assets policy
 Financial Analysis
of Property Plant and Equipment
PP&E Acquisitions
(in millions)

400 324
300
179.5
200
100 12.8 16.4
0
2010 2011

Hershey Tootsie Roll

 Financial Analysis of
Property Plant and Equipment
PP&E Acquisitions
(As % of total assets)

9.0%
10.0%
8.0%
5.3%
6.0%
2.9% 3.3%
4.0%
2.0%
0.0%
2010 2011

Hershey Tootsie Roll

Financial Analysis of Property , Plant
and Equipment
 The companies’ return on
assets percentages are not
being distorted by a failure to
systematically replace their
long-term assets
 Cost Allocation
 Capitalization implies future
service potential
 Matching concept requires
expiration of future service potential to be
recorded in the period incurred
 “Cost allocation”
 Actual expiration of future service potential difficult
to ascertain
 Method of cost allocation should be systematic and
rational
 Depreciation is a form of cost allocation
 The Depreciation Process
 Issues:
 Establishing the proper depreciation
base
 Determining useful service life
 Choosing a cost allocation method
 Straight-line
 Accelerated
 Units of Activity
 Capital Vs. Revenue Expenditures

Whether to capitalize
or charge to expense
expenditures required for an existing
long-term asset
 Criteria
 Prolong life or increase efficiency Capitalize
 Ordinary and necessary
Expense
Recognition and Measurement Issues

 User needs are currently not being satisfied

 Suggests a current value approach
 Impairment of Value
 Long-term asset accounting should be similar to
accounting for other assets
 Asset should be written down when value diminishes
 SFAS No.121
 Impairment occurs when carrying amount is not recoverable

Future cash flows < Book value

 Recognize loss when book value is not recoverable
SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived
Assets
 Issued because SFAS No. 121 did not address accounting
for a segment of a business accounted for as a discontinued
operation under APB Opinion 30.
 Consequently, two accounting models existed for
long-lived assets to be disposed of.
 The Board decided to establish a single accounting model
 Based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale.
SFAS No. 144: Accounting for the Impairment or
Disposal of Long-Lived Assets
(See FASB ASCs 360-35-15 to 49)
 Applies to all dispositions of long-
term assets
 Excludes current assets, intangibles
and financial instruments because
they are covered in other releases.
 According to its provisions assets are
to be classified as:
1. Long-term assets held and used
2. Long-lived assets to be disposed of
other than by sale
3. Long-Lived Assets to Be Disposed Of
by Sale
 SFAS No. 144: Accounting for the
Impairment or Disposal of Long-Lived Assets
 Long-term assets held and used are to be
tested for impairment using the SFAS No.
121 criteria if events suggest there may
have been an impairment.
 The impairment is to be measured at fair
value by using the present value
procedures outlined in SFAC No. 7.
 For long-term assets held and used, it
might be necessary to review the original
depreciation policy to determine if the
useful life is still as originally estimated.
SFAS No. 144 (FASB ASC 360): Accounting
for the Impairment or Disposal of Long-Lived
Assets
 Next the assets are grouped at the lowest level for which
identifiable cash flows are independent of cash flows from
other assets and liabilities
 Losses are allocated to the assets in the group on a pro-rata
basis.
 Any losses are disclosed in income
from continuing operations
 SFAS No. 143 (FASB ASC 410-20):
Accounting for Asset Retirement Obligations

 Objective: to provide accounting

requirements for all obligations
associated with the removal of long-lived
assets
 For each asset retirement obligation
 Initially record the fair value (present value) of the liability to
dispose of the asset when a reasonable estimate of its fair value is
available.
 Required to use SFAC No. 7 criteria for recognition of the liability
 Present value of the asset at the credit adjusted rate.
 Defined as the amount a third party with a comparable credit standing
would charge to assume the obligation.
 SFAS No. 143 (FASB ASC 410-20):
Accounting for Asset Retirement Obligations

 Capitalized asset retirement cost

 Allocated in a systematic and rational manner
as depreciation expense over the estimated
useful life of the asset.
 Initial carrying value of the liability
 Increased each year by use of the interest
method
 Using the credit adjusted rate
 Classified as accretion expense
and not interest expense.