Intermediate Accounting

Volume 1 Twelfth Canadian Edition

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 10
Property, Plant, and Equipment: Accounting
Model Basics
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Chapter 10: Property, Plant, and Equipment:
Accounting Model Basics (1 of 2)
After studying this chapter, you should be able to:
1. Identify the business importance and characteristics of
property, plant and equipment and explain the recognition
criteria.
2. Identify the costs to include in the measurement of
property, plant and equipment at acquisition.
3. Determine asset cost when the transaction has delayed
payment terms or is a lump-sum purchase, a nonmonetary
exchange, or a contributed asset.

2
Chapter 10: Property, Plant, and Equipment:
Accounting Model Basics (2 of 2)
4. Identify the costs included in specific types of property,
plant and equipment.
5. Understand and apply the cost model, the revaluation
model using the asset adjustment method, and the fair
value model.
6. Explain and apply the accounting treatment for costs
incurred after acquisition.
7. Identify the differences in accounting between I FRS and
ASPE, and what changes are expected in the near future.

3
Property, Plant, and Equipment:
Accounting Model Basics

Definition and
Recognition of
Property, Plant, Measurement after
and Equipment Cost Elements Measurement of Cost Acquisition IFRS/ASPE Comparison
• Property, • Self- • Cash discounts not taken • Cost and • A comparison of IFRS
plant, and constructed • Deferred payment terms revaluation models and ASPE
equipment— assets • Lump-sum purchases • Fair value model • Looking ahead
business • Borrowing • Nonmonetary exchanges • Additions
perspective costs • Contributed assets and • Replacements,
• Property, • Dismantling government grants major overhauls
plant, and and • Land and inspections
equipment— restoration • Buildings • Rearrangement
characteristics costs • Leasehold improvements and reinstallation
• Equipment • Repairs
• Investment property
• Natural resource properties
• Biological assets

4
Property, Plant, and Equipment—Business
Perspective
• Long-lived assets include:
o Physical assets such as property, plant and equipment
o Non-physical assets such as patents
• Long-lived assets are important to businesses—these assets are
used to produce goods and/or provide services
• They represent the enterprise’s potential for future cash flows
• To assess potential, users need:
o Solid understanding of the investment in long-term productive assets
o Information about how the investments have changed in the period
o Information about the accounting policies applied to the assets

• Governments have the same issues with long-lived assets as

businesses
LO 1 5
Property, Plant, and Equipment—Characteristics
(1 of 4)

• Property, plant, and equipment includes long-term assets like:

o Office, factory and warehouse buildings
o Investment property
o Equipment (machinery, furniture, and tools)
o Mineral resource properties

• PP&E also called tangible capital assets, plant assets, fixed assets
• Amortization— a general term for allocation of the cost of any long-
lived asset to different accounting periods; but specifically
o Depreciation for property, plant and equipment
o Depletion for mineral resource properties
o Amortization for intangibles

LO 1 6
Property, Plant, and Equipment—Characteristics
(2 of 4)

• Property, plant, and equipment are defined under both IFRS and ASPE as
assets that are:
o Held for use in production of goods and services, for rent or for
administrative purposes
o Used over more than one accounting period
o Tangible
• Items that have multiple uses, are used regularly, and replaced within the
accounting period would be classified as inventory
• Items used only with a specific capital asset and are useful over more than
one accounting period are classified as PP&E
• Biological assets:
o Under ASPE, apply same principles as for PP&E
o Under IFRS, apply specific standards for biological assets, agricultural produce and
bearer plants.

LO 1 7
Property, Plant, and Equipment—Characteristics
(3 of 4)

• Recognition criteria for capitalization:

o Probable that the future economic benefits from the asset will flow to
the entity
o Cost can be measured reliably
• Assets that do not have future economic benefits, but are necessary to
obtain benefits from related assets can be capitalized as PP&E (such as
pollution reduction equipment)

• Costs that are incurred but do not meet the criteria (such as repairs
and ongoing maintenance) are expenses

LO 1 8
Property, Plant, and Equipment—Characteristics
(4 of 4)

• Componentization: Components of a single asset (e.g. roof of a

building) recognized separately
o Only if they make up a relatively significant portion of the asset’s
total cost
o If the components have different useful lives and/or different
pattern of delivering economic benefits (different depreciation)
• The significance of the items and the similarity of their life and
use are considerations in deciding whether to aggregate smaller
items into a single larger asset
• Componentization addressed under both ASPE and IFRS, with
the discussion and application under IFRS more developed
LO 1 9
Property, Plant, and Equipment—Cost Elements
(1 of 2)

• Capitalized cost of property, plant, and equipment includes all

expenditures needed to:
o Acquire the asset (purchase price, net of discounts and rebates)
o Bring it to its location and to a state where it is ready for use (including delivery,
site preparation, installation, assembly, professional fees, etc.)

o Discharge obligations associated with asset’s eventual disposal (e.g. site

restoration)
• Costs that are not capitalized: initial operating loss, training employees,
reorganizing operations, admin and general overhead costs, cost of opening a
new facility, introducing a new product, operating in a new location

LO 2 10
Property, Plant, and Equipment—Cost Elements
(2 of 2)

• The general principle of capitalization of costs is the same under IFRS

and ASPE, but the application may be different (different outcomes)
• Example: A company, after clearing land and while waiting for
construction to be completed, generates net income from using the
property as a parking lot. Should this net revenue be deducted from
the cost of the building, or recognized immediately in net income?
IFRS ASPE
Capitalization stops when the asset is in place Capitalization stops when an asset is substantially
and ready to use as intended. complete and ready for productive use.
Cannot be capitalized. The principle of being a Any net revenue or expenses generated prior to
necessary cost to acquire and get in place, and to substantial completion and readiness for use are
be ready for use, is strictly applied. included in determining the asset’s cost.

Dr. Cash and Cr. Rent Revenue Dr. Cash and Cr. Building

LO 2 11
Property, Plant, and Equipment—Cost Elements:
Self-Constructed Assets
• These are assets constructed by the business for use
in operations
• The cost of self-constructed assets includes:
o Direct materials,
o Direct labour,
o Directly attributable overhead (e.g. variable
manufacturing overhead)

• Abnormal amounts of wasted inputs and related excess

costs should be expensed
LO 2 12
Property, Plant, and Equipment—Cost Elements: Borrowing
Costs

• Under IFRS, borrowing costs to finance the cost of acquiring,

constructing or producing assets that take a substantial
period of time to get ready and that would otherwise be
avoidable, are to be capitalized
• ASPE allows a choice of capitalizing or expensing such
interest costs
• Amount of interest capitalized and policy chosen must be
disclosed in the notes
• Appendix 10A explains
o How borrowing costs are defined
o How to determine which are avoidable
o How to determine the amount to capitalize
LO 2 13
Property, Plant, and Equipment—Cost
Elements: Dismantling and Restoration
• Asset retirement costs are the costs needed to dismantle and
remove an item, and restore the site, at the end of its useful life
• Under both IFRS and ASPE recognition criteria, these costs are
added (debited) to the capital cost of the PP&E—with a credit to
an asset retirement or restoration liability
IFRS ASPE

Because the actual Category of Recognizes costs of both legal Recognizes costs associated with
obligations and constructive obligations, legal obligations only.
expenditures will not such as when an entity creates
be incurred for a long an expectation in others through
its own actions that it will meet
period of time, the this obligation.
liability is based on
the present value of Category of Costs include only those related Costs include both retirement
activities to the acquisition of the asset, obligations resulting from the
future costs. not those related to the use of acquisition of the asset and its
the asset in the production of subsequent use in producing
goods or services (product inventory, such as the mining of coal.
costs).

LO 2 14
Measurement of Cost for Nonmonetary
Exchange (1 of 14)
• Generally, cost is measured by the amount of cash (or cash
equivalents) paid, or the fair value of consideration given, to
acquire an asset
• The amount of the “cash cost” may not always be obvious
• Common issues when cash is not exchanged at acquisition:
1. Cash discounts not taken
2. Deferred payment terms
3. Lump-sum purchases
4. Nonmonetary exchanges—share-based payments
5. Nonmonetary exchanges—asset exchanges
6. Contributed assets and government grants
LO 3 15
Measurement of Cost for Nonmonetary
Exchange: Cash Discounts Not Taken (2 of 14)
• When cash discounts are offered on the purchase of plant
assets, the Net-of-Discount Method is preferred
(conceptually)
o The asset cost is reduced by the discount amount even if the discount
is not taken
o The discount, if not taken, can be recognized as a financing expense

• Other approach: discount should not be deducted unless

taken
o Simpler approach; preferred by companies
o Recognizes that the discount may not be deducted because of
unfavourable terms, or because taking discount may not be prudent

LO 3 16
Measurement of Cost for Nonmonetary
Exchange: Deferred Payment Terms (3 of 14)
• Assets, purchased through long-term credit, are recorded at the
present value of the consideration exchanged (cash price equivalent or
fair value)
• Difference between fair value and the cash paid is recognized as
interest

• When no interest rate is stated, an appropriate rate is imputed

• If cash exchange price is known, it is used as the basis of cost and for
identifying the interest element
• Interest is expensed during the periods involved

LO 3 17
Measurement of Cost for Nonmonetary
Exchange: Deferred Payment Terms (4 of 14)
• Example: Sutter Corporation purchases a specially built robot spray
painter for its production line. The company issues a $100,000, five-year,
non–interest-bearing note to Wrigley Robotics Ltd. for the new equipment
when the prevailing market interest rate for obligations of this nature is 10%.
Sutter is to pay off the note in five $20,000 instalments made at the end of
each year. Assume that the fair value of this specially built robot cannot
readily be determined. At what amount should Sutter record the equipment
purchased?

PV of 5 annual payments made at the end of each year at a rate of 10%

$24,184 difference between cash cost ($75,816) and amount repaid ($100,000)
is the discount or interest on the $75,816 borrowed
LO 3 18
Measurement of Cost for Nonmonetary
Exchange: Lump-Sum Purchases (5 of 14)
• Cost of assets, acquired at a single lump sum price, is the purchase
price allocated to assets on the basis of their relative fair market values
• Individual fair value is based on the best information available:
insurance, replacement cost, tax values, independent appraisal

Example: Purchase several assets of a smaller

company for a total price of $80,000
Seller’s Book Value Asset Fair Value
Inventory $30,000 $ 25,000
Land 20,000 25,000
Building 35,000 50,000
$ 85,000
$85,000 $$100,000
100,000
Seller’s book value is irrelevant
LO 3 19
Measurement of Cost for Nonmonetary
Exchange: Share-Based Payments (6 of 14)
• (IFRS) When property is acquired by issuing shares, the fair value of the
asset received or the fair value of the shares given up is used for the
cost of the asset
• If the fair value of the asset received cannot be determined readily, and
the shares given up are actively traded, the market value of publicly
traded shares is used
• (ASPE) The more reliable of the fair value of the goods received or the
equity instruments given up is the asset cost
A company purchases land; issues 5,000 no par value common shares to seller.
A. Land is appraised at $62,000; B. Fair value of the land cannot be
shares are not publicly traded: determined reliably; shares recently traded
Cost of the land is $62,000. at $12: Cost is $60,000.
LO 3 20
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (7 of 14)
• Monetary assets are money or claims to future cash receipts (such as
cash and accounts receivable)
• Nonmonetary assets are assets that are not claims to fixed or
determinable cash flows (such as inventory, long-lived assets, equity
investments)
• When nonmonetary assets are disposed of and monetary assets
are received in exchange, a gain or loss on disposal is recognized
in income
• When a nonmonetary asset is exchanged for another
nonmonetary asset
o What should be the cost of the asset acquired?
o Should a gain or loss on disposal be recognized for the asset given up?
LO 3 21
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (8 of 14)
• The general principle is that: the cost of the asset acquired is
determined by the fair value of the assets given up unless the fair
value of the asset received can be more reliably measured
• The exchange cannot be recorded at fair value if the fair value of
either asset can not be reliably measured
• The exchange transaction has to have commercial substance—
there has to be a significant change in the company’s expected
future cash flows and therefore its value
o Amount, timing or risk of new future cash flows is different from those of
the cash flows of the asset given up
o Entity specific value of the new asset differs significantly from the value of
the asset given up
LO 3 22
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (9 of 14)
• Summary of the accounting for asset exchange
Does the exchange meet both criteria? In other words, does it have commercial substance, and can
fair values can be reliably determined?
Yes No When an
Apply the fair value standard: Exception to the fair value standard: asset is
acquired it
Cost of asset(s) received = fair value of Cost of asset(s) received = carrying cannot be
what is given up, or what is acquired, amount of asset(s) given up.
if more reliably measurable. recognized
at more
Difference between carrying amount No gain is recognized. Loss is than its fair
and fair value of asset(s) given up is recognized if fair value of asset(s) value.
recognized in income as a gain or loss. acquired is less than the carrying
amount of the asset(s) given up.

LO 3 23
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (10 of 14)
Examples: Commercial Substance (Trade-in)
Machine given up Machine acquired
Because the cash paid is significant relative to the fair
Book value: $8,000 List price: $16,000 value of the total consideration, the change in the
(original cost of $12,000 Trade-in allowance on old configuration of the company’s future cash flows
less $4,000 accumulated machine: $9,000 justifies a conclusion that this transaction has
depreciation) Cash paid to seller: $7,000 commercial substance.
Fair Value: $6,000

LO 3 24
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (11 of 14)
Examples: Commercial Substance (Exchange trucks, cash for land)
Assets given up (Trucks) Asset acquired (Land)
This exchange has commercial substance
Carrying amount: $42,000 Cash given up: $4,000 because the pattern and timing of cashflows
(cost $64,000 − $22,000 from the investment in land are very different
accumulated depreciation) from those of the trucks. In addition, fair values
Fair value: $49,000 can be determined.

Calculation of land’s acquisition cost:

The gain is the difference between the trucks’ fair value of

$49,000 and their carrying amount of $42,000.

LO 3 25
Measurement of Cost for Nonmonetary
Exchange: Asset Exchange (12 of 14)
Examples: No Commercial
Substance (Exchange of similar
properties)

Because both companies

remain in the same
economic position after the
exchange as before, there is
no reason to recognize any
change in asset values and a
related gain or loss on the
exchange.

LO 3 26
Measurement of Cost for Nonmonetary
Exchange: Contributed Assets and
Government Grants (13 of 14)
• Non-reciprocal transfers—Transfer of assets in one direction
only; nothing is given in exchange
o Donations, gifts, government grants
o Land, buildings, equipment or cash to acquire same
o Forgiveness of debt
• Asset’s fair value is used to establish its cost
• What account should be credited?
o Capital approach: credit Contributed Surplus—Donated Capital; only used
when the donation is from an owner
o Income approach: credit net income—contribution from a non-owner

LO 3 27
Measurement of Cost for Nonmonetary
Exchange: Contributed Assets and Government
Grants (14 of 14)
• Standards require government assistance to be recognized in income:
through cost reduction or deferral
• Cost reduction method
o Asset is carried at a cost less related government assistance
o Future depreciation will be less; net income will be higher each year
o Weakness—reports assets at less than their fair value

• Deferral method
o Record as a deferred credit and amortized over the life of the asset
o Amortized amount is recognized in each year’s income
o Weakness—not consistent with conceptual framework; Deferred Revenue does not
meet the definition of a liability
Extensive disclosure requirements for amounts, terms and conditions, and
accounting treatment of government assistance
LO 3 28
Measurement of Costs Associated with Specific
Assets: Land (1 of 2)

• Land costs include:

1. Purchase price
2. Closing costs (title, legal, and recording fees)
3. Costs of getting land ready for use (such as removal of old
building, clearing, grading, filling and draining)
4. Assumption of liens or encumbrances (taxes in arrears)
5. Additional improvements with an indefinite life
• Sale of salvaged materials reduces cost of land
• Special assessments for local (permanent) improvements
(e.g., pavement, street lights) are part of land cost
LO 4 29
Measurement of Costs Associated with Specific
Assets: Land (2 of 2)

• Permanent improvements to the land made by the

owner such as landscaping are added to the Land
account
• Improvements with limited lives (such as driveways,
walkways, fences, and parking lots) are recorded in a
separate Land Improvements account
• These costs are separated from Land as they are
depreciated over their estimated useful lives

LO 4 30
Measurement of Costs Associated with Specific
Assets: Buildings
• Net costs for the removal of an old building, previously
owned and used, to construct a new one are expensed as
disposal costs of the old building (increases loss on
disposal)
• If land is purchased with an old building on it that will not
be used, any demolition costs less salvage value is charged
to Land
• Under ASPE, the carrying amount of a building being torn
down to redevelop rental real estate and net costs for
removal can be capitalized as part of the redeveloped
property
LO 4 31
Measurement of Costs Associated with Specific
Assets: Leasehold Improvements
• In long-term lease contracts, the lessee may pay for
improvements on the leased property, but they become the
property of the lessor when the lease expires
• Construction of building on leased land, improvements to
leased building
• These costs are recorded in a separate account called
Leasehold Improvements
• Leasehold improvements are depreciated over the lesser of
the remaining lease life and the useful life
LO 4 32
Measurement of Costs Associated with Specific
Assets: Equipment
• Includes delivery equipment, office equipment, factory
equipment, machinery, furniture and fixtures, furnishings
• Cost of equipment includes all necessary and reasonable costs
incurred to get asset ready for its intended use
• Includes:
o Purchase price
o Freight and handling charges
o Insurance while in transit
o Costs of special foundations, assembly and installation
o Net cost of trial runs
o Costs of adjustments to make it operate as intended
• Does not include any recoverable tax (e.g. GST, HST)
LO 4 33
Measurement of Costs Associated with Specific
Assets: Investment Property
• Property that is held to generate rental revenue and/or
appreciate in value, rather than
o Sell as part of ordinary business or
o Use in production, administration, or supplying of goods and
services
• Includes investment property currently under construction
• Issues:
o If parts can be sold separately, then account for and depreciate
separately
o If added services expose owner to normal risks of business, might
not be considered an investment
• Under IFRS and ASPE, cost is determined using same principles
as for PP&E
LO 4 34
Measurement of Costs Associated with Specific
Assets: Natural Resources
• Examples: oil and gas resources, and mineral deposits
• Main characteristics:
1. Asset is completely removed or consumed
2. Asset does not retain original characteristics

• Costs to be capitalized relate to four activities:

1. Acquisition of properties
2. Exploration for and evaluation of reserves
3. Development
4. Decommissioning and site restoration

• Capitalized costs make up the depletion base, and are amortized

through depletion charge into inventory
35
LO 4
Measurement of Costs Associated with Specific
Assets: Biological Assets
• Examples: fruit trees, grapevines, livestock
• Under ASPE, general principles that apply to PP&E are also
followed for biological assets
• Special standard under IFRS: Measure at fair value less
costs to sell, with changes in value going through income
statement
• If no reliable fair value, measured at cost less accumulated
depreciation and accumulated impairment losses

LO 4 36
Measurement after Acquisition (1 of 9)
• There are three different models used to account for
property, plant, and equipment subsequent to acquisition:
1. Cost model (CM)
2. Revaluation model (RM)
3. Fair value model (FVM)
• Accounting model choices: the GAAP choice of model depends
on the type of asset and which standards are being applied

LO 5 37
Measurement after Acquisition: Cost Model
(2 of 9)

• Most widely used model to account for property, plant and

equipment

• Only model acceptable under A SPE

• Measures PP&E assets after acquisition at their cost less

accumulated depreciation and any accumulated
impairment losses

LO 5 38
Measurement after Acquisition: Revaluation
Model (3 of 9)

• Can be used to measure property, plant and equipment

under IFRS--Available only for PP&E assets whose fair value can
be measured reliably
• PP&E are carried after acquisition at their fair value at the date
of the revaluation less any subsequent depreciation and any
subsequent impairment losses
• Not required at every reporting date—but often enough that
amount is close to fair value
• Depreciation is taken on the revalued amount

LO 5 39
Measurement after Acquisition:
Revaluation Model (4 of 9)
If the asset's carrying amount is
increased (debited)
The amount is recorded as a credit
to Revaluation Surplus (OCI), an
equity account. However, it would
be recognized as an increase in
profit or loss to the extent it
reverses a revaluation decrease for
the same asset that was previously
recognized in profit or loss.
If the asset's carrying amount is
decreased (credited)
The amount is recorded as a debit There can be no net
to Revaluation Surplus (OCI), an increase in net
equity account, to the extent of any
credit balance associated with that income from
asset. This account cannot have a revaluing the asset
debit (that is, a negative) balance. over its life
Any remaining amount is
recognized in profit or loss.

• Disposing of the Revaluation Surplus (OCI) account, two choices

1. Transfer some to Retained Earnings (The difference between depreciation
expense based of the revaluation and the expense based on original cost)
2. Remains in Revaluation Surplus (OCI) until the asset is retired or disposed of
—then transfer the balance to Retained Earnings
LO 5 40
Measurement after Acquisition:
Revaluation Model (5 of 9)
• There are two methods of accounting for the balance in the
Accumulated Depreciation account when revaluing an asset
Proportionate approach Asset Adjustment method
• Adjusts the asset’s carry amount and its Eliminates the balance in the Accumulated
accumulated depreciation Depreciation account, writing it off against the asset
• Net balance is the fair value of the asset on the The asset is then adjusted to its revalued amount
revaluation date
• Gives some idea of the age of the asset because Simpler method
the accumulated depreciation continues
• Example shown in Appendix 10B Also called the elimination method

LO 5 41
Measurement after Acquisition:
Revaluation Model: Example A (6 of 9)
Revaluation Asset Adjustment Method
• Building purchased in Jan 2017
• Buildings account, $100,000
• Company uses revaluation model,
revalues every third year, uses straight-
line depreciation
• Life expectancy, 25 years
• No residual value
• Fair value on Dec 31, 2019 is $90,000
• Calculate depreciation for the first three
years and revaluation entries
considering balance of Accumulated
Depreciation is eliminated

LO 5 42
Measurement after Acquisition:
Revaluation Model: Example B (7 of 9)
Revaluation Asset Adjustment Method
• Building purchased in Jan 2017
• Revalued to $90,000 end of 2019
• Company uses revaluation model,
revalues every third year, uses straight-
line depreciation
• Life expectancy, 25 years
• No residual value
• Fair value on Dec 31, 2022 is $75,000
Calculate depreciation for the next
three years and revaluation entries
considering balance of Accumulated
Depreciation is eliminated

LO 5 43
Measurement after Acquisition: Fair
Value Model (8 of 9)
• Available as measurement option for investment properties
only (and under IFRS only)
• Investment property measured at fair value subsequent to
acquisition and until it is disposed of
• Changes in value reported in net income during period of
change
• No depreciation is recognized over asset’s life
• Note that fair value must be disclosed in financial
statements, even if cost model is chosen instead of fair value
model
LO 5 44
Measurement after Acquisition: Fair
Value Model: Example (9 of 9)
• Mall acquired Feb 2, 2020
• 9 out of 10 stores leased
• Cost, $1 million + property transfer,
$40,000 + legal fees, $3,000
• Cost of paint for store, $2,000
• Assumed $730,000 mortgage
• Received $37,000 in damage deposits
• Fair value on Dec 31, 2020 is $1,040,000
• Fair value on Dec 31, 2021 is $1,028,000
• Fair value on Dec 31, 2022 is $1,100,000
Prepare: (1) summary journal entry for the
purchase and (2) adjustment to fair value
entries for the three years.
• Cost of the investment property:
$1,000,000 + $40,000 + $3,000 =
$1,043,000
• Painting is repairs and maintenance
expense
• No depreciation
LO 5 45
Costs Incurred after Acquisition (1 of 8)
• If costs incurred achieve greater future benefits, capitalize costs
(Capital expenditure)
• If costs maintain a specific level of service, expense costs (Revenue
expenditure)
• Major types of expenditures are:
o Additions: Increase or extension of existing assets
o Replacements, major overhauls, and inspections: Substitution of a new
part/component for an existing asset, and overhauls/inspections whether
or not physical parts are replaced
o Rearrangement and reinstallation: Moving an asset from one location to
another
o Repairs: Costs that maintain assets in good operating condition

LO 6 46
Costs Incurred after Acquisition: Additions
(2 of 8)

• Any addition to plant assets is capitalized because a new asset

has been acquired
• Addition costs are capitalized if they increase the service
potential of the existing structure
• When changes are made to an existing asset to accommodate
acquiring a new one (e.g. removing a wall to make room for an
addition) theoretically it should be considered a disposal cost of
the existing asset
• If the change is a minor part of cost of old asset, most companies
would keep the carrying amount of the old asset, and include the
cost of the change (removing a wall) in the cost of the new asset
LO 6 47
Costs Incurred after Acquisition: Replacements,
Major Overhauls, and Inspections (3 of 8)

• Replacements are substitutions of one asset for another that recur and
may be needed to allow continued use of an asset
• Similar to replacements, major overhauls, reconditioning and
inspections also recur and are often needed to keep an asset
operational
• These costs often meet the requirements for capitalization—they
should be added to the carrying amount of the asset
o Because it is replacing something that has already been included in the
asset’s original cost, the original cost and the related accumulated
depreciation must be removed from the accounts
o If the original cost is not known, then it must be estimated

LO 6 48
Costs Incurred after Acquisition:
Replacements, Major Overhauls, and
Inspections (4 of 8)
• If the revaluation model is used,
o the cost of the new “asset” (component, part, overhaul) is added
to the asset’s carrying amount,
o the carrying amount of the replaced asset is removed,
o a gain or loss can be recognized on the disposal of the replaced
asset
• Under the fair value model,
o add the cost of the replacement component or overhaul to the
asset,
o reassess and adjust the asset to its fair value after the
replacement

LO 6 49
Costs Incurred after Acquisition: Replacements,
Major Overhauls, and Inspections—Example
(Replacement) (5 of 8)
15-year old facility
Roof work, $26,000 B. Building—Roof is not a separate
Repair and replace shingles, $1,000 component. Cost $16,000; 40-year life,
Straight-line depreciation; Construction
A. Building—Roof is a separate component. costs doubled since 15 years ago
Cost $16,000; 20-year life, Straight-line
depreciation

LO 6 50
Costs Incurred after Acquisition: Replacements,
Major Overhauls, and Inspections—Example
(Overhaul) (6 of 8)
Fleet of trucks; Truck B14; 2-years old; $63,000; Expected km for life: 300,000
1st overhaul cost $9,000 at 50,000 km; 2nd overhaul cost $11,000 at 92,100 km.

A. B14 recognized at $55,000; cost of 1st B. No separate components recognized

overhaul originally estimate at $8,000 initially; one will be recognized after the
first full overhaul.

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Costs Incurred after Acquisition: Rearrangement
and Reinstallation (7 of 8)
• Accounting treatment for rearrangement and
reinstallation costs:
1. If the original installation cost is known, record as a replacement

2. If the original installation cost is not known, cost is expensed

3. If the original installation cost is not known and amount is material,

capitalize cost (ASPE)

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Costs Incurred after Acquisition:
Repairs (8 of 8)

• Ordinary repairs are costs that occur regularly to keep

an asset in good operating condition
• Ordinary repairs are treated as an expense

• Examples: replacement of minor parts, repainting,

lubricating equipment

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