WEEK 5
CHAPTER 9 - PLANT ASSETS, NATURAL RESOURCES, INTANGIBLE ASSETS
9.1 - Plant asset expenditures
Plant assets
● Have a physical substance (definitely size and shape)
● Used in the operations of a business
● Not intended for sale to customers
(Or fixed assets / (property), plant and equipment)
-> expected to be of use to company for a number of years
-> except for land they decline in service potential over their useful lives
Determining the cost of plant assets:
-> historical cost requires that companies record plant assets at cost
-> cost consists of all expenditures necessary to acquire the asset and make
it ready for its intended use
(1) Land = site for manufacturing plant or office building
● Cost of land:
○ Cash purchase price
○ Closing costs e.g. title insurance, attorney’s fees
○ Real estate brokers’ commissions
○ Accused property taxes and other liens assumed by purchaser
● Costs when land is acquired:
○ Clearing, draining, filling, grading
-> Land account debited (increases) for all necessary costs to make land
ready for intended use
(2) Land improvements = structural additions with limited lives made to
,land
● e.g. driveways, parking lots, landscaping etc
● Cost of land improvements:
○ All expenditures necessary to make improvements ready for intended
use
● Limited useful lives -> eventually will need to be replaces
○ Expense (depreciate) cost of land improvements over their useful
lives
(3) Buildings = facilities used in operations
● e.g. stores, offices, warehouses etc
● Costs when building is purchased:
○ Purchase price
○ Closing costs
○ Real estate broker’s commission
● Cost to make building ready for intended use:
○ Remodelling, replacing, repairing roof, floors, electrical wiring and
plumbing
● Costs for construction:
○ Contract price plus payments for architects feeds, building permits,
excavation costs
-> debit buildings account all expenditures
● Companies might charge certain interest costs to buildings account
(included when a significant period of time is required to get the
buildings ready for use)
○ Limited to interested costs incurred during construction period
○ Outside that period: record interest as debits (increases) to interest
expenses
(4) Equipment = assets used in operations
● e.g. store check-out customers, factory machinery, delivery trucks,
airplanes
● Cost of equipment:
○ Cash purchase price, sales taxes, freight charges, insurance during
transit paid by purchaser + costs required in assembling, installing
and testing unit
● Represent annual recurring expenditures and do not benefit future
periods
,Expenditures during useful life
. Ordinary repairs = expenditures to maintain the operating efficiency and
productive life of the unit
○ Small, frequent amounts
○ e.g. oil changes, paintings of buildings
○ Debit maintenance and repairs expenses as they are incurred
○ Also called revenue expenditures
. Additions and improvements = costs incurred to increase operating
efficiency, productivity capacity or useful life of a plant asset
○ Material in amount and less frequent
○ Increase company’s investment in productive facilities
○ Debit these amounts to plan asset affected
○ Also called capital expenditures
Materiality concept = if an item would not make a difference in decision-
making, the company does not have to follow IFRS in reporting that item
9.2 - Depreciation methods
Depreciation = systematic allocation of depreciable amount of an asset over
its useful life
Process of cost allocation -> allows companies to match expenses with
revenues in accordance with expense recognition principle
● Book value (cost minus accumulated depreciation) of a plant asset may
be different from fair value
● Fully depreciated asset: zero book value but can still have positive fair
value
● Depreciable assets -> land improvements, buildings, equipment
○ Not land: usefulness may even increase over time because of scarcity
of good land sites
, ● Revenue producing ability during depreciable asset’s useful life can
decline due to:
○ Wear and tear
○ Obsolescence
● Recognising depreciation on an asset doesn’t result in accumulation of
cash for replacement of asset -> represents total amount of asset’s cost
that the company has charged as expense (not cash fund)
● Consistent with “going concern assumption”
○ States that the company will continue in operation for the
foreseeable future
○ If company doesn’t use this assumption, then plant assets should be
stated at their fair value -> then depreciation of these assets not
needed
Factors in computing deprecation
. Cost -> all companies record plant assets at cost, in accordance with
historical cost basis
. Useful life = estimate of expected productive life of asset for its owner
(or service life)
○ Expressed in terms of time, units of activity, or units of output
○ To decide: consider factors e.g. intended use, expected repair and
maintenance, vulnerability to obsolescence + past experience with
similar assets
. Residual (or salvage) value = estimate of asset’s value at the end of its
useful life
○ May be based on asset’s worth as scrap or its expected trade-in
value
○ To decide: consider how you plan to dispose of the asset and
experience with similar assets
Depreciation methods:
(All acceptable under IFRS)
-> choose one that best measures asset’s contribution to revenue over its
useful life
-> stay consistent to enhance comparability of financial statements of asset
-> depreciable cost = cost of the asset minus its residual value (total
amount depreciated over useful life)
CHAPTER 9 - PLANT ASSETS, NATURAL RESOURCES, INTANGIBLE ASSETS
9.1 - Plant asset expenditures
Plant assets
● Have a physical substance (definitely size and shape)
● Used in the operations of a business
● Not intended for sale to customers
(Or fixed assets / (property), plant and equipment)
-> expected to be of use to company for a number of years
-> except for land they decline in service potential over their useful lives
Determining the cost of plant assets:
-> historical cost requires that companies record plant assets at cost
-> cost consists of all expenditures necessary to acquire the asset and make
it ready for its intended use
(1) Land = site for manufacturing plant or office building
● Cost of land:
○ Cash purchase price
○ Closing costs e.g. title insurance, attorney’s fees
○ Real estate brokers’ commissions
○ Accused property taxes and other liens assumed by purchaser
● Costs when land is acquired:
○ Clearing, draining, filling, grading
-> Land account debited (increases) for all necessary costs to make land
ready for intended use
(2) Land improvements = structural additions with limited lives made to
,land
● e.g. driveways, parking lots, landscaping etc
● Cost of land improvements:
○ All expenditures necessary to make improvements ready for intended
use
● Limited useful lives -> eventually will need to be replaces
○ Expense (depreciate) cost of land improvements over their useful
lives
(3) Buildings = facilities used in operations
● e.g. stores, offices, warehouses etc
● Costs when building is purchased:
○ Purchase price
○ Closing costs
○ Real estate broker’s commission
● Cost to make building ready for intended use:
○ Remodelling, replacing, repairing roof, floors, electrical wiring and
plumbing
● Costs for construction:
○ Contract price plus payments for architects feeds, building permits,
excavation costs
-> debit buildings account all expenditures
● Companies might charge certain interest costs to buildings account
(included when a significant period of time is required to get the
buildings ready for use)
○ Limited to interested costs incurred during construction period
○ Outside that period: record interest as debits (increases) to interest
expenses
(4) Equipment = assets used in operations
● e.g. store check-out customers, factory machinery, delivery trucks,
airplanes
● Cost of equipment:
○ Cash purchase price, sales taxes, freight charges, insurance during
transit paid by purchaser + costs required in assembling, installing
and testing unit
● Represent annual recurring expenditures and do not benefit future
periods
,Expenditures during useful life
. Ordinary repairs = expenditures to maintain the operating efficiency and
productive life of the unit
○ Small, frequent amounts
○ e.g. oil changes, paintings of buildings
○ Debit maintenance and repairs expenses as they are incurred
○ Also called revenue expenditures
. Additions and improvements = costs incurred to increase operating
efficiency, productivity capacity or useful life of a plant asset
○ Material in amount and less frequent
○ Increase company’s investment in productive facilities
○ Debit these amounts to plan asset affected
○ Also called capital expenditures
Materiality concept = if an item would not make a difference in decision-
making, the company does not have to follow IFRS in reporting that item
9.2 - Depreciation methods
Depreciation = systematic allocation of depreciable amount of an asset over
its useful life
Process of cost allocation -> allows companies to match expenses with
revenues in accordance with expense recognition principle
● Book value (cost minus accumulated depreciation) of a plant asset may
be different from fair value
● Fully depreciated asset: zero book value but can still have positive fair
value
● Depreciable assets -> land improvements, buildings, equipment
○ Not land: usefulness may even increase over time because of scarcity
of good land sites
, ● Revenue producing ability during depreciable asset’s useful life can
decline due to:
○ Wear and tear
○ Obsolescence
● Recognising depreciation on an asset doesn’t result in accumulation of
cash for replacement of asset -> represents total amount of asset’s cost
that the company has charged as expense (not cash fund)
● Consistent with “going concern assumption”
○ States that the company will continue in operation for the
foreseeable future
○ If company doesn’t use this assumption, then plant assets should be
stated at their fair value -> then depreciation of these assets not
needed
Factors in computing deprecation
. Cost -> all companies record plant assets at cost, in accordance with
historical cost basis
. Useful life = estimate of expected productive life of asset for its owner
(or service life)
○ Expressed in terms of time, units of activity, or units of output
○ To decide: consider factors e.g. intended use, expected repair and
maintenance, vulnerability to obsolescence + past experience with
similar assets
. Residual (or salvage) value = estimate of asset’s value at the end of its
useful life
○ May be based on asset’s worth as scrap or its expected trade-in
value
○ To decide: consider how you plan to dispose of the asset and
experience with similar assets
Depreciation methods:
(All acceptable under IFRS)
-> choose one that best measures asset’s contribution to revenue over its
useful life
-> stay consistent to enhance comparability of financial statements of asset
-> depreciable cost = cost of the asset minus its residual value (total
amount depreciated over useful life)
