StIce | StIce |Skousen
Investments in Noncurrent
Operating Assets - Acquisition
Chapter 10
Intermediate Accounting
16E
Prepared by: Sarita Sheth | Santa Monica College
COPYRIGHT © 2007
Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license.
Learning Objectives
1. Identify those costs to be included in
the acquisition cost of different types
of noncurrent operating assets.
2. Properly account for noncurrent
operating asset acquisitions using
various special arrangements,
including deferred payment, selfconstruction, and acquisition of an
entire company.
Learning Objectives
3. Separate costs into those that
should be expensed immediately and
those that should be capitalized, and
understand the accounting
standards for research and
development and oil and gas
exploration costs.
4. Recognize intangible assets acquired
separately, as part of a basket
purchase, and as part of a business
acquisition.
Learning Objectives
5. Discuss the pros and cons of
recording noncurrent operating
assets at their current values.
6. Use the fixed asset turnover ratio as
a general measure of how efficiently
a company is using its property,
plant, and equipment.
What Costs are Included in
Acquisition Cost?
• Initially record asset at cost.
• Cost includes all expenditures
required to obtain asset and place it in
use.
• Most costs associated with internallygenerated intangible assets are
expensed.
• The cost of externally purchased
intangibles is generally recorded as an
asset.
Tangible Assets- Land
• Purchase price,
commissions, legal fees
escrow fees, surveying
fees
• Clearing and grading
costs
• Cost of removing
unwanted structures
• Assessments for water
lines, sewers, roads
Tangible Assets- Land
Improvements
•
•
•
•
Landscaping
Paving parking lots
On-property sidewalks
Light structures (for
parking and sidewalks)
• Fencing
Tangible Assets- Building
• If ready for use:
– Purchase price
– Commissions, legal fees, escrow fees,
reconditioning costs
• If newly constructed by an outsider:
– Contract Price
– Legal Fees
• If self constructed:
– Cost of materials,
– Labor
– Overhead
Tangible Assets- Equipment
• Purchase price
• Taxes, freight, insurance during
shipping and installation
• Special foundations or reinforcing of
floors
• Reconditioning and testing costs
Note: Any expenditure incurred in preparing the
asset for its intended use is charged to
Equipment.
Intangible Assets
• Patent: Purchase price, filing and registry fees,
cost of subsequent litigation to protect right. Does
not include internal research and development
costs.
• Copyright: Same as Patent.
• Trademark: Same as Patent.
• Franchise agreement: Expenditures made to
purchase the franchise. Legal fees and other costs
incurred in obtaining the franchise.
• Acquired customer list: Purchase price when
acquired from another company.
• Goodwill: Portion of purchase price that exceeds
the sum of the current market value for all
identifiable net assets.
Acquisitions Other than Simple
Cash Transactions
•
•
•
•
•
•
•
•
Basket purchase
Deferred payment
Leasing
Exchange of nonmonetary assets
Acquisition by issuance of securities
Self-construction
Acquisition by donation or discovery
Acquisition of an asset with significant
restoration costs at retirement
• Acquisition of an entire company
Methods of Acquisition
• Leasing: A capital lease is economically the
same as a purchase.
• The acquiring company records the asset
and liability at the present value of future
lease payments.
• Exchange of nonmonetary assets: The new
asset is valued at its fair market value or at
the fair market value of the asset given up,
whichever is more clearly determinable.
Methods of Acquisition
• Issuance of securities: Record the asset at
the fair market value of the securities
issued.
• Self-construction: Recorded at cost,
including all expenditures incurred to build
the asset and make it ready for its intended
use.
Interest Capitalization
Capitalization of interest is
required for assets that are
being self-constructed for an
should not
enterprise’s own Interest
use and assets
that are intendedbe
to capitalized
be leased for
or sold to others that
can be
inventories
identified as discrete
projects.
manufactured
or
produced on a
repetitive basis.
Interest Capitalization
• When assets are acquired by selfconstruction, interest incurred on funds
borrowed to finance construction can be
capitalized if the following conditions are
met:
–
–
–
–
Projects are discrete.
Costs are separately accumulated
Construction covers an extended period of time.
Construction costs are substantial.
Interest Capitalization
• Interest charges begin when the first
expenditures are made on the project and
continue until the asset is completed.
• Interest capitalization is calculated on
average amount of accumulated
expenditures.
• Interest rate used is:
(1) actual rate on debt incurred specifically for the
project
(2) weighted average interest rate on all
borrowings not specifically for the project.
• If the construction period covers more than
one fiscal period, accumulated expenditures
include prior years’ capitalized interest.
Acquisition by Donation or
Discovery
• Property acquired through donation
should be appraised and recorded at
its fair market value.
Land
400,000
Buildings 1,500,000
Revenue or
Gain
1,900,000
Asset with Significant
Restoration Costs at Retirement
Bryan Beach
Company
purchases and
erects an oil
platform at a total
cost of $750,000.
Oil Platform 750,000
Cash
750,000
Asset with Significant
Restoration Costs at Retirement
The oil platform will
be in use for 10
years, at which
time Bryan Beach
is legally obligated
to ensure that the
platform is
dismantled (at a
cost of $100,000).
Asset with Significant
Restoration Costs at Retirement
The oil platform will be in use for 10
years, at which time Bryan Beach is
legally obligated to ensure that the
platform is dismantled (at a cost of
$100,000).
Oil Platform
46,319
Asset Retirement
Obligation
46,319
FV = $100,000
i = 8%
N = 10 years
Postacquisition Expenditures
• Expenditures to
keep plant and
equipment in good
operating condition
are referred to as
maintenance…
• Expenditures that
do not extend the
useful life or
increase future
cash flows…
Expense as
incurred
Postacquisition Expenditures
• If the cost of the old component is known,
remove its cost and accumulated
depreciation.
• Next, record cost of the new component and
recognize a gain or loss.
• If the cost of the old component is not
known, then the cost of the new component
is deducted from accumulated depreciation.
Research and Development
• Research and development costs include:
–
–
–
–
–
–
–
Costs of materials
Equipment
Facilities
Personnel
Purchased intangibles
Contract services
A reasonable allocation of indirect costs that are
specifically related to R & D activities and that
have no alternative future use.
Oil and Gas Exploration Costs
• Full cost method- all exploratory costs
are capitalized.
– Reasoning: The cost of drilling dry wells
is part of the cost of locating productive
wells.
• Successful efforts method- exploratory
costs for dry wells are expensed, and
only exploratory costs for successful
wells are capitalized. wells.
Accounting for the Acquisition
of Intangibles
Five General Categories of Intangible Assets:
1. Marketing-related - trademarks, brand
names, and internet domain names.
2. Customer-related - customer lists, order
backlogs, and customer relationships.
3. Artistic-related - items protected by
copyright.
4. Contract-based - licenses, franchises, and
broadcast rights.
5. Technology-based -patented and unpatented
technologies as well as trade secrets.
Valuation of Assets at Current
Values
• In IFRS 16, concerns about permitting
upward revaluations of noncurrent
operating assets is reflected in the rules laid
out:
– If a company revalues its noncurrent operating
assets to fair value, it must do so on a regular
basis and must revalue entire classes of assets
rather than just picking and choosing certain
assets.
– Downward revaluations are recorded as a loss.
– Upward revaluations are recorded as a debit to
the asset and a credit to a special “revaluation”
equity account.