Chapter 9: Reporting and Analyzing Long-Lived Assets

Property, Plant, and Equipment (PPE)

Determining the Cost of PPE

PPE is recorded at cost, which includes:

1. Purchase price (including non-refundable taxes and duties, less discounts or rebates).

2. Expenditures necessary to bring the asset to its intended location and make it ready for use.

3. Estimated cost of future obligations to dismantle, remove, or restore the asset at the end of its useful life.

PPE is usually subdivided into classes such as land, land improvements, buildings, and equipment.

Land

• Cost includes purchase price, closing costs (title search, surveying, legal fees), and additional costs to prepare land for use (less any proceeds from salvage).

• Land has an unlimited life and is not depreciated.

Item	Amount
Cash price of property	$1,200,000
Net cost of removing warehouse ($50,000 - $10,000)	40,000
Legal fees	5,000
Total Cost of Land	$1,245,000

Land Improvements

• Structural additions to property (e.g., parking lots, fencing, driveways, sidewalks).

• Recorded separately from land and depreciated over their useful lives.

• Do not include costs of getting the land ready for use.

Buildings

• Includes all expenditures related to purchase or construction.

• When purchased: purchase price, closing costs (legal fees), and costs to make building ready for use.

• When constructed: contract price, architect's fees, building permits, excavation cost, and interest during construction.

Equipment

• Includes office equipment, machinery, vehicles, furniture, and fixtures.

• Costs: purchase price, freight and insurance during transit, assembling, installing, and testing.

Expenditure	Benefit Future Periods?	Required to Get Asset Ready?	Capitalize as Non-Current Asset?	Capitalize as Prepaid Insurance?	Expense Immediately?
Price paid for van	Yes	Yes	$32,500
Painting and lettering	Yes	Yes	500
Cost of oil change	No	No			130
One-year insurance policy	Yes	No		1,000
Total			$33,000	$1,000	$130

Expenditures During Useful Life

• Operating expenditures: Benefit only the current period; required to maintain asset in normal operating condition.

• Capital expenditures: Capitalized as an asset (increase asset cost); increase life, productivity, or efficiency of the asset.

Leasing: Buy or Lease?

Advantages of Leasing

• Reduced risk of obsolescence.

• Cash outlays spread over time.

• 100% financing.

• Income tax advantages.

Lessor: Owner of asset for lease. Lessee: Party leasing asset from owner.

IFRS Lease Rules

• Lease is considered an asset purchase financed by a loan from the lessor.

• Risks and rewards of ownership transfer to lessee, even if legal title does not.

• Lessee reports leased asset (as a right-of-use asset) and related liability.

• Exceptions: leases under 12 months or for low-value assets are treated as period expenses.

ASPE Lease Rules

• Capital lease: Substantially all benefits and risks of ownership transfer to lessee; lessee records asset and liability at present value of minimum lease payments.

• Operating lease: Benefits and risks of ownership do not transfer; lease payments are expenses for lessee, revenue for lessor.

Depreciation

Definition and Purpose

• Systematic allocation of the cost of PPE over the asset's useful life.

• It is a process of cost allocation, not valuation.

• Does not use or provide cash to replace the asset.

Factors in Calculating Depreciation

1. Cost: Purchase price plus costs to get asset ready for use, plus estimated asset retirement costs.

2. Useful life: Period of expected use or number of units expected to be produced.

3. Residual value: Estimated amount to be received from disposal at end of useful life.

Depreciation Methods

• Straight-line

• Diminishing-balance

• Units-of-production

Management selects the method that best reflects the pattern of economic benefit consumption.

Straight-Line Method

• Depreciation is constant each year.

• Formula:

$\text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Example: For a van costing $33,000, residual value $3,000, useful life 5 years:

$\text{Depreciation Expense} = \frac{33,000 - 3,000}{5} = 6,000$ per year

Diminishing-Balance Method

• Produces decreasing annual depreciation expense.

• Depreciation is based on the asset's carrying amount at the beginning of each year.

• Formula:

$\text{Depreciation Expense} = \text{Carrying Amount at Beginning of Year} \times \text{Depreciation Rate}$

$\text{Depreciation Rate} = \text{Straight-Line Rate} \times \text{Multiplier}$

Example: $33,000 \times 40\% = 13,200$ (using double-declining balance, multiplier = 2)

Units-of-Production Method

• Useful life is expressed in total units of production or activity.

• Formula:

$\text{Depreciation Expense} = \text{Depreciation Rate per Unit} \times \text{Units of Activity During the Year}$

$\text{Depreciation Rate per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Estimated Total Units of Activity}}$

Example: $\frac{33,000 - 3,000}{100,000} = 0.30$ per km; if 15,000 km used, $0.30 \times 15,000 = 4,500$

Comparison of Depreciation Methods

Year	Straight-Line Depreciation	Carrying Amount (SL)	Diminishing-Balance Depreciation	Carrying Amount (DB)	Units-of-Production Depreciation	Carrying Amount (UOP)
2021	6,000	27,000	13,200	19,800	4,500	28,500
2022	6,000	21,000	7,920	11,880	6,000	22,500
2023	6,000	15,000	4,752	7,128	7,500	15,000
2024	6,000	9,000	2,851	4,277	6,000	9,000
2025	6,000	3,000	1,277	3,000	6,000	3,000
Total	30,000		30,000		30,000

Other Depreciation Issues

• Significant components: May be depreciated separately.

• Income tax: Capital Cost Allowance (CCA) used for tax purposes.

• Impairments: Occur when carrying amount exceeds fair value; loss is recorded as:

$\text{Impairment Loss} = \text{Carrying Amount} - \text{Fair Value}$

• Cost vs. revaluation model: IFRS allows revaluation to fair market value (limited use).

• Revising depreciation: Needed if capital expenditures, impairment, or changes in useful life/residual value occur. Changes are prospective (current and future years only).

• Natural resources: Long-lived tangible assets consumed physically ("wasting assets"). Depreciation is called depletion, usually using units-of-production method. Remaining asset is called reserves.

Derecognition of Property, Plant, and Equipment

1. Update depreciation to date of disposal.

2. Calculate carrying amount: $\text{Carrying Amount} = \text{Cost} - \text{Accumulated Depreciation}$

3. Calculate gain or loss on disposal: $\text{Gain/Loss} = \text{Proceeds} - \text{Carrying Amount}$ If proceeds > carrying amount: Gain (credit). If proceeds < carrying amount: Loss (debit).

4. Record disposal: Remove cost and accumulated depreciation; record proceeds and gain/loss.

Retirement of an asset is similar, except there may be little or no proceeds.

Step	Entry
Update Depreciation	Depreciation Expense xx Accumulated Depreciation—Asset xx
Record Disposal	Cash (or Receivable) xx Accumulated Depreciation xx Loss on Disposal (or credit Gain on Disposal) xx Asset xx

Summary Table: Key Depreciation Formulas

Method	Formula
Straight-Line	$\frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$
Diminishing-Balance	$(\text{Cost} - \text{Accumulated Depreciation}) \times \text{Depreciation Rate}$
Units-of-Production	$\frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Units of Activity}} \times \text{Actual Units of Activity During Period}$