11 - Intermediate Acctg 9th Ed McGraw Hill Ch-11 Property, Plant, and Equipment and Intangible Assets: Utilization & Disposition - Learning Objectives

LO11-7. Explain the appropriate treatment required when an error in accounting for property, plant, and equipment and intangible assets is discovered. (p.601)

A material error in accounting for property, plant, and equipment and intangible assets that is discovered in a year subsequent to the year of the error requires that previous years' financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction. Any account balances that are incorrect as a result of the error are corrected by journal entry. If retained earnings is one of the incorrect accounts, that correction is reported as a prior period adjustment to the beginning balance in the statement of shareholders' equity. In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on income.

LO11-10. Discuss the primary differences between U.S. GAAP an IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets. (pp. 584, 589, 593, 596, 605, 507, 611, & 617)

Among the several differences between U.S. GAAP and IFRS with respect to the utilization and impairment of property, plant, and equipment and intangible assets pertains to reporting assets in the balance sheet. IFRS allows a company to value property, plant, and equipment (PP&E) and intangible assets subsequent to initial valuation at (1) cost less accumulated depreciation/amortization or (2) fair value (revaluation). U.S. GAAP prohibits revaluation. There also are significant differences in accounting for the impairment or property, plant, and equipment and intangible assets.

LO11-8. Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures. (p. 603)

Conceptually, there is considerable merit for a policy requiring the write-down of an asset when there has been a significant decline in value below book value. The write-down provides important information about the future cash flows to be generated from the use of the asset. However, in practice this policy is very subjective. GAAP [FASB ASC 360] establishes guidance for when to recognize and how to measure impairment losses of property, plant, and equipment and intangible assets that have finite useful lives. GAAP [FASB ASC 360] also provides guidance for the recognition and measurement of impairment for indefinite-life intangibles and goodwill.

LO11-9. Discuss the accounting treatment of repairs and maintenance, additions, improvements, and rearrangements to property, plant, and equipment and intangible assets. (p. 614)

Expenditures for repairs and maintenance generally are expensed when incurred. The costs of additions and improvements usually are capitalized. The costs of material rearrangements should be capitalized if they clearly increase future benefits.

LO11-6. Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made. (p. 600)

A change in depreciation, depletion, or amortization method is considered a change in accounting estimate that is achieved by a change in accounting principle. We account for these changes prospectively, exactly as we would any other change in estimate. One difference is that most changes in estimate do not require a company to justify the change. However, this change in estimate is a result of changing an accounting principle and therefore requires a clear justification as to why the new method is preferable.

LO11-5. Explain the appropriate accounting treatment required when a change in depreciation, amortization, or depletion method is made in the service life or residual value of property, plant, and equipment and intangible assets. (p. 599)

A change in either the service life or residual value of property, plant, and equipment and intangible assets should be reflected in the financial statements of the current period and future periods by recalculating periodic depreciation, depletion, or amortization.

LO11-4. Calculate the periodic amortization of an intangible asset, (p. 593)

The allocation process for intangible assets is called amortization. For an intangible asset with a finite useful life, the capitalized cost less any estimated residual value must be allocated to periods in which the asset is expected to contribute to the company's revenue-generating activities. AN intangible asset that is determined to have an indefinite useful life is not subject to periodic amortization. Goodwill is perhaps the most typical intangible asset with an indefinite useful life.

LO11-3. Calculate the periodic depletion of a natural resource. (p. 591)

The allocation process for natural resources is called depletion. The activity-based method called units-of-production usually is employed to determine periodic depletion.

LO11-2. Determine periodic depreciation using both time-based and activity-based methods and account for dispositions. (p. 578)

The allocation process for plant and equipment is called depreciation. Time-based depreciation methods estimate service life in years and then allocate depreciable base, cost less estimated residual value, using either a straight-line or accelerated pattern. Activity-based depreciation methods allocate the depreciable by estimating service life according to some measure of productivity. When an item of property, plant, and equipment or an intangible asset is sold, a gain or loss is recognized for the difference between the consideration received and the asset's book value.

LO11-1. Explain the concept of cost allocation as it pertains to property, plant, and equipment and intangible assets. (p. 575)

The use of property, plant, and equipment and intangible assets represents a consumption of benefits, or service potentials, inherent in the assets. The cost of these inherent benefits or service potentials should be recognized as an expense over the periods they help to produce revenues. As there very seldom is a direct relationship between the use of assets and revenue production, accounting resorts to arbitrary methods to allocate these costs over the periods of their use.