Property, Plant, and Equipment (Portfoliio 5132)

Bloomberg BNA Tax and Accounting Portfolio 5132, Property, Plant and Equipment, discusses the U.S. GAAP and IFRS rules on how to account for property, plant, and equipment (PP&E). It details the rules for what items to capitalize when acquiring or constructing PP&E. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Bloomberg BNA Tax and Accounting Portfolio 5132, Property, Plant and Equipment, discusses the U.S. GAAP and IFRS rules on how to account for property, plant, and equipment (PP&E). It details the rules for what items to capitalize when acquiring or constructing PP&E. Once PP&E is acquired or constructed, it typically is classified as “held and used.” However, when an entity plans to sell or abandon PP&E, it must classify the PP&E as “held for sale” if certain criteria are met.

PP&E that is held and used is depreciated and, if circumstances warrant, is tested for impairment. This Portfolio explains and illustrates the depreciation and impairment testing rules. It also explains and illustrates how PP&E is presented in financial statements and how it is common factored into financial analysis by the investment community.

PP&E that is held for sale is presented at its fair value less estimated cost to sell and is not depreciated. This Portfolio details the criteria for classifying assets as held for sale, as well as special rules for assets that are deemed to be held for sale when they are acquired. It further explains the appropriate accounting when held-for-sale assets are no longer held for sale.

This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5132, Daher and Daher, Property, Plant and Equipment (Accounting Policy and Practice Series).

Authors

Dominic L. Daher, MAcc, JD, LLM in Taxation

Dominic L. Daher is the Associate Vice President of Internal Audit and Tax Compliance at the University of San Francisco. Mr. Daher holds a Master of Laws in Taxation from New York University School of Law (where he served as the Graduate Editor of the Environmental Law Review); a Juris Doctor from Washington University School of Law (where he was the Judge Myron D. Mills Scholar); and both Master and Bachelor of Accountancy degrees from the University of Missouri-Columbia (where he was a merit scholar and graduated with honors).

Mr. Daher writes for various scholarly and professional journals, and he is the author of numerous books which deal with a variety of accounting and legal issues. In addition, he serves on editorial advisory boards for several professional publications. Mr. Daher also serves as an adjunct member of the faculty in the University of San Francisco in its School of Law, and he has previously served as an adjunct member of the faculty in the University of San Francisco's School of Management. In May 2005, Mr. Daher garnered the Outstanding Faculty Teaching Award. In May 2016 Mr. Daher received the Honorable Ira A. Brown Distinguished Adjunct Professor Award from the School of Law.

Stacy E. Daher, MAcc, CPA

Stacy E. Daher was formerly with the international accounting firm, PricewaterhouseCoopers. Ms. Daher is a graduate of Saint Louis University (Master of Accountancy) and the University of Missouri-Columbia (Bachelor of Music). Ms. Daher was previously an adjunct member of the faculty at the University of San Francisco in its School of Business.

Table of Contents

Detailed Analysis
I. Background and Scope of Portfolio
A. Background
B. Scope of Portfolio
II. Initial Recognition and Measurement of Property, Plant and Equipment
Introductory Material
A. Purchased Assets
1. Capitalization vs. Expense
2. Land
3. Land Improvements
4. Buildings
5. Equipment, Furniture and Fixtures
6. Purchase of Multiple Assets
B. Noncash Acquisitions
1. Payment by Issuing Debt or Equity Securities
2. Assets Acquired Through Nonmonetary Exchanges
3. Financial Statement Disclosure
C. Acquisition of Residual Value in Leased Assets
D. Self-Constructed Assets
1. General Capitalization Rules
2. Capitalization of Interest
a. Materiality
b. Construction Projects Subject to Interest Capitalization
c. Capitalization Period
d. Amount of Interest Cost to be Capitalized
(1) Determining Average Accumulated Expenditures
(2) Determining the Capitalization Rate
(3) Comprehensive Example Under U.S. GAAP
e. Disclosure of Capitalized Interest
(1) U.S. GAAP
(2) IFRS
3. Leasehold Improvements
III. Subsequent Accounting for Long-Lived Assets Classified as Held and Used
Introductory Material
A. IFRS Revaluation Election
B. Depreciation
1. Straight-line Method of Depreciation
2. Accelerated Methods of Depreciation
a. Double-Declining Balance Method of Depreciation
b. Sum-of-the-Years-Digits Method of Depreciation
3. Units of Production Method of Depreciation
4. Comparison of Depreciation Methods
5. Changes in Depreciation Estimates
a. Changes in Estimated Useful Lives and Salvage Values
b. Disclosures for Changes in Estimated Useful Lives and Salvage Values
(1) U.S. GAAP Disclosures
(2) IFRS Disclosures
c. Change in Depreciation Method
d. Required Disclosures for a Change in Depreciation Method
(1) U.S. GAAP Disclosures
(2) IFRS Disclosures
C. Presentation and Disclosure Requirements for Property, Plant and Equipment Classified as Held and Used
1. U.S. GAAP Disclosures
2. IFRS Disclosures
3. PP&E on the Cash Flow Statement
D. Financial Statement Analysis
1. Return on Asset Ratio
2. Asset Turnover Ratio
E. Impairment of Long-lived Assets to be Held and Used
1. Impairment Test Outlined
2. Scope of Impairment Guidance
3. Sequence of Impairment Testing
4. Asset Groups
a. Generally
b. SEC Concerns
c. IFRS Differences
5. Assessing Impairment Indicators
6. Testing for Recoverability
a. Estimating Cash Flows
b. Cash Flow Estimation Period
c. Expected Expenditures to be Included in Estimated Cash Flows
d. Effect of Environmental Exit Costs on Cash Flow Estimates Used to Test a Long-Lived Asset for Recoverability
7. Determining the Amount of an Impairment Loss
8. Allocation of the Impairment Loss
9. New Cost Basis
10. Presentation and Disclosure of an Impairment Loss
11. Reversal of Impairment Charge
F. Planned Major Maintenance Activities
1. U.S. GAAP
2. IFRS
IV. Long-Lived Assets Held for Sale
A. Introduction
B. Initial Criteria for Classification as Held for Sale
1. Commitment to Sell Asset
2. Available for Immediate Sale
3. Active Program to Locate Buyer
4. Sale Within One Year Probable
5. Reasonable Price
6. Significant Changes to Plan Unlikely
C. Newly Acquired Assets Classified as Held for Sale
D. Change in Classification After Balance Sheet Date but Before Issuance of Financial Statement
E. Measurement of Expected Cost to Sell
F. Reclassifying Long-Lived Assets to be Disposed of When Plans to Dispose are Abandoned
G. Presentation and Disclosure of Assets Held for Sale
1. Income Statement Presentation Requirements
2. Balance Sheet Presentation Requirements
3. Disclosure Requirements
V. Sale or Disposal of Long-Lived Assets
Introductory Material
A. Sale of Long-Lived Assets
1. Recognition of Gain or Loss
2. Presentation and Disclosure Requirements for Disposal Gains or Losses
B. Exchange for a Similar Long-Lived Asset
C. Long-Lived Assets to be Abandoned
1. Classification and Accounting
2. Long-Lived Assets Temporarily Idled
D. Distribution of an Asset in a Spin-Off

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Quick Reference: Examples of Acquisition Costs to be Capitalized
Worksheet 2 Property, Plant and Equipment Disclosure Example: Asset Section of the Ford Motor Company 2017 Balance Sheet
Worksheet 3 Property, Plant and Equipment Disclosure Example: Asset Section of the Staples, Inc. and Subsidiaries 2017Balance Sheet
Worksheet 4 Property, Plant and Equipment Disclosure Example: Staples, Inc. and Subsidiaries Consolidated Statement of Cash Flows for the Fiscal Year Ended 2017
Worksheet 5 Property, Plant and Equipment Disclosure Example: Note 12 of the Ford Motor Company 2017 Form 10-K
Worksheet 6 Property, Plant and Equipment Disclosure Example: Property and Equipment Disclosures of the Staples, Inc. and Subsidiaries 2013 Financial Statements
Worksheet 7 Quick Reference: Formulas for Depreciation Expense
Worksheet 8 Disclosure of Impairment of Property, Plant and Equipment Valero Energy Corporation and Subsidiaries Income Statement for the Fiscal Year Ended December 31, 2017
Worksheet 9 Disclosure of Impairment of Property, Plant and Equipment Staples, Inc. and Subsidiaries Note C of the Company's Fiscal 2017 Financial Statements
Worksheet 10 Disclosure of Impairment of Property, Plant and Equipment Valero Energy Corporation and Subsidiaries Note 2 of the Company's Fiscal 2017 Financial Statements
Worksheet 11 Assets Held for Sale Murphy Oil Corporation and Consolidated Subsidiaries Consolidated Balance Sheets
Worksheet 12 Assets Held for Sale Murphy Oil Corporation and Consolidated Subsidiaries Note 4 of the Company's Fiscal 2017 Financial Statements
Worksheet 13 Examples of Cash-Generating Units Under IFRS