1. Property, Plant and Equipment (including natural resources)
The life cycle, including expense versus capitalize, front end costs, maintenance and overhaul, depreciation and depletion, exchange and sale. Topics include impairment and capitalization of interest.

2. Plant assets, fixed assets, operational assets– which is included in property, plant and equipment (PPE)?
Tangible resources
Expected to benefit more than one year of operations
Needed to “run the business” and ultimately help generate revenue
Historical cost valuation (objective, verifiability versus relevance)
Cost or depreciated cost (depreciate no more than cost less salvage)
Impairment write-down (no write-up later if circumstances change)

3. Front end costs –to expense or capitalize, that is the question!
Expense or prepaid expense
Capitalize (record as an asset)
Insurance
Repairs for unintended damage to new asset
Annual fees that must be paid, like property taxes
Necessary expenditures to obtain asset and get it ready for intended use
Examples – installation, shipping, delinquent property taxes, title search fees, survey costs, tearing down original structures not needed on land
Fix up costs on used assets to get them ready for 1st time use

4. Straight line depreciation –the most popular one
Straight line depreciation –the most popular one! (& related depreciation methods)
Straight-line method
Group/Composite method
Formula (cost-salvage)/useful life (time based)
Record gain or loss when individual assets are sold
If partial year, smaller amount of depreciation (or use nearest whole year or other convention)
Based on STL depreciation
Calculate rate as % of cost by doing STL for each asset in the batch when start with this method (continue rate if sell off, change if add new items)
Materiality allows no gain/loss when selling assets from the pool (since assumed gains offset losses on sales of old items over time)

5. Depreciation methods-Accelerated ones
Double declining balance (DDB)
Sum of the year’s digits (SYD)
Formula – (cost- accumulated depreciation) times 2/useful life
Time based
Most depreciation the first year
Poor math!
Once DDB amount less than STL, use STL to finish
Formula – (cost- salvage) times the remaining useful life beginning of the year/SYD
SYD = add up the numbers counted to reach useful life or n(n+1)/2
Time based
Most depreciation the first year (though less than DDB)
1st year partial year – more complicated math

6. Units of Output/Production Depreciation method
Activity-based, not time-based method
Hours, miles, units produced, etc.
Better matching to revenues probably when usage varies from period to period
Extra work since must track the actual activity of an asset each period
Not necessarily an “activity” identified for every PPE

7. Depreciation conventions and revisions
Nearest whole month – 1st to 15th, depreciate that entire month, 16th to 31st, depreciate next month
Nearest whole year convention – purchase in 1st 6 months of year, depreciate whole year; 2nd 6 months of year, depreciate next year
One-half year convention – ½ year’s depreciation taken in year of acquisition and year of disposal on all assets
If change in estimate –service life or salvage value – adjust in current and future year (prospectively)
If add to original cost of PPE or decrease accumulated depreciation – adjust in current and future year (prospectively)

8. Capitalization of Interest
During construction period only
Must have debt (either project loan and/or other loans)
Can’t exceed actual interest accrued/paid
Need weighted average accumulated expenditure – for the year -# of months divided by 12 months that must finance an expenditure before project is completed (or average of total spent for the accounting period)
Project loan borrowed just for PPE project –use first in calculations.
Other loans can be used next – must calculate weighted average of interest (total interest expense/total principle of loans)
Eventually, record increase to PPE ledger account and decrease to interest expense
Interest capitalized will be expensed as part of depreciation over the life of PPE

9. Overhaul versus maintenance
Change quality of usage (such as additions) or substantially extend useful life beyond original expectation – capitalize (add to asset or decrease accumulated depreciation) – “capital expenditure”
Capital expenditure will impact future depreciation
Keeping an asset in good working condition – expense or prepaid expense – “operating or revenue expenditure”
Revenue expenditure will not impact future depreciation
Immaterial – probably expense

10. Exchanges of PPE
Swap assets – take off asset on books (cost and accumulated depreciation) and recognize new asset received
Gain – if value of asset given up is less than fair market value of same asset
Loss –if value of asset given up is greater than fair market value of same asset
Cash received – if fair value of asset given up is greater than fair value of asset received
Cash paid – if fair value of asset given up is less than fair value of asset received
swapping solely to generate a gain with no economic substance (gain deferred and new asset value decreased)

11. Impairment of PPE
If major technological or other change causes likelihood of vastly diminished future returns
Test for impairment – book value versus estimated future benefit (add up expected future cash flows)
Impaired ---book value > total future cash flows
Not impaired – book value < total future cash flows
Loss from impairment --- revised fair market value of PPE (present value of expected future flows) compared to book value
Journalize --- close out cost and accumulated depreciation to date and replace with fair market value of impaired asset, recognize loss
Conservative – picking the lower of two asset values

12. Disposal of property, plant and equipment
Update depreciation until time of disposal
Recognize “realized” gain or loss in journal entry (giving up versus receiving)
Close out PPE asset ledger account and any accumulated depreciation
If no compensation for disposal, book value becomes loss

13. Depletion of natural resources
Timber, coal and mineral deposits, oil and gas
Expensed as generate revenues – depletion
Follows same basic rules as PPE –including units of output depreciation method often used
Asset “capitalized costs”– includes acquisition, exploration costs (searching for natural resource reserves), development costs before production, asset retirement obligations (costs of restoring to natural state)
Related PPE with useful life limited to life of the mine or deposit would be depreciated in same way as natural resource depleted