Exposure Draft Accounting For Certain Costs And Activities Related To Property Plant And Equipment

Accounting for property, plant and equipment. Revaluation gains. A gain on revaluation is always recognised in equity, under a revaluation reserve (unless the gain reverse’s revaluation losses on the same asset that were previously recognised in the income statement – in this instance the gain is to be shown in the income statement).

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The revaluation gain is known as an unrealised gain which later becomes realised when the asset is disposed of (derecognised). Double entry: Dr Non- current asset cost (difference between valuation and original cost/valuation)Dr Accumulated depreciation (with any historical cost accumulated depreciation)Cr Revaluation reserve (gain on revaluation)Example 7 A company purchased a building on 1 April 2. The asset had a useful economic life at that date of 4. On 1 April 2. 00. What is the double entry to record the revaluation? Any additional loss must be charged as an expense in the income statement. Double entry: Dr Revaluation reserve (to maximum of original gain)Dr Income statement (any residual loss)Cr Non- current asset (loss on revaluation)Example 8 The carrying value of Zen’s property at the end of the year amounted to $1.

On this date the property was revalued and was deemed to have a fair value of $9. The balance on the revaluation reserve relating to the original gain of the property was $1. What is the double entry to record the revaluation? However, now that the asset has been revalued the depreciable amount has changed.

In simple terms the revalued amount should be depreciated over the assets remaining useful economic life. Reserves transfer. Director Software Development Amazon Salary Slip.

The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset. As a result of this, IAS 1. Double entry: Dr Revaluation reserve. Cr Retained earnings. Be careful, in the exam a reserves transfer is only required if the examiner indicates that it is company policy to make a transfer to realised profits in respect of excess depreciation on revalued assets. If this is not the case then a reserves transfer is not necessary. This movement in reserves should also be disclosed in the statement of changes in equity.

Example 9 A company revalued its property on 1 April 2. The property originally cost $1. The original useful economic life of 4.

The company’s policy is to make a transfer to realised profits in respect of excess depreciation. How will the property be accounted for in the year ended 3.

March 2. 01. 0? If the revaluation takes place at the start of the year then the revaluation should be accounted for immediately and depreciation should be charged in accordance with the rule above. If however the revaluation takes place at the year- end then the asset would be depreciated for a full 1. This will enable the carrying amount of the asset to be known at the revaluation date, at which point the revaluation can be accounted for. A further situation may arise if the examiner states that the revaluation takes place mid- way through the year. If this were to happen the carrying amount would need to be found at the date of revaluation, and therefore the asset would be depreciated based on the original depreciation for the period up until revaluation, then the revaluation will take place and be accounted for. Once the asset has been revalued you will need to consider the last period of depreciation. This will be found based upon the revaluation rules (depreciate the revalued amount over remaining useful economic life).

This will be the most complicated situation and you must ensure that your working is clearly structured for this; ie depreciate for first period based on old depreciation, revalue, then depreciate last period based on new depreciation rule for revalued assets. Example 1. 0 A company purchased a building on 1 April 2. At the year end 3. March 2. 01. 0 the company decided to revalue the building to its current value of $9. How will the building be accounted for in the year ended 3. March 2. 01. 0? HD Ltd decided to revalue the office block on 1 October 2. The useful economic life remaining was reassessed at the time of valuation and is considered to be 4.

It is the company’s policy to charge depreciation proportionally. How will the office block be accounted for in the year ended 3. Paid Surveys And More Make Up To 92 84 Per Sale Executive Uniform on this page. March 2. 01. 0? This can be found by comparing the difference between.

Can you capitalize demolition costs? Can you capitalize demolition costs? A question has arose multiple times in my career at different organizations regarding the types of costs that are capitalizable. This questions intrigues me because of the fact that it seems very basic and straightforward, but surprisingly, I’ve seen a lot of time spent attempting to research and support a particular position on this, one way or another. The two most common situations I’ve seen is where you a) need to perform demolition costs to remove whatever is in a particular location in order have the space available to build or install a new asset in that location, and b) where you have two very similar assets, and therefore you tear down the old one, to install a new one in a different location (think of a office remodel where you tear down demising walls to expand the space and reinstall another one in a different location. What does the codification say? ASC 3. 60- 1. 0- 3.

Historical Cost Including Interest. Paragraph 8. 35- 2. As indicated in that paragraph, if an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset. See the glossary for a definition of activities necessary to bring an asset to the condition and location necessary for its intended use. The ASC Glossary further defines these activities, as alluded to in paragraph 3. Activities. The term activities is to be construed broadly.

It encompasses physical construction of the asset. In addition, it includes all the steps required to prepare the asset for its intended use.

For example, it includes administrative and technical activities during the preconstruction stage, such as the development of plans or the process of obtaining permits from governmental authorities. It also includes activities undertaken after construction has begun in order to overcome unforeseen obstacles, such as technical problems, labor disputes, or litigation.

So at this point, most of you already have a predefined notion of what the guidance is trying to say here, and it seems pretty clear. Either you are thinking a) “I have to enter into some sort of demolition project/incur some demolotion costs in order for a new asset to be ready for its intended use, so clearly this would be a a capitalizable cost.” Or b) “the guidance above is clearly all around the new asset, but does not speak to costs of OTHER assets. If the FASB was so specific as to include references to construction costs, they would have also been equally as specific about de- construction costs or demolition costs. The fact that they didn’t mention it should be interpreted to mean that this was a specific omission, and therefore the demolition costs should be treated as any other period costs, the same as if there was an absence of the construction of a new asset.”Either way you are thinking about it right now, you have to least see that the guidance isn’t as specific as it could be. Next we turn to other available guidance. The questions is whether or not to expense costs associated with demolition of a space or existing asset at a location, vs capitalize those related costs to the ultimate asset.

When framing the question in this way, we find that there is some guidance out there. First, here is an excerpt from EY “Real Estate Acquisition, development and construction costs”, revised June 2. Accounting for demolition costs.

An entity may purchase property with the intention of demolishing the existing structure and replacing it with a new structure or with the intention of reconstructing the interior of the building (e. Alternatively, an entity may purchase property with the intention of operating the property, but later decide to demolish and replace the property with a new structure. When there is a change in the use of real estate (e. ASC 9. 70- 3. 60- 3.

Section 2. 1. 0). However, the guidance for real estate project costs does not address demolition costs or the accounting for previously capitalized development and construction costs when there is no change in use (i. Demolition costs incurred in conjunction with the acquisition of real estate may be capitalized as part of the cost of the acquisition if the demolition (a) is contemplated as part of the acquisition and (b) occurs within a reasonable period of time after the acquisition, or is delayed, but the delay is beyond the entity’s control (e. If an entity purchases property with the intention of demolishing the existing structure and replacing it with a new structure, the entire purchase price and the costs of demolition should be allocated to the cost of the land.

If an entity purchases a property with the intention of demolishing and rebuilding the interior of the building only, the purchase price and costs of demolition should be allocated between the land and building with the demolition component assigned solely to the building. If a demolition was not contemplated as part of an acquisition of real estate or the demolition does not occur within a reasonable period of time after the acquisition, the costs of the demolition should be charged to expense as incurred, unless the demolition is accounted for as an asset retirement obligation (ARO) in accordance with ASC 4. The key, per EY, appears to be whether or not the demolition is contemplated at the outset of obtaining control over the item to demolish. However, if you begin operating your parking lot without removing the statue, but realize that it is taking up valuable space a year or so later, then this wouldn’t be considered a cost to get your parking lot ready for its intended use, evidenced by the fact that you would have already been using it).

It’s always good to look at international standards as well, as it is well known that there is an overall desire to generally converge. Also, there are many publications which specifically highlight the differences between US GAAP and IFRS, so if, in general, you are taking a position that clearly is in opposition to the treatment applied under IFRS, then it is a good idea to see if others acknowledge the divergence between the accounting standards. First, note the similarities in the actual IFRS guidance to ASC 3. The following is from IAS 1. The cost of an item of property, plant and equipment comprises: a. The costs that may be included in the carrying amount of an asset are limited to those that arise directly from the construction or acquisition of the asset. When, for example, costs are incurred to demolish existing structures in order to build on a site, the cost of demolition may be incremental to the construction cost or it may be associated with derecognition of a previously held asset.

It depends on whether the existing structures were previously used in the entity’s business, or were acquired as part of the site with the specific intention of demolishing them. In the latter case, the demolition costs are clearly incremental and should be included in the cost of the new asset. In the former case, the cost of the old asset should be written off to profit or loss through accelerated depreciation once the decision to demolish is made; the demolition costs incurred relate to the derecognition of the old asset and should also be expensed when incurred. It appears that Deloitte (technically Deloitte Touche Tohmatsu) believes that the IAS guidance should be applied in a similar fashion as EY believes that the Codification should be. Pw. C on the other hand, refers to the fact that most companies will refer to a SOP that was never actually finalized, due to the lack of availability of more specific US guidance.