Non-current Assets-
Acquisition
Bythe end of today’s class you
should understand…
– the basic issues in accounting for
the acquisition,
– capitalize or expense decision
– How to value self constructed
assets including R&D and
software
Types of Operational Assets
– PPE incl. Natural resources
– Intangible Assets
Capitalization
Recognition
– Expenditures that provide future benefits
Measurement
– All costs incurred until asset is ready for use
must be capitalized.
Types of PPE
– Equipment
– Land
– Land Improvements
– Buildings
– Natural Resources – acquisition costs,
exploration costs, development costs
Types of Intangibles
– Goodwill,Patents, Copyrights, Trademarks,
Franchises (initial fee plus legal cost),
Organization costs
Accounting for Long-
Lived Assets
Types of Acquisition
– Lump-sum purchase
» Unbundle individual asset value.
– Non-cash acquisitions –use fair value of assets
given or received whichever is more reliable
» Deferred Payments eg. If note is long term use
present value
» Issuance of Equity Securities
Use market value of stock
» Donated Assets
Recognize revenue or gain (SFAS 116)
» Acquisition by exchange (Trade in)
Commercial asset exchange – recognize gains or
loss on transaction. Assumes sale of old asset
and purchase of new at fair market value. If
FMV of new not available use FMV of old plus
cash given (recd)
Non-commercial asset exchange – next slide
Non-commercial asset
exchange
Compute gain/loss on transaction = (FMV
–BV) of old asset
If (FMV-BV) 0 then
– If cash paid but not recd, no gain recognized,
reduce value of new asset by amount of gain
– If cash is received, then portion of gain
recognized.
» Gain = {Cash/ (Cash +FMV of new asset)}*
Total gain
» Alternatively Gain = {Cash / FMV of old
asset)* Total Gain
» If Cash/ (Cash +FMV of new asset) > 0.25 then
recognize Total gain
Accounting for Long-
Lived Assets
Self-Constructed Asset(FAS 34)
– Overhead allocation. Value includes labor,
materials and overhead
– Interest capitalization
» Applied during the period of construction based
on when the funds were applied
» Interest capitalization is not dependent on
whether you borrowed specific construction
funds or not
» If money is not borrowed then use weighted cost
of interest from existing borrowing
» If average accumulated expenditure is greater
then borrowing, then interest is determined:
Specific loan at borrowing rate +
Expenditure in excess of borrowing * weighted
cost of existing debt
» Show example in class
Accounting for Long-
Lived Assets
Research and Development (FAS2)
– Determine R&D costs
» Expense all costs prior to commercial
production
» Capitalize after commercial production as asset
– R&D for others
» Capitalize as inventory until project completed
– Software development costs(FAS 86)
» Expense costs until technological feasibility,
capitalize following technological feasibility
until commercial production (intangible), then
capitalize as inventory
» Intangible has to be amortized using percentage
of revenue method or straight line (time)
whichever is greater