Property, Plant, and Equipment, Investment Property and Intangible Assets:

Acquisi;on and Disposi;on (Part A)

1. Capitaliza+on vs Expensing
Capitaliza+on
§ Record current expenditures as an asset if they are expected to produce economic
benefits over mul.ple periods in the future
è Recognize expenses over the useful life of the asset.
§ Example: Expenditures on a major improvement of a building (e.g., the replacement
of a centralized air condi?oning system)
Expensing
§ Record current expenditures as an expense if they are expected to produce economic
benefits only in the current period
§ Example: Expenditures for ordinary repairs and normal maintenance of a building
(e.g., carpet cleaning)

a. Cost to be capitalized
Ini?al cost = Purchase price + All expenditures necessary to bring the asset to its desired
condi?on and loca?on for use

i. Equipment
Capitalizable costs for equipment will include:
• Purchase price
• Any sales tax
• Transporta?on costs
• Expenditures for installa?on and tes?ng
• Legal fees to establish ?tle
• Any other costs to bring the asset to its condi?on and loca?on for use

ii. Land
When purchasing land, usually the following costs are capitalized:
• Purchase price
• ALorney fees
 • Real estate agent commissions
• Costs related to ?tle and ?tle search
• Recording fees
• Any back taxes, liens, mortgages, or other obliga?ons
• Expenditures such as clearing, filling, draining, and even removing old buildings
Proceeds from the sale of salvaged materials after purchase reduce the cost of land

iii. Land Improvement

• Land improvement costs should also be capitalized. Land improvements usually have
useful lives that are es?mable
• Costs:
– Separately iden?fied and capitalized
– Depreciated over periods benefited by their use
• Examples:
– Cost of parking lots, driveways, private roads, fences, and sprinkler systems

iv. Buildings
• Cost of acquiring a building usually includes:
– Purchase price
– Realtor commissions and legal fees
– Recondi?oning costs

2. Intangible Assets
• Represent exclusive rights that provide benefits to the owner
• Lack physical substance
• Difficult to an?cipate the ?ming and the existence of future benefits aLributable to
many intangible assets
• Companies can either
– Purchase intangible assets from other en??es
E.g.: Exis?ng patent, copyright, trademark
– Develop intangible assets internally
E.g.: Develop a new product that is then patented
• With finite useful lives -> Amor?zed
With indefinite useful lives -> Not amor?zed
Cost = Purchase price + All other costs necessary to bring the asset to its desired condi?on
and loca?on for use

a. Iden+fiable
a) Separable (i.e., can be sold, rented, transferred, licensed or exchanged individually or
together with a related contract or an iden?fiable asset or liability), or
b) Arising from contractual or other legal rights
----accoun?ng regulated by IAS 38
Example: Patent, Copyright, Trademark, Franchise

b. Uniden+fiable
The intangible asset cannot exist separately without the business. It cannot be sold, rented,
licensed separately ---- accoun?ng regulated by IFRS 3

c. Common iden+fiable intangible assets

i. Patent
‒ Exclusive rights to use, manufacture, or sell products or processes without
interference or infringement by others
• Recognized by law and granted by a country for a limited period (usually 20
years)
• Example: The GoPro patent of cameras that can be strapped to the athlete’s body
(fairly simple idea).

ii. Copyrights
– Exclusive rights to print, reprint, copy, sell, distribute, perform and record works
• Protec.on given by law to authors of literary, musical, ar?s?c, and similar works
(e.g., films)
• The legal life of copyright = The life of the creator + 50 to 100 years (or a finite
period for anonymous or corporate crea?ons)
• Example: J. K. Rowling became a billionaire by the sale of Harry PoLer Books and
the royalty from the related movies, and royalty from the toys and theme parks.

iii. Trademarks
– Exclusive rights to display symbols, designs, or logos associated with a business
• Registered with relevant na?onal authority
• Renewable indefinitely in (usually) 10-year periods
• Example: The Coca Cola Trademark is supremely valuable. The other soc drinks are
not allowed to use that name.

iv. Franchises
– Rights to use a firm’s business model and brand for a prescribed period of ?me
Example:
• Fast food outlets
• Automobile dealerships, etc.
3. Recogni+on of Intangible Assets
1. Recogni.on of Iden.fiable intangible assets (IAS 38)
• Acquired separately or as a result of business combina?on
• Sa?sfying the defini?on of an intangible asset and the recogni?on criteria (IAS 38.18)
2. Recogni.on of purchased goodwill (IFRS 3)
• Acquired as a result of business combina?on, but
• Not sa?sfying the IAS 38 defini?on of an intangible asset (i.e., not iden?fiable)
Note: Research and development is not covered.

a. Separately acquired intangible asset

The asset is recorded at cost at the date of acquisi?on (cost = A + B)
A. The purchase price
• reflects the probability that the economic benefits embodied in the asset will
flow to the en?ty (mee.ng criterion (a))
• the fair value of the purchase considera?on = the amount of cash or the fair value
of other monetary assets paid (mee.ng criterion (b))
• The purchase price = the price paid to the seller + import du?es and non-
refundable purchase taxes – trade discounts and rebates
B. Any directly aRributable costs of preparing the asset for its intended use
• Costs of employee (during the prepara?on stage)
• Professional fees
• Costs of tes?ng the asset, etc.

b. Intangible asset acquired as part of a business combina+on

The asset is recorded at its fair value at the acquisi?on date
– Reflects the probability of the economic benefit flowing to the en?ty
– Sufficient informa?on exists to measure the fair value of the iden?fiable asset reliably
– This is true regardless of whether the acquired firm purchased or internally developed
the asset
– Example: Company A has acquired company B. Company B owns a drilling license
with a fair value of $2 million at the date of acquisi.on. The cost of the license in
the consolidated accounts will be $2 million.
c. Subsequent intangible asset costs
§ Costs incurred acer ini?al recogni?on should be expensed unless
a) those costs enable the asset to generate future economic benefits in excess of the
originally assessed standards of performance
b) those costs can be measured reliably
* The legal costs of defending against a patent infringement acer ini?al measurement be
expensed as they are incurred to maintain the asset at its originally assessed standard of
performance (X in excess of)
* Plain?ff -> win patent infringement lawsuit -> legal costs to be capitalized

4. Goodwill
Represents the unique value of a company as a whole over and above its iden?fiable
tangible and intangible assets

o por?on of the value of a company that cannot be aLributed to other assets

1. Internally generated goodwill

– Developed by adver?sing, training, research and development, and other efforts
• Examples: A list of major clients, reputa?on, well-trained employees and
management team, favorable business loca?on, etc.
• Accountants do NOT recognize internally generated goodwill (difficult to
ascertain a value for the asset)
2. Purchased goodwill
– Acquired by a business combina.on (recognized)

a. Ini+al measurement of purchased goodwill

Key assump.ons
• The buyer and seller nego?ate and agree on a price
• The price consists of the value of iden?fiable net assets on a stand-alone basis and a
premium for goodwill
The cost of purchased goodwill is imputed as
• the difference between the purchase price and the buyer’s own valua?on of the
iden?fiable net assets acquired
 – All iden?fiable assets acquired and liabili?es assumed by the buyer are
individually recognized at fair values

If the purchase price of the company is less than the sum of fair value of its iden?fiable
components (bargain purchase, distressed sale)
è No such thing called nega?ve goodwill
è Recognize the difference in the purchase price and the fair value of the company
‘net assets’ as gain
Property, Plant, and Equipment, Investment Property and Intangible Assets:
Acquisi;on and Disposi;on (Part B)

Capitalizing the costs of self-constructed assets

• Overhead cost alloca?on (apply the concepts learned from Management Accoun6ng)
• Capitaliza?on of borrowing cost (new concepts covered in Intermediate Accoun6ng 1)

1. Self-constructed assets
• An en?ty builds its own inventory or non-current assets over a substan.al period of
?me
– Examples of self-constructed assets
• A retailer builds a store for future use
• A manufacturer builds facili.es for future use
• A ship-building company builds ships for future sale
• A real estate developer purchases land and builds rental apartment towers

2. Why capitalizing the costs of self-constructed assets

– The self-constructed assets are not yet ready for their intended use for producing
revenue during the construc.on period
• The costs of self-constructed assets are capitalized during the construc.on
period
• The capitalized costs are recognized as expenses during later periods when the
assets are providing benefits

3. Costs to be capitalized
A. Materials and direct labor (direct costs)
• Traced directly to work and material orders rela?ng to self-constructed assets

B. Overhead costs (indirect costs)

• Power, heat, light, insurance, property taxes on factory buildings, factory
supervisory labor, etc.
• Related to all construc?on ac?vi?es for a year
• Allocated to self-construc?on and other ac?vi?es based on the rela?ve amount of
a cost driver (e.g., labor hours)

C. Borrowing costs
• Directly aRributable to the acquisi?on, construc?on, or produc?on of a
qualifying asset, or
 • Would have been avoided* if the expenditure on the self-constructed asset had
not been made
* Repaying or using general debts elsewhere

Note: All other interest charges are expensed in the period in which they are incurred. (e.g.,
interest charges to finance the purchase of equipment)

4. Capitaliza+on of borrowing costs

Step 1: Iden+fy qualifying assets
– Inventories, manufacturing plants, power genera?on facili?es, intangible assets,
investment proper?es, etc.
– The construc?on of these assets should require a substan.al period of .me to get
them ready for sale or intended use
– Note: Financial assets and inventories produced over short periods are not
qualifying assets

Step 2: Determine the capitaliza+on period

Capitaliza.on begins when:
1. Expenditures on the asset have been made,
2. Construc?on of the asset is in progress, and
3. Borrowing costs are being incurred
Capitaliza.on ends when:
1. The asset is substan?ally complete and ready for use, or
2. Borrowing costs are no longer being incurred

Step 3: Compute weighted average accumulated expenditures

• The average amount outstanding during the capitaliza?on period
– Expenditures are made at or a=er the beginning of the capitaliza?on period
• The amount of funds that would be required to finance the expenditures
– Funds = A mix of borrowings and internal funds
– The use of internal funds to finance the expenditures reduces avoidable
borrowing costs

Step 4: Compute avoidable borrowing costs (calculate the actual and capitalized interest)
Types of borrowings
a) Construc.on-specific borrowing
§ Debt issued specifically for funding the construc?on
b) General borrowing
§ Debts that could have been liquidated or employed elsewhere if construc?on
had not been undertaken
Methods
Method 1: Specific interest method
- Apply interest rates from specific construc?on loans to the amount of specific
borrowings
- Then use the weighted average rate of general debt on the amount of general
borrowings (on amount equals to WAAE – specific debt)
Method 2: Weighted average method
- Apply the weighted average interest rate on all interest-bearing debts, including all
construc?on loans
- if it is difficult to associate specific borrowings with the project

* Examples please see the slide

Tips
1. Weighted-average accumulated expenditures = sum of all actual expenditure × their
respec.ve por.on of construc.on period
!"#$%& #( )%&*+*,&
2. Interest rate =
!"#$%& #( -*.&

3. Amount of interest expense to be recognized = Actual interest accrued for the year/
period – Interest capitalized for the year/period
4. Journal entry:
Dr. The Asset
Dr. Interest expense
Cr. Interest payable / Cash
5. If longer than one year and brought forward to another year, the first expenditure of that
year/period would be the accumulated expenditure at the end of last year/period, i.e.
equals to Last Year/Period Actual Expenditures + Avoidable Interest (why not actual interest
is because only avoidable interest is related to the construc.on)
6. When the period is less than a year, also need to mul?ply the frac?on of year when
calcula?ng the interest

What if the actual interest paid is lower than calculated avoidable borrowing cost?
- Rule: Capitalized borrowing cost = Lower of (the actual interest paid, calculated
avoidable borrowing cost)
- Always check to see if your calculated avoidable borrowing cost is in fact lower
than the total interest paid.
- Always use the lower of the two figures.