Non-current assets

Asset acquisition and disposal

1/1/X1, XYZ acquired production machine #123 for 60,000, intending to use it for 12 years. It estimated the machine could be sold for 9,000 at the end of its useful life and elected to apply a straight-line depreciation method.

As most tangible assets have some value at the end of their useful lives, depreciating them to their residual/salvage value, rather than zero, is common IFRS/US GAAP practice.

IAS 16.6 defines: The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

While ASC 360 does not define the term salvage value, the way it uses the term indicates that the two are synonyms.

ASC 360-10-35-4: ... This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. ...

Dr/Cr

1/1/X1 | 1.1.X1

 

 

Machine #123

60,000

 

 

Accounts payable

 

60,000


12/31/X1 to X12 | 31.12.X1 to X12

 

 

Depreciation expense

4,250

 

 

Accumulated depreciation: Machine #123

 

4,250


12/31/X12, it sold the machine for 9,500.

12/31/X12 | 31.12.X12

 

 

Accumulated depreciation: Machine #123

51,000

 

Cash

9,500

 

 

Machine #123

 

60,000

 

Gain on asset disposal

 

500


Loss on disposal

Same facts as above, except XYZ sold the machine for 8,500.

12/31/X12 | 31.12.X12

 

 

Accumulated depreciation: Machine #123

51,000

 

Cash

8,500

 

Loss

500

 

 

Machine #123

 

60,000


Components

IFRS versus US GAAP

If a company acquires an asset with significant parts, IFRS requires it to apply component accounting.

A component is a spare part that:

1. would cost more than 10% to 20% of the cost of the entire asset if acquired separately, and

IAS 16.43: Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

While IFRS does not quantify the term significant, in practice it is generally understood to mean between 10% to 20%.

This implies that no asset should have more than 5 to 10 components.

2. has a useful life that differs by more than 10% to 20% from the useful life of the asset.

Although IAS 16.43 only outlines a single (cost) criteria, IAS 16.45 suggests that useful life should also be considered.

IAS 16.43: Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

IAS 16.45 states: A significant part of an item of property, plant and equipment may have a useful life and a depreciation method that are the same as the useful life and the depreciation method of another significant part of that same item. Such parts may be grouped in determining the depreciation charge.

Thus even if two parts had significant values, they would not be considered separate components unless their useful lives also differed significantly.

IAS 16.43: Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately.

In contrast, US GAAP does not require components, but it does allow them.

US GAAP does not specify how assets must be depreciated. It merely requires a "systematic and rational" method to be used.

ASC 360-10-35-4: The cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility. This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation.

As the component approach is systematic and rational, it is allowed even though, unlike IFRS, it is not required.

Since the component approach is required under IFRS, IFRS has also developed a methodology (see above).

As this methodology is not contrary to any US GAAP guidance, it may be used for US GAAP purposes.

The only methods US GAAP specifically disallows are the ACRS and annuity method.

ASC 360-10-35-9: If the number of years specified by the Accelerated Cost Recovery System of the Internal Revenue Service (IRS) for recovery deductions for an asset does not fall within a reasonable range of the asset's useful life, the recovery deductions shall not be used as depreciation expense for financial reporting.

ASC 360-10-35-10: Annuity methods of depreciation are not acceptable for entities in general.

It is important to note, however, neither IFRS nor US GAAP specify the unit of account that is to be divided into components.

In contrast to tax law and many national GAAPs, neither IFRS nor US GAAP include an arbitrary list of items that are to be considered individual assets for recognition, measurement or disclosure purposes.

3-year property.

Tractor units for over-the-road use.

Any race horse over 2 years old when placed in service. (All race horses placed in service after December 31, 2008, and before January 1, 2015, are deemed to be 3-year property, regardless of age.)

Any other horse (other than a race horse) over 12 years old when placed in service.

Qualified rent-to-own property (defined later).

5-year property.

Automobiles, taxis, buses, and trucks.

Computers and peripheral equipment.

Office machinery (such as typewriters, calculators, and copiers).

Any property used in research and experimentation.

Breeding cattle and dairy cattle.

Appliances, carpets, furniture, etc., used in a residential rental real estate activity.

Certain geothermal, solar, and wind energy property.

7-year property.

Office furniture and fixtures (such as desks, files, and safes).

Agricultural machinery and equipment.

Any property that does not have a class life and has not been designated by law as being in any other class.

Certain motorsports entertainment complex property (defined later) placed in service before January 1, 2015.

Any natural gas gathering line placed in service after April 11, 2005. See Natural gas gathering line and electric transmission property , later.

10-year property.

Vessels, barges, tugs, and similar water transportation equipment.

Any single purpose agricultural or horticultural structure.

Any tree or vine bearing fruits or nuts.

Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008.

15-year property.

Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges).

Any retail motor fuels outlet (defined later), such as a convenience store.

Any municipal wastewater treatment plant.

Any qualified leasehold improvement property (defined later) placed in service before January 1, 2015.

Any qualified restaurant property (defined later) placed in service before January 1, 2015.

Initial clearing and grading land improvements for gas utility property.

Electric transmission property (that is section 1245 property) used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005. See Natural gas gathering line and electric transmission property , later.

Any natural gas distribution line placed in service after April 11, 2005 and before January 1, 2011.

Any qualified retail improvement property placed in service before January 1, 2015.

20-year property.

Farm buildings (other than single purpose agricultural or horticultural structures).

Municipal sewers not classified as 25-year property.

Initial clearing and grading land improvements for electric utility transmission and distribution plants.

25-year property. This class is water utility property, which is either of the following.

Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.

Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996.

Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.

Nonresidential real property. This is section 1250 property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years.

Note: while this list was taken from the US tax code, similar lists are part of most nations' tax codes and/or National GAAPs.

Consequently, it is not uncommon for a company to define an asset such as a production line to be the unit of account with its constituent machines (laths, mills, robots, conveyors, etc.) treated as parts for component accounting purposes.

As a general rule, good accounting is to treat any assemblage of parts acquired together, used together and disposed of together an asset item even if, in different circumstances, those parts would be considered asset items in their own right.

Another rule of thumb is to consider the next organization level down from the cash-generating unit / asset group to be the asset item.

IAS 36.6: A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

ASC 360-10-20: An asset group is the unit of accounting for a long-lived asset or assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

IAS 16.9 states: This Standard does not prescribe the unit of measure for recognition, ie what constitutes an item of property, plant and equipment. Thus, judgement is required in applying the recognition criteria to an entity's specific circumstances. …

The IFRS master glossary defines: unit of account - The level at which an asset or a liability is aggregated or disaggregated in an IFRS for recognition purposes.

In contrast "unit of measure for recognition" is not a defined term.

Thus, although the term "unit of account" was introduced and defined by IFRS 13, it can be considered a synonym to IAS 16's "unit of measure for recognition".

Instead of stating that it does not prescribe a unit of account, ASC 360 simply does not prescribe a unit of account.

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