Chapter 8: Property, Plant, and Equipment

Perspective and Issues

Long-lived tangible and intangible assets (which include plant, property, and equipment as well as development costs, intellectual property intangibles, and goodwill) provide economic benefits to an enterprise for a period greater than that covered by the current year's financial statements. Accordingly, these assets must be capitalized and their costs must be allocated over the periods of benefit to the reporting enterprise. Generally accepted accounting principles for long-lived assets address matters such as the determination of the amount at which to initially record the acquisition, the amount at which to present the asset at subsequent reporting dates, and the appropriate method(s) by which to allocate their costs to future periods. Under current international accounting standards, while historical cost is identified as the benchmark treatment, it is also acceptable to periodically revalue long-lived assets if certain defined conditions are met.

Long-lived assets are primarily operational in character, and they may be classified into two basic types: tangible and intangible. Tangible assets, which are the subject of the present chapter, have physical substance and can be further categorized as follows:

1. Depreciable assets

2. Depletable assets

3. Other tangible assets

Intangible assets, on the other hand, have no physical substance. The value of an intangible asset is a function of the rights or privileges that its ownership conveys to the business enterprise. Intangible assets, which are explored at length in the following chapter of this book, can be further categorized as either

1. Identifiable, or

2. Unidentifiable (i.e., goodwill).

Property (such as factory buildings) is often constructed by an enterprise over an extended period of time, and during this interval, when the property has yet to be placed in productive service, the enterprise may incur interest cost on funds borrowed to finance the construction. IAS 23 provides, as an allowed alternative treatment, that such cost be added to the carrying value of the asset under construction. However, the benchmark treatment is to expense such costs as period costs, as they are incurred. A recently issued IASC interpretation has stipulated that once an enterprise adopts the allowed alternative as its accounting policy, interest costs should be added to the carrying value of all qualifying assets.

It has long been accepted that an enterprise's balance sheet should not present assets at amounts in excess of some threshold level, often described as net realizable value or fair value, even if its (amortized) cost exceeds that amount. Previously, there was no specific guidance under international accounting principles directing preparers of financial statements in how to measure long-lived assets' fair values, or how to account for any diminution in value which may have occurred during the reporting period. IAS 36, Impairment of Assets, has significantly altered the accounting landscape by providing thorough coverage of this subject. IAS 36 is equally applicable to tangible and intangible long-lived assets, and will be accordingly addressed in both this and the immediately succeeding chapters.

Long-lived assets are sometimes acquired in nonmonetary transactions, either in exchanges of assets between the entity and another business, or when assets are contributed by shareholders to the enterprise. Although there are no specific standards on the accounting for these transactions under existing international accounting standards, the accounting that may logically be applied to these commonly encountered transactions is also considered in this chapter.

Sources of IAS

IAS 16, 23, 36

SIC 2, 14, 21, 23