Question

You are working for Mindak LLP, an accounting consulting firm, as a research and accounting specialist.  Rowling Inc., an important manufacturing client, has asked you to research and explain the accounting rules for property, plant and equipment issues that the company is experiencing.  The client wants you to reference and briefly explain the GAAP rules provided in the FASB codification. Rowling Inc. will then use your business professional memo to look up the rules in the codification.

(a) the capitalization period for interest being capitalized on self-constructed assets,

(b) impairment of property, plant and equipment,

(c) changes in the estimate of depreciation useful life or salvage value,

(d) the primary disclosures that need to be made for property, plant and equipment.

Answer 1

(A)The Capitalization period for interest being capitalized on self-constructed assets:

The capiitalization period begins when:

-expenditures on such assets have been commenced

-unitl activities to get asset ready for intended use are in progress, and

-interest cost is being incurred

So the costs for interest incurred are capitalized upto the period such activities are being performed which get the asset ready for its intended use. And shall be ceased to be capitalized if substantially all the activities have been stopped.

​(B)The impairment of property plant and equipment (long-lived assets) is generally governed under the latter of two categories:

• Assets Held for Sale
• Assets Held and Used

​​It is a event driven two step process which is applied at asset level.

• First, we determine whether the long lived assets are recoverable, and if not then an impairment loss is recognized considering the amount by which carrying value exceeds the assets' fair value.

Recoveraility of the assets is determined by comparing the net carrying value of the asset to the undiscounted net cash flows to be generated from use of the asset upto its disposition including any amount recoverable on disposition of the asset.

This test intends to find the recoverablity of the asset group as a whole.

(C)Changes in the Estimate of Depreciation, Useful Life or Salvage Value:

This is required only when the reassessment of useful life of asset is made on occurence of events of events or circumstances that lead to shortening of useful life of asset.