Question

In: Accounting

What principles underlie the initial measurement of PP&E, natural resources, and intangible assets? Why does interest...

  • What principles underlie the initial measurement of PP&E, natural resources, and intangible assets?
  • Why does interest need to be capitalized on self-constructed assets? How much interest is capitalized?
  • What is the conceptual basis for capitalizing versus expensing items related to intangible assets such as R&D, software, patents, etc.
  • What are some of the most significant differences in accounting for PP&E and intangibles in US GAAP vs. IFRS?

Solutions

Expert Solution

1.  initial measurement of PP&E, natural resources, and intangible assets is based on the cost incured to make the asset ready or available to use which include the purchase cost of asset or cost incured to acquire the place for mining etc

2. on self constructed asset if the company take loan for the purpose of meeting the expense on the contructing asset then interest expense incured for the purpose of asset so it should be capitalised . interest expense incuring can be capitalised when the criteria met to the date when asset is ready

3. expenses incurred on R&D , patent etc can be capitalised from the date when the project is feasible , company is financially sound to complete the project etc certain conditions met . which means that company can benefit from the project for long time (usefull life) , otherwise if it is not feasible then it should be expensed

4.IFRS allows revaluation of the following assets to fair value if fair value can be measured reliably: inventories, property, plant & equipment, intangible assets, and investments in marketable securities. This revaluation may be either an increase or a decrease to the asset’s value. Under GAAP, revaluation is prohibited except for marketable securities.

Both standards allow for the recognition of impairment losses on long-lived assets when the market value of an asset declines. When conditions change, IFRS allows impairment losses to be reversed for all types of assets except goodwill. GAAP takes a more conservative approach and prohibits reversals of impairment losses for all types of assets.

GAAP requires that long-lived assets, such as buildings, furniture and equipment, be valued at historic cost and depreciated appropriately. Under IFRS, these same assets are initially valued at cost, but can later be revalued up or down to market value. Any separate components of an asset with different useful lives are required to be depreciated separately under IFRS. GAAP allows for component depreciation, but it is not required.


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