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PART A: Depreciation

The allocation of asset cost over time for plant and equipment (include land, buildings, equipment, machinery, autos, and trucks.


For intangible asset (lack physical substance and the extent and timing of their future benefits typically are highly uncertain. Includes patents, copyrights, trademarks, franchises, and goodwill.


Natural resources- such as oil and gas deposits, timber tracts, and mineral deposits also are included.

Costs to be capitalized

The initial cost of property, plant, and equipment and intangible assets includes the purchase price and all expenditures necessary to bring the asset to its desired condition and location for use.

Land Improvements

The costs of land improvements are capitalized and depreciated.

Cost of Natural Resources

Includes the acquisition costs for the use of land, the exploration and development costs incurred before production begins, and restoration costs incurred during or at the end of extraction.

Asset Retirement Obligations (ARO)

Measured at fair value and is recognized as a liability and corresponding increase in asset valuation. ARO's could result from the acquisition of many different types of tangible assets, not just natural resources.

Intangible Assets

Generally represent exclusive rights that provide benefits to the owner. Intangible assets with finite useful lives are amortized; those with indefinite useful lives are not amortized. Purchased intangible assets are valued at their original cost.


Can only be purchased through the acquisition of another company. The excess of the fair value of the consideration exchanged over the fair value of the net assets acquired. Along with other intangible assets with indefinite useful lives, is not amortized. In a business combination, an intangible asset must be recognized as an asset apart from goodwill if it arises from contractual or other legal rights or is separable.

Noncash Acquisitions

Assets acquired in noncash transactions are valued at the fair value of the assets given or the fair value of the assets received, whichever is more clearly evident. The total purchase price is allocated in proportion to the relative fair values of the assets required.

Deferred Payments

Some portion of the payment(s) required by a noninterest-bearing note in reality is interest. Noncash transactions are recorded at the fair value of these items exchanged. The economic essence of a transaction should prevail over its outward appearance.

Issuance of Equity Securities

Assets acquired by issuing common stock are valued at the fair value of the securities or the fair value of the assets, whichever is more clearly evident.

Donated Assets

Donated assets are recorded at their fair value. Revenue is credited for the amount paid by an unrelated party.

PART B: Dispositions

A gain or loss is recognized for the difference between the consideration received and the assets book value. Property, plant and equipment and intangible assets to be disposed of by sale are classified as held for sale and measured at the lower of book value or fair value less cost to sell.


Gain or loss is the difference between fair value and book value of the asset given. An asset received in an exchange of non-monetary assets generally is valued at fair value. A gain is recognized when the fair value of an asset given is more than its book value. A loss is recognized when the fair value of an asset given is less than its book value.

Fair Value Not Determinable

If we cant determine the fair value of either asset in the exchange, the asset received is valued at the book value of the asset given.

Exchange Lacks Commercial Substance

Commercial substance is present when future cash flows change as a result of the exchange.

Loss Situation

When the fair value of the asset given is less than its book value, we always use fair value to record the exchange.

Overhead Allocation

The cost of a self-constructed asset includes identifiable materials and labor and a portion of the company's manufacturing overhead costs.

Interest Capitalization

Only assets that are constructed as discrete projects qualify for interest capitalization. Only interest incurred during the construction period is eligible for capitalization. The interest capitalization period begins when construction begins and the first expenditure is made as long as interest costs are actually being incurred.

~Average Accumulated Expenditures

Approximates the average debt necessary for construction. Is determined by time-weighting individual expenditures made during the construction period.

Weighted-average Steps

Step 1: Determine the average accumulated expenditures.
Step 2: Calculate the amount of interest to be capitalized
*The amount of interest capitalized is determined by multiplying an interest rate by the average accumulated expenditures.
*interest capitalized is limited to interest incurred
Step 3: Compare calculated interest with actual interest incurred.
Note: If material, the amount of interest capitalized during the period must be disclosed.

Research and Development

Most R&D costs are expensed in the periods incurred. R&D costs entail a high degree of uncertainty of future benefits and are difficult to match with future revenues.

Determining R&D Cost

R&D expense includes the depreciation and amortization of assets used in R&D activities. Costs incurred before the start of commercial production are all expensed as R&D. Cost incurred after commercial production begins would be either expensed or included in the cost of inventory. GAAP requires disclosure of total R&D expense incurred during the period.

Start-up Costs

Expensed in the period incurred.

Software Development Costs

GAAP requires the capitalization of software development costs incurred after technological feasibility is established.

Purchased Research and Development

For business acquisitions made during fiscal years beg on or after Dec 15th the fair value of in-process research and development is capitalized as an indefinite-life intangible asset.
IFRS requires companies to capitalize development expenditures that meet specified criteria.

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