Exchange summary Step 1: record new asset Step 2: remove old asset Step 3: record cash Step 4: record gain or loss Self-constructed assets Fair value determinable and commercial substance FV given + cash paid (or - cash received) BV of cost minus accumulated depreciation Amount paid or received FV given BV given (if FV > BV, gain; if FV < BV, loss) Type of exchange Fair value note determinable Lack of commercial substance BV given + cash paid If gain, BV given + (or cash received) cash paid (or cash received) + gain recognized. If loss, FV given + cash paid (or cash received) BV of cost minus BV of cost minus accumulated accumulated depreciation depreciation Amount paid or Amount paid or received received No gain or loss Calculate gain to be recognized recognized. Recognize entire loss.   a company might decide to construct an asset for its own use rather than buy an existing one. identifying the cost is difficult because there is no external transaction to establish an exchange price. Determining the amount of indirect manufacturing costs (overhead) to be allocated to the construction() Self-constructed assets Two critical issues Deciding on the proper treatment of interest (actual or implicit) incurred during construction. () Overhead allocation: the treatment of manufacturing overhead cost and its allocation: 1. Inclusion of only the incremental overhead costs 2. full-cost approach Interest Capitalization: 1. capitalized and then allocated as depreciation Interest Capitalization Qualifying assets:   assets that are constructed for a companys own use as well as assets constructed as discrete projects for sale or lease. Only interest incurred during the construction period is eligible for capitalization Period of capitalization:  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. Interest Capitalization Interest Capitalization    The same procedure is carried out for 2022. 2022 The method of determining the amount of interest to capitalize by suing rates from specific loans to the extent of specific borrowings before using the average rate of other debt is called the specific interest method. The alternative is the weighted-average method. Interest capitalizationweighted average method Capitalized interest disclosureWal-Mart Stores, Inc. Research and development (R&D) Research  planned search or critical investigation to discover new knowledge that helps developing a new product or service or a new process or technique or improving an existing product or processes. Development:  translation of research findings into a plan or design for a new product or process or improving existing product or processes, whether intended for sale or use. Determining R&D costs includes costs relevant to R&D projects, such as:     salaries, wages, and other labor costs of R&D personnel. Costs of materials consumed, equipment, facilities, and intangibles used in R&D projects. Costs of services performed by others. a reasonable allocation of indirect costs related to the R&D activities. Asset purchased for single R&D project:  cost is considered R&D and expensed immediately in the current year. Asset purchased for more than a single R&D project:  Depreciation or amortization of these assets is included as R&D expenses only in the periods the assets are used for R&D activities. Research and development expenditures Examples of R&D costs  Laboratory research aimed at discovery of new knowledge  Searching for applications of new research findings or other knowledge  Design, construction, and testing of preproduction prototypes and models  Modification of the formulation or design of a product or process Research and development costs Examples of Non-R&D costs:  Engineering follow-through in an early phase of commercial production  Quality control during commercial production including routine testing of products  Routine ongoing efforts to refine, enrich, or otherwise improve on the qualities of an existing product  Adaptation of an existing capability to a particular requirement or customers need as a part of a continuing commercial activity International financial reporting standardsresearch activities and development activities U.S. GAAP IFRS Research activities and development activities Research and development activities are not treated distinctly from one another Research expenditures are expensed in the period incurred. However, development expenditures that meet specified criteria are capitalized as an intangible asset Under both U.S. GAAP and IFRS, any direct costs to secure a patent, such as legal and filing fees, are capitalized. (GAAP) (IFRS) Research and development expenditurescomputer software- When the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. () Cloud computing costs The costs of cloud computing arrangements are treated as the purchase of intangible assets if both: 1. the customer has a contractual right to take possession of the software without significant penalty, and 2. the customer could run the software on its own or with an unrelated vendor If either of these criteria is not met, the arrangement is treated as a service contract, and costs are expensed as incurred. R&D performed for others and start-up costs R&D performed for others:  R&D costs are capitalized as inventory and carried forward into future years until the project is completed. Start-up costs:    refers to one-time preopening costs Includes organization costs. expensed in the period incurred Purchased research and development In case of purchased research and development Developed technology In-process research and development Capitalize fair value as a finite-life  Capitalize the fair value of in-process intangible asset and amortize that R&D as an indefinite-life intangible amount over its useful life asset R&D costs incurred after the acquisition are expensed as incurred  start-up costs start-up costs include organization costs related to organizing a new entity  Example: legal fees and state filing fees to incorporate: companies are required to expense all the costs related to a companys start-up and organization activities in the period incurred, rather than capitalize those costs as an asset. Oil and gas accounting Methods of accounting Successful efforts method Full-cost method Exploration costs known not to have Exploration costs to be capitalized as assets resulted in the discovery of oil or gas to be and expensed in future as oil and gas from the treated as expenses in the period the successful wells are removed from that expenditures are made. area. Oil and gas accounting