Accounting principles generally accepted in the United States of America (U.S. GAAP) for long-lived assets are detailed in ASC 360, Property, Plant, and Equipment. Policies for recording cost, capitalization, assigning useful lives, and depreciation are summarized below.
Property, Plant, and Equipment should be reported at historical cost in accordance with FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises. The historical cost is the amount of cash or cash equivalents paid for an asset. Historical cost also includes any costs required to relocate and bring the asset to working condition (ASC 360-10). Examples of these costs include the initial cost to purchase the asset, sales tax, shipping, and installation costs.
Costs incurred to replace Property, Plant, and Equipment or to enhance the productivity of a long-lived asset should also be capitalized. Costs that are incurred during construction or acquisition of an asset which can be directly traced to preparing the asset for service should be capitalized. Costs that are not required to prepare an asset for use, such as regular maintenance, should be expensed as incurred.
While U.S. GAAP does not specifically permit the establishment of capitalization thresholds, many entities establish minimum cost thresholds to simplify recordkeeping. However, is it essential that the use of a threshold does not materially affect the financial statements.
According to the ASC Master Glossary, useful life is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Factors to examine include the expected use of the asset by the entity, any legal or contractual time constraints, an entity’s historical experience with similar assets, and obsolescence or other economic factors (ASC 350-30-35-3). When estimating the useful life of an asset, entities should consider all relevant facts and circumstances.
Depreciation is meant to allocate the cost of an asset over the period it is in use by the reporting entity. ASC 360-10-35-4 explains that depreciation aims to distribute the cost of the asset less the salvage value, over the estimated useful life of the asset. U.S. GAAP recognizes several methods to depreciate assets which include straight-line, sum-of-the-years’-digits, declining-balance, and units-of-production methods. When selecting a method, consideration should be given to the cost of repairs and maintenance, whether productivity declines over time, and if the asset may become obsolete quickly.
For additional information on Long-Lived Assets or any other accounting or auditing matter, please feel free to contact Kristi Yanover, Audit Partner, at (858) 558-9200, or any member of our Accounting & Assurance Team, as we would be happy to assist you.