Property, Plant & Equipment.

• Author: Dauberman, Mark E.
• Position: Accounting and Auditing

The AICPA has issued an exposure draft for a proposed Statement of Position related to the Accounting for Certain Costs and Activities Related to Property, Plant and Equipment. Although many principles remain unchanged, the SOP takes a different view on several issues related to costs that may or may not be capitalized in relation to PP&E. The SOP divides the process of acquiring and owning a capital asset into four stages: preliminary; pre-acquisition; acquisition or construction; and in-service. Following are some of the key issues that the exposure draft raises.

PRELIMINARY STAGE

The preliminary stage begins when management first contemplates the acquisition or construction of a capital asset and continues until it becomes probable that the acquisition or construction will occur. The proposed SOP uses the term "probable" similarly to its use in FASB Statement No. 5, Accounting for Contingencies.

A capital acquisition becomes probable when three conditions exist:

* Management, having the authority to do so, must have authorized and committed to funding the proposed acquisition;

* Financial resources must be available for the acquisition; and

* The entity must be able to meet any requisite local and governmental regulations.

Almost all costs incurred during the preliminary stage are recognized as expenses in the period incurred. This includes the cost of feasibility studies, asset selection, surveying, engineering studies, design layout and traffic studies as well as costs associated with obtaining management approval. Direct costs of obtaining an option related to the acquisition may be capitalized.

If the cost of an option is capitalized, it must be reported on the balance sheet at the lower of its cost or its net realizable value, which would be its fair value less any costs that would be necessary to sell it. Any reductions to the carrying value of an option are charged to expense.

PRE-ACQUISITION STAGE

During the pre-acquisition stage, only those costs that are directly identifiable to the asset are capitalized. Incremental direct costs of pre-acquisition activities that are incurred in transactions with independent third parties are capitalized. Most costs that are incurred internally are recognized as expense. The only exceptions are:

* The direct costs of obtaining an option are capitalized.

* The cost of payroll and benefits for employees involved in the pre-acquisition activities are also capitalized.

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