Intermediate_Accounting_Chapter10 - 1460T_c10.qxd...

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Learning Objectives After studying this chapter, you should be able to: 1 Describe property, plant, and equipment. 2 Identify the costs to include in initial valuation of property, plant, and equipment. 3 Describe the accounting problems associated with self-constructed assets. 4 Describe the accounting problems associated with interest capitalization. 5 Understand accounting issues related to acquiring and valuing plant assets. 6 Describe the accounting treatment for costs subsequent to acquisition. 7 Describe the accounting treatment for the disposal of property, plant, and equipment. Investments in long-lived assets, such as property, plant, and equipment, are important ele- ments in many companies’ balance sheets. As the chart below indicates, major companies, such as Southwest Airlines and Wal-Mart , recently reported property, plant, and equipment (PP&E) as a percent of total assets ranging from 54 percent up to nearly 77 percent. However, for various strategic reasons, many companies are now shedding property, plant, and equipment. Instead, they are paying others to manufacture and assemble products—functions they previously performed in their own facilities. Companies are also reducing fixed assets by outsourcing warehousing and distribution. Such logistics out- sourcing can cut companies’ own costs for keeping and managing inventories, and spare them the need to invest in advanced tracking technologies increasingly required by retail- ers. In a recent year more than 80 percent of the country’s 100 biggest companies used third-party logistics providers. 1 As a result, some companies such as Nortel and Lucent are decreasing their investment in long-lived assets, as the following chart shows. 1 Adapted from Chapter 1 in Grady Means and David Schneider, MetaCapitalism: The e-Business Revolution and the Design of 21 st -Century Companies and Markets (New York: John Wiley and Sons, 2000); and Kris Maher, “Global Goods Jugglers,” Wall Street Journal Online (July 5, 2005). 471 CHAPTER TEN ACQUISITION AND DISPOSITION OF PROPERTY, PLANT, AND EQUIPMENT Where Have All the Assets Gone? 0% 40% 20% 60% 80% 100% 2004 2003 2002 Lucent Nortel PP&E/Assets Wal-Mart Southwest Airlines Nortel is a good example of these strategies. It has sold and outsourced certain facili- ties in order to reduce its direct manufacturing activities and costs. Nortel also sold its train- ing and headset businesses. Further, it has aggressively outsourced other operations to reduce costs. Reductions in these areas will enable Nortel and other outsourcing compa- nies to concentrate on their core operations and better manage investments in property, plant and equipment.
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As we indicate in the opening story, a company like Southwest Airlines has a sub- stantial investment in property, plant, and equipment. Conversely, other companies, such as Nortel , have a minor investment in these types of assets. In this chapter, we discuss the proper accounting for the acquisition, use, and disposition of property, plant, and equipment. The content and organization of the chapter are as follows.
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Intermediate_Accounting_Chapter10 - 1460T_c10.qxd...

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