Capital Expenditures

Property, plant and equipment is usually measured at historical cost. Historical cost includes both the costs of purchasing or acquiring the asset as well as the costs associated with transporting it to the needed location and preparing it (ensuring it is in the proper condition) for its intended use. As a result, freight costs, non-refundable sales taxes, and installation costs are typically included with pruchase price in accounting for the historical cost of a long-term asset. Because source documents show the historical cost, historical costs are verifiable. This makes this measurement more reliable. On the other hand, historical costs may not faithfully represent the value of the asset to the business, which makes historical costs less relevent. 

Interest costs: The FASB recommends that the actual interest incurred during the construction of long-term assets is capitalized; that is, it is included as part of the historical cost. 

Non-monentary transactions: When non-monetary assets are exchanged for monentary assets (such as money or claims to future cash flows which are fixed and determinable), the present value of the monentary asset can be reliably determined and a gain or loss may be recognized on the sale of the asset. When non-monetary assets are exchanged for other non-monentary assets (whos future cash flows are not fixed or reliably determinable) there are two appraoches: (1) when the fair values of the assets can be reliably measured, the transaction is accounted ofr on the same basis as a monentary transaction; and (2) when the fair values of the assets cannot be reliably determined, the exchange is recorded at the carrying amount of the asset given up. 

Cash discounts: When cash discounts are taken they are accounted for as a reduction in the purchase price of the asset. When cash discounts are foregone, they may be recognized as a current expense or capatalized as either part of the purchase price or art of the financing costs of the asset. 

Deferred payments: Assets that are purchased on long-term credit contracts are accounted for at the present value of the contract. Where the interest rate on the long-term contract is unreasonable, an appropriate interest rate should be determined. This ensures that the cost of the asset approximates its cash exchange price and the interest rate used approximates the same rate that would have been used for an arm's length transaction. 

Issuing shares: Property may be aquired by issuing securities in exchange. In this case, the historical cost is measured by either the fair value of the shares or the fair value of the property, whichever can by measured more reliably. 

Contributed assets: Non-recipricocal transfers of goods may occur where a company receives an asset (or is forgiven of debt) through a donation, gift or government grant. In these cases the assets fair value should be used to establish its "cost," which forms the debit entry for recording the transaction. The credit entry for the value of the asset can be made either to capital (usually an account named "Contributed surplus - donated capital) or to income (or comprehensive income). Owner contribtuions are usually accounted for in contributed surplus, non-owner contributions are typically accounted for in other comprehensive income, and government assistance is typically accounted for in income. Investment tax credits (ITCs) are typically accounted for on the same basis as government assistance. 

Cost subsequent to acquisition: Additional costs may be incurred for ordinary repairs as well as out-of the ordinary capital improvements to property, plant and equipment. There is often a fine line between whether an cost should be treated as a capital expenditure (which is treated as an asset) or a revenue expenditure (which is treated as an expense). Errors or manipulation of these costs may have a significant effect on net income. For example, WorldCom accounted for billions of dollars worth of repairs to infrastructure as capital expenditures instead of operating expenses, which had the effect of significantly overstating income. The general rule is that only costs that extend the useful life of an asset, improve an assets productivity, or are incurred for a major (not ordinary) repair should be capitalized. Accounting standards are shifting towards expensing, rather than capitalizing, additions, improvements, replacements and repairs unless it is very clear that future benefits outway the cost. 

Asset retirement costs: The costs to retire long-term assets (such as obligations to restore land) are added to the carrying cost of the asset (and amortized over the assets useful life). At the same time, a corresponding liability is created which represents the amount of the cost that will be incurred.