FAR coverage for capitalization, depreciation, depletion, impairment, AROs, and disposal accounting.
This chapter covers long-lived tangible assets from acquisition through disposal. The major issue is knowing which costs belong in the asset, how they are allocated over time, and when changes in value or use require a different accounting response.
PP&E questions should be solved as lifecycle questions. The accounting answer depends on whether the fact pattern is about acquisition, subsequent expenditure, cost allocation, impairment, retirement obligations, held-for-sale classification, or disposal.
| Lifecycle stage | First question | Common FAR trap |
|---|---|---|
| Acquisition and capitalization | Which costs are necessary to acquire and prepare the asset for use? | Expensing costs that should be capitalized, or capitalizing ordinary operating costs. |
| Depreciation and depletion | Which allocation method matches the asset’s use or resource extraction pattern? | Changing depreciation mechanically without considering estimates and prospective treatment. |
| Subsequent expenditures | Does the cost maintain the asset or improve its service potential? | Capitalizing routine repairs because they are large cash outflows. |
| Impairment and AROs | Has recoverability, fair value, or a retirement obligation changed recognition or measurement? | Mixing impairment testing with depreciation or ignoring asset retirement obligations. |
| Held for sale and disposal | Has the asset’s classification or removal from service changed the measurement model? | Continuing normal depreciation after held-for-sale classification. |
| Step | What to do | Why it matters on FAR |
|---|---|---|
| 1. Build the initial cost | Identify purchase price, directly attributable costs, installation, removal obligations, and excluded operating costs. | Capitalization determines the asset base for later depreciation and impairment. |
| 2. Choose the allocation model | Apply depreciation or depletion based on useful life, residual value, production, or extraction pattern. | Cost allocation affects both income and carrying amount. |
| 3. Classify later spending | Separate repairs, maintenance, betterments, replacements, and component changes. | Subsequent expenditures can be expenses or capital assets depending on service potential. |
| 4. Test impairment and obligations | Evaluate recoverability, fair value, asset retirement obligations, and triggering events. | PP&E questions often shift from routine depreciation to measurement changes. |
| 5. Account for exit or disposal | Apply held-for-sale, retirement, sale, abandonment, and gain-or-loss treatment. | End-stage classification changes depreciation and presentation. |
| Checkpoint | Exam use | What to avoid |
|---|---|---|
| Capitalizable cost | Include costs necessary to acquire, construct, install, and prepare the asset for intended use. | Capitalizing training, start-up, or ordinary operating costs because they relate to the asset. |
| Allocation method | Match depreciation or depletion to useful life, residual value, production pattern, and estimate changes. | Treating estimate changes as retroactive corrections. |
| Subsequent spending | Decide whether the expenditure maintains service potential or improves, replaces, or extends the asset. | Capitalizing routine repairs solely because the dollar amount is large. |
| Measurement trigger | Check impairment indicators, recoverability, fair value, ARO changes, and held-for-sale criteria. | Applying depreciation logic when the issue is impairment or exit classification. |
| Disposal result | Determine sale, abandonment, retirement, held-for-sale presentation, and gain or loss recognition. | Continuing depreciation or normal presentation after classification changes. |