USA Capitalization of Assets?

[Elizabeth Silva]

I have a technical question that I have been researching the FASB codification and can't find the answer to. Hopefully you all can help me. We manufactures pipe for oil and gas companies. We have a manufacturing line that does heat treat and straightening. Currently, the straightener is not working and we are only using the rollers inside the straighter machine to keep the line moving so the pipe can make its way to the next steps in the manufacturing process. The Straighter machine needs to be powered in order for the rollers to work and if we remove the machine there would be a 12 ft gap and we wouldn't be able to run the line.

Currently, we have the straighter in CIP on the BS, should we capitalize this asset even though its not being used for its "intended purpose"?

The Straighter machine itself is not working and would require significant capital outlay that we are not currently in a position to spend due to demand

Any feedback would be appreciated.

 

[kirby]

Your choice is to either capitalize the CIP costs for the straighter or leave the costs in CIP. Either way you have an asset. But as CIP that asset never depreciates and sits on your books as a problem waiting to happen in the future. It is more conservative to capitalize the straighter. So your research should focus on the principle of conservatism as I doubt you will find an exact cite on your specific issue. Once capitalized then you can measure the capitalized cost vs the functionality of the broken machine to see if you need to write down the machine to the value of a machine that merely moves pipe vs a full blown straighter.

 

[HowToAccount]

If this machine isn't broken, and instead is just unfinished (but can function merely to roll things along) I think you have a strong case for CIP here. Let's say I have an office building and to get from one side of the office to the other I have to go through a portion that is under construction. I'm not going to capitalize that portion just because I need to use it to walk through to the other side. I'd say at the most to capitalize the rollers (if they aren't already) and keep the machine itself in CIP. If they are one in the same, I wouldn't capitalize any of it.

I think what you need to worry about here is having this equipment sit on the books for a long time. If this asset sits on the books and you just have it there intending to spend a bunch of money on it eventually, you risk keeping it to a point where the market value become less than what you bought it for (impairment) which would result in a loss.

 

[Elizabeth Silva]

Thanks for your advice. So just to follow-up with what our Deloitte auditors suggested. Once assets go into service, we do not stop depreciating unless it’s completely depreciated, held for sale or going to be abandoned (meaning disposed). This includes idle assets and transfer of assets between companies/ countries, depreciation would continue. Additionally, we can only capitalize costs that will extend the life of the asset and continue to depreciate the original basis. So any additional cost that will not extend the life of the asset needs to be expensed. According to them, CIP account are for new assets undergoing constructs and not a holding account for idle assets. Please let me know if you know anything different. I know most companies don't follow this rule however it is the most conservative approach.

One other thing, assets that are considered permanently idle would be tested for impairment under step 2 only against its FMV.