Disclosures Related to Plant Assets

Learning Outcomes

• Recognize disclosures related to plant assets

Here is the disclosure checklist for PP&E from the 2017 AICPA publication “Financial Reporting Framework for Small- and Medium-Sized Entities Presentation and Disclosure Checklist.

Paragraph numbers included at the end of each disclosure requirement refer to paragraphs within the “Financial Reporting Framework for Small- and Medium-Sized Entities.” Similarly, chapter numbers refer to chapters within the framework.

E. PP&E [chapter 14]

Disclosure

1. For each major category of PP&E, has the entity disclosed:
1. cost?
2. the depreciation method used, including the depreciation period or rate? [14.21]
2. Has the entity disclosed the carrying amount of an item of PP&E not being depreciated because it is under construction or development or has been removed from service for an extended period of time? [14.22]
3. Has the entity disclosed the amount of depreciation of PP&E charged to income for the period? [14.23]
4. Has the entity disclosed the total accumulated depreciation? [14.23]
5. Has the entity disclosed the following information in the period in which the carrying value of a long-lived asset is reduced (other than for depreciation) due to the cessation of the asset’s use or written down in the carrying value of the asset:
1. A description of the long-lived asset?
2. A description of the facts and circumstances leading to the reduction in carrying value?
3. If not separately presented on the face of the statement of operations, the amount of the reduction in carrying value, and the caption in the statement of operations that includes that amount? [14.25]
6. When the entity’s accounting policy is to capitalize interest costs, has disclosure been made of interest costs capitalized? [14.26]

Let’s take a quick look at Home Depot, Inc.’s balance sheet presentation (just the asset section is presented below) and footnotes for the fiscal year ended February 2, 2020:

THE HOME DEPOT INC.
CONSOLIDATED BALANCE SHEET
in millions, except per share data February 2, 2020 February 3, 2019
Category, Assets
Subcategory, Current Assets:
Cash and cash equivalents $2,133$     1,778
Receivables, net 2,106 1,936
Merchandise inventories 14,531 13,925
Other current assets 1,040 890
Total current assets Single line
19,810Double line
Single line
18,529Double line
Net property and equipment 22,770 22,375
Operating lease right-of-use assets 5,595
Goodwill 2,254 2,252
Other Assets 807 847
Total assets Single line
$51,236 Double line Single line$     44,003
Double line

Property and Equipment

Buildings, furniture, fixtures, and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized using the straight-line method over the original term of the lease or the useful life of the improvement, whichever is shorter.

The estimated useful lives of our property and equipment follow:

• Buildings: 5–45 years
• Furniture, fixtures, and equipment: 2–20 years
• Leasehold improvements: 5–45 years

We capitalize certain costs, including interest, related to construction in progress and the acquisition and development of software. Costs associated with the acquisition and development of software are amortized using the straight-line method over the estimated useful life of the software, which is three to six years. Certain development costs not meeting the criteria for capitalization are expensed as incurred.

We evaluate our long-lived assets each quarter for indicators of potential impairment. Indicators of impairment include current period losses combined with a history of losses, our decision to relocate or close a store or other location before the end of its previously estimated useful life, or when changes in other circumstances indicate the carrying amount of an asset may not be recoverable. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The assets of a store with indicators of impairment are evaluated for recoverability by comparing its undiscounted future cash flows with its carrying value. If the carrying value is greater than the undiscounted future cash flows, we then measure the asset’s fair value to determine whether an impairment loss should be recognized. If the resulting fair value is less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value. Impairment losses on property and equipment are recorded as a component of selling, general, and administrative expenses (SG&A). When a leased location closes, we also recognize, in selling, general, and administrative expenses (SG&A), the net present value of future lease obligations less estimated sublease income. Impairments and lease obligation costs on closings and relocations were not material to our consolidated financial statements in fiscal 2019, fiscal 2018, or fiscal 2017.

3. PROPERTY AND LEASES
Net Property and Equipment
The components of net property and equipment follow:
in millions February 2, 2020 February 3, 2019
Land $8,390$     8,363
Buildings 18,432 18,199
Furniture, fixtures and equipment 13,666 12,460
Leasehold improvements 1,789 1,705
Construction in progress 1,005 820
Finance leases 1,578 1,392
Property and equipment, at cost Single line
44,860
Single line
42,939
Less accumulated depreciation and finace lease amortization 22,090 20,564
Net property and equipment Single line
$22,770 Double line Single line$     22,375
Double line

If you look through these footnotes and disclosures and compare them to the checklist, can you find everything? If not, what is missing? Also, there are probably still some components of these disclosures that sound strange, such as the whole section on impairments, which is related to the disclosure checklist item #5 (note that the checklist presented is for small and medium-size companies—The Home Depot checklist is much more detailed).

You can see that in addition to simply recording the numbers in the GL, accountants have to analyze, document, and communicate qualitative information and underlying assumptions.