4.8 Property, Plant, and Equipment
Property, plant, and equipment (PP&E) that is acquired in a business
combination and classified as held and used by the
acquirer should be measured at fair value. The
acquiree’s accumulated depreciation is not carried
over into the acquirer’s financial statements;
rather, the acquirer’s financial statements should
reflect only the accumulated depreciation since
the acquisition date.
Connecting the Dots
If PP&E is acquired in a business combination and the acquirer intends to
sell it shortly after the acquisition, the PP&E may qualify for
held-for-sale classification as of the acquisition date. Such PP&E is
measured at fair value less costs to sell in accordance with ASC 360 and is
therefore an exception to ASC 805’s measurement principle. PP&E that the
acquirer intends to abandon, however, must be recognized and measured at
fair value by using market participant assumptions. See Section 4.3.5 for
more information about classifying assets as held for sale as of the
acquisition date and Section 4.9 for information about assets that the acquirer
intends to use in a manner other than their highest and best use.
4.8.1 PP&E Subject to Asset Retirement Obligations
ASC 410-20 provides guidance on accounting for AROs and, as indicated
in ASC 410-20-15-2(a), its scope includes “[l]egal obligations associated with the retirement of a tangible
long-lived asset that result from the acquisition, construction, or development and (or) the normal
operation of a long-lived asset, including any legal obligations that require disposal of a replaced part
that is a component of a tangible long-lived asset.” For a long-lived asset acquired and a related ARO
assumed in a business combination, an entity should measure and record both of the following:
- The ARO on the basis of the fair value of the liability by using the credit-adjusted risk-free rate as of the acquisition date.
- The associated long-lived asset at fair value without considering any future cash outflows associated with the asset retirement activities and without making an adjustment to add the amount of the ARO.
While quoted market prices, if available, provide the most reliable and best
evidence of an ARO’s fair value, often they do not
exist and fair value is determined by using an
income approach. ASC 410-20- 30-1 states, in part,
that “[a]n expected present value technique will
usually be the only appropriate technique with
which to estimate the fair value of a liability
for an asset retirement obligation.”
In a manner consistent with the above framework, if an income approach is used
to measure the fair value of the PP&E to which
the ARO is related, the cash outflows associated
with the obligation may not be incorporated into
the measure. However, if the measure does
incorporate such cash outflows, the fair value of
the ARO should be added back to the value of the
PP&E to remove that effect from the
measurement of the PP&E. Either approach
should result in a consistent PP&E measure
exclusive of any future cash outflows associated
with the asset retirement activities.
Further, if a quoted market price is used to obtain the fair value of the PP&E to which the ARO is related,
and the market price incorporates costs that will be incurred to retire the asset, an entity should add
back the fair value of the ARO to appropriately measure the fair value of the asset.
Example 4-7
Initial Recognition of an ARO in a Business Combination
Company A acquires Company B in a transaction accounted for as a business
combination. Company B is a utility, and A
determines that an ARO related to the facility
exists and estimates its fair value to be $25
million. Company A estimates the fair value of the
facility to be $100 million (by using either (1)
an income approach that includes the expected cash
outflows for the ARO in the cash flow model or (2)
an approach based on a quoted market price that
incorporates the ARO into the measure of fair
value). Thus, the value of the facility would be
$25 million higher if the costs associated with
the ARO were ignored.
Company A should recognize an asset of $125 million for the facility and a
liability of $25 million for the ARO.
After the acquisition date, the ARO should be subsequently measured in accordance with ASC
410-20-35.
4.8.2 Mineral Rights and Mining Assets
The ASC master glossary defines mineral rights as “[t]he legal right to explore, extract, and retain at least
a portion of the benefits from mineral deposits.” While some mineral rights may have characteristics of
both tangible and intangible assets, ASC 805-20-55-37 states that “mineral rights are tangible assets.”
Mining assets include mineral rights. ASC 805 requires entities to recognize
mining assets at fair value as of the acquisition
date. Entities should use the guidance in ASC
930-805-30-1 and 30-2 when measuring the fair
value of mining assets. The guidance states that
in estimating the fair value of mining assets, an
acquirer should take into account both of the
following:
-
The “value beyond proven and probable reserves” (VBPP) “to the extent that a market participant would include [VBPP] in determining the fair value of the asset.”
-
The “effects of anticipated fluctuations in the future market price of minerals . . . in a manner that is consistent with the expectations of marketplace participants.”
Estimates of anticipated fluctuations in market prices should be based on all
available information, including current prices,
historical averages, and forward pricing
curves.