Chapter 3
Long-Term Assets
143
Canadian Pacific Railway disclosed its depreciation policy in Note 1 (summary of significant
accounting policies), as shown below.
losses and prior service costs and credits that arise during the period are recognized as a component of “Other comprehensive (loss) income”, net of
tax.
Gains and losses on post-employment benefits that do not vest or accumulate, including some workers’ compensation and long-term disability
benefits in Canada, are included immediately in income as “Compensation and benefits”.
Materials and supplies
Materials and supplies are carried at the lower of average cost or market and consist primarily of fuel and parts used in the repair and maintenance
of track structures, equipment, locomotives and freight cars.
Properties
Fixed asset additions and major renewals are recorded at cost, including direct costs, attributable indirect costs and carrying costs, less accumulated
depreciation and any impairment. When there is a legal obligation associated with the retirement of property, a liability is initially recognized at its
fair value and a corresponding asset retirement cost is added to the gross book value of the related asset and amortized to expense over the
estimated term to retirement. The Company reviews the carrying amounts of its properties whenever changes in circumstances indicate that such
carrying amounts may not be recoverable based on future undiscounted cash flows. When such properties are determined to be impaired, recorded
asset values are revised to their fair value.
The Company recognizes expenditures as additions to properties or operating expenses based on whether the expenditures increase the output or
service capacity, lower the associated operating costs or extend the useful life of the properties and whether the expenditures exceed minimum
physical and financial thresholds.
CP ANNUAL REPORT | 2014
77
Much of the additions to properties, both new and replacement properties, are self-constructed. These are initially recorded at cost, including direct
costs and attributable indirect costs, overheads and carrying costs. Direct costs include, among other things, labour costs, purchased services,
equipment costs and material costs. Attributable indirect costs and overheads include incremental long-term variable costs resulting from the
execution of capital projects. Indirect costs include largely local crew facilities, highway vehicles, work trains and area management costs. Overheads
primarily include a portion of the cost of the Company’s engineering department which plans, designs and administers these capital projects. These
costs are allocated to projects by applying a measure consistent with the nature of the cost based on cost studies. For replacement properties, the
project costs are allocated to dismantling and installation based on cost studies. Dismantling work is performed concurrently with the installation.
Ballast programs including undercutting, shoulder ballasting and renewal programs which form part of the annual track program are capitalized as
this work, and the related added ballast material, significantly improves drainage which in turn extends the life of ties and other track materials.
These costs are tracked separately from the underlying assets and depreciated over the period to the next estimated similar ballast program. Spot
replacement of ballast is considered a repair which is expensed as incurred.
The costs of large refurbishments are capitalized and locomotive overhauls are expensed as incurred, except where overhauls represent a betterment
of the locomotive in which case costs are capitalized.
The Company capitalizes development costs for major new computer systems.
The Company follows group depreciation which groups assets which are similar in nature and have similar economic lives. The property groups are
depreciated on a straight-line basis reflecting their expected economic lives determined by studies of historical retirements of properties in the group
and engineering estimates of changes in current operations and of technological advances. Actual use and retirement of assets may vary from
current estimates, which would impact the amount of depreciation expense recognized in future periods. Rail and other track material in the U.S. are
depreciated based directly on usage.
When depreciable property is retired or otherwise disposed of in the normal course of business, the book value, less net salvage proceeds, is charged
to accumulated depreciation and if different than the assumptions under the depreciation study could potentially result in adjusted depreciation
expense over a period of years. However, when removal costs exceed the salvage value on assets and the Company has no legal obligation to
remove the assets, the removal costs incurred are charged to income in the period in which the assets are removed and are not charged to
accumulated depreciation.
For the sale or retirement of larger groups of depreciable assets that are unusual and were not considered in depreciation studies, CP records a gain
or loss for the difference between net proceeds and net book value of the assets sold or retired.
Equipment under capital lease is included in Properties and depreciated over the period of expected use.
Assets held for sale
Assets to be disposed that meet the held for sale criteria are reported at the lower of their carrying amount and fair value, less costs to sell, and are
no longer depreciated.
Goodwill and intangible assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets upon acquisition of a business. Goodwill is assigned
to the reporting units that are expected to benefit from the business acquisition which, after integration of operations with the railway network, may
be different than the acquired business.
The carrying value of goodwill, which is not amortized, is assessed for impairment annually in the fourth quarter of each year, or more frequently as
economic events dictate. The fair value of the reporting unit is compared to its carrying value, including goodwill. If the fair value of the reporting
unit is less than its carrying value goodwill is potentially impaired. The impairment charge that would be recognized is the excess of the carrying
value of the goodwill over the fair value of the goodwill, determined in the same manner as in a business combination.
Intangible assets with finite lives are amortized on a straight-line basis over the estimated useful lives of the respective assets. Favourable leases,
customer relationships and interline contracts have amortization periods ranging from 15 to 20 years. When there is a change in the estimated
useful life of an intangible asset with a finite life, amortization is adjusted prospectively.
Financial instruments
Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party.
