10. Long-term Assets

Question 1

What are some of the judgments or estimates that need to be made by management when determining depreciation calculations?

Answer 1

• The asset’s expected useful life, or period over which the asset is expected to provide benefit to the organization.
• The expected salvage value at the end of the asset’s useful life. The asset should not be depreciated below salvage value.
• The depreciation method must be selected and should reflect the asset’s usage pattern.

Question 2

What are the four most common depreciation methods?

Answer 2

• Straight-line depreciation: Recognizes depreciation equally over the asset’s useful life.
• Sum of year’s digits (SOYD): Records more depreciation in early years than in the later years.
• Double declining balance (DDB): Calculates depreciation by multiplying the asset’s book value by 2 ÷ n (n = number of years in the asset’s useful life).
• Units of production (UOP): Spreads the depreciable cost evenly over the number of units produced during the asset’s life

Question 3

What impact does using different depreciation methods have on organizations?

Answer 3

Depreciation is an expense; therefore, different methods result in different effects on the balance sheet and income statement:

• Accelerated depreciation methods (like double-declining balance and sum-of-the-years’ digits) result in higher depreciation expense earlier in the asset’s life. This will reduce net income and the asset’s value on the balance sheet.
• Organizations looking for higher net income during a period of high investment will likely use the straight-line method.

Question 4

What is the process for calculating impairment losses on long-term tangible assets?

Answer 4

Step 1 Recoverability Test: Compare the book value of an asset to the sum of the future undiscounted cash flows. If the FCF exceed the BV, the asset is considered recoverable and no impairment exists. Otherwise, an impairment loss must be calculated and recognized (Step 2).

Step 2 Impairment Loss: Management must estimate the asset’s fair value. A loss will be recognized for the difference between BV and FV.

Question 5

What are the different classifications of intangible assets and how are they each carried on an organization’s balance sheet?

Answer 5

• Intangible assets with a finite life: Amortized similar to depreciation of tangible assets. Impairment follows the same two-step process as tangible asset impairment.
• Intangible assets with an indefinite life: Carried at cost and reviewed for impairment when circumstances indicate a possible problem and at least annually.
• Goodwill: Recorded when a business is acquired for more than the fair value of its net identifiable assets. There is a two-step process to review for impairment.