Ch. 8: Reporting & Analysing Long-Term Operating Assets Flashcards
Common characteristics of long-term operating assets
- Acquired for the purpose of producing and delivering products and services that generate revenues.
- Help produce revenues for multiple periods.
Tangible assets
Have physical substance.
Usually include land, buildings, machinery, fixtures and equipment.
Intangible assets
Have no physical substance.
Provide the owner with specific rights and privileges.
Include trademarks, patents, copyrights
Capital costs
Reported as assets on the balance sheet.
Called capital expenditures.
Must include all costs necessary to acquire an asset and prepare it for its intended use.
Includes: ▪ Installation costs ▪ Taxes ▪ Shipping costs ▪ Legal fees ▪ Setup and calibration costs ▪ Asset retirement obligations
Constructed assets
When assets are constructed by a company for its own use, capitalised costs should include:
▪ All direct material and labor costs, and
▪ A reasonable amount of overhead costs, and
▪ Capitalised interest -> Interest expenses associated with debt
incurred to finance the construction. Only if specific criteria are met.
Costs subsequent to capitalisation
Additional costs incurred after an asset is placed in service:
- Improvement or betterment
▪ Consist of outlays that enhance the usefulness of the asset or extend the asset’s useful life beyond the original expectation
▪ Costs should be capitalised - Routine repairs and maintenance
▪ Expensed in the period incurred
Useful life
The period of time over which the asset is expected to provide economic benefits to the company.
Differs from the physical life
Residual value
The expected realizable value of the asset at the end of its useful life.
Also known as salvage value.
Can represent the scrap, disposal, or resale value
What are the three depreciation methods?
- Straight-line method
- Double-declining-balance method
- Units-of-production method.
Straight-line method
Equal expense each year.
Double-declining-balance method
Accelerated method—more expense in early years.
Units-of-production method
Based on activity instead of time.
Selling long-term assets
Produces a gain if the proceeds are greater than the book value of the asset.
Produces a loss if the proceeds are less than the book value of the asset.
Gains and losses can be reported in income from continuing operations or, if applicable, as discontinued operations.
Asset impairments
Companies must recognise losses on assets if impairment exists.
When does impairment exist?
▪ When market values of long-term assets decline to less than book value, and
▪ It can be determined that the asset’s value is permanently impaired
Potential challenges of asset impairments
- Insufficient Write-Down -> Assets sometimes are impaired to a larger degree than is actually recognised.
- Aggressive Write-Down -> The “big bath” scenario can arise if income is currently and severely depressed.
PPE turnover
Measures how efficient management utilised its plant
assets.
PPET = Sales revenue / Avg. PPE, net
Types of intangible assets
- Separately transferable intangibles
2. Not separately transferable intangibles
Separately transferable intangibles
Those that are the product of contractual or other legal rights
Those that are not contractually or legally defined, but can be separated from the company and sold, transferred, or exchanged.
Not separately transferable intangibles
(Goodwill)
The excess of cost over the fair value of net assets acquired in a business combination
Problems with accounting for intangibles
Benefits provided by intangibles are uncertain
and difficult to quantify.
Useful life often impossible to estimate with confidence.
Patent
An exclusive right to produce a product or use a technology.
Granted to protect the inventor by preventing other companies from copying the innovation
Accounting costs of patents
If purchased from another company -> Capitalised and amortised.
If developed internally -> Only legal and registration fees are capitalised and amortised.
Copyright
An exclusive right granted by the government to an individual author, composer, play writer, or similar individual.
For the life of the creator plus 70 years.
Accounting costs of copyrights
Cost is capitalised and amortised over the expected remaining economic life
Trademarks
A registered name, logo, package design, image, jingle, or slogan that is associated with a product
Accounting costs of trademarks
If purchased from another company -> Capitalise the cost and amortise.
If developed internally -> Expense as incurred.
Amortisation of intangible assets that have a definite life
Capitalised cost is amortised over the expected useful life of the intangible
Amortisation is a systematic allocation of the cost of an intangible asset over its useful life
Straight-line method used most often
Amortisation of intangible assets that have an indefinite life
Not amortised until the useful life can be specified.
Must be tested for impairment annually.
Considered to be impaired if the book value of the asset exceeds its fair value.
Write-down equal to:
Book value – Fair value
Goodwill
The excess of the purchase price paid over the fair value of its identifiable net assets to buy an entire company.
Cannot be separated from the acquired company or sold separately.
Has an indefinite life.
Never amortised.
Subject to impairment of value
Goodwill impairment test
Impaired when the fair value of the acquires business is less than the recorded book value. (Book value > fair value)
