Chapter 11 Flashcards
Amortization, Depreciation, Depletion
the process of allocating the carrying amount of any long-lived asset to the accounting periods that benefit from its use, or it may refer specifically to this process for intangible assets; depreciation is reserved for PP&E; depletion is used for natural resource assets
Asset Components
four principles guide the componentizaiton decision:
(1) identify each part of a PP&E asset whose cost is a significant portion of the asset
(2) group together significant components with similar useful lives and pattern of providing benefits
(3) add together the cost of the remaining parts - these may be depreciated as a single component
(4) group together separate individual minor assets to depreciate as one component based on the similarity of their useful life and pattern of consumption
Depreciable Amount
the amount of an asset that is to be depreciated is the depreciable amount – the difference between the asset’s cost and its residual value
Residual Value
residual value is the amount a company would receive today if it disposed of the asset, less any disposal costs, if the asset were at the same age and condition expected at the end of its useful life; when the residual value is less than the carrying amount, an asset continues to be depreciated; [IFRS] residual value is reviewed each year
Salvage Value
[ASPE] depreciation charged is based on the higher of salvage value at the end of the asset’s life, and its residual value at the end of its useful life
Depreciation Period
based on an estimate of the asset’s useful life, the depreciation period begins when the asset is available for use, and continues even where the asset is idle; depreciation ends whn the asset is full depreciated, derecognized, or classified as held for sale
Straight-Line Method Depreciation
depreciation is considered a function of the passage of time; this is the most common method of depreciation; this method assumes the asset delivers equal benefits each year and that annual maintenance expense is roughly equal
Diminishing Balance Method
an accelerated amortization method which creates a higher depreciation expense in the earlier years
Declining Balance Depreciation Method
uses a depreciation rate that stays constant throughout the asset’s life, expressed as a percentagea and called the declining-balance rate which is applied to the carrying amount each year
e.g. the rate is usually calculated as a multiple of the straight-line rate (for an asset with a ten-year life, the double-declining-balance rate is 20%
Activity Depreciation Methods
depreciation is calcualted according to usage or productivity instead of the passage of time, for example according to units produced
* depreciation based on revenue generated is not permitted
Amortization of Mineral/Gas Reserves
the amortization of these reserves as inventory is extracted is known as depletion;
normally, depletion is calculated using an activity approach, such as the units of production method;
the cost of the resource asset is divided by the recoverable reserves to obtain a cost per unit of production, which is multiplied by the units extracted during the period to determine the depletion charge; the extracted resources are initially debited to inventory, with a credit to accumulated depreciation
Estimating Recoverable Oil/Mineral Reserves
the procedure to change an estimate in reserves is to revise the depletion rate by dividing the costs remaining on the books less any residual value by the new estimate of the recoverable reserves
Liquidating Dividend
companies may choose to distribute to shareholders a portion or all of their capital investment, called a liquidating dividend, upon depletion of a mineral resource; the share capital account must be reduced in proportion to the amount of the dividend that is a return of the investor’s original contribution
Revision of Depreciation Rates
estimates for the asset’s benefits, useful life, and residual value need to be reviewed regularly, and at least each fiscal year under IFRS – a change in any of these variables indicates that the depreciation method or the rate must also be changed;
a company accounts for a change in estimate prospectively, thus a new depreciation schedule must be prepared
Indicators of Impairment
External
a. change in the technological, market, economic, or legal environment has adversely affected the entity
b. market rates have increased, decreasing value in use
c. carrying value of net assets is greater than company’s market cap
Internal
d. evidence of obsolescence or physical damage to the asset
e. changes in the asset’s use with adverse effects (becoming idle, for example)
f. internal reports indicate low performance of the asset
g. costs incurred for acquisition were higher than expected
Impairment Under Revaluation Model
the loss is accounted for on the same basis as a revaluation decrease (Chapter 10), charged first through OCI to any revaluation surplus that exists for the asset, and only the excess is recognized in income
Account for an Asset that is Held for Sale
- the asset is remeasured at the lower of its carrying amount and fair value less costs of disposal, and is classified separately
- the asset is no longer depreciated
- further losses are recognized if net amount expected from the asset drops
- gains are recognized for any increase in value, limited to the amount of cumulative losses previously recognized
[ASPE] - asset retain current/noncurrent status and may be reclassified as current only where sold before statements are completed and proceeds to be received qualify as current
[IFRS] - most assets held for sale meet the criteria for current assets, and all are reported separately with disclosures
Criteria for an Asset to be Held for Sale
To be held for sale, assets must meet all of these criteria
(1) authorized plan to sell exists
(2) asset available for immediate sale
(3) active search for a buyer
(4) sale is probable within a year
(5) asset is reasonably priced and actively marketed
(6) changes to the plan are unlikely
Derecognition of PP&E
- unless classified as held for sale, depreciation is taken until date of sale
- if carrying amount is not equal to disposal value, a gain or loss is reported
- under cost and FV models, the gain or loss is shown on the income statement, only revenue if sale of PP&E is regular part of business
- according to IAS 16, a company could account for differences in most recent carrying amount and POD on income statement (but theoretically Revaluation Surplus account should be adjusted straight to retained earnings)
Involuntary Conversion
when an assets life is ended unexpectedly, gains and losses are calculated as they would be for a sale of PP&E, and the difference between carrying amount and any amount recovered (insurance) is reported as a gain or loss
Donation of a Capital Asset
when a company donates or contributes an asset, the gift is recorded as an expense and is measured at the asset’s fair value, with the difference between this and its carrying aount recognized as a gain or loss
