Chapter 7: Impact of New Information and Disposal Flashcards
What are the four issues of long lived assets?
Issue 1: Cost Capitalization
-Tangible and Intangible Assets
-Measuring and Recording Acquisition Cost
-Journal Entries (Paid by cash, debt or common shares)
-Basket purchase
-Repairs, Maintenance, and Additions
Issue 2: Cost Allocation
-Which method of depreciation is used?
Issue 3: Impact of New Information
-Changes in Depreciation Estimates
Issue 4: Disposal
-Extension: Natural resources, intangible assets, goodwill.
What is another word for carrying amount?
Net book value
What are examples of new information that may affect depreciation?
1) Changes in expected services lives or salvage values(Depreciation estimates).
2) Additional expenditures to maintan or improve the assets.
3) Changes in the market value of assets.
What is the formula to calculate changes in depreciation estimates when there is a new residual value?
(Carrying Amount-New Residual Value)*1/Remaining Life=Revised Depreciation Expense
-It’s worth noting that it’s the remaining useful life. Not the useful life.
How do governments have competing interests in regards to their taxation policy?
-They want to collect as much tax revenue as possible.
-At the same time, they want to encourage businesses to open up.
What is the purpose of financial reporting compared to tax reporting. How does that influence the way net earnings are reported with both of those.
-Financial reporting gives accurate information to investors and lenders. It provides best matching of revenue and expenses.
-The objective of the Income Tax Act is to raise enough revenue to pay for the expendirues of the federal government.
-Companies tend to set a higher depreciation expense for taxes, which causes lower net income. But they have a lower depreciation expense for financial reporting, which gives a higher net income.
When do you want to use less depreciation expense for tax purposes?
When you incur a loss, net earnings are already negative and taxes will be very little. Don’t use up your depreciation then. Use your depreciation when you had a good year and taxes will be high.
What is capital cost allowance?
The government allows you to depreciate a maximum amount of money each year. That is your capital cost allowance.
When you incur a loss for a year, what does the government allow you to do?
Carry your loss forward, but only to a certain percentage, and to a certain amount of years.
When does asset impairment occur
-Asset impairment occurs when one of the following things happens: reduced market price for the asset, contraction in the economy, technological obsolescence, ongoing evidence of operating cash flow losses.
-When asset impairment occurs, the recoverable amount will fall below the carrying amount. At that point, accounting has to recognize the loss.
Are asset impairments usually told to the market or kept hidden
-When people know about a company’s asset impairment, it has a negative impact on stock price.
-So the reporting entity has incentive to hide this.
When measuring asset impairment, and there are two ways to value the asset, which do we take as the recoverable amount: the higher or the lower value?
The higher value that is closer to the carrying amount
If interest rates increase, is asset impairment more or less likely?
Value in use=expected future cash flow/discount rate. When high interest rates are there, inflation rate is higher, and the discount rate will also be higher. So the value in use will be lower. And that means asset impairment is more likely. It’s covered in depth on the discounted cash flow topic.
What is the journal entry for impairment loss?
Debit impairment loss
Credit (value of whatever the thing is)
How are market value and fair value related?
They mean the same thing
When was fair value accounting introduced, and what is it?
-It was introduced during 2008-2009 financial crisis.
-It meant that certain assets can be written up or written down.
What are marketable securities?
-A type of asset with lots of value on a company’s balance sheet.
-Marketable securities are highly liquid.
-Lots of different types of marketable securities. Cash or bonds are an example.
What are Over the Counter(OTC) marketable securities?
-No liquid market
-Not a reliable market price
-In this case, people need to build models to get the market price
Can you write up the value of an asset?
-For PPE, you can choose to use either cost model or revaluation model to measure PPE.
-You can write up the value of the asset if you choose revaluation model, but most companies choose cost model.
-The reporting entity must tell investors whether they used the cost model or revaluation model.
What type of asset need annual impairment test?
-Impairment test is required for goodwill and intangible asset with indefinite lives for each reporting date.
-For other long-lived assets, it is required only if indicators of impairment.
-Impairment test is required for assets with an indefinite life. Not a patent. A patent is just amortized.
Can you reverse the amount of asset write down?
Yes, but not for goodwill.
When you sell an asset (sale, trade-in retirement) or involuntarily dispose of it (fire, accident), how do you make sure financial statements reflect this?
Step 1: Adjusting entry to update depreciation to the date of disposal.
Step 2: Entry to record the disposal. Remove the cost of the asset and accumulated depreciation, compare carrying value with any resources received due to asset disposal to record a gain or loss.
What is the journal entry for when we dispose of an asset
-Dr. Cash(cash received in sale)
-Dr. Accumulated Depreciation(full balance)
-Dr. Loss(plug-in)
-Cr. Gain(plug-in)
-Cr. Equipment(original cost)
What is net book value?
Same as carrying amount
What are intangible assets? Are they cost capitalized, or are they expensed?
-Intangible assets are internally developed and includes: R&D(Patents), Advertising(Brand Value), Training(Human Capital).
-Costs are expensed immediately.
What is the new rule: the Accounting for Income Aggregation rule?
-It occured because in the past 20 years, far more of a company’s assets became intangible assets.
When are internally developed intangible assets included on the balance sheet?
-They are only included when you acquire a company, but not when the intangible asset is developed internally.
-Internally developed assets include R&D (Patents), Advertising (Brand Value), Training (Human Capital).
How do we assess assets with a definite life and indefinite life differently?
-With a definite life we amortize using straight-line depreciation.
-With an indefinite life it’s not amortized, and instead is tested at least annually for possible impairment, and carrying amount is reduced to fair value if impaired.
What do we do with technology in terms of capitalized costs, depreciation, or amortization?
Website development costs are capitalized.
How do financial analysts differ from accountants in how they view research and development expenses?
-Many analysts add research and development expenses into the assets and remove it from expenses.
-Analysts like to see R&D expenses.
How do you calculate goodwill?
-Take the fair value of assets, subtract out liabilities, that will give fair value of the assets.
-Then you take purchase price and subtract fair value of the assets, and the difference will be goodwill.
How do you find if an asset is impaired?
If the value in use is less than the carrying amount.
