FRA: long-lived assets

Question 1

Impairment of long-lived assets according to IFRS

Answer 1

Impairment occurs if the carrying value of assets is higher than max(Net sale value, value of use)
Impairment value recovery is allowed

Question 2

Impairment of long-lived assets according to GAAP

Answer 2

1) Test for impairment - if carrying value is bigger than sum of undiscounted cash flows from the asset
2) Loss measurement - difference between carrying value and fair value
Impairment value recovery is not allowed

Question 3

Revaluation of long-lived assets

Answer 3

GAAP - revaluation is allowed only for assets held for sale and only to extend of previously recognized loss
IFRS - revaluation is allowed even beyond the initial loss, but in this case it bypasses PnL and is recognized in other comprehensive income

Question 4

What kind of fixed assets are not depreciated?

Answer 4

Land

Question 5

Metrics for estimation of duration of fixed assets

Answer 5

1) Average age = Accum depreciation / deprec. expense
2) Average deprec. life = Gross investment / depec. exp.
3) Remaining useful life = (2) - (1)

Question 6

Finance (capital) lease vs operational lease

Answer 6

Finance lease - essentially purchase of an assets financed by debt, so it increases the balance sheet. Operational lease stays completely off the balance sheet.

Question 7

Criteria of finance lease according to GAAP

Answer 7

1) Title to the leased assets is transferred to the lessee at the end of the lease period
2) A bargain purchase option exists
3) The lease period exceeds 75% of the asset’s economic life
4) NPV of lease payments exceeds 90% of the fair value of the leased asset

Question 8

Annual lease liability depreciation

Answer 8

End of year payments:
Lease liability(t-1)(1+IR) - lease payment(t)
Beginning of the year payments:
(Lease liability(t-1) - lease payment(t))(1+IR)

Question 9

Effect of type of lease on CF

Answer 9

1) Operating lease - payments go through CFO

2) Finance lease - interest payments go through CFO, principal repayment - through CFF (lessee) / CFI (lessor)

Question 10

Effect of type of lease on NI

Answer 10

Finance lease - NI lower in early years (big interest payments), but is better in late years

Question 11

Lessor’s accounting of finance lease

Answer 11

If lease sale price is higher than its carrying value (sale-type lease) than profit is recognized at inception
Then lease is recognized as a typical credit (interest payments -> CFO, principal repayment -> CFI)

Question 12

Rules for capitalization of R&D costs

Answer 12

IFRS: R&D can be capitalized if are linked to the implementation phase
GAAP: only software development costs can be capitalized

Question 13

Issues with capitalization of interest payments

Answer 13

Interest incurred during construction of an asset is generally capitalized, however it inflates firm’s liquidity and solvency ratios, so prudent analysts usually correct these ratios treating interests as expensed