LM 6: Analysis of Long-Term Assets Flashcards
What type of assets are used for depreciation?
tangible assets
What type of assets are used for amortization?
intangible assets
Which 2 models does IFRS allow you to value long-lived assets on the balance sheet?
- cost model
- reevaluation model
What is the revaluation model?
long-lived assets are reported at fair value rather than at the historical cost
Which model does US GAAP allow you to value long-lived assets on the balance sheet?
cost model only
What 4 criteria’s under IFRS does intangible assets must meet? IUEC
- identifiable
- under control of company
- expected to generate future economic benefits that will flow to company
- cost of asset can be readily measured
What are the 3 ways to acquire intangible assets? TDB
- transaction sale
- developed internally
- business combination
How are intangible assets purchased by transaction sale recorded?
recorded on the balance sheet at its fair value (aka purchase price) when acquired
How should the cost of intangible assets internally developed usually be recorded?
costs should be expensed as they are incurred.
Under IFRS how must research and development costs be recorded?
research stage: costs expensed
development stage: costs capitalized after technical feasibility
Under US GAAP how must research and development costs be recorded?
expense both research and development costs
How are tangible assets given through other means that purchase recorded when fair value can be determined and when fair value cannot be determined?
if fair value can be determined asset will be recorded at fair value
if fair value cannot be determined asset is valued at the amount of the asset given up (assumes fair trade)
What is goodwill in a business combination?
assets that are neither tangible nor identifiable intangible assets
What is impairment of assets?
unanticipated value declines in long-lived assets
How do you record a long-lived asset deemed to be impaired?
carrying value is reduced on the balance sheet - equivalent reduction in equity
impairment charge recognized as loss on income statement
How often must companies assess evidence of impairment and conduct actual impairment tests for property, plant, and equipment (PPE)?
evidence of impairment: end of each reporting period
conduct actual impairment testing: annual only if such indicators are discovered
Under IFRS when is a PP&E considered impaired?
impaired if the carrying amount exceeds the recoverable amount
What is the impairment loss equation under IFRS?
impairment loss = carrying amount - (recoverable amount (fair value - costs to sell))
Under US GAAP when is a PP&E considered impaired?
when the carrying amount exceeds the undiscounted expected future cash flows
What is the impairment loss equation under US GAAP?
impairment loss = carrying amount - fair value
How is the impairment of intangible assets with a finite life treated?
treated the same as a long-lived asset
assessment of impairment end of each period and testing if evidence annually
How is the impairment of intangible assets with an indefinite life treated?
tested annually for impairment (such as goodwill)
Under US GAAP when are reversals for impairment of long-lived assets allowed and not allowed?
allowed for assets that have been reclassified as held for sale
not allowed for assets currently in use
Under IFRS when are reversals for impairment of long-lived assets allowed and not allowed?
not allowed even if the asset is held for sale or in use
What are the 2 requirements for a company to derecognize a long-lived asset? AA
- asset is sold
- asset no longer expected to provide future value
How do you record a long-lived asset that has been sold?
gain or loss recorded on income statement based on difference between sale proceeds and carrying amount
What is the equation for the gain or loss of a long-lived asset for sale that you would record on the income statement?
gain/loss on sale = sale price - net carrying value
carrying value = (gross carrying value - accumulated depreciation)
What 11 things must you disclose for each asset class of PP&E under IFRS? MDUGARTCDDC
- measurement basis
- depreciation method
- useful life (depreciation rate)
- gross carrying amount
- accumulated depreciation at the beginning and end of the period
- reconciliation of carrying amount at the beginning & end of the period
- title restrictions for existing PP&E
- contracts to acquire new PP&E
- depreciation method for PP&E
- depreciation expense for the period
- carrying amount of major asset classes
In addition to the 11 disclosures of IFRS, what 2 other disclosures are required if using the revaluation model for PP&E? DD
- disclose details of fair value methodology
- date of revaluation
Under IFRS what 6 things must be disclosed for intangible assets with finite lives? UAGAWR
- Useful lives
- Amortization methods used
- Gross carrying amount
- Accumulated amortization at the beginning and end of the period
- Where amortization has been recorded on the income statement
- Reconciliation of carrying amount at the beginning and end of the period
Under IFRS what 4 things must be disclosed for intangible assets with indefinite lives? CWTC
- Carrying amount
- Why the asset is considered to have an indefinite life
- Title restrictions and pledges as security
- Contracts to acquire new intangible assets
Under US GAAP what 4 things must be disclosed for intangible assets? GAAE
- Gross carrying amounts
- Accumulated amortization
- Aggregate amortization expense for the period
- Estimated amortization expense for the next five fiscal years
What is the formula for estimated total useful life?
estimated total useful life = historical cost / annual depreciation expense
What is the formula for the estimated age of the equipment?
estimate age of equipment = accumulated depreciation / annual depreciation expense
What is the formula for the estimated remaining life?
estimated remaining life = Net PPE/ annual depreciation expense
When can borrowing costs be capitalized?
if incurred prior to the asset being ready for its intended use
What governing body requires you to reduce borrowing costs by investment income when when temporarily investing borrowed funds?
IFRS
What impact does capitalization have on expenses in current period?
expenses in current period lower because they are spread out overtime while profits will be higher
What impact does capitalization have on assets?
assets on balance sheet when capitalized will be greater because assets are slowly depreciated staying on assets balance sheet longer
What impact does capitalization have on profits in later period?
lower profits in later period due to depreciation and amortization
What impact does capitalization have on shareholders equity in early years?
greater shareholders equity in early years due to higher profits in current period
What impact does capitalization have on operating cash flows?
greater operating cash flows because capital expenditures are treated as investment cash flows
What impact does capitalization have on taxes paid in early years?
greater taxes paid in early years due to current period profits being greater
How are interest costs recorded when constructing an asset takes a long time?
interest costs will be capitalized along with the asset
What is the component method of depreciation?
company must separately depreciate significant components of an asset.
eg. company may have to separate the depreciation for the engine and frame of a ship
Under IFRS what 3 things must be disclosed about impairment losses? WAR
- What led to the impairment
- Amount of impairment losses
- Reversals of impairment losses
Under US GAAP what 2 things must be disclosed about impairment losses? WA
- What led to the impairment
- Amount of impairment losses
What costs are expenses and what costs are capitalized?
costs providing less than 1 year of economic benefits should be expensed
costs providing more than 1 year of economic benefits should be capitalized
If a company uses the reevaluation model for buying equipment, and the value increases above the purchase price, should the company record a profit?
No, reevaluation would be recorded directly under equity.
Losses would be directly deducted from net income.
