Long-Lived Assets

Question 1

Tangible asset

Answer 1

fixed asset or PP&E

- land, buildings, furniture, machinery, etc

Question 2

Intangible assets

Answer 2

patents, trademarks, etc

Question 3

Financial assets (LLA)

Answer 3

investments in equity or debt securities issued by other entities

Question 4

At acquisition, tangible LLAs are recorded on the BS at ______

Answer 4

recorded at cost, ie fair value,

• plus all costs needed to get the asset ready for intended use
• ie installation of a machine, but not training

Question 5

Costs that can be capitalized with the acquisition of tangible LLAs:

Answer 5

costs that will benefit the asset beyond one year in the future can be capitalized.
- installation of the machine, delivery to location, building upgrades to home a new machine

Question 6

Costs that are expensed with the acquisition of tangible LLAs:

Answer 6

costs not expected to provide benefits in future

- training staff, painting factory

Question 7

Acquisition of intangible LLA:

Acquired in a business combination:

Answer 7

• IFRS and GAAP require the use of the “acquisition method” (level 2)
• LLAs are reported at fair value
• Goodwill
  
  • ie purchase price - fair value of assets = goodwill

Question 8

Acquisition of intangible LLA:

Purchased in situations other than business combinations:

Answer 8

• ie when an intangible is purchased

- recorded at fair value

Question 9

Acquisition of intangible LLA:

Developed internally:

Answer 9

• costs to internally developed intangible assets are generally expensed when incurred

Question 10

Differences of capitalized costs or expensed costed related to the acquisition of intangible LLAs vs internally developed

on BS and stmt of CF:

Answer 10

BS: internally developed will be expensed thus record lower assets vs acquired LLAs

CF: internally developed costs are classified as operating cash flows
- cost of acquiring intangible assets are investing cash flows

Question 11

Acquisition of intangible LLA:

Differences of capitalized costs or expensed costs related IFRS and GAAP reporting

Answer 11

IFRS: - research costs are expensed, development costs can be capitalized if feasibility and the intent to sell are established

GAAP: R&D costs are expensed, but;

• software for sale: costs are expensed until product feasibility is established, and capitalized after
• software for internal use: costs are capitalized

Question 12

Capitalizing LLAs leads to ______ profitability in the period when the asset was purchased.

Answer 12

higher

Question 13

Expensing an asset’s cost immediately results in _______ profitability in the current period and _______ profits in the future

Answer 13

lower profitability in the current period

higher profits in future

Question 14

Capitalization of interest costs

-ie borrowing or bond issuance for construction or LLA purchase

Answer 14

• interest costs during construction are capitalized as part of the asset cost. IFRS allows offsetting of short-term lending/investing on capitalized costs
• during capitalization: higher NI and higher interest coverage ratios

Question 15

Depreciation methods and formulas

Answer 15

Straight-line: even cost depreciation over asset’s useful life
= depreciable cost / estimated useful life
*depreciable cost= historical - salvage value

Accelerated methods ie double-declining: higher depreciation is recorded in early years
= DD depreciation = 2 * straight-line rate x beginning book value
**no recognition of salvage value

Units-of-production: based on the actual use of an asset in a particular period
UoP = depreciable cost / useful life in units
UoP= depreciable cost * (output during period / total output)

Question 16

Depreciable cost formula

Answer 16

= historical cost - estimated residual value

ie - salvage value

Question 17

Impact of depreciation methods on financial statements
During the early years of an asset life, SL v DD method relationships on:
- depreciation expense, NI, assets, equity, ROA, ROE, asset turnover, operating profit margin

Answer 17

Straight Line is x to DD
Depreciation expense: lower
NI: higher
Assets: higher
Equity: higher
ROA: higher
ROE: higher
Asset turnover: lower
Operating profit margin: higher

Question 18

Amortization of LLA v depreciation of LLA:

Answer 18

Amortization applies to intangible assets

Depreciation applies to tangible assets

Question 19

Revaluation Model

and impact on financial statements

Answer 19

• applies to IFRS only
• assets are revalued periodically
• lots of subjectivity

Gains from revaluation flow to equity
losses from revaluation are shown on IS

Question 20

Impairment of Assets

- definition

Answer 20

impairment charges reflect an unexpected decline in fair value of an asset to an amount lower than its carrying amount

Question 21

Impairment of Assets

IFRS v GAAP

Answer 21

IFRS:

• impairment when asset carrying value > recoverable amount
• if impaired, asset write down to the recoverable amount
• loss recoveries are allowed, but cannot exceed the historical cost

GAAP

• impaired if carrying value is > than asset’s undiscounted future cash flows
• if impaired, asset write down to fair value
• no loss recoveries allowed

Question 22

Impairment loss formula (IFRS)

Answer 22

= carrying value - recoverable amount

recoverable amount = the greater of fair value - cost to sell, or present value

Question 23

sale proceeds formula

Answer 23

= gain (loss) on sale + (acquisition cost - accum deprecation)

Question 24

Estimated total useful life formulas (2)

Answer 24

= time elapsed since purchase (age) + estimated remaining life

= historical cost / annual depreciation expense

Question 25

Historical cost formula

Answer 25

accumulated depreciation + net PPE

Question 26

The cost of an acquired intangible asset is classified as an ______ cash flow

Answer 26

investing cash flow

Question 27

The cost of an internally developed intangible asset is classified as an _____ cash flow

Answer 27

operating cash flow