Long-Lived Assets Flashcards
Tangible asset
fixed asset or PP&E
- land, buildings, furniture, machinery, etc
Intangible assets
patents, trademarks, etc
Financial assets (LLA)
investments in equity or debt securities issued by other entities
At acquisition, tangible LLAs are recorded on the BS at ______
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
Costs that can be capitalized with the acquisition of tangible LLAs:
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
Costs that are expensed with the acquisition of tangible LLAs:
costs not expected to provide benefits in future
- training staff, painting factory
Acquisition of intangible LLA:
Acquired in a business combination:
- 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
Acquisition of intangible LLA:
Purchased in situations other than business combinations:
- ie when an intangible is purchased
- recorded at fair value
Acquisition of intangible LLA:
Developed internally:
- costs to internally developed intangible assets are generally expensed when incurred
Differences of capitalized costs or expensed costed related to the acquisition of intangible LLAs vs internally developed
on BS and stmt of CF:
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
Acquisition of intangible LLA:
Differences of capitalized costs or expensed costs related IFRS and GAAP reporting
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
Capitalizing LLAs leads to ______ profitability in the period when the asset was purchased.
higher
Expensing an asset’s cost immediately results in _______ profitability in the current period and _______ profits in the future
lower profitability in the current period
higher profits in future
Capitalization of interest costs
-ie borrowing or bond issuance for construction or LLA purchase
- 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
Depreciation methods and formulas
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)
Depreciable cost formula
= historical cost - estimated residual value
ie - salvage value
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
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
Amortization of LLA v depreciation of LLA:
Amortization applies to intangible assets
Depreciation applies to tangible assets
Revaluation Model
and impact on financial statements
- applies to IFRS only
- assets are revalued periodically
- lots of subjectivity
Gains from revaluation flow to equity
losses from revaluation are shown on IS
Impairment of Assets
- definition
impairment charges reflect an unexpected decline in fair value of an asset to an amount lower than its carrying amount
Impairment of Assets
IFRS v GAAP
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
Impairment loss formula (IFRS)
= carrying value - recoverable amount
recoverable amount = the greater of fair value - cost to sell, or present value
sale proceeds formula
= gain (loss) on sale + (acquisition cost - accum deprecation)
Estimated total useful life formulas (2)
= time elapsed since purchase (age) + estimated remaining life
= historical cost / annual depreciation expense
