Long-Term Asset Analysis Flashcards
What are examples of long-term assets?
Property, plant, equipment and intangible assets
“Economic” balance sheets would include a wide range of long-term assets such as reputation, workforce skills etc. However, under IFRS and US GAAP, only a narrow range of long-term assets is recognized which are measured under the cost model or revaluation model (only IFRS)
Under IFRS, identifiable intangible assets must meet three definitional and two recognition criteria, which five?
- They must be identifiable, separable from entity or arise from contractual rights.
- They must be under control of the company
- Expected to generate future economic benefits
- It is probable that the economic benefits will flow to the company
- Cost of the asset can be reliably measured
What is goodwill?
An intangible asset that arises when one company purchases another and the acquisition price exceeds the fair value of the net identifiable assets (both the tangible assets and the identifiable intangible assets, minus liabilities) acquired.
How are intangible assets treated that are acquired in situations other than business combinations, such as buying a patent?
They are treated the same as long-lived tangible assets, they are recorded at fair value when acquired (which is the purchase price)
How are intangible assets treated that are internally developed?
Under IFRS, research costs have to be expensed and development costs can be capitalized.
Under US GAAP, both research and development have to be expensed until technological feasibility is proven.
What is the difference between impairment and depreciation / amortization?
Depreciation / amortization serves to allocate the depreciable costs of a long-lived asset over its useful life, while impairment changes reflect an unanticipated decline in the value of an asset.
Both IFRS and US GAAP require companies to write down the carrying amount of impaired assets. However, impairment reversals are allowed under IFRS but not under US GAAP.
When is an asset considered to be impaired?
When its carrying amount exceeds its recoverable amount.
Accounting standards do not require that PPE be tested for impairment annually. Rather, at the end of each reporting period, a company assesses whether there are indications of asset impairment. A company should only test for impairment if there are indications such as obsolescence.
What happens to the financial statements with an impairment loss?
Asset on balance sheet is reduced and net income on income statement is reduced. Since impairment is non-cash, it doesn’t affect the cash flow statement.
How to measure the impairment loss under IFRS and US GAAP?
Under IFRS, an impairment loss is measured as the excess of carrying amount over the recoverable amount of the asset. The recoverable amount is defined as “the higher of fair value minus selling costs OR the present value of future expected cash flows.
Under US GAAP, they compare the undiscounted expected future cash flows with the carrying amount. If the carrying amount is less then the future cash flows, the asset is considered recoverable and there is no impairment loss. Otherwise, if the carrying amount is more than the future cash flows, the impairment is measured at the difference between fair value and carrying amount.
The impairment of intangible assets with a finite life is the same as for tangible assets.
How are intangible assets with indefinite lives impaired?
They are not amortized but annually tested for impairment.
What is reclassification of an asset?
The switch from “held for use” to “held for sale”
At times of reclassification, an asset has to be tested for impairment. Also, long-lived assets that become available for sale are no longer depreciated / amortized.
How do IFRS and US GAAP allow the reversal of impairment losses?
IFRS allows reversals only back to the original value, not above it.
Under US GAAP, assets held for use cannot be reversed. Assets held for sale can be reversed.
What is derecognition of an asset?
A company derecognizes an asset (removing it from financial statements) when the asset is disposed or is expected to provide no future benefits from either use or disposal.
Define an asset’s carrying amount.
Historical book value minus depreciation.
How to calculate the gain or loss from the sale of long-lived assets?
Proceeds from sale minus carrying amount.
What is a spin-off?
A Spin-Off refers to when a parent company sells a specific business unit or division, i.e. a subsidiary, to effectively create a new standalone company.
As part of the spin-off, the parent company’s existing shareholders are given shares in the new independent company.
What is the asset turnover ratio and what does it reflect?
It reflects the relationship between total revenue and the existing assets. The higher this ratio, the higher the amount of revenue a company can generate with the given set of assets.
Revenue / assets
What are asset age ratios and what are the two most important?
They rely on the relationship between historical cost and depreciation. They are important indicators of a company’s need to reinvest in productive capacity. The older the assets and the shorter the remaining life, the more a company may need to reinvest to maintain productive capacity.
“Asset age” and “remaining useful life”
What is the asset age ratio and how to calculate it?
The average age of a company’s asset base can be estimated as accumulated depreciation divided by depreciation expense.
