Long-term operating assets Flashcards
Assets must possess the following characteristics
It must be owned by the company and expected to provide future benefits
Considerations for capitalizing costs
1) The cost should be directly linked to the future benefits 2) The costs capitalized should be no greater than the expected future benefit Ex: If you record a $200 asset then you should derive at least $200 in value from the asset.
Capitalized interest.
Interest capitalized as part of the asset’s cost.
Should you capitalize maintenance costs?
No
Should you capitalize improvements?
Yes. Improvement enhance the usefulness of the asset or extends the asset’s useful life.
Depreciation
The systematic allocation of assigning the value of an asset’s cost to each period benefited
Is depreciation a measure of the fair value of an asset?
No
Impairment
If the fair value of PPE decreases permanently then companies must recognize losses on those assets.
Impairment costs are frequently reported as
restructuring costs
Issues with write-downs
Insufficient write-down - the impairment is larger than was the company reports Aggressive write-down - the impairment is larger than what was actually reported
PPE Turnover
Revenue / Average PPE, net
Percent depreciated
Accum dep / cost of depreciable assets
Types of intangibles
Separately transferrable or not separately transferable
Separately transferrable assets
Type 1: Assets that are a product of contractual or other legal rights (e.g. patents, trademarks, copyrights) Type 2: Benefits that are not contractually or legally defined but can be sold (e.g. customer lists, formulas, processes, databases)
Do you capitalize R&D?
No, you expense it because R&D success is uncertain
What costs can you capitalize for a patent?
If you purchase the patent you can capitalize the purchase amount. If you develop the patent internally you can only patent the legal costs and registration fees.
What can you capitalize for trademarks or copyrights?
Only the purchase price if you acquire them. You can’t capitalize your internal costs.
What can you capitalize for franchise rights?
The purchase price
What must you determine when you acquire or capitalize an intangible?
If the asset has a definite life.
Impairment
An intangible asset is impaired if the book value of the asset exceeds its fair value and the write-down is equal to the difference between the book value and fair value.
Goodwill
The excess of the purchase price paid for a company over the fair value of its identifiable net assets acquired in the purchase. Goodwill is considered to have an indefinite life.
How does the acquisition of patents and trademarks from a 3rd party impact the statement of cash flows?
It’s represented as an investing activity
How does the cost of generating patents and trademarks from internally get represented on the SOCF?
Operating activities
What costs are capitalized for self-constructed assets?
All costs during construction including the interest cost of financing the construction
When is an asset impaired?
When the expected benefits (undiscounted cash flows) derived from the asset fall below its book value
