Reading #30: Long Lived Assets Flashcards
Where are capitalized assets (bal sheet, income, cash flow?)
balance sheet
where are expenses assets (bal sheet, income, cash flow?)
income statement
if expenditure immediately expenses, what happens to current period pretax income?
pretax income is reduced by amt of expenditure
what is more aggressive capitalizing or expensing?
expensing because it is immediate (after tax) and capitalizing spreads out the expenses through depreciation
capitalization - effects on SE - higher or lower?
higher SE becasue retained earnings higher because NI higher in that period compared to expensing.
capitalization - effects on total assets and liabilities
higher assets and liabilites unchanged
expenses - effects on SE - higher or lower?
lower because retained earnings and SE are lower from reducing in NI
capitalization - reports in cash flow statement as what?
CFI. therefore higher opering cash flow and will continue this way because depreciation is a non cash expense
expensed - reported in cash flow statement as what?
CFO
capitalization effect on debt-to-equity and debt-to-assets ratio?
cap. causing higher asset and equity, therefore both ratios are lower (larger denom)
capitalization effect on ROE and ROA
higher in beginning due to higher NI compared to expensing, but then will switch
IFRS interest cost from capitalized interest shows in what statement?
through depreciation expense - asset must be held for use
GAAP interest cost from capitalized interest shows in what statement?
COGS if asset is held for sale
how is capitalized interest reported in cashflow statement?
in cash flow statement as outflow for CFI
how is interest expense reported in cashflow statement?
outflow in cashflow statement as outflow for CFO
examples of intangible assets
patents, brand names, copyrights
how are indefinite lived intagible assets treated?
not amortized but tested for impairment annually
if indefinite intagibles are impaired, then what?
reduction in value is recognized in income statement as a loss
IFRS - how handles research and development costs?
research expensed as incurred, development may be capitalized
GAAP - how handles research and development costs?
generally expensed as incurred - exception is software development costs
software development costs - IFRS and GAAP how treated? expensed or cap?
IFRS capitalized until product technoligical feasibility is established. under GAAP must be for own use
IFRS and GAAP - how do they treat component depreciation?
IFRS requires it, GAAP will allow it but does not require
capitalization results in higher or lower assets, equity and/or CFO compared to expensing?
higher for all three assets, equity and CFO
is interest from construction usually capitalized or expensed?
capitalized. it adds up and then is used to depreciate the asset over its life.
why would an analyst reverse the capitalization of interest from construction to an expense?
because when capitalized it makes the interest coverage ratio lower (smaller denom), so adds back in as int. expense
GAAP or IFRS allow for revaluation of assets?
IFRS only
what statement does revaluation show up on up to point of initial loss recorded and then beyond?
up to initial loss, revaluation reported in income statement. after meets initial loss, reported in the shareholders equity
define carrying value
aka book value. “net value of asset or liability on balance sheet” “equals historical cost -depreciation
define historical cost
“original purchase price of asset including installation and transportation costs”
define the recoverable amount
“greater of fair value-selling costs and ‘value in use’”. “value in use = PV of future cash flow stream from continuous use”
When is asset impaired under IFRS?
carrying value > recoverable amt
when is asset impaired under GAAP?
carrying value > recoverability
when is asset tested for impairment under GAAP?
tested for impairment only when “events/circumstances indicate firm may not be able to recover carrying value”
define GAAP recoverability
PV of future UNDISCOUNTED cash flows
how is loss from impairment treated in GAAP?
income statement–> written down to fair value and loss is “excess of carrying value/fair value of DISCOUNTED cash flows”
held for use vs. held for sale - tested for impairment?
held for sale. if held for use reclassified to held for sale, must be tested under GAAP
long-lived assets held for sale, IFRS or GAAP allows for reversed losses?
both but limited to original impairment loss.
