Reading #30: Long Lived Assets

Question 1

Where are capitalized assets (bal sheet, income, cash flow?)

Answer 1

balance sheet

Question 2

where are expenses assets (bal sheet, income, cash flow?)

Answer 2

income statement

Question 3

if expenditure immediately expenses, what happens to current period pretax income?

Answer 3

pretax income is reduced by amt of expenditure

Question 4

what is more aggressive capitalizing or expensing?

Answer 4

expensing because it is immediate (after tax) and capitalizing spreads out the expenses through depreciation

Question 5

capitalization - effects on SE - higher or lower?

Answer 5

higher SE becasue retained earnings higher because NI higher in that period compared to expensing.

Question 6

capitalization - effects on total assets and liabilities

Answer 6

higher assets and liabilites unchanged

Question 7

expenses - effects on SE - higher or lower?

Answer 7

lower because retained earnings and SE are lower from reducing in NI

Question 8

capitalization - reports in cash flow statement as what?

Answer 8

CFI. therefore higher opering cash flow and will continue this way because depreciation is a non cash expense

Question 9

expensed - reported in cash flow statement as what?

Answer 9

CFO

Question 10

capitalization effect on debt-to-equity and debt-to-assets ratio?

Answer 10

cap. causing higher asset and equity, therefore both ratios are lower (larger denom)

Question 11

capitalization effect on ROE and ROA

Answer 11

higher in beginning due to higher NI compared to expensing, but then will switch

Question 12

IFRS interest cost from capitalized interest shows in what statement?

Answer 12

through depreciation expense - asset must be held for use

Question 13

GAAP interest cost from capitalized interest shows in what statement?

Answer 13

COGS if asset is held for sale

Question 14

how is capitalized interest reported in cashflow statement?

Answer 14

in cash flow statement as outflow for CFI

Question 15

how is interest expense reported in cashflow statement?

Answer 15

outflow in cashflow statement as outflow for CFO

Question 16

examples of intangible assets

Answer 16

patents, brand names, copyrights

Question 17

how are indefinite lived intagible assets treated?

Answer 17

not amortized but tested for impairment annually

Question 18

if indefinite intagibles are impaired, then what?

Answer 18

reduction in value is recognized in income statement as a loss

Question 19

IFRS - how handles research and development costs?

Answer 19

research expensed as incurred, development may be capitalized

Question 20

GAAP - how handles research and development costs?

Answer 20

generally expensed as incurred - exception is software development costs

Question 21

software development costs - IFRS and GAAP how treated? expensed or cap?

Answer 21

IFRS capitalized until product technoligical feasibility is established. under GAAP must be for own use

Question 22

IFRS and GAAP - how do they treat component depreciation?

Answer 22

IFRS requires it, GAAP will allow it but does not require

Question 23

capitalization results in higher or lower assets, equity and/or CFO compared to expensing?

Answer 23

higher for all three assets, equity and CFO

Question 24

is interest from construction usually capitalized or expensed?

Answer 24

capitalized. it adds up and then is used to depreciate the asset over its life.

Question 25

why would an analyst reverse the capitalization of interest from construction to an expense?

Answer 25

because when capitalized it makes the interest coverage ratio lower (smaller denom), so adds back in as int. expense

Question 26

GAAP or IFRS allow for revaluation of assets?

Answer 26

IFRS only

Question 27

what statement does revaluation show up on up to point of initial loss recorded and then beyond?

Answer 27

up to initial loss, revaluation reported in income statement. after meets initial loss, reported in the shareholders equity

Question 28

define carrying value

Answer 28

aka book value. “net value of asset or liability on balance sheet” “equals historical cost -depreciation

Question 29

define historical cost

Answer 29

“original purchase price of asset including installation and transportation costs”

Question 30

define the recoverable amount

Answer 30

“greater of fair value-selling costs and ‘value in use’”. “value in use = PV of future cash flow stream from continuous use”

Question 31

When is asset impaired under IFRS?

Answer 31

carrying value > recoverable amt

Question 32

when is asset impaired under GAAP?

Answer 32

carrying value > recoverability

Question 33

when is asset tested for impairment under GAAP?

Answer 33

tested for impairment only when “events/circumstances indicate firm may not be able to recover carrying value”

Question 34

define GAAP recoverability

Answer 34

PV of future UNDISCOUNTED cash flows

Question 35

how is loss from impairment treated in GAAP?

Answer 35

income statement–> written down to fair value and loss is “excess of carrying value/fair value of DISCOUNTED cash flows”

Question 36

held for use vs. held for sale - tested for impairment?

Answer 36

held for sale. if held for use reclassified to held for sale, must be tested under GAAP

Question 37

long-lived assets held for sale, IFRS or GAAP allows for reversed losses?

Answer 37

both but limited to original impairment loss.