Reading 33 Flashcards
What are intangible assets?
Long-term assets that lack physical substance, such as patents, brand names, copyrights, and franchises.
How are finite-lived intangible assets accounted for?
The cost is amortized over its useful life.
What is the accounting treatment for indefinite-lived intangible assets?
They are not amortized but tested for impairment at least annually.
What happens if an indefinite-lived intangible asset is impaired?
The reduction in value is recognized in the income statement as a loss in the period it is recognized.
What are the characteristics of an identifiable intangible asset under IFRS?
Must be capable of being separated, controlled by the firm, and expected to provide future economic benefits.
What is an unidentifiable intangible asset?
An asset that cannot be purchased separately, often having an indefinite life; common example is goodwill.
What is goodwill?
The excess of purchase price over the fair value of identifiable assets acquired in a business combination.
How are internally created intangible assets treated in accounting?
Costs to create them are generally expensed as incurred, with some exceptions.
What are the exceptions to expensing costs for internally created intangible assets?
Research and development costs and software development costs.
How does IFRS treat research costs?
They are expensed as incurred.
What are development costs under IFRS?
Costs incurred to translate research findings into a plan or design of a new product or process; may be capitalized if certain criteria are met.
How does U.S. GAAP treat research and development costs?
Generally expensed as incurred.
When can costs for software developed for sale to others be capitalized under U.S. GAAP?
After technological feasibility has been established.
How are purchased intangible assets recorded on the balance sheet?
Initially recorded at cost, typically its fair value at acquisition.
What happens to the total purchase price of a group of intangible assets?
Allocated to each asset based on its fair value.
What is the impact of capitalizing intangible assets on financial statements?
Results in higher net income in the first year and lower net income in subsequent years; assets, equity, and operating cash flow are also higher.
How do internally generated intangibles affect balance sheet assets compared to purchased intangibles?
Internally generated intangibles result in lower balance sheet assets.
What accounting method is used for business combinations?
The acquisition method.
How is the purchase price allocated in a business combination?
Allocated to identifiable assets and liabilities based on fair value.
What must be true for intangible assets that were previously expensed to be capitalized in a business combination?
They must be identifiable intangible assets.
What is the treatment of goodwill in business combinations?
Only goodwill created in a business combination is capitalized on the balance sheet.
Fill in the blank: Goodwill is the excess of purchase price over the _______.
fair market value of net assets acquired.
True or False: Goodwill can be recognized for internally generated assets.
False.
What do depreciation and amortization represent?
The spreading of an asset’s cost to match the benefits earned over an asset’s life
What is an impairment?
An unanticipated decline in an asset’s value, causing it to fall below the carrying value
Define derecognition.
Occurs when an asset is disposed of or retired
What must firms do under both IFRS and U.S. GAAP when an asset is impaired?
Write down impaired assets by recognizing a loss in the income statement
How is an asset considered impaired under IFRS?
When its carrying value exceeds the recoverable amount
What is the recoverable amount under IFRS?
The greater of fair value less selling costs and value in use
What is value in use?
The present value of future cash flow stream from continued use and disposal
Can an impairment loss be reversed under IFRS?
Yes, if the asset’s value recovers in the future, limited to the original impairment loss
Under U.S. GAAP, when is an asset tested for impairment?
Only when events indicate recovery of carrying value may not be possible
What is the first step in determining an impairment under U.S. GAAP?
Apply a recoverability test
How is an impairment loss measured under U.S. GAAP?
By writing down the asset to fair value or discounted future cash flows
Are loss recoveries permitted under U.S. GAAP?
Typically not permitted
What is an example of asset impairment given in the text?
Brownfield Company’s equipment with original cost of $900,000 and fair value of $790,000
How does impairment affect return on assets (ROA) and return on equity (ROE)?
ROA and ROE will decrease due to the impairment charge reducing net income
What happens to net income in subsequent periods after an impairment charge?
Net income will be higher due to lower depreciation or amortization
How are intangible assets with indefinite lives treated?
They are not amortized and are tested for impairment at least annually
What occurs when a long-lived asset is reclassified as held for sale?
The asset is no longer depreciated or amortized
What is the treatment of a long-lived asset if it is abandoned?
The carrying value is removed from the balance sheet, and a loss is recognized
What is derecognition in the context of long-term assets?
Removal of assets from the balance sheet when sold, exchanged, or abandoned
What is the accounting treatment for a spinoff?
No profit or loss is recorded on the disposal in the income statement
What must be reported when a long-term asset is sold?
The difference between sale proceeds and carrying value as a gain or loss in the income statement
Fill in the blank: An impairment charge reduces _______ and equity.
net income
True or False: Under U.S. GAAP, the loss measurement is based on fair value less selling costs.
False
What is the basis for measurement usually used for property, plant, and equipment (PP&E) under IFRS?
Historical cost
Measurement basis is crucial for determining the value of PP&E.
What must a firm disclose regarding the depreciation method for PP&E under IFRS?
Depreciation method used
This informs stakeholders about how the asset’s value is allocated over time.
What information about depreciation must be disclosed under IFRS?
Depreciation expense in the period
This helps assess the asset’s contribution to expenses.
What must a firm disclose about the useful lives of PP&E under IFRS?
Useful lives or depreciation rate
This indicates how long the asset is expected to provide economic benefits.
What is required for gross carrying value and accumulated depreciation at the start and end of the period under IFRS?
Disclose both gross carrying value and accumulated depreciation
This provides a clear picture of asset valuation changes.
What reconciliation must be provided under IFRS regarding carrying amounts?
Reconciliation from the beginning to the end of the period
This shows how the asset’s value has changed over the reporting period.
What additional disclosures are required under IFRS for PP&E?
Title restrictions and assets pledged as collateral
This information is vital for understanding asset encumbrances.
What agreements must be disclosed regarding future PP&E acquisitions under IFRS?
Agreements to acquire PP&E in the future
This provides insight into future capital investment plans.
What must be disclosed if the revaluation model is used under IFRS?
The revaluation date, how fair value was determined, carrying value using historical cost model, revaluation surplus in OCI
These disclosures clarify the valuation basis of revalued assets.
What is a key difference in the disclosure of intangible assets under IFRS compared to PP&E?
Whether the useful lives are finite or indefinite
This distinction affects amortization and impairment assessments.
What disclosures are required for impaired assets under IFRS?
Amounts of impairment losses and reversals by asset class, recognition location in income statement, circumstances causing impairment
This helps assess financial health and asset management.
What are the key PP&E disclosures required under U.S. GAAP?
Depreciation expense by period, balances of major asset classes, accumulated depreciation, description of depreciation methods
These disclosures ensure transparency for stakeholders.
What must be disclosed for intangible assets under U.S. GAAP in addition to PP&E?
Estimate of amortization expense for the next five years
This provides a forecast of future expense obligations.
What information must be disclosed for impaired assets under U.S. GAAP?
Description of impaired asset, circumstances causing impairment, fair value determination, amount of loss, recognition location in income statement
This is crucial for understanding the impact of impairment on financial statements.
How can depreciation and amortization expenses be presented on the income statement under IFRS?
Shown on the face if using nature of expense approach; included in cost of sales if using function of expense method
The method of presentation affects how expenses are perceived by users of financial statements.
What does fixed-asset turnover measure?
Revenue per dollar of fixed assets
It indicates how efficiently a firm uses its long-term assets to generate sales.
What is the formula for fixed asset turnover?
fixed asset turnover = revenue / average fixed assets
This ratio helps assess operational efficiency.
What are two reasons why average age of assets is useful for analysts?
- Older, less-efficient assets may reduce competitiveness
- Helps estimate timing of capital expenditures and financing requirements
Understanding asset age can inform investment and operational strategies.
What is the formula for calculating average age of assets?
average age = accumulated depreciation / annual depreciation expense
This calculation is more accurate for firms using straight-line depreciation.
What is the formula for calculating total useful life of assets?
total useful life = historical cost / annual depreciation expense
This provides insight into the asset’s expected lifespan.
What is the formula for calculating remaining useful life of assets?
remaining useful life = ending net PP&E / annual depreciation expense
This indicates how much longer the asset can contribute to operations.
What can the ratio of annual capital expenditures to depreciation expense indicate?
Whether the firm is maintaining its production capacity
It signals if a firm is investing adequately to replace depreciated assets.
