SS9 R30 Long-Lived Assets Flashcards
LONG-LIVED ASSETS
include: tangible & intangible assets, and financial assets
CAPITALIZED costs
expenditure recorded as an asset on balance sheet (typ. at fair value + costs to prepare asset for use); cost then allocated to income statement over asset’s life as depr or amort (see expensed costs)
EXPENSED costs
in contrast to capitalized expenses, expensed costs reduce current period pretax income in income statment
capitalizing/expensing effect on NET INCOME
capitalizing costs delays recognition of expense, leading to higher net income in the current period and lower net income in subsequent periods (due to depr); this method reduces variability of net income compared to expensing
total net income is identical
capitalizing/expensing effect on S. EQUITY
capitalization results in higher net income in the current period, so it also results in higher SE since retained earnings are greater (A=L+E holds true as L is unaffected)
capitalizing/expensing effect on CASH FLOW FROM OPERATIONS
capitalized costs - reported as outflow from INVESTING activities
expensed costs - reported as outflow from OPERATING activities
total CF remains the same; classification is the only difference
note: depr is a noncash expense and doesn’t affect operating cash flow
capitalizing/expensing effect on FINANCIAL RATIOS
capitalizing initially leads to higher assets & equity
->
lower debt-to-assets & debt-to-equity
higher ROA & ROE in first year (result of higher net income) then lower for subsequent periods
*opposite effects for expensing in first period
CAPITALIZED INTEREST
occurs when firm constructs asset for its own use
interest accrued during construction period is capitalized as part of asset’s cost
similar under US GAAP and IFRS, except:
*under IFRS income earned by temporarily investing borowed funds reduces the interesed eligible for capitalization (no reduction of cap int under US GAAP)
capitalized interest is not reported in the income statement as interest expense (interest cost allocated to I/S through depr if held for use or COGS if held for sale) reported in CF Statement as outflow from investing activities
interest expense is reported as an outflow from operating activities
INTANGIBLE ASSETS
long-term assets without physical substance (eg. patents, brand names, copyrights, franchises)
can have indefinite or finite lives
not always reported on balance sheet, depending on how the asset was obtained or created
IDENTIFIABLE v. UNIDENTIFIABLE intangible assets
identifiable: capable of separation from firm, controlled by firm, expected to provide future econ benefits
unidentifiable: cannot be purchased separately, may have indefinite life (eg. goodwill)
intangible assets CREATED INTERNALLY
also: R&D, Software Development
costs to create intangible assets are EXPENSED as incurred
Exception: R&D Costs
Under IFRS, research costs are expensed and dev costs are capitalized. Under US GAAP, R&D are both expensed (except software development)
Software Devlopment:
Costs expensed until technological feasibility is established for software developed to SELL (both IFRS & US). Under US GAAP, costs are always capitalized if developed for OWN USE.
intangible assets PURCHASED
recorded on balance sheet at cost (typically at fair value at acquisition)
intangible assets OBTAINED IN A BUSINESS COMBINATION
ie. ACQUISITION METHOD
acquisition method: purchase price is allocated to identifiable assets and liablities of the acquired firm on the basis of fair value. Remaining amount of purchase price is recorded as GOODWILL (an unidentifiable asset).
Goodwill created in business combination is capitalized (internally generated goodwill is expensed).
DEPRECIATION
systematic allocation of asset’s cost over time
a real and significant OPERATING EXPENSE
analysts should compare against economic depreciation
CARRYING VALUE
BOOK VALUE
net value of asset/liability on balance sheet
for PPE: historical cost minus accumulated depr
HISTORICAL COST
original purchase price, including installation and transportation costs
also called ‘gross investment in the asset’
ECONOMIC DEPRECATION
actual decline in value of an asset over the period
analyst should watch for differences between this and reported depreciaiton expense (video rental store example)
STRAIGHT-LINE DEPRECATION
depr exp = (original cost - salvage value)/depreciable life
same each year over asset’s life
DOUBLE-DECLINING BALANCE (depr)
DDB depr in year x =
2*(book value at beg. year x/depr life in years)
salvage value not in formula
one asset reaches salvage value, no additional depr expense is recognized
UNITS OF PRODUCTION (depr)
= (original cost - salvage value)*(output units in the period / life in output units)
called DEPLETION when applied to natural resources
change in SALVAGE VALUE & USEFUL LIFE
a change in these accting estimates is put into effect PROSPECTIVELY
previous periods are not affected
COMPONENT DEPRECIATION
IFRS requirement (seldom used under US GAAP)
useful life of each compnent is estimated and depr computed separately for each (eg. building separated into roof, walls, flooring, etc.)
AMORTIZATION
only applies to intangible assets with FINITE lives
identical to depr of tangible assets
intangible assets with
INDEFINITE LIFE
not amortized
tested for IMPAIRMENT AT LEAST ANNUALLY
can be renewed at minimal cost (eg. trademark)
