Vol. 3 LM 6 Long-Lived Assets Acquisition

Question 1

Concept

are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.

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Answer 1

long-lived assets

Question 2

Define

long-lived assets

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Answer 2

are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.

Question 3

examples

long-lived intangible assets

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Answer 3

• assets lacking physical substance
• patents and trademarks

Question 4

issues

accounting for a long-lived asset

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Answer 4

• first is determining its cost at acquisition
• second issue is how to allocate the cost to expense over time

Question 5

acquisition of long-lived assets

upon acquisition, PPE are recorded (where) using what (measurement)

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Answer 5

where: balancae sheet
measurement: at cost

Question 6

treatment of long-lived assets

Accounting for an intangible asset depends upon what

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Answer 6

how the asset is acquired

Question 7

treatment of long-lived assets

If several assets are acquired as part of a group, describe allocation

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Answer 7

the purchase price is allocated to each asset on the basis of its fair value

Question 8

treatment of long-lived assets

A key concept in accounting for expenditures related to long-lived assets is …

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Answer 8

when such expenditures are capitalized (i.e., included in the asset shown on the balance sheet)

Question 9

acquisition of PPE

When as asset is exchanged for another asset, the asset acquired is recorded

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Answer 9

• at fair value if reliable measures of fair value exist
• If there is no reliable measure of fair value, the acquired asset is measured at the carrying amount of the asset given up

Question 10

acquisition of long-lived assets

If the asset acquired is measured at the carrying amount, then …

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Answer 10

the carrying amount of the assets is unchanged, and no gain or loss is reported.

Question 11

treatment of subsequent expenditures

long-lived assets

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Answer 11

if the assets are expected to provide benefits
FOR >1 year
* included as part of the recorded value of the assets on the balance sheet (i.e., capitalised)

FOR <=1 year
* they are expensed

Question 12

treatment of long-lived assets

benefits expected for >1 year

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Answer 12

IF >1 year
* included as part of the recorded value of the assets on the balance sheet (i.e., capitalised)

Question 13

treatment of long-lived assets

benefits expected for <=1 year

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Answer 13

IF <=1 year
* they are expensed

Question 14

Treatment of PPE

borrowing costs incurred directly related to the construction of the asset

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Answer 14

they are generally capitalised

Question 15

Classification of asset

building held for sale

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Answer 15

building is classified as inventory

Question 16

Classification of asset

building held for company’s own use

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Answer 16

building is classified as a long-lived asset

Question 17

treatment of PPE

any borrowing costs incurred prior to the asset being ready for its intended

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Answer 17

capitlised as part of the cost of the asset

Question 18

treatment of PPE

if a company takes out a loan specifically to construct a building, the interest cost on that loan during the time of construction

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Answer 18

interest cost would be capitalised as part of the building’s cost

Question 19

Treatment eligibility

income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalisation

A. IFRS
B. US GAAP
C. Both
D. Neither

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Answer 19

A. IFRS, but not US GAAP

Question 20

treatment of PPE

If the interest expenditure is incurred in connection with constructing as asset to sell (home builder)

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Answer 20

the capitalised interest appears on the company’s balance sheet as part of inventory

Question 21

activity classification

expenses interest may be classified as

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Answer 21

IFRS
* operating cash outflow
* financing cash outflow

US GAAP
* operating cash outflow

Question 22

characteristics

intangible assets

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Answer 22

• lacking physical substance
• include items that involve exclusive rights, such as patents, copyrights, trademarks, and franchises

Question 23

Under IFRS

identifiable intangible assets must meet three definitional criteria

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Answer 23

1. identifiable (either capable of being separated from the entity or aising from contractual or legal rights)
2. under the control of the company, and;
3. expected to generate future economic benefits

Question 24

recognition criteria

identifiable intangible assets

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Answer 24

1. it is probable that the expected future economic benefits of the asset will flow to the company, and;
2. the cost of the asset can be reliably measured

Question 25

acquisition of intangible assets

list three ways they are obtained

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Answer 25

1. purchased in situations other than business combinations
2. developed internally
3. acquired in business combinations

Question 26

acquisition method

intangible assets purchased in this method are treat at acquisition the same as long-lived tangible assets

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Answer 26

intangible assets purchased in situations other than business combinations

Question 27

accounting valuation

intangible assets purchased in situation other business combinations, such as:
* buying a patent

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Answer 27

recorded at their fair value when acquired, which is assumed to be equivalent to the purchase price

Question 28

intangible assets

Considerable amounts of judgments and assumptions are used by companies to determine the fair values; therefore, analyst should pay attention to

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Answer 28

the types of intangible assets acquired, rather than the precise portion of the purchase price a company allocated to each asset

Question 29

treatment

internally developed intangible assets

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Answer 29

expensed when incurred

Question 30

financial ratios

analytical issues related to the capitalising-versus-expensing decision

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Answer 30

comparability across companies and the effect on an individual company’s trend analysis

Question 31

treatment and valuation

why would a company recognize a lower amount of intangible assets than would be recognized if purchased the same assets externally

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Answer 31

1. internally developed assets such as patents and copyrights have lower recognition amounts
2. if these assets were developed externally, i.e., purchased from outside the company, they would be capitalised.

Question 32

classification

costs of internally developed intangible assets on the statement of cash flows

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Answer 32

classified as operating cash outflows

Question 33

classification

costs of acquiring intangible assets on the statement of cash flows

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Answer 33

classified as investing cash outflows

Question 34

reason

developing a strategy for developing versus acquiring intangible assets

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Answer 34

it can impact financial ratios

Question 35

Under IFRS

how does it require expenditures on research be treated

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Answer 35

expensed
* IAS 38 Intangible Assets

Question 36

Define

research phase of an internal project

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Answer 36

refers to the period during which a company cannot demonstrate that an intangible asset is being created

Question 37

IFRS vs US GAAP

what part of the treatment of intangibles assets differs during R&D

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Answer 37

• the development phase must also be expensed under US GAAP, but not necessarily under IFRS
• All R&D expenditures must be expensed under US GAAP with the exception that certain costs related to software development be capitalised

Question 38

Exceptions

Under US GAAP, these R&D costs are generally capitalised instead of expensed

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Answer 38

certain costs related to software development

Question 39

threshold

costs incurred to develop a software product for sale are expensed until this point

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Answer 39

• the product’s technological feasibility is established
• they are capitalised thereafter

Question 40

When one company acquires another company, the transaction is accounted for using

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Answer 40

acquisition method

Question 41

Under the acquisition method

the company identified as the acquirer allocates…

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Answer 41

the purchase price to each acquired on the basis of its fair value.

Question 42

Under US GAAP

there are two criteria to judge whether an intangible asset acquired in a business combination should be recognised separately from goodwill

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Answer 42

1. the asset must be either an item arising from contractual or legal rights
2. an item that can be separated from the acquired company

Question 43

List

two analytical issues related to the decision of capaitalising versus expensing

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Answer 43

1. the effect on a individual company’s trend analysis
2. the effect on comparability across companies

Question 44

effect

in the period of the expenditure, an expenditure that is capitalised

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Answer 44

increases the amount of assets on the balance sheet

Question 45

capitalization versus expensing

after inital recognition of a capitalised expenditure

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Answer 45

a company allocates the capitalised amount over the asset’s useful life as depreciation and amortisation expense
* except assets that are not depreciated, i.e., land, or amortised, e.g., intangible assets with indefinite lives
* this expense reduces net income on the income statement
* this expense reduces the value of the asset on the balance sheet

Question 46

impact on financial statements

depreciation and amortisation

Answer 46

non-cash expenses, and; therefore,
* have no impact on the cash flow statement
* in the section of the statement of cash flows that reconciles net income to operating cash flow, depreciation and amortisation expense are added back to net income

Question 47

impact on financial statements

an expenditure that is expenses

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Answer 47

• reduces net income by the after-tax amount of the expenditure in the period it is made
• No asset is recorded on the balance sheet, and thus, no depreciation or amortisation occurs in subsequent periods
• there is no effect on the financial statements of subsequent periods

Question 48

appearance on statement of cash flows

expenditure that is expensed

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Answer 48

an expenditure that is expensed appears as an operating cash outflow in the period it is made

Question 49

capitalising versus expensing

results in higher profitability in the first year, but it results in lower profitability in the subsequent years

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Answer 49

capitalising

Question 50

capitalising versus expensing

results in lower profitability in the first year, but it results in higher profitability in the subsequent years, indicating a favorable trend

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Answer 50

expensing

Question 51

effect on profitability

if a company continues to purchase similar or increasing amounts of assets each year

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Answer 51

the profitability-enhancing effect of capitalising continues if the amount of the expenditures in the period continues to be more than the depreciation expense.