Vol. 3 LM 6 Long-Lived Assets Acquisition Flashcards
Concept
are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.
p 326
long-lived assets
Define
long-lived assets
p. 326
are assets that are expected to provide economic benefits over a future period of time, typically greater than one year.
examples
long-lived intangible assets
p 326
- assets lacking physical substance
- patents and trademarks
issues
accounting for a long-lived asset
p 326
- first is determining its cost at acquisition
- second issue is how to allocate the cost to expense over time
acquisition of long-lived assets
upon acquisition, PPE are recorded (where) using what (measurement)
p 327
where: balancae sheet
measurement: at cost
treatment of long-lived assets
Accounting for an intangible asset depends upon what
p 327
how the asset is acquired
treatment of long-lived assets
If several assets are acquired as part of a group, describe allocation
p 327
the purchase price is allocated to each asset on the basis of its fair value
treatment of long-lived assets
A key concept in accounting for expenditures related to long-lived assets is …
p 327
when such expenditures are capitalized (i.e., included in the asset shown on the balance sheet)
acquisition of PPE
When as asset is exchanged for another asset, the asset acquired is recorded
p 327
- 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
acquisition of long-lived assets
If the asset acquired is measured at the carrying amount, then …
p 327
the carrying amount of the assets is unchanged, and no gain or loss is reported.
treatment of subsequent expenditures
long-lived assets
p 328
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
treatment of long-lived assets
benefits expected for >1 year
p 328
IF >1 year
* included as part of the recorded value of the assets on the balance sheet (i.e., capitalised)
treatment of long-lived assets
benefits expected for <=1 year
p 328
IF <=1 year
* they are expensed
Treatment of PPE
borrowing costs incurred directly related to the construction of the asset
p 328
they are generally capitalised
Classification of asset
building held for sale
p 328
building is classified as inventory
Classification of asset
building held for company’s own use
p 328
building is classified as a long-lived asset
treatment of PPE
any borrowing costs incurred prior to the asset being ready for its intended
p 328
capitlised as part of the cost of the asset
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
p 328
interest cost would be capitalised as part of the building’s cost
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
p 328
A. IFRS, but not US GAAP
treatment of PPE
If the interest expenditure is incurred in connection with constructing as asset to sell (home builder)
p 328
the capitalised interest appears on the company’s balance sheet as part of inventory
activity classification
expenses interest may be classified as
p 328
IFRS
* operating cash outflow
* financing cash outflow
US GAAP
* operating cash outflow
characteristics
intangible assets
p 328
- lacking physical substance
- include items that involve exclusive rights, such as patents, copyrights, trademarks, and franchises
Under IFRS
identifiable intangible assets must meet three definitional criteria
p 330
- identifiable (either capable of being separated from the entity or aising from contractual or legal rights)
- under the control of the company, and;
- expected to generate future economic benefits
recognition criteria
identifiable intangible assets
p 330
- it is probable that the expected future economic benefits of the asset will flow to the company, and;
- the cost of the asset can be reliably measured
acquisition of intangible assets
list three ways they are obtained
p 330
- purchased in situations other than business combinations
- developed internally
- acquired in business combinations
acquisition method
intangible assets purchased in this method are treat at acquisition the same as long-lived tangible assets
p 330
intangible assets purchased in situations other than business combinations
accounting valuation
intangible assets purchased in situation other business combinations, such as:
* buying a patent
p 331
recorded at their fair value when acquired, which is assumed to be equivalent to the purchase price
intangible assets
Considerable amounts of judgments and assumptions are used by companies to determine the fair values; therefore, analyst should pay attention to
p 331
the types of intangible assets acquired, rather than the precise portion of the purchase price a company allocated to each asset
treatment
internally developed intangible assets
p 331
expensed when incurred
financial ratios
analytical issues related to the capitalising-versus-expensing decision
p 331
comparability across companies and the effect on an individual company’s trend analysis
treatment and valuation
why would a company recognize a lower amount of intangible assets than would be recognized if purchased the same assets externally
p 331
- internally developed assets such as patents and copyrights have lower recognition amounts
- if these assets were developed externally, i.e., purchased from outside the company, they would be capitalised.
classification
costs of internally developed intangible assets on the statement of cash flows
p 331
classified as operating cash outflows
classification
costs of acquiring intangible assets on the statement of cash flows
p 331
classified as investing cash outflows
reason
developing a strategy for developing versus acquiring intangible assets
p 331
it can impact financial ratios
Under IFRS
how does it require expenditures on research be treated
p 331
expensed
* IAS 38 Intangible Assets
Define
research phase of an internal project
p 331
refers to the period during which a company cannot demonstrate that an intangible asset is being created
IFRS vs US GAAP
what part of the treatment of intangibles assets differs during R&D
p 331
- 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
Exceptions
Under US GAAP, these R&D costs are generally capitalised instead of expensed
p 332
certain costs related to software development
threshold
costs incurred to develop a software product for sale are expensed until this point
p 332
- the product’s technological feasibility is established
- they are capitalised thereafter
When one company acquires another company, the transaction is accounted for using
p 333
acquisition method
Under the acquisition method
the company identified as the acquirer allocates…
p 333
the purchase price to each acquired on the basis of its fair value.
Under US GAAP
there are two criteria to judge whether an intangible asset acquired in a business combination should be recognised separately from goodwill
p 333
- the asset must be either an item arising from contractual or legal rights
- an item that can be separated from the acquired company
List
two analytical issues related to the decision of capaitalising versus expensing
p 335
- the effect on a individual company’s trend analysis
- the effect on comparability across companies
effect
in the period of the expenditure, an expenditure that is capitalised
p 335
increases the amount of assets on the balance sheet
capitalization versus expensing
after inital recognition of a capitalised expenditure
p 335
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
impact on financial statements
depreciation and amortisation
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
impact on financial statements
an expenditure that is expenses
p 335
- 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
appearance on statement of cash flows
expenditure that is expensed
p 335
an expenditure that is expensed appears as an operating cash outflow in the period it is made
capitalising versus expensing
results in higher profitability in the first year, but it results in lower profitability in the subsequent years
p 338
capitalising
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
p 338
expensing
effect on profitability
if a company continues to purchase similar or increasing amounts of assets each year
p 338
the profitability-enhancing effect of capitalising continues if the amount of the expenditures in the period continues to be more than the depreciation expense.
