2015, Study Session # 9, Reading # 30

LONG-LIVED ASSETS
G/W
SL
RV
BV
B.S
PP&E
SV

=
=
=
=
=
=

Goodwill
Straight Line
Residual Value
Book Value
Balance Sheet
Property, Plant &
Equipment
= Salvage Value

30.a

Expenditure can either be capitalized as an asset (investing outflow) or expensed in I.S.

Nonmonetary exchange, cost is based on F.V.

If expensed then operating outflow, total CF is unaffected by expensing vs. capitalizing
decision.

NRV
FV
CF
BC

=
=
=
=

DDB =
CV =
HC =
G/L =

Capitalized Interest

Net Realizable Value

Fair Value
Cash Flows
Business
Combination
Double Declining
Balance
Carrying Value
Historical Cost
Gain & Loss

Interest cost is capitalized when an asset is constructed for own use or for resale under
both standards.

Interest rate is based either on debt acquired to specifically finance the assets
construction or the firms existing borrowings.

Interest cost is charged to I.S through depreciation or COGS.

In CF statement, cap. Interest is an outflow from investing activities.

Income earned by temporarily investing borrowed funds reduces borrowing costs
available for capitalization (IFRS). No reduction under U.S. GAAP.

Effects of capitalizing VS. Expensing

Items
Total assets
Equity
Income variability
Net income (1st year)
Net income (subsequent years)
CFO
CFI
Debt-to-equity & debt ratio
Interest coverage (1st year)
Interest coverage (subsequent
years).

Capitalizing
Higher
Higher
Lower
Higher
Lower
Higher
Lower
Lower
Higher
Lower

Expensing
Lower
Lower
Higher
Lower
Higher
Lower
Higher
Higher
Lower
Higher

Analyst may reverse effect of capitalized interest & restate

financial statements & ratios.

Many analysts consider total interest expense when calculating
interest coverage ratios.

30.b

Intangible assets long term assets that lack physical substance (e.g. brand
name, copyrights etc).

Finite-life intangible asset amortized; Indefinite-life impairment test.

Intangible Assets

Identifiable Intangible assets

Capable of being separated from firms, controlled by firms
& expected to provide future eco benefit (IFRS).

Future eco benefit must be probable & asset cost can be
measured reliably.

Unidentifiable Intangible assets

Cant purchase separately & may have indefinite life (e.g.
G/W).

G/W is excess of purchase price over FV of identifiable net
assets.

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2015, Study Session # 9, Reading # 30

30.b

Intangible Assets

Created Internally

Expensed as incurred except following exceptions.
R&D Costs

IFRS

U.S.GAAP
Expensed

Research cost expensed

development capitalized.

Software development cost

IFRS

Obtained in B.C

Initially at fair value.

If part of a group then
purchase price allocated
to each asset based on its
FV.

Analyst is more interested
in type of asset rather
value.

Capitalizing intangible
assets have similar effects
as capitalizing other
expenditures.

Acquisition method is
used for B.C.

Purchase price is allocated
to assets & liabilities of
acquired firm on basis of
their FV, any remaining is
G/W.

U.S.GAAP
Same treatment as IFRS
for sale, capitalized for
own use once probability
of completion is
determined.

For sale or own use

expensed until technological
feasibility, then capitalized.

30. c,d

Purchased

Depreciation systematic allocation of an assets cost over time.

Carrying value net value on B.S.
Historical cost original purchase price + installation & transportation.
Dep. is a real & significant operating expense.
Analyst should compare the reported depreciation to eco. dep. (actual decline in value).

Depreciation Methods

Straight-line depreciation

Same amount each year.

Dep. expense = (original cost SV)
/ useful life.

Accelerated depreciation

More dep. in early years & less in later years.

Less N.I in early years.

DDB dep. in year X =

  


Units-of-production

Based on asset production activity rather time.

Dep. =

BV 

 
      

Once CV reaches SV, no additional dep expense.

Useful Lives & salvage values

Longer useful life & higher salvage value
dep. N.I & vice versa.

in estimate (useful life or SV ) affects financial statements prospectively.

Estimate involved when allocating dep. exp between COGS & SG&A by a manufacturing firm
(affect GP margin).

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output units in period

2015, Study Session # 9, Reading # 30

30. c,d

Component Depreciation

IFRS

U.S.GAAP

To depreciate components of assets

separately useful life estimates are required.

Dep.exp of each component is computed
separately.

Allowed but seldom used.

30.e

Amortization is identical to the depreciation of tangible assets, (same methods & estimates are used).

Indefinite life intangibles are tested for impairment at least annually.

30.f
Example

30.g

Most long-lived assets carried at depreciated cost & no FV alternative under U.S.GAAP.
IFRS provide alternative revaluation model (long-lived assets at FV).
FV < carrying amount loss in I.S,
income & and thus equity.
Subsequent increase gain in I.S up to previous loss and any excess in equity.
 in asset value above carrying amount component of shareholders equity (revaluation surplus).
Subsequent decline reduce surplus and remainder is recorded as loss in I.S.
Upward revaluation results in  total assets & equity, dep. exp &
profitability in periods after revaluation.

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2015, Study Session # 9, Reading # 30

Impairment

30.h

IFRS

U.S.GAAP

If CV > recoverable amount then impaired.

Recoverable amount = greater of, FV selling cost or
value in use.

Value in use = PV of future CF stream.

If impaired, B.S value is recoverable amount & loss (CV
recoverable amount) is recorded in I.S.

Loss reversal is allowed (limited to original loss).

Long lived assets held for sale

If firm reclassify from held for use to held for sale,
impairment test, impaired if CV > NRV, NRV at B.S &
loss in I.S.

Loss reversal allowed under IFRS & U.S.GAAP (limited
to original impairment loss).

Impaired if firms unable to recover CV through future

use.

Impairment Steps

Recoverability

Loss measurement

Impaired if CV >
future undiscounted
CF.

Value written down

to FV on B.S & loss
(CV FV) in I.S.

Loss recovery is not
permitted.

30.i

Derecognition

Sold

Abandoned

Diff. b/w sale proceeds & CV G/L

in I.S.

G/L as part of other G/L or reported
separately if material.

G/L removed from N.I when
calculating CFO from indirect
method.

No proceeds.

CV removed from B.S & loss in I.S.

Exchanged

G/L is computed by comparing CV of
old asset with FV of old asset (or FV
of new asset if more evident).

CV of old asset removed & new
asset recorded at FV.

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2015, Study Session # 9, Reading # 30

30.j

Disclosures (PP&E Intangible assets)

IFRS

U.S.GAAP

PP&E

Intangible assets

PP&E

Intangible assets

Basis for measurement, useful life

& dep. method.

Gross CV, acc. Dep. & reconciliation
of carrying amount from beg. to
ending period.

Agreement to acquire PP&E in
future & assets pledge as collateral.

Revaluation date, CV using H.C
model & how FV is determined.

Carrying amount under cost model
and revaluation surplus

Amount & reversals of impairment
losses recognized in the period.

Circumstances & main events
leading to loss recognition in I.S.

Similar as PP&E
except, must
disclose whether
useful lives are finite
or indefinite.

Dep. exp & balance of major classes

of assets by nature & function.

Description of dep. methods for
major asset classes.

Accumulated Dep. By major classes
or total.

Description of impaired asset &
impairment circumstances.

How FV is determined.

Amount & location of loss in
financial statements.

Provide an estimate of
amortization expense for
next five years.

Gross carrying amount and
accumulated amortization
expense in total and by
major asset classes.

The aggregate amortization
expense.

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