FINANCIAL ACCOUNTING:

ADVANCED TOPICS
OKTAY URCAN

Long-Term Assets
Overview and Asset Recognition Criteria
AGENDA

 Accounting for long-term assets

 Accounting for depreciation
 Accounting for disposal and impairment of long-term assets

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ASSET RECOGNITION CRITERIA

An asset is created on the balance sheet (i.e., capitalization) if the expenditure satisfies
the asset recognition criteria:

1. The benefit is quantifiable

2. Rights to use are obtained due to past transactions

Tangible versus intangible asset

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ASSET RECOGNITION CRITERIA: EXAMPLES

Buildings: Asset
Land: Asset
R&D expenditures: Expense
Advertising: Expense
Training: Expense
Patent purchased: Asset

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FINANCIAL ACCOUNTING:
ADVANCED TOPICS
OKTAY URCAN

Long-Term Assets
Fixed Assets
FIXED ASSETS

During acquisition:
• All costs until the asset is ready to use
• All construction costs

Post acquisition:
• C osts which (1) increase productivity, (2) increase useful life, and (3) decrease
operating costs

• Maintenance  Expense

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TREATMENT OF CAPITALIZED COSTS
OVER THE LIFE OF THE ASSET
• Value of the asset is reduced gradually over the life of the asset
• This process is called:
− Depreciation for tangible assets
− Depletion for natural resources
− Amortisation for intangible assets
• Depreciation does not necessarily track market value of the asset

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TREATMENT OF CAPITALIZED COSTS
OVER THE LIFE OF THE ASSET (CONT.)
• Depreciation requires estimating
− S alvage value
− Useful life
− Depreciation method

• Depreciation methods:
− Straight line: C onstant depreciation over time (most common)
− Accelerated: Decreasing depreciation over time

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STRAIGHT LINE METHOD
• Annual depreciation = (Original cost - S alvage value) / useful life

Example:
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is 10
years with a salvage value of $2,0 0 0.

Assets SHE
Cash PPE AD IS RE

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STRAIGHT LINE METHOD
• Annual depreciation = (Original cost - S alvage value) / useful life

Example:
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is 10
years with a salvage value of $2,0 0 0.

Assets SHE
Cash PPE AD IS RE

Truck purchase (35,000) 35,000

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STRAIGHT LINE METHOD
• Annual depreciation = (Original cost - S alvage value) / useful life

Example:
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is 10
years with a salvage value of $2,0 0 0.
Accumulated
Depreciation
Assets SHE
Cash PPE AD IS RE

Truck purchase (35,000) 35,000 (35,0 0 0 - 2,0 0 0 ) / 10

Depreciation (3,300) (3,300)

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FINANCIAL ACCOUNTING:
FOUNDATIONS
OKTAY URCAN

Long-Term Assets
Disposal of Fixed Assets
DISPOSAL OF FIXED ASSETS

• Net book value = C ost of the asset – Accumulated depreciation

• Gain/Loss on disposal = S ale price – NBV

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DISPOSAL OF FIXED ASSETS: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The truck is sold after 5 years of usage for
$20,0 0 0.

Assets SHE
Cash PPE AD IS RE

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DISPOSAL OF FIXED ASSETS: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The truck is sold after 5 years of usage for
$20,0 0 0.

Assets SHE
Cash PPE AD IS RE
$3,30 0 *5

Ending balance (35,000) 35,000 (16,500) (16,500)

Year 5

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DISPOSAL OF FIXED ASSETS: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The truck is sold after 5 years of usage for
$20,0 0 0.

Assets SHE
Cash PPE AD IS RE

Ending balance (35,000) 35,000 (16,500) (16,500)

Year 5
Disposal 20,000 (35,000) 16,500 1,500
NBV = 35,0 0 0 -16,50 0 = 18,50 0 Gain on disposal

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FINANCIAL ACCOUNTING:
ADVANCED TOPICS
OKTAY URCAN

Long-Term Assets
Gross vs. Net PPE
GROSS VS. NET PPE

Gross PPE – Accumulated Depreciation = Net PPE

Gross PPE Acc. Depreciation Net PPE

Opening balance Opening balance Opening balance

+ Additions + Depreciation + Additions

- S ales (historical) - S ales (acc dep) - S ales (nbv)

- Depreciation
C losing balance C losing balance C losing balance

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ILLINI SUPERMARKET: EXAMPLE

Illini supermarket has the following balances on its balance sheet:

Account Year 2015 Year 2014
Gross PPE 65,0 0 0 40,0 0 0
Accumulated depr. 25,0 0 0 15,0 0 0
Depreciation expense 15,0 0 0

Assume that Illini S upermarket purchases new fixed assets worth $35,0 0 0 in year
20 15 and sells a truck for $25,0 0 0 in cash.

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ILLINI SUPERMARKET: EXAMPLE

1. What is the original cost of the truck sold in year 20 15?

Gross PPE
Opening 40,0 0 0
+ New purchases 35,0 0 0
- PPE sold ?
= C losing 65,0 0 0

? = $10,0 0 0

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ILLINI SUPERMARKET: EXAMPLE

2. What is the accumulated depreciation of the truck sold in year 20 15?

Accumulated Depreciation
Opening 15,0 0 0
+ Depreciation expense 15,0 0 0
- Acc depr of PPE sold ?
= C losing 25,0 0 0

? = $5,0 0 0

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ILLINI SUPERMARKET: EXAMPLE

3. What is the gain/loss on the sale of the truck?

Gain / loss = S ale price – NBV

= 25,0 0 0 – [10,0 0 0 (from Q1) – 5,0 0 0 (from Q2)]
= $20,0 0 0 Gain

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FINANCIAL ACCOUNTING:
ADVANCED TOPICS
OKTAY URCAN

Long-Term Assets
Accounting for Asset Impairments
ACCOUNTING FOR ASSET IMPAIRMENTS

• S ignificant decrease in the value of an asset

• Accounting for asset impairment

‾ Remove accumulated depreciation of the asset
‾ Reduce the value of the asset to impaired amount
‾ Recognize a loss on the income statement
‾ Permanent

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ASSET IMPAIRMENT: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The value of the truck after 2 years of
usage is $20,0 0 0. The truck is depreciated using straight-line depreciation.

Assets SHE

Cash PPE AD IS RE

Opening bal.

Impairment

Closing
balance
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ASSET IMPAIRMENT: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The value of the truck after 2 years of
usage is $20,0 0 0. The truck is depreciated using straight-line depreciation.

Assets SHE

Cash PPE AD IS RE

Opening bal. (35,000) 35,000 (6,600) (6,600)

Impairment

Closing
balance
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ASSET IMPAIRMENT: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The value of the truck after 2 years of
usage is $20,0 0 0. The truck is depreciated using straight-line depreciation.

Assets SHE

Cash PPE AD IS RE

Opening bal. (35,000) 35,000 (6,600) (6,600)

Impairment (15,000) 6,600 (8,400)

Closing
balance
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ASSET IMPAIRMENT: EXAMPLE
Illini supermarket acquires a new truck by paying $35,0 0 0. Estimated useful life is
10 years with a salvage value of $2,0 0 0. The value of the truck after 2 years of
usage is $20,0 0 0. The truck is depreciated using straight-line depreciation.

Assets SHE

Cash PPE AD IS RE

Opening bal. (35,000) 35,000 (6,600) (6,600)

Impairment (15,000) 6,600 (8,400)

Closing (35,000) 20,000 (15,000)

balance
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FINANCIAL ACCOUNTING:
ADVANCED TOPICS
OKTAY URCAN

Long-Term Assets
Walmart Assets
WALMART ASSETS 2015

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NOTE 1: PROPERTY AND EQUIPMENT

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WALMART INCOME STATEMENT 2015

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WALMART 2015 DEPRECIATION EXPENSE

• Note 1: Depreciation expense for property and equipment for fiscal 2015, 2014, and 2013 was $9.1
billion, $8.8 billion, and $8.4 billion, respectively.

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SUMMARY

In this module we discussed

 Accounting for long-term (fixed) assets
 Accounting for depreciation
 Accounting for disposal and impairment of long-term assets

In the next module we will discuss accounting for liabilities.

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