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Long-Lived Assets
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Contents
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8.
Introduction
Acquisition of Long-Lived Assets
Depreciation and Amortization of Long-Lived Assets
The Revaluation Model
Impairment of Assets
Derecognition
Presentation and Disclosures
Investment Property
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1. Introduction
Long-lived assets are defined as those assets which are expected to provide
future economic benefits extending more than one year
These assets may be tangible, intangible, or financial assets
Major questions:
What value should be shown on the balance sheet?
How should the cost be allocated over the life of the asset?
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Expensing
Total Assets
Equity
Income variability
CFO
CFI
D/E
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Example
Acme Inc. purchased a machine for 10,000. In addition the following costs were
incurred:
1.
2.
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Example
A company borrows 2,000,000 at an interest rate of 5 percent per year on 1 January
2011 to finance construction of a factory that will have a useful life of 40 years.
Construction is completed after two years, during which time the company earns
20,000 by temporarily investing the loan proceeds.
1. How much interest will be capitalized under IFRS and U.S. GAAP?
2. Where will the capitalized borrowing cost appear on the companys financial
statements?
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Intangible Assets
Intangible assets lack physical substance. Classic examples include software, customer
lists, patents, copyrights and trademarks. Accounting for intangible asset depends on
how it is acquired.
Acquired in a business combination
Developed internally
Next slide
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Example
Acme Inc. starts an internal software development project on 1 January 2012. It incurs
expenditures of 10,000 per month during the fiscal year ended 31 December 2012.
By 31 March it is clear that product will be developed successfully and will be used as
intended. How are the software development costs recorded before and after 31
March according to IFRS? According to U.S. GAAP?
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Example
Consider three companies with names based on their depreciation method:
1. Straight Line (SL) Inc.
2. Double Declining Balance (DDB) Inc.
3. Units of Production (UOP) Inc.
Each company purchases identical equipment for 10,000 and makes similar assumptions: estimated
useful life = 4 years; residual value = 1,000; productive capacity = 1,000 units. Production over 4 years:
300, 300, 200, 100. Complete the table below for each company.
Beginning Net
Book Value
Depreciation
Expense
Accumulated
Depreciation
Year 1
Year 2
Year 3
Year 4
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Solution
Straight Line
Double Declining
Balance
Units of Production
Acc. Dep.
Year 1
10,000
2,250
2,250
7,750
Year 2
7,750
2,250
4,500
5,500
Year 3
5,500
2,250
6,750
3,250
Year 4
3,250
2,250
9,000
1,000
Acc. Dep.
Year 1
10,000
5,000
5,000
5,000
Year 2
5,000
2,500
7,500
2,500
Year 3
2,500
1,250
8,750
1,250
Year 4
1,250
250
9,000
1,000
Acc. Dep.
Year 1
10,000
3,000
3,000
7,000
Year 2
7,000
3,000
6,000
4,000
Year 3
4,000
2,000
8,000
2,000
Year 4
2,000
1,000
9,000
1,000
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Example (Continued)
Given the data below, compute the asset turnover ratio, operating profit margin and operating return
on assets for SLD and DDB.
Sales
Year 1
400,000
300,000
30,000
Year 2
400,000
300,000
30,000
Year 3
400,000
300,000
30,000
Year 4
400,000
300,000
30,000
For the solution visit our the FRA tread under IFTs Google Group:
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Straight Line
Accelerated (DDB)
Depreciation expense
Lower
Higher
Net income
Higher
Lower
Assets
Higher
Lower
Equity
Higher
Lower
Return on assets
Higher
Lower
Return on equity
Higher
Lower
Asset turnover
Lower
Higher
Higher
Lower
Above relationships reverse in the later years if the firms capital expenditure decline
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Intangible assets with finite useful lives are amortized over their useful lives.
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4. Revaluation Model
The revaluation model is an alternative to the cost model for the
periodic valuation and reporting of long-lived assets.
IFRS permit the use of either the revaluation model or the cost model
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Example
Scenario 1: Machine costs 10,000 at the start of Period 1. At the end of Period 1 the
fair value of the machine is 12,000. At the end of Period 2 the fair value is 8,000.
Show the impact on the financial statements.
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Example
Scenario 2: Machine costs 10,000 at the start of Period 1. At the end of Period 1 the
fair value of the machine is 8,000. At the end of Period 2 the fair value is 12,000.
Show the impact on the financial statements.
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5. Impairment of Assets
Impairment charges reflect an unanticipated decline in the value of an
asset.
Both IFRS and U.S. GAAP require companies to write down the carrying
amount of impaired assets.
Impairment reversals are permitted under IFRS but not under U.S.
GAAP.
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Impairment Calculation
Under IFRS: Impairment loss = Carrying Value Recoverable amount
Recoverable amount = greater of fair value less cost to sell and value in use
Value in use is present value of cash flow from asset
Under U.S. GAAP: First do the recoverability test to determine whether the asset is
impaired. Asset is impaired if the carrying value is greater than the assets future
undiscounted cash flows
Impairment loss = Difference between fair value and carrying amount
Example 9
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Example
Given the following data, what is the reported value under IFRS and U.S. GAAP.
Carrying amount = 8,000
Undiscounted expected future cash flows = 9,000
Present value of expected future cash flows = 6,000
Fair value if sold = 7,000
Costs to sell = 200
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6. Derecognition
A company derecognizes an asset (i.e., removes it from the financial statements)
when the asset is disposed of or is expected to provide no future benefits from either
use or disposal.
A company may dispose of a long-lived operating asset by selling it, exchanging it, or
abandoning it.
Gain or loss on sales = sales proceeds carrying amount
Example 10
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Exchanged Assets
Carrying value removed from balance sheet
Record fair value of new asset
Gain/loss computed by comparing carrying value of old asset with fair value of
new asset
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8. Investment Property
Investment property is defined as property that is owned (or, in some cases, leased
under a finance lease) for the purpose of earning rentals, capital appreciation, or
both.
Under IFRS, companies are allowed to value investment properties using either a cost
model or a fair value model. The cost model is identical to the cost model used for
property, plant, and equipment, but the fair value model differs from the revaluation
model used for property, plant, and equipment. Under the fair value model, all
changes in the fair value of investment property affect net income.
Under U.S. GAAP, investment properties are generally measured using the cost model.
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Example
What is the treatment of unrealized gains and losses for AFS securities, assets valued
using revaluation model, and assets valued using the fair value model?
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Summary
Acquisition
Impact of Expense versus Capitalize Decision
Impairment
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Conclusion
Read summary
Review learning objectives
Examples
Practice problems: good but not enough
Practice questions from other sources
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