A.2. Fixed and Intangible Assets

Question 1

What is included in the initial recording of fixed assets?

Answer 1

Historical cost, which includes:

• The amount paid for the asset
• All costs necessary to get the asset ready for use

Historical cost includes the purchase price and any costs required to prepare the asset for its intended use, such as installation or renovation costs.

Question 2

How should proceeds from the sale of an asset resulting from preparing land for use be treated?

Answer 2

As a reduction in the historical cost of the land.

For example, if trees are cleared and the timber is sold, the proceeds from the sale of the wood are accounted for as a reduction in the historical cost of the land.

Question 3

What is the purpose of depreciation?

Answer 3

To systematically allocate the costs of a fixed asset over its expected useful life.

Depreciation matches the cost of acquiring the asset with the revenues it generates over its useful life.

Question 4

Under U.S. GAAP, are fixed assets reported at fair value during their life?

Answer 4

No

U.S. GAAP does not attempt to report fixed assets at fair value due to the difficulty in objectively measuring value fluctuations.

Question 5

What is the net book value of fixed assets?

Answer 5

Historical cost of the fixed assets minus accumulated depreciation.

The net book value is the carrying value of fixed assets on the balance sheet.

Question 6

What information is needed to calculate depreciation?

Answer 6

• Estimated useful life
• Estimated salvage value
• Depreciable amount or depreciable base, which is the historical cost of the asset minus its salvage value

These elements are essential for determining the depreciation expense for an asset.

Question 7

What is the straight-line depreciation method?

Answer 7

A method where an equal amount of depreciation is taken each period.

The periodic depreciation is calculated as the depreciable base divided by the estimated useful life.

Question 8

How is depreciation calculated under the double declining balance method?

Answer 8

By applying twice the straight-line rate to the net book value of the asset at the beginning of each year.

This method results in greater depreciation in the early years of an asset’s life.

Question 9

What is the sum-of-the-years’-digits method of calculating depreciation?

Answer 9

A method where the depreciable base (cost less estimated salvage value) is multiplied each period by a fraction that is determined using the estimated useful life of the asset.

The numerator of the fraction is the number of years remaining in the asset’s life, including the year for which depreciation is being calculated. The denominator is the sum of all the asset’s estimated years of useful life.

Question 10

Under IFRS, how should components of a fixed asset with different useful lives be depreciated?

Answer 10

Separately

Each component should be depreciated over its own useful life if they have different usage patterns and useful lives.

Question 11

What is component depreciation under IFRS?

Answer 11

Under IFRS, if individual components of a fixed asset have different usage patterns and useful lives, they must be depreciated separately.

This requirement ensures that each component’s depreciation reflects its actual usage and wear over time.

Question 12

How is the depreciation rate per unit calculated in the units-of-production method?

Answer 12

It is calculated as the depreciable base (cost less the estimated salvage value) divided by the estimated number of units to be produced over the asset’s estimated useful life.

The depreciation recorded for a period is the depreciation rate per unit multiplied by the number of units produced during the period.

Question 13

What is the MACRS method of depreciation used for?

Answer 13

It is used for calculating depreciation for tax purposes in the U.S.

MACRS - Modified Accelerated Cost Recovery System

Question 14

What is the half-year convention in tax depreciation?

Answer 14

It involves taking one-half year’s depreciation in both the first and last year of an asset’s life, regardless of the actual date the asset was placed in service.

Question 15

True or False:

Under U.S. GAAP, fixed assets can be written up to recognize an increase in fair value.

Answer 15

False

U.S. GAAP does not allow fixed assets to be written up to recognize increases in fair value.

Question 16

What triggers a recoverability test for long-lived assets under U.S. GAAP?

Answer 16

• Significant decreases in market price
• Adverse changes in use or condition
• Legal or business climate changes
• Increased costs
• Expected early disposal

A long-lived asset or asset group is tested for recoverability whenever something happens that may cause the carrying amount of the asset or asset group to not be recoverable.

Question 17

What happens if the carrying value of an asset exceeds the sum of its estimated future undiscounted cash flows?

Answer 17

The asset is considered impaired and must be written down to its fair value, recognizing an impairment loss.

Question 18

How is the fair value of an asset determined if there is no active market?

Answer 18

It is determined as the present value of the future net cash flows expected to result directly from the asset’s use and ultimate disposition.

Question 19

What is the impact of an impairment loss on financial statements?

Answer 19

It is reported as a current period loss and included in income from continuing operations before income taxes.

Question 20

Can an impaired asset be written up if its value recovers under U.S. GAAP?

Answer 20

No

Once an asset is impaired and an impairment loss recorded, it cannot be written up in value if its value subsequently recovers.

Question 21

What is the impairment process under IFRS?

Answer 21

A one-step process where the carrying value of the asset is compared to its recoverable amount. If the recoverable amount is less than the asset’s carrying amount, the carrying amount is reduced to its recoverable amount, and the reduction is an impairment loss.

The recoverable amount is the higher of the fair value of the asset minus any costs of sale or its value in use, which is the present value of the future net cash flows expected to be received from the asset.

Question 22

Does IFRS allow for the revaluation of fixed assets?

Answer 22

Yes

Under IFRS, a company may increase the carrying value of its fixed assets if the fair value of that class of assets is materially different from the class’s carrying value.

The increase in value is recognized in accumulated other comprehensive income in the equity section of the balance sheet as a revaluation surplus.

Question 23

How are intangible assets initially recorded in the accounting system?

Answer 23

Intangible assets (other than crypto assets) are initially recorded at the cost paid to acquire them, including expenditures required to make the assets ready for their intended use.

For a patent developed internally, only registration fees and legal fees paid for filing the patent may be capitalized on the balance sheet.

Internally generated assets such as patents (other than registration fees and legal fees for filing the patent) or customer goodwill are not recorded on the balance sheet because they do not meet the definition of an asset.

Question 24

How are research and development costs treated in accounting?

Answer 24

They are generally expensed as incurred and are not capitalized and amortized.

For example, a patent resulting from R&D activities would not lead to an asset on the books of the company that developed it, except for registration fees and legal fees for filing the patent, which may be capitalized.

Question 25

When and how is an intangible asset's cost amortized?

Answer 25

If an intangible asset (other than a crypto asset) has a **finite life**, its cost is amortized over that useful life. ## Footnote The amount amortized is its cost minus any residual value, and the expense is recognized based on the pattern in which the asset will be used up, if that is determinable.

Question 26

What is the treatment for **intangible assets** with **indefinite lives**?

Answer 26

Intangible assets (other than crypto assets) with indefinite lives are **not amortized** but must be tested regularly for **impairment** and written down to their **fair value** if impaired. ## Footnote The useful life is indefinite if there are no factors limiting its useful life, such as the expiration of a patent, and no foreseeable limit on the period it is expected to contribute to cash flows.

Question 27

What is the impairment test for **limited-life intangible assets** (other than crypto assets) that are being amortized?

Answer 27

The company performs a **recoverability test** by comparing the undiscounted sum of future estimated cash flows from the asset’s expected use and its eventual disposal with the book value of the asset. ## Footnote If the book value is greater than this sum, the asset is impaired and written down to its fair value. The fair value is the present value of the future estimated net cash flows, discounted at the company’s market rate of interest.

Question 28

How is **goodwill impairment** assessed and accounted for?

Answer 28

**Step 1** (optional): Make a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit including the goodwill is less than its net carrying amount including the goodwill. If it is, proceed to Step 2. **Step 2**: Compare the fair value of the reporting unit, including the goodwill, with the reporting unit’s carrying amount including the goodwill. If the carrying amount is greater than the fair value, an **impairment loss** is recognized in an amount equal to the excess, up to the amount of goodwill allocated to the reporting unit.

Question 29

What is **goodwill** in the context of business acquisitions?

Answer 29

The amount by which the **purchase price** of a business exceeds the **fair value** of its net identifiable assets. It represents the **future economic benefits** arising from other assets acquired in a business combination that are not individually identified and separately recognized. ## Footnote Goodwill cannot be purchased separately from an acquisition nor developed internally. It is recognized only by the acquirer of a business and only when the acquirer pays more for the acquired business than the fair value of its net assets.

Question 30

How should a company account for **advertising production costs**?

Answer 30

Production costs for advertising and public relations are generally **expensed as incurred**, as an advertising message is produced. However, **ASC 720-35-25-1** provides an option to **defer** reporting advertising production costs as expenses until the first time the advertising takes place. The company must **disclose** this policy in the notes to financial statements. ## Footnote However, if the advertising is not expected to be used, production costs must be expensed immediately.

Question 31

What is a **bargain purchase** in the context of business acquisitions?

Answer 31

It occurs when the **price paid** for a business is less than the **value of the net identifiable assets** acquired. ## Footnote The acquirer must reassess the valuation of assets and liabilities, and any gain from the bargain purchase is recognized in income from continuing operations.

Question 32

Under IFRS, when can internal development costs of intangible assets be capitalized?

Answer 32

When the **technological** and **economic feasibility** of the project can be **demonstrated**. ## Footnote This differs from U.S. GAAP, where internal development costs are usually expensed as incurred unless a specific standard allows capitalization.

Question 33

What is the accounting treatment for **crypto assets** effective for fiscal years beginning after December 15, 2024?

Answer 33

Crypto assets are to be measured at **fair value**, with changes in fair value recognized in net income, and presented separately from other intangible assets in the statement of financial position. ## Footnote Significant disclosures are required for crypto assets, including cost basis, fair value, and reconciliation of activity.

Question 34

What **disclosures** are required for crypto assets at annual reporting periods?

Answer 34

* Method used to determine cost basis for computing gains and losses * Line item for gains and losses on crypto assets in the income statement * Reconciliation of activity from opening to closing balances, including additions, dispositions, and gains/losses ## Footnote The reconciliation must include descriptions of activities resulting in additions and dispositions, and cumulative realized gains and losses.