33.0 What are long-lived assets?
also referred to as non-current assets or long-term assets, are assets that are expected to provide economic benefits over a future period of time, typically greater than one year. 1 Long-lived assets may be tangible, intangible, or financial assets.
Examples of long-lived tangible assets, typically referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and equipment, and vehicles;
examples of long-lived intangible assets (assets lacking physical substance) include patents and trademarks; and examples of long-lived financial assets include investments in equity or debt securities issued by other entities.
33.0 The costs of most long-lived assets are capitalised and then allocated as expenses in the profit or loss (income) statement over the period of time during which they are expected to provide economic benefits.
But what are the two main types of long-lived assets with costs that are typically not allocated over time?
LAND - which is not depreciated
and intangible assets with indefinite useful lives
Additional issues = treatment of subsequent costs incurred related to that asset, the use of the cost model versus the revaluation model, unexpected declines in the value of the asset, classification of the asset with respect to intent, and the derecognition of the asset.
33.0 Where is PPE recorded? (if it has a life of longer than one year and is intended to be held for company’s own use)
they are recorded on the balance sheet at cost, which is typically the same as their fair value
33.0 How do we account for an intangible asset?
Accounting for an intangible asset depends on how the asset is acquired. If several assets are acquired as part of a group, the purchase price is allocated to each asset on the basis of its fair value. An asset’s cost potentially includes expenditures additional to the purchase price.
33.0 what is the carrying amount of an asset?
The carrying amount (also called book value) of an asset is the value at which the asset is recorded on the balance sheet after accounting for depreciation, amortization, or impairment.
Carrying amount = Original cost − Accumulated depreciation − Accumulated impairment
33.0 IFRS and US GAAP require that for a company to recognize a gain or loss on a nonmonetary exchange…
the transaction must have economic substance.
33.0 When costs of PPE are capitalised and what are expensed?
capitalised = all costs that are necessary to get the new machine ready for its intended use
expensed = costs to do with the machine that are not necessary to get the asset ready for its intended use
ongoing costs - repairs that are meant to extend the useful life of the asset are capitalised, but expense costs that does not extend the life or alter the productive capacity of the buildings
33.0 To finance construction, any borrowing costs incurred prior to the asset being ready for its intended use are capitalised as part of the cost of the asset.
If income is earned on temporarily investing the borrowed monies, where does IFRS and US GAAP differ?
Under IFRS, but not under US GAAP, income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalisation.
33.0 Expensed interest is expressed how under IFRS and GAAP?
Expensed interest may be classified as an operating or financing cash outflow under IFRS and is classified as an operating cash outflow under US GAAP.
33.0 What is the difference between depreciation and amortisation?
Depreciation and amortisation are effectively the same concept, with the term depreciation referring to the process of allocating tangible assets’ costs and the term amortisation referring to the process of allocating intangible assets’ costs.
33.0 What is an asset’s carrying amount?
An asset’s carrying amount is the amount at which the asset is reported on the balance sheet.
Under the cost model, at any point in time, the carrying amount (also called carrying value or net book value) of a long-lived asset is equal to its historical cost minus the amount of depreciation or amortisation that has been accumulated since the asset’s purchase (assuming that the asset has not been impaired, a topic which will be addressed later).
33.0 What are the three depreciation methods?
Depreciation methods include the straight-line method, in which the cost of an asset is allocated to expense evenly over its useful life;
accelerated methods, in which the allocation of cost is greater in earlier years;
and the units-of-production method, in which the allocation of cost corresponds to the actual use of an asset in a particular period.
33.0 Detail the straight line method for depreciation:
Using the straight-line method, depreciation expense is calculated as depreciable cost divided by estimated useful life and is the same for each period. Depreciable cost is the historical cost of the tangible asset minus the estimated residual (salvage) value
33.0 Detail the accelerated method for depreciation:
A commonly used accelerated method is the declining balance method, in which the amount of depreciation expense for a period is calculated as some percentage of the carrying amount (i.e., cost net of accumulated depreciation at the beginning of the period). When an accelerated method is used, the estimated residual value is not used to calculated the depreciation expense, but the carrying amount should not be reduced below the estimated residual value.
33.0 Detail the units-or-production method:
In the units-of-production method, the amount of depreciation expense for a period is based on the proportion of the asset’s production during the period compared with the total estimated productive capacity of the asset over its useful life.
The depreciation expense is calculated as depreciable cost times production in the period divided by estimated productive capacity over the life of the asset.
Equivalently, the company may estimate a depreciation cost per unit (depreciable cost divided by estimated productive capacity) and calculate depreciation expense as depreciation cost per unit times production in the period.
33.0 In most countries, companies must use the same depreciations methods on…
both financial and tax reporting.
in the US, they can use different. As a result of using different depreciation methods for financial and tax reporting, pre-tax income on the income statement and taxable income on the tax return may differ.
Although these differences eventually reverse because the total depreciation is the same regardless of the timing of its recognition in financial statements versus on tax returns, during the period of the difference, the balance sheet will show what is known as deferred taxes.
33.0 What is the component methods of depreciation?
Although no significant differences exist between IFRS and US GAAP with respect to the definition of depreciation and the acceptable depreciation methods, IFRS require companies to use a component method of depreciation.
Companies are required to separately depreciate the significant components of an asset (parts of an item with a cost that is significant in relation to the total cost and/or with different useful lives) and thus require additional estimates for the various components.
For instance, it may be appropriate to depreciate separately the engine, frame, and interior furnishings of an aircraft. Under US GAAP, the component method of depreciation is allowed but is seldom used in practice.
33.0 Describe the amortisation methods:
Only those intangible assets assumed to have finite useful lives are amortised over their useful lives, following the pattern in which the benefits are used up.
Acceptable amortisation methods are the same as the methods acceptable for depreciation.
Assets assumed to have an indefinite useful life (in other words, without a finite useful life) are not amortised. An intangible asset is considered to have an indefinite useful life when there is “no foreseeable limit to the period over which the asset is expected to generate net cash inflows” for the company
33.0 What would some examples of intangible assets in which you would amortise be?
WITH FINITE USEFUL LIFE:
Intangible assets with finite useful lives include an acquired customer list expected to provide benefits to a direct-mail marketing company for two to three years, an acquired patent or copyright with a specific expiration date, an acquired license with a specific expiration date and no right to renew the license, and an acquired trademark for a product that a company plans to phase out over a specific number of years.
33.0 What would some examples of intangible assets in which you would not amortise be?
INFINITE USEFUL LIFE
Examples of intangible assets with indefinite useful lives include an acquired license that, although it has a specific expiration date, can be renewed at little or no cost and an acquired trademark that, although it has a specific expiration, can be renewed at a minimal cost and relates to a product that a company plans to continue selling for the foreseeable future.
33.0 What is the revaluation model?
PERMITTED UNDER IFRS BUT NOT UNDER GAAP
The alternative model of reporting long-lived assets is the revaluation model, which is permitted under IFRS but not under US GAAP. Under the revaluation model, a company reports the long-lived asset at fair value rather than at acquisition cost (historical cost) less accumulated depreciation or amortisation, as in the cost model.
33.0 How do the carrying amounts of classes of long-lived assets change under the revaluation model?
Revaluation changes the carrying amounts of classes of long-lived assets to fair value (the fair value must be measured reliably).
Under the cost model, carrying amounts are historical costs less accumulated depreciation or amortisation.
Under the revaluation model, carrying amounts are the fair values at the date of revaluation less any subsequent accumulated depreciation or amortisation.
33.0 What is a key difference between cost models and the revaluation model?
A key difference between the two models is that the cost model allows only decreases in the values of long-lived assets compared with historical costs but the revaluation model may result in increases in the values of long-lived assets to amounts greater than historical costs.
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QUANT METHODS 1, 3 ...224
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QUANT METHODS MODULE 231
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QUANT METHODS MODULE 30
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ECONOMICS MODULE 1269
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ECONOMICS MODULE 1322
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ECONOMICS MODULE 1436
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ECONOMICS MODULE 1533
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ECONOMICS MODULE 1624
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ECONOMICS MODULE 1721
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ECONOMICS MODULE 1843
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ECONOMICS MODULE 1914
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CORPORATE ISSUERS MODULE 20+2124
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CORPORATE ISSUERS MODULE 2214
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CORPORATE ISSUERS MODULE 2328
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CORPORATE ISSUERS MODULE 2430
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CORPORATE ISSUERS MODULE 2530
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CORPORATE ISSUERS MODULE 2616
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FSA PRE-REQ25
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FSA MODULE 2719
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FSA MODULE 2869
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FSA MODULE 2946
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FSA MODULE 30-3164
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FSA MODULE 3242
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FSA MODULE 3355
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FSA MODULE 3449
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FSA MODULE 3551
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FSA MODULE 3614
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FSA MODULE 3761
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FSA MODULE 3817
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EQUITY MODULE 3936
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EQUITY MODULE 4020
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EQUITY MODULE 4110
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EQUITY MODULE 4221
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EQUITY MODULE 4319
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EQUITY MODULE 4414
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EQUITY MODULE 4518
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EQUITY MODULE 4650
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FIXED INCOME MODULE 4717
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FIXED INCOME MODULE 4840
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FIXED INCOME MODULE 4913
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FIXED INCOME MODULE 50+5122
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FIXED INCOME MODULE 5219
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FIXED INCOME MODULE 5314
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FIXED INCOME MODULE 5418
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FIXED INCOME MODULE 5520
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FIXED INCOME MODULE 5621
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FIXED INCOME MODULE 5717
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FIXED INCOME MODULE 5814
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FIXED INCOME MODULE 5914
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FIXED INCOME MODULE 6025
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FIXED INCOME MODULE 61+6218
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FIXED INCOME MODULE 63+64+6538
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DERIVATIVES MODULE 66+6732
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DERIVATIVES MODULE 6817
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DERIVATIVES MODULE 6922
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DERIVATIVES MODULE 7018
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DERIVATIVES MODULE 71+72+7341
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DERIVATIVES MODULE 7413
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DERIVATIVES MODULE 759
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ALTERNATIVES MODULE 7642
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ALTERNATIVES MODULE 7739
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ALTERNATIVES MODULE 7849
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ALTERNATIVES MODULE 7939
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ALTERNATIVES MODULE 8035
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ALTERNATIVES MODULE 8138
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ALTERNATIVES MODULE 8241
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PM MODULE 83+8445
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PM MODULE 858
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PM MODULE 8612
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PM MODULE 8720
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PM MODULE 8823
