Long Lived Assets

Question 1

How are indefinite-lived intangible assets handled?

Answer 1

Indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually.

Question 2

How are the costs of internally developed intangible handled?

Answer 2

The cost of internally developed intangible assets is expensed.

Question 3

What is the treatment of R&D under IFRS?

Answer 3

1. Research costs are expensed
2. Development costs are capitalized.

Question 4

How are R&D expenses handled under US GAAP?

Answer 4

Both research and development costs are expensed as incurred.

Question 5

What are three allowable depreciation methods?

Answer 5

1. Straight-line
2. Accelerated (declining balance)
3. Units-of-production

Question 6

What difference is there between accelerated depreciation and strait-line in the early years of an asset’s life?

Answer 6

Accelerated depreciation results in higher depreciation expense, lower net income, and lower ROA and ROE compared to straight-line depreciation.

Cash flow is the same assuming tax depreciation is unaffected by the choice of method for financial reporting.

Question 7

How can firms reduce depreciation expense and increase net income?

Answer 7

By using longer useful lives and higher salvage values.

Question 8

What is the formula for strait-line depreciation?

Answer 8

Question 9

What is the calculation for Double-declining balance (DDB)?

Answer 9

Question 10

What is the calculation for units of production depreciation?

Answer 10

Question 11

What is component depreciation?

Answer 11

1. Required by IFRS
2. When significant parts of an asset are identified and depreciated separately.

Question 12

Compare/contrast the allowable depreciation methods for tangible assets and intangible assets with finite lives:

Answer 12

The same methods used for depreciating tangible assets—straight-line, accelerated, and units-of-production—are used for intangible assets with finite lives.

Question 13

Does IFRS or US GAAP give firms the option to revalue assets based on fair value under the revaluation model?

Answer 13

IFRS

GAAP does not permit revaluation

Question 14

Under IFRS, when is an asset impaired?

Answer 14

When its carrying value exceeds the recoverable amount.

Question 15

What is the recoverable amount?

Answer 15

The recoverable amount is the greater of fair value less selling costs and the value in use (present value of expected cash flows).

If impaired, the asset is written down to the recoverable amount. Loss recoveries are permitted, but not above historical cost.

Question 16

Under U.S. GAAP, when is an asset impaired?

Answer 16

If its carrying value is greater than the asset’s undiscounted future cash flows.

Question 17

Under US GAAP, how are impaired assets handled?

Answer 17

The asset is written down to fair value. Subsequent recoveries are not allowed for assets held for use.

Question 18

What is the effect of asset impairments on financial statements?

Answer 18

• Asset impairments result in losses in the income statement.
• Impairments have no impact on cash flow as they have no tax or other cash flow effects until disposal of the asset.

Question 19

When a long-lived asset is sold, what is the recognized gain/loss?

Answer 19

The difference between the sale proceeds and the carrying (book) value of the asset is reported as a gain or loss in the income statement.

Question 20

What is the treatment when a long-lived asset is abandoned?

Answer 20

The carrying value is removed from the balance sheet and a loss is recognized in that amount.

Question 21

What is the treatment of a long-lived asset that is exchanged for another asset?

Answer 21

A gain or loss is computed by comparing the carrying value of the old asset with fair value of the old asset (or fair value of the new asset if more clearly evident).

Question 22

What are the five disclosures that are typically required for long lived assets?(applies to both IFRS & GAAP)

Answer 22

1. Carrying values for each class of asset.
2. Accumulated depreciation and amortization.
3. Title restrictions and assets pledged as collateral.
4. For impaired assets, the loss amount and the circumstances that caused the loss.
5. For revalued assets (IFRS only), the revaluation date, how fair value was determined, and the carrying value using the historical cost model.

Question 23

What is the definition of investment property under IFRS?

Answer 23

1. Property owned for the purpose of earning rent, capital appreciation, or both.
2. Not applicable to US GAAP

Question 24

What are the two methods that firms can use to account for investment property?

Answer 24

1. Cost model or
2. The fair value model.

Question 25

How are increases in fair value using the fair value model different from using the revaluation model?

Answer 25

Unlike the revaluation model for property, plant, and equipment, increases in the fair value of investment property above its historical cost are recognized as gains on the income statement if the firm uses the fair value model. ## Footnote