Kế toán, kiểm toán - Chapter 11: Property, pland and equipment, investment property, and intangible assets: utilization and impairment

PROPERTY, PLAND AND EQUIPMENT,INVESTMENT PROPERTY, AND INTANGIBLE ASSETS: UTILIZATION AND IMPAIRMENTChapter 11Some of the cost is expensed each period.Cost Allocation – An OverviewExpenseAcquisitionCost(Balance Sheet)(Income Statement)The matching principle requires that part of the acquisition cost of property, plant and equipment, investment property and intangible assets be expensed in periods when the future revenues are earned.Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements. Caution! Depreciation, depletion, and amortizationare processes of cost allocation, not valuation!Depreciation on the Statement of Financial PositionCost Allocation – An OverviewCost allocation requires three piecesof information for each asset:The estimated expected use from an asset. Total amount of cost to be allocated.Cost - Residual Value (at end of useful life)The systematic approach used for allocation. Allocation BaseService LifeAllocation MethodMeasuring Cost AllocationTime-based MethodsStraight-line (SL)Accelerated Methods Sum-of-the-years’ digits (SYD)Declining Balance (DB)Activity-based methodsUnits-of-production method (UOP).Group andcomposite methodsTaxdepreciationDepreciationStraight-LineThe most widely used and most easily understood method.Results in the same amount of depreciation in each year of the asset’s service life.On January 1, we purchase equipment for $50,000 cash. The equipment has an estimated service life of 5 years and estimated residual value of $5,000. What is the annual straight-line depreciation?Residual ValueBV = Residual Value at the end of the asset’s useful life.Straight-LineLife in YearsDepreciationAccelerated MethodsNote that total depreciation over the asset’s usefullife is the same as the straight-line method.Accelerated methods result in more depreciation in the early years of an asset’s useful life and less depreciation in later years of an asset’s useful life.Sum-of-the-years’-digits (SYD) depreciation2Sum-of-the-Years’ Digits (SYD)On January 1, we purchase equipment for $50,000 cash. The equipment has a service life of 5 years and an estimated residual value of $5,000. Using SYD depreciation, compute depreciation for the first two years.Sum-of-the-Years’ Digits (SYD)Residual ValueLife in YearsDepreciationSum-of-the-Years’ Digits (SYD)Declining-Balance (DB) MethodsDB depreciationBased on the straight-line rate multiplied by an acceleration factor. Computations initially ignore residual value.Stop depreciating when:BV = Residual ValueDouble-Declining-Balance (DDB) depreciationis computed as follows:Note that the Book Value will get lower each year.On January 1, we purchase equipment for $50,000 cash. The equipment has a service life of 5 years and an estimated residual value of $5,000.What is depreciation for the first two years usingdouble-declining-balance?Declining-Balance (DB) MethodsDepreciation forced so that BV = Residual Value.Life in YearsDepreciationDeclining-Balance (DB) MethodsUnits-of-ProductionOn January 1, we purchased equipment for $50,000 cash. The equipment is expected to produce 100,000 units during its life and has an estimated residual value of $5,000.If 22,000 units were produced this year, what is the amount of depreciation?Units-of-ProductionUse of Various Depreciation MethodsU.S. GAAP vs. IFRSComponent depreciation is allowed but not often used in practice.The depreciable base is determined by subtracting estimated residual value from cost. Annual reviews of residual values are not required.Each component of an item of property, plant, and equipment is depreciated separately if its cost is significant to the total cost of the item.Depreciable base is determined by subtracting estimated residual value from cost. IFRS requires a review of residual values annually.Component Depreciation, Depreciable Base, and Residual ValueGroup and Composite MethodsAssets are grouped by common characteristics.An average depreciation rate is used.Annual depreciation is the average rate × the total group acquisition cost.Accumulated depreciation records are not maintained for individual assets.If assets in the group are sold, or new assets added, the composite rate remains the same.When an asset in the group is sold or retired, debit accumulated depreciation for the difference between the asset’s cost and the proceeds. U.S. GAAP vs. IFRSProperty, plant, and equipment is reported in the statement of financial position at cost less accumulated depreciation (book value).Revaluation is prohibited.Property, plant, and equipment may be reported at cost less accumulated depreciation, or alternatively, at fair value (revaluation).If revaluation is chosen, all assets within a class of property, plant, and equipment must be revalued on a regular basis.Valuation of Property, Plant, and EquipmentAmortization of Intangible AssetsThe amortization process also uses the straight-line method, but usually assumes residual value = 0.Amortization period is the shorter ofthe asset’s legal or contractual life.The amortization entry is:A contra-asset account is generally not used when recording the amortization of intangible assets.Amortization expense .................................. $$$ Intangible asset ........ $$$To record amortization expense.Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and $1,000 in federal registration fees. The device has a contractual (useful) life of 5 years. The legal life is 20 years.For year 1, what is Torch’s amortization expense?Amortization of Intangible AssetsAmortization expense ................................... 600 Patent ........................ 600To record amortization of patent.Not amortized.Subject to assessment for impairment ofvalue and may bewritten down.Goodwill and TrademarksIntangible Assets notSubject to AmortizationU.S. GAAP vs. IFRSIntangible assets are reported at cost less accumulated amortization.U.S.GAAP prohibits revaluation of any intangible asset. Intangible assets may be reported at (1) cost less accumulated amortization or (2) fair value, if fair value can be determined in an active market.If revaluation is chosen, all assets within the class of intangibles must be revalued on a regular basis. Goodwill cannot be revalued. Valuation of Intangible AssetsPartial-Period Depreciation Half-Year ConventionTake ½ of a year of depreciation in the year of acquisition, and the other ½ in the year of disposal.Pro-rating the depreciation based on the date of acquisition is time-consuming and costly. A commonly used alternative is the . . . ESTIMATED service lifeESTIMATED residual valueChanges in estimates are accounted for prospectively. The book value less any residual value at the date of change is depreciated over the remaining useful life. A disclosure note should describe the nature and effect of a change.On January 1, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. At the beginning of the fourth year, it was decided that there were only 5 years remaining, instead of 7 years. Calculate depreciation expense for the fourthyear using the straight-line method.Changes in EstimatesWhat happens if we change depreciation methods?Changes in EstimatesChange in Depreciation MethodWe account for these changes prospectively, exactly as we would any other change in estimate.A change in depreciation, amortization, or depletion method is considered a change in accounting estimate.On January 1, 2011, Matrix, Inc., purchased equipment for $400,000. Matrix expected a residual value $40,000, and a service life of 5 years. Matrix uses the double-declining-balance method to depreciate this type of asset. During 2013, the company switched from double-declining balance to straight-line depreciation. The residual value remained at $40,000. Let’s determine the amount of depreciation to be recorded at the end of 2013.Change in Depreciation MethodDecember 31, 2013:Depreciation expense ................................... 34,667 Accumulated depreciation................ 34,667To record depreciation expense.Error CorrectionErrors found in a subsequent accounting period are corrected by . . . Entries that restate the incorrect account balances to the correct amount. Restating the prior period’s financial statements. Reporting the correction as a prior period adjustment to Beginning R/E.In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on each financial statement line item affected and earnings per share.Subsequent Changes in Fair Value Subsequent Change in Fair ValueCost ModelProperty, plant and equipment, investment property and intangible assets Revaluation ModelProperty, plant and equipment and intangible assets onlyFair Value ModelInvestment property onlyCost ModelCarry at costIgnore all subsequent changes in fair value of the assetsAllocation RequiredDepreciation or amortization recognized every periodDisclosuresrequired when the fair values of its assets are materially different from the assets’ carrying amountsImpairmentAssets are not exempted from impairment analysisRevaluation ModelAll assets within a class of property, plant and equipment and intangible assets must be revalued on a regular basis. Records the difference between(1) the book value of a revalued asset and (2) its fair value at the end of each financial periodA revaluation surplus is reported as other comprehensive income and accumulated in a revaluation surplus account in equity unless a revaluation deficit has been charged to the income statement previouslyRevaluation deficit is recognized as an expense in the income statement unless there is a balance in the revaluation surplus accountRevaluation ModelPrevious Period / Current PeriodNet Revaluation DeficitNet Revaluation SurplusRevaluation LossLoss is recognized as an expenseBalance in the revaluation reserve is eliminated before charging the revaluation deficit as an expense to the income statementRevaluation GainPart of the current revaluation gain is directly credited to the income statement, up to the total amount of revaluation deficit previously recognized as an expense. The rest is will be as per..revaluation surplus is reported as other comprehensive income and accumulated in a revaluation reserveRevaluation ModelDefinition of Fair value: The amount for which an asset could be exchanged between knowledgeable and willing parties in an arm’s length transaction.For intangible assets, fair values must be determined with reference to an active market. For property, plant and equipment’s fair value can be determined with reference to an active market, or it can be estimated using an income or a depreciated replacement cost approach.Revaluation Model.Depreciation or amortization has to be recognized in the current financial year before computing revaluation surplus or deficitThe accumulated depreciation or amortization can either be:Eliminated against the gross carrying amount of asset before restating that net amount to the revalued amountRestated proportionally with the gross carrying amount of the asset so that the difference between the restated accumulated depreciation or amortization and the restated carrying amount is equal to the revalued amountRevaluation ModelDerecognitionAsset’s carrying amount, accumulated depreciation or amortization and accumulated impairment are written offAny gain or loss on disposal is recognizedRealizing revaluation surplus as the relating asset is being usedThe realized amount is the difference between (1) the depreciation or amortization based on the revalued amount and (2) the depreciation and amortization based on the asset’s original historical costThe realized surplus is transferred directly from the assets revaluation reserve account to the retained earningsIt is not compulsory for companies to realized the revaluation surplus as the relating asset is being usedFair Value ModelThe fair value model is only applicable to investment property and NOT property, plant and equipment and intangible asset.Investment properties are initially measured at cost when acquireda company may then choose to adopt either a cost or fair value model of accounting for themSelected cost model must be applied to all investment properties.It is easier to switch to fair value model from the cost model than the other way round. The difference between the carrying amount of the investment property and its fair value at the end of each financial year is recognized as either a gain or a loss in the income statement.Depreciation charges are not necessarySubsequent Changes in Use of PropertyTransfer from investment property to property, plant and equipment Investment property is accounted for using the cost model before transferTransfer at book value on the date of the change in useNo change to the cost of the investment propertyInvestment property is accounted for using the fair value model before transferTransferred at its fair value on the date of the change in use. The fair value is deemed to be the property’s cost after transferSubsequent Changes in Use of PropertyTransfer from property, plant and equipment to investment property Investment property will be accounted for using the cost model after transferCarrying value of the property, plant and equipment or inventory will be deemed the cost of the investment property on the date of change in use Investment property will be accounted for using the fair value model after transferProperty, plant and equipment or inventory brought to fair value on the date of change in use. Any revaluation surplus in the equity account brought to retained earnings only when the investment property is derecognizedImpairment of ValueAccounting treatment differs.Long-term assetsto be held and usedLong-term assetsheld for saleTangible andintangible  with finiteuseful livesIntangiblewithindefiniteuseful livesGoodwillTest for impairmentof value when consideredfor sale.Test for impairment of value at least annually.Test for impairment when events or changes in circumstances indicate that book value may not be recoverableFinite-life Assets to be Held and Used An asset is impaired when . . .the recoverable value of the asset or cash-generating unitMeasurement – Step 1Itsbookvalue RV, recognize impairment loss.Indefinite-life IntangiblesTest for impairment of value at least annually.Impairment of GoodwillIn 2012, the Upjane Corporation acquired Pharmacopia Corporation for $500 million. Upjane recorded $100 million in goodwill related to this acquisition because the fair value of the net assets of Pharmacopia was $400 million. After the acquisition, the assets of Pharmacopia are the smallest group of assets that generate cash flows that are largely independent of the cash flows from other assets or group of assets. Therefore, Pharmacopia is a cash-generating unit. As this cash-generating unit (Pharmacopia) includes goodwill within its carrying amount, it must be tested for impairment annually or more frequently if there is an indication that it may be impaired. At the end of 2013, Pharmacopia’s net assets have a book value of $380 million and a recoverable amount of $350 million. Is goodwill impaired and if so, by what amount? Impairment of GoodwillU.S. GAAP vs. IFRSIndefinite-life intangible assets other than goodwill are tested for impairment at least annually. The impairment loss is the difference between book value and fair value.Indefinite-life intangible assets other than goodwill are tested for impairment at least annually. The impairment loss is the difference between book value and the recoverable amount, the higher of the asset’s value-in-use (present value of estimated future cash flows) and fair value less costs to sell.Impairment of Value: Indefinite-life Intangible Assets Other than GoodwillU.S. GAAP vs. IFRSReversals of impairment losses are prohibited.If certain criteria are met, indefinite-life intangible assets are combined for the required annual impairment test.An impairment loss is reversed if the circumstances that caused the impairment is resolved.Indefinite-life intangible assets may not be combined with other indefinite-life intangible assets for the required annual impairment test.Impairment of Value: Indefinite-life Intangible Assets Other than GoodwillU.S. GAAP vs. IFRSGoodwill is tested for impairment at least annually.Reversals of impairment losses are prohibited.The level of testing (reporting unit) is a segment or a component of an operating segment for which discrete financial information is available.Goodwill is tested for impairment at least annually.Reversals of impairment losses are prohibited.The level of testing (cash-generating unit) is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets.Impairment of Value: GoodwillU.S. GAAP vs. IFRSMeasurement of an impairment loss is a two-step process. In step one the fair value of the reporting unit is compared to its book value. A loss is indicated if the fair value is less than the book value. In step two, the impairment loss is calculated as the excess of book value of goodwill over the implied fair value of goodwill.Measurement of an impairment loss is a one-step process. The recoverable amount of the cash-generating unit is compared to its book value. If the recoverable amount is less, goodwill is reduced before other assets are reduced. Impairment of Value: GoodwillImpairmentloss=BookvalueFair value lesscost to sell–Assets held for saleinclude assets that managementhas committed to sell immediately intheir present condition andfor which sale within one yearIs highly probable.Assets Held for SaleType of ExpenditureDefinitionUsual Accounting TreatmentRepairs and MaintenanceCosts of day-to-day servicing to maintain a given level of Benefits Expense in the period incurredRegular major inspectionsExpenditure required for continuing operation of the AssetCapitalize and amortize over the period between major InspectionsAdditionsThe addition of a new major component to an existing assetCapitalize and depreciate over the remaining useful life of the original asset or its own useful life, whichever is shorterImprovementsThe replacement ofa major componentCapitalize and depreciate over the useful life of the improved assetRearrangementsExpenditures to restructure an asset without addition, replacement, or improvementIf expenditures are material and clearly increase future benefits, capitalize and depreciate over the future periods benefitedExpenditures Subsequentto AcquisitionU.S. GAAP vs. IFRSLitigation costs to successfully defend intangible rights are capitalized and amortized over the remaining useful life of the asset.Litigation costs are expensed, except in rare situations when an expenditure increases future benefits.Costs of Defending Intangible RightsFirms can’t choose among various accelerated methods used for income tax purposes.Estimated useful lives and residual values are not used in tax depreciationA half-year convention is often used in determining the tax depreciation amountsTax rules allow taxpayers to compute depreciation for their tax returns based on the tax laws of the relevant jurisdictions. The common differences in calculation pertain to:Appendix 11A – Tax DepreciationRetirement MethodAcquisitions: Record initial acquisitions of assets at cost in the  asset account. Record subsequent acquisitions of assets at cost in the asset accountDispositions: Credit the asset account for cost. Debit depreciation expense for cost less the proceeds received.Replacement MethodAcquisitions: Record initial acquisitions of assets at cost in the asset account. Record subsequent acquisitions with a debit to depreciation expense.Dispositions: Credit depreciation expense for the proceeds received. Used for groups of similar, low-valuedassets with short service lives.Appendix 11B – Retirement and Replacement Methods of DepreciationEnd of Chapter 11