Kế toán, kiểm toán - Chapter 9: Reporting and analyzing long-Lived assets

CHAPTER 9:Reporting and Analyzing Long-Lived AssetsLO 1: Determine the cost of property, plant and equipment.LO 2: Explain and calculate depreciation.LO 3: Account for the derecognition of property, plant, and equipment.LO 4: Identify the basic accounting issues for intangible assets and goodwill.LO 5: Illustrate how long-lived assets are reported in the financial statements.LO 6: Describe the methods for evaluating the use of assets.LEARNING OBJECTIVESLong-lived resources thatAre controlled by the companyAre tangible (have physical substance)Are used in the operation of a businessAre not intended for sale to customersProvide economic benefits over many years Property, Plant, and EquipmentRecorded at cost, which includesPurchase price, including non-refundable taxes and duties, less discounts or rebatesExpenditures necessary to bring asset to its intended location and make it ready for its intended useEstimated cost of future obligations to dismantle, remove or restore the asset at the end of its useful lifeDetermining the Cost of Property, Plant and EquipmentOperating expendituresBenefit only the current periodImmediately charged as an expenseCapital expendituresCapitalized as an asset (increases the cost of the asset)Benefit future periodsIncreases a company’s investment in productive activityTypes of ExpendituresCost of land includesPurchase priceClosing costs such as title and legal feesAdditional costs to prepare land for its intended use (less any proceeds from salvage)Land has an unlimited life, therefore it is not depreciatedLandThe costs of structural additions made to land (such as paving, fencing, and sidewalks)These decline in service potential over timeThey are recorded separately from landDepreciated over their useful livesWill not include costs of getting the land ready to useLand ImprovementsAll expenditures related to the purchase or construction of a buildingWhen a building is purchased such costs includePurchase priceClosing costs (legal fees)Costs required to make building ready for its intended useBuildingsWhen a building is constructed, its cost consists of Contract price Architect's feesBuilding permitsExcavation costInterest costs during constructionBuildings (Continued)Costs includePurchase priceFreight charges and insurance during transit paid by the purchaserAssemblingInstalling and testingEquipmentSubsequent to acquisition, same distinction exists:Operating expendituresBenefit only the current periodRequired to maintain asset in normal operating conditionCapital expendituresCapitalized as an asset (increases the cost of the asset)Increases life of an asset, its productivity or efficiencyExpenditures During Useful LifeWhat are some of the expenditures that would be included in the cost of a specialized piece of equipment that a company ordered and had delivered from another country?Discussion QuestionAdvantages of leasingReduced risk of obsolescence100% financingIncome tax advantagesTerminologyLessor — owner of asset for lease (such as a landlord)Lessee — party leasing asset from owner (such as a tenant)Buy or Lease?Operating leaseTreated as rental by lesseePeriodic payment (rent expense)No asset is recorded by the companyFinance leaseTreated as purchase by lessee (as an asset and corresponding liability)Periodic payment (decrease liability and charge interest expense)Buy or Lease? (Continued)Systematic allocation of the cost of property, plant and equipment over the asset’s useful lifeA process of cost allocation, not determining an asset’s current valueDoes not use or provide cash to replace the assetDepreciationCostPurchase price plus costs required to get the asset ready for use plus estimated asset retirement costsUseful lifeThe period of time that the asset is expected to be available for use, orThe number of units that the asset is expected to produce or units of output expected to be obtainedResidual valueEstimated amount to be received at the end of the asset’s useful lifeFactors in Calculating DepreciationStraight-lineUsed by the majority of Canadian publicly-traded companiesDiminishing-balanceUnits-of-productionManagement chooses the method that best reflects the pattern of use of the economic benefits from that assetDepreciation MethodsA delivery van was bought on Jan. 1, 2018Cost $33,000Estimated residual value $3,000Estimated useful life (in years) 5Estimated useful life (in kilometres) 100,000Example – Depreciation MethodsDepreciation is constant for each year of the asset's useful life Straight-Line MethodProduces a decreasing annual depreciation expense over an asset’s useful lifeDepreciation is calculated based on the asset’s carrying amount, which diminishes each year as accumulated depreciation increasesAnnual depreciation expense is calculated by multiplying the carrying amount at the beginning of the year by the depreciation rateResidual value is not included in the calculationCan be applied using different ratesDepreciation rate = Straight-line rate x multiplierDiminishing-Balance MethodDiminishing-Balance Method (Continued)Useful life is expressed in terms of total units of production or activity expected from the assetSuch as units produced or machine-hours workedUseful for factory machinery, vehicles, airplanes or any asset whose usage varies over timeUnits-of-Production MethodUnits-of-Production MethodWhat would be the best choice of depreciation method for a fleet of company trucks if a company wanted the depreciation expense to track the “wear and tear” of the trucks?Discussion QuestionSignificant componentsMay be depreciated separatelyIncome taxImpairmentsImpairment loss occurs when carrying amount of asset exceeds its recoverable amountCost vs. revaluation modelRevaluation model allowed under IFRS; used on a limited basisOther Depreciation IssuesRevisions needed ifCapital expenditures during useful lifeImpairment lossesChange in estimated useful life or residual valueChange in the pattern in which the asset’s economic benefits are consumedAccounted for as a change in estimateChange made in current and future years, but not to prior periods (prospectively)Revising Periodic DepreciationUpdate depreciationDepreciation for the fraction of the year to the date of disposal must be recordedCalculate carrying amountCarrying amount = Cost – Accumulated depreciationCalculate gain or lossProceeds – carrying amount = gain/lossDerecognition of Property, Plant, and EquipmentProceeds > carrying amount = Gain (Cr.)Proceeds < carrying amount = Loss (Dr.)Record disposalRemove cost of asset and accumulated depreciation. Record proceeds (if any) and gain or loss on disposition (if any)Derecognition of Property, Plant, and EquipmentDo not have physical substanceRights, privileges and/or competitive advantagesFor example, intellectual property in a production processMust be identifiable Can be separated from company and sold; orBased on contractual or legal rightsIntangible Assets and GoodwillAccounting for intangible assets parallels accounting for tangible assetsRecorded at cost including all costs to make asset ready for useIf intangible asset has a finite (limited) life, its cost must be systematically allocated over its useful lifeFor intangible assets, this is referred to as amortization rather than depreciationIntangible assets with an indefinite (unlimited) life are not amortizedAccounting for Intangible AssetsAmortize over shorter ofEstimated useful lifeLegal lifeTest for impairmentAmortization for IntangiblesPatentsExclusive right to produce for 20 yearsResearch and development costsAll research costs are expensedDevelopment costs are capitalized only if associated with an identifiable, feasible productCopyrights ©Protection for the life of the creator + 50 yearsIntangibles with Finite LivesTrademarks and trade names ™®Word, phrase, jingle, symbol that distinguishes businessFranchisesContractual arrangement to sell products or servicesLicencesGrant the holder operating rightsIntangibles with Indefinite LivesAsset representing future economic benefits arising from the purchase of a businessExcess of cost over fair market value of net identifiable assets (assets less liabilities) acquiredRepresents the extra value relating to a business when it is purchasedOnly identified with the business as a wholeNot amortized, but subject to an annual test for impairmentGoodwillStatement of Financial PositionReported asProperty, Plant and EquipmentIntangible AssetsGoodwillDisclose cost and accumulated depreciation (amortization) of each major class of assetsEither in statement or in notesDisclose depreciation/amortization methods and useful lives or ratesIFRS also requires additional disclosuresPresentation of Long-Lived AssetsIncome StatementDepreciation expense, gains and losses on disposal and impairment losses are included in the operating sectionStatement of Cash FlowsCash flows from the purchase and sale of long-lived assets are reported in the investing sectionPresentation of Long-Lived AssetsMeasures overall profitabilityReturn on AssetsReturn on Assets = Net Income .Average Total AssetsHigher is better because it indicates that for every dollar invested in assets, more net income is being generatedMeasures how efficiently a company uses its assetsAsset TurnoverAsset Turnover =Net SalesAverage Total AssetsHigher is better because it indicates that for every dollar invested in assets, more net income is being generatedTogether, profit margin and asset turnover explain the return on assets ratioProfit Margin RevisitedProfit x Asset = Return onMargin Turnover AssetsComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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