7 CHAPTER Analysis of Long-lived Assets: Part I ---- the capitalization Decision

1.Introduction  A.Long-lived assets are expected to yield their economic benefits (or service potential) over a period longer than one year.

Long-lived assets

露天煤业

伊利股份

Measuring the Carrying Amount of Long-Lived Assets  GAAP uses historical cost—an economic sacrifices approach—for measuring long-lived assets in almost all circumstances.  1. The only long-lived asset measurement method that survives the dual screens of reliability and objectivity is the economic sacrifices approach called historical cost.  2. Reliability implies that the numbers are not prone to manipulation.  3. Objectivity implies that the numbers are verifiable.

案例：金融街（ ）  金融街 2007 年年报显示： 2007 年年末投资性房地产为 1 ， 511 ， 960 ， 000 元，占总资产的比重为 10.90% 。  自 2008 年 1 月 1 日起对投资性房地产采用公允价值模式进行后续计量。 评估后的公允价值约为 亿元。  经公司测算，采用公允价值计量投资性房地产后，将增加公司 2007 年 所有者权益约 亿元，其中留存收益约 亿元，资本公积约 0.44 亿元。  从金融街发布的公告来看，每股净资产指标会显著提高；资产负债率 会得到明显改善，与未采用公允价值计量模式的其他房地产类上市公 司相比具有明显优势（房地产行业属于高资产负债率行业，全国经济 普查数据显示：房地产企业平均资产负债率为 74.1 ％，最高的达 94 ％ ）。  对后续年度的业绩产生巨大的提升作用（由于采用公允价值模式后不 得再转为成本模式）。

Long-Lived Asset Measurement Rules  Two rules govern determining the initial carrying amount of a long-lived asset.  1. All costs necessary to acquire the asset and make it ready for use are included in the asset account.  a.The way that construction is financed alters the cost capitalized under GAAP.  b.Capitalization of interest costs is limited to interest arising from actual borrowings from outsiders.  c.The actual amount of interest that can be capitalized is the lower of actual interest incurred or avoidable interest (e.g., the product of the interest rate times cumulative weighted average expenditures).

 2.Joint costs incurred in acquiring more than one asset are apportioned among the acquired assets.  a. For financial reporting purposes, the manner in which joint costs are allocated is guided by which one generated the cost.  b. For tax purposes the incentives for allocating costs between land and building asset categories are completely different, because the tax objective is to minimize tax payments, not to “correctly” allocate costs.

Long-lived assets Tangible fixed assets such as property, plant, and equipment Intangible assets such as computer, software patents, trademarks, copyrights, and goodwill Not hold for sale

Financial Analysis and Fixed Asset Reporting  Using unamortized historical cost as the measure of fixed asset values introduces many potential pitfalls for unwary statement readers. For example, when asset reinvestment is not continuous, the increasing age of the asset base in conjunction with rising prices introduces distortions.  1. An aging asset base results in a higher return on assets ratio, all other things being equal.  2. Increasing costs and prices may also result in a higher return on assets ratio.

假定接下来的四年没有其他资本性支出，同时假定 宏观经济物价水平每年上涨 3% ，陈氏公司能够跟 随经济大潮使净经营现金流量增加 3% 。 1999 年 1 月 1 日 12 月 31 日 净资产帐面净值 净经营现金流量（每年增 加 3% ） 折旧 税前利润 年初净资产回报率 12%14.1%16.7%20.1%24.6% 资产平均已使用年限 1年1年 2年2年 3年3年 4年4年 5年5年

 Historical cost accounting for long-lived assets also creates problems for statement readers who try to make comparisons between companies.  1. Differences across firms may be driven by the way that historical cost fixed asset accounting rules affect firms with aging assets.  2. Comparisons among firms within the same industry are usually meaningful since market forces often lead firms to pursue similar investment and operating strategies.

2. Capitalization All the costs incurred until the asset is ready for use must be capitalized, including the invoice price, applicable sales tax, freight and insurance costs incurred delivering the equipment, and any installation costs. (1) Capitalization vs. Expensing: conceptual issues Capitalization Expensing Balance sheet Income statement

 GAAP capitalizes an expenditure on a long- lived asset when the expenditure causes any of the following conditions:  1. The useful life of the asset is extended.  2. The capacity of the asset is increased.  3. The efficiency of the asset is increased.  4. There is any other type of increase in the future service potential value of the asset that results as a consequence of the expenditure.

Financial statement effects of capitalization:  Income variability; The variance declines as the firm matures and is lower for larger firms.

 Profitability;

 Cash flow from operations;

 Leverage ration. Expensing firms report lower assets and equity balances. As a result, debt – to equity and debt-to- assets solvency ratios will appear worse for expensing firms as compared with firms that capitalize the same costs.

For purposes of analysis, the income statement capitalization of interest should be reversed, resulting in the following effects:  Capitalized interest should be added back to interest expense.  Adding capitalized interest back to interest expense reduces net income.  The capitalization of interest also distorts the classification of cash flows.  The interest coverage ratio should be calculated with interest expense adjusted to add back capitalized interest Example see page 235. (2) Capitalization vs. Expensing: general issues Capitalization of interest costs

Intangible assets  Intangible assets are identifiable, nonmonetary resources controlled by firms.  For example  For example:  Licenses, computer software, patents, leasehold rights, brand names, copyrights.  For some firms, intangible assets are important on-or off-balance sheet revenue-producing assets that account for a substantial portion of the value of a firm.

云南白药 （无形资产 / 总资产）

 据统计，标准普尔 500 公司在 1982 年的市场 价值中无形资产只占 38% ，有形资产账面价 值在市场价值中所占的比例为 62% ；然而到 了 1992 年，无形资产在市场价值中所占的比 例上升到 62% ，有形资产账面价值在市场价 值中所占的比例则从 62% 下降到 38%[1] 。[1]  [1] 注释：参见 Lev, Baruch., Jurgen H. Daum. Intangible Assets and the Need for a Holistic and More Future-oriented Approach to Enterprise Management and Corporate Reporting. [1]

 例如， Polaroid 公司 1991 年年报中披露，该公司起 诉 Kodak 公司的即时成像照相机侵犯了其专利权， 法院裁定 Kodak 公司败诉，该公司因此获得了 亿美元的赔偿。然而，在 Polaroid 公司 1991 年的年 报中，所列示的 “ 专利权和商标 ” 的价值仅为 1 美元。 显然，由于研发技术的支出在发生当期就被费用化 了， Polaroid 公司年报中所列示的无形资产并没有 反映其真实的经济价值。

Recognition and Measurement Issues  Purchase: unrelated entities  The cost of acquiring intangible assets from unrelated entities if capitalized at acquisition, measured by the amount paid to acquire them.  Arm’s-length transaction:  Acquisition price= market value

 When an intangible asset is purchased from another organization, few new accounting or reporting issues arise.  1. The acquired intangible asset is recorded at the arms-length transaction price and is amortized over the shorter of its legal or expected useful life, not to exceed 40 years.  2. The accounting for purchased goodwill may be more problematic

(1) Recognition and Measurement Issues  Generate internally or government grants  Generate internally or government grants:  Intangible assets may also be received through government grants or generated internally by the firm.  In the absence of secondary market:  cost  With active secondary market:  Market price can be a reliable measure.

Internally generated intangible assets  Intangible assets generated internally are the most troublesome category because:  The cost incurred in developing these assets may not be easily separable;  It is difficult to measure the amount and duration of benefits from such expenditures as advertising when they are made, or even later.  There may be little relationship between the costs incurred and the value of the asset created.

Internally generated intangible assets  For many internally generated intangible assets, discounted cash flow analysis may be the only way to measure their fair value.  Problem  Problem:  Accurate forecasting of amount and timing of cash flows and the choice of discount rates.

(1). Research and Development (R&D)  Companies invest in R&D because they expect the investment to produce profitable future products.  Minasian （ 1969 ）对化工行业的公司在 1948~1957 年间的收益情况做了研究，他的 研究结果表明， R&D 支出的总体回报率约为 54% ，远远高于实物资本投资约为 9% 的回报 率。

 根据统计，从 1991 年到 1996 年，全球 R&D 投资 从 4380 亿美元增长到 5760 亿美元，平均每年增 长约 4.4% 。到 2002 年，这一数字增长到 6770 亿 美元。在全球的 R&D 投资中，企业（包括私有企 业和国有企业）的 R&D 支出占了主要的比重。从 1991 年的 2920 亿美元增长到 1996 年的 3760 亿美 元，到 2002 年则达到 4500 亿美元，约占全球 R&D 投资支出的 66.47%[1][1]  [1] 数据来源： UNCATD, World Investment Report 2005, p.105~ [1]

(1). Research and Development (R&D)  However, absent a resultant commercial product, these expenditures may have no value to the firm. Further, the value of the resulting product may be unrelated to the amount spent on R&D. R&D is generally unacceptable to creditors as security for loans.  Due to such valuation uncertainties, R&D is generally unacceptable to creditors as security for loans.

Accounting for R&D  US: SFAS 2, accounting for research and development costs  SFAS2 requires that virtually all R&D costs be expensed in the period incurred and the amount disclosed.  IASB: certain criteria  Requires the expensing of research costs but capitalization of development costs when certain criteria are met.  Capitalized costs must be periodically reviewed to ensure that these conditions are still operable and that capitalized costs do not exceed net realizable value. P237

内部研 究开发 费用的 确认和 计量 研究阶段 开发阶段 费用化 满足资本化 条件（同时 满足 5 个条 件 不满足资 本化条件 费用化 资本化 中国

开发阶段有关支出资本化的条件  在开发阶段，判断可以将有关支出资本化计入无形资产成 本的条件包括；  1 ．完成该无形资产以使其能够使用或出售在技术上具有 可行性。  2 ．具有完成该无形资产并使用或出售的意图。  3 ．无形资产产生经济利益的方式，包括能够证明运用该 无形资产生产的产品存在市场或无形资产自身存在市场， 无形资产将在内部使用的，应当证明其有用性。  4 ．有足够的技术、财务资源和其他资源支持，以完成该 无形资产的开发，并有能力使用或出售该无形资产。  5 ．归属于该无形资产开发阶段的支出能够可靠地计量。

Effect on financial statements :capitalization vs. expensing  Effect on income statement  Capitalization  expensing  Effect on cash flow statement  CFO: expensing  CFI: capitalization Why software outsourcing ?

不同国家 R&D 支出会计处理的比较 国家外购的 R&D 支出 内部创造 研究支出开发支出 美国资本化费用化费用化 [1] 英国资本化 基础研究成本和应用研 究成本均应费用化。 满足递延条件的开发成 本可以选择资本化。 澳大利亚资本化 基础研究成本费用化， 应用研究成本资本化 资本化 日本资本化费用化 IASB 资本化费用化 满足递延条件的开发成 本必须资本化。 中国资本化费用化 满足递延条件的开发成 本必须资本化。 [1] [1] 注释：对于计算机软件存在例外。根据 SFAS86 ，在技术上可行时，可以将软件的开发支出资本化。 Microsoft vs. 小软件公司

(2). Patents and Copyrights expensed  All costs incurred in developing patents and copyrights are expensed in conformity with the treatment of R&D costs.  Only the legal fees incurred in registering internally developed patents and copyrights can be capitalized.  The full acquisition cost is capitalized when such assets are purchased from other entities.

(3). Franchises and Licenses Companies may sell the right to use their name, product, processes, or management expertise to others for some negotiated time period or market. capitalizes the cost of purchasing these rights The franchisee or licensee capitalizes the cost of purchasing these rights.

(4). Brands and Trademarks  The cost of acquiring brands and trademarks in arm’s length transaction is capitalized.  Recognition of the value of internally created brands or trademarks is prohibited. (U.S, IASB) (5). Advertising costs Advertising costs are expensed as incurred. (6). Goodwill The difference between the cost of an acquired firm and the fair market value of its net assets is accounted for as an intangible assets, goodwill.

Asset revaluation  The balance sheet is more informative when assets and liabilities are stated at market value rather than historical cost.  Recognition of changes in fixed asset value is not permitted under US GAAP.  IASB: at fair value less accumulated depreciation  IAS16,Property, plant and equipment,allows firms to report fixed assets at fair value less accumulated depreciation.

思考题：

Asset revaluation  The revaluation of land has the following effects compared with that do not revalue:  Lower asset turnover due to the higher asset value for land  Lower ROA due to higher assets  Higher reported book value per share  Lower ROE due to higher equity  Lower debt ratios due to higher equity.  For assets that are depreciated, revaluation has the following additional effects:  Lower earnings due to higher depreciation expenses  Lower interest coverage due to reduced EBIT

Computer software development costs SFAS86:  All costs incurred to establish the technological and/or economic feasibility of software be viewed as R&D costs and expensed as incurred  Once economic feasibility has been established, subsequent costs can be capitalized as part of product inventory and amortized based on product revenues or on a straight-line basis. Although this provision allows software firms to increase reported assets and income, some software firm (most notably Microsoft) have not taken advantage of the provisions of SFAS86

Example: Lucent P243 (in $millions) Opening balance$293$298 Closing Balance Amortization Capitalized software (in $millions) Net Investment$239$421

(in $millions) Income adjustmentInvestment less amortization$ 5$ 172 Tax offset(35%)(2)(60) Net adjustment$ 3$ 112 Net IncomeReported$1,035$3,458 Adjusted1,0323,346 %reduction-0.3%-3.2% (in $millions) Reported$1,860$(276) Adjusted1,621(697) %reduction-12.8%-152.5% Cash flow from operations

SOP 98-1:Statement of position 98-1,accounting for the costs of computer software development or obtained for internal use  Requires the capitalization and subsequent amortization of the cost of developing internal-use software once technical feasibility has been established.  Allowing capitalization of costs to development or add applications for websites.(EITF)

Accounting for oil and gas exploration Firms have the option of capitalizing the cost of dry holes or expensing them as they occur. Successful efforts method (SE) Full cost method (FC) The choice between these two methods has s significant impact on the financial statements of oil and gas exploration companies and on many ratios as well.

Example: Assumptions: 1. $1000 cost of drilling well (dry or productive); 2. four wells are drilled : one is productive, the other three are dry; 3. the productive well has a four-year life, with revenues (net of cost of production) of $3,000 per year.

Year1234Total Net revenues$3,000 $12,000 Dry hole expense(3,000)000 Amortization(250) (1,000) Net income$(250)$2750 $8,000 Cash flow Operations$ 0$3,000 $9,000 Investment(1,000)000 Total$(1,000)$3,000 $8,000 Successful Efforts Method

Year1234Total Net revenues$3,000 $12,000 Amortization(1,000) (4,000) Net income$2,000 $8,000 Cash flow Operations$ 3,000 $12,000 Investment(4,000)000 Total$(1,000)$3,000 $8,000 Full Cost Method

Summary: the difference between the methods cause SE firms report:  Lower carrying costs of oil and gas reserves than FC firm;  Lower stockholder’s equity due to lower asset values;  Lower earnings than FC firms when exploration efforts are rising;  Lower cash from operation than FC firms.

Additional analysis of fixed asset data  Changes in the balance sheet of fixed assets result from four types of events:  Capital spending (acquisition of fixed assets)  Sale, impairment, or retirement (no longer in use) if fixed assets  Increases (decreases) in fixed assets due to acquisitions (disposal)  Changes due to the effects of foreign currency translation.

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