Copyright John Wiley & Sons Canada, Ltd. Long-Lived Assets Property, Plant and Equipment Determining cost and depreciation Revising depreciation Disposals Natural Resources Cost, depreciation and disposal Intangible Assets Accounting for intangible assets Assets with finite and indefinite lives Goodwill Statement Presentation and Analysis Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 3

Property, Plant and Equipment Long-lived assets owned by a company Used in production & sale of goods & services Characteristics: Have physical substance (size and shape) Used in the operations of the business Not intended for sale to customers Expected to provide services for a number of years Divided into four classes: Land, land improvements, buildings, equipment Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Determining Cost Cost includes: Purchase price, non-refundable taxes, less discounts and rebates All costs necessary to bring asset to location and make it ready for use Obligations to remove, restore asset when it is retired (asset retirement costs) These costs are capital expenditures Benefit future periods Costs that benefit only the current period are called operating expenditures Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Land and Improvements Cost of land includes: Purchase price Closing costs such as legal fees and surveys Costs of preparing land for intended use Land improvements: Structural additions to land such as fences, parking lots, landscaping Have limited useful lives Recorded separately and depreciated Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Buildings Include costs related to purchase or construction If purchased, include: Purchase price and closing costs Costs to make building ready for its intended use, such as remodelling and repairs If constructed, include: Contract price plus architects’ fees, building permits, interest payments during construction, excavation costs Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Equipment Broad category that includes: Delivery equipment Office equipment Computers Machinery Vehicles Furniture and fixtures Other similar assets Cost includes charges paid by purchaser: Purchase price Freight charges and insurance during transit Assembling, installing, testing Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Multiple Assets Property, plant and equipment purchased together for a single price (basket purchase) Total cost is allocated to each asset in proportion to its relative fair value Copyright John Wiley & Sons Canada, Ltd.

Significant Components If parts of an asset have a cost that is significant in relation to total cost of asset, then these components are depreciated separately Known as component depreciation Same process to allocate costs as used for basket purchases Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 11

Copyright John Wiley & Sons Canada, Ltd. Depreciation Systematic allocation of the cost over the long-lived asset’s useful life A process of cost allocation, not determining fair value Does not accumulate cash for replacement of the asset Two models available: Cost model – more commonly used Revaluation model Copyright John Wiley & Sons Canada, Ltd.

Calculating Depreciation To calculate depreciation, must determine: The cost of the asset Costs to acquire asset and make it ready for use Its estimated useful (productive) life Can be expressed in terms of time, units of activity or units of output Based on assessment of use, obsolescence and other relevant factors The estimated residual value Estimated value of asset at end of its useful life Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Depreciation Methods Three alternative methods: Straight-line Diminishing-balance Units-of-production Management chooses method that best matches the pattern of consumption of the asset’s future economic benefits Depreciation method, estimated useful life and residual value must be reviewed at least annually Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Straight-Line Method Depreciation expense is constant every year of asset’s useful life Depreciable amount: the amount to be depreciated Copyright John Wiley & Sons Canada, Ltd.

Diminishing-Balance Method Depreciation expense based on asset’s diminishing carrying amount (cost less accumulated depreciation) Depreciation rate remains constant, but depreciation expense declines each year Copyright John Wiley & Sons Canada, Ltd.

Units-of-Production Method Useful life expressed as total units of production or activity Must estimate the total units of production that will be obtained from asset Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 18

Revising Depreciation Annual depreciation must be revised if there are: Capital expenditures during the useful life of an asset Impairments in the fair value of an asset Changes in an asset’s fair value using the revaluation model Changes in the appropriate depreciation model, asset’s useful life or residual value Copyright John Wiley & Sons Canada, Ltd.

Capital Expenditures During Useful Life Expenditures on existing capital assets are classified as operating or capital Ordinary repairs (operating expenditures): Costs to maintain operating efficiency and productive life of the long-lived asset Usually small amounts that occur frequently Debited to Repair Expense as incurred Copyright John Wiley & Sons Canada, Ltd.

Capital Expenditures During Useful Life 2 Additions and improvements (capital expenditures): Costs to increase the efficiency, capacity or expected useful life of the long-lived asset Usually material in amount and occur infrequently Debited to the long-lived asset affected Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Impairments Long-lived assets are considered impaired when carrying value > asset’s recoverable amount Greater of asset’s fair value less costs to sell or asset’s value in use Amount of impairment loss = Carrying Amount − Recoverable Amount Entry to record impairment loss: Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Revaluation Model Carrying amount = fair value less accumulated depreciation, less impairment losses Can only be used if fair value can be reliably measured Only for IFRS; rarely used by any companies Copyright John Wiley & Sons Canada, Ltd.

Changes in Depreciation Method, Useful Life, Residual Value Each must be reviewed at least annually Any changes will cause a revision to the depreciation calculations Copyright John Wiley & Sons Canada, Ltd.

Revised Depreciation Calculations When a change is made: No correction of previous depreciation expense Depreciation expense for current and future years is revised Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 26

Disposals of Property, Plant and Equipment Four steps required to record a disposal: 1. Update depreciation For the part of the year to the date of disposal 2. Calculate the carrying amount = Cost − Accumulated Depreciation 3. Calculate the gain or loss = Proceeds – Carrying Amount Proceeds > Carrying amount: gain Proceeds < Carrying amount: loss 4. Record the disposal Copyright John Wiley & Sons Canada, Ltd.

Disposals of Property, Plant and Equipment 2 Entry to record disposal of asset: Retirement of Property, Plant and Equipment No proceeds are received Debit accumulated depreciation for full amount of depreciation and credit asset account for original cost If fully depreciated no loss; if not, loss on retirement is equal to the carrying amount of the asset Copyright John Wiley & Sons Canada, Ltd.

Exchanges of Property, Plant and Equipment New asset is purchased by trading in an old asset A Trade-in allowance reduces the cash cost of new asset Cash paid = difference between trade-in allowance and purchase price Trade-in allowance is rarely equal to fair value therefore it is ignored; fair value is more relevant New asset is recorded at fair value of asset given up plus any cash paid (or less any cash received) Copyright John Wiley & Sons Canada, Ltd.

Exchanges of Property, Plant and Equipment - Procedure Update any unrecorded depreciation To date of exchange Calculate carrying amount of asset being given up = Cost − accumulated depreciation Calculate gain or loss on disposal = Fair value − carrying amount Record the exchange Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 31

Copyright John Wiley & Sons Canada, Ltd. Natural Resources Consists of standing timber and deposits of oil, gas and minerals Also called wasting assets Differ from other long-lived assets: Physically extracted: deplete as they are used Replaced only by an act of nature Cost determined as for other long-lived assets: Include costs of acquiring and preparing asset for use Include asset retirement costs: future restoration and clean-up costs Copyright John Wiley & Sons Canada, Ltd.

Depreciation of Natural Resources The units-of-production method is used to calculate depreciation First calculate the depreciable amount per unit Depreciation of natural resources is debited to inventory As it is a cost of extracting a saleable product When product is sold the cost is expensed to cost of goods sold Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 34

Intangible Assets & Goodwill Rights, privileges, and competitive advantages that have no physical substance Recorded at cost, including costs to make ready for its intended use (legal fees and similar) If intangible asset has a finite (limited) life, it is amortized (depreciated) over its useful or legal life, whichever is shorter Straight-line method is often used Assets with indefinite lives are not amortized Copyright John Wiley & Sons Canada, Ltd.

Intangible Assets with Finite Lives Patents and Copyrights Research and development (R&D) costs: Development costs with probable future benefits are capitalized Research costs and development costs are expensed when incurred unless meet specific criteria Other intangible assets Customer lists, noncompetition agreements, sports contracts Copyright John Wiley & Sons Canada, Ltd.

Intangible Assets with Indefinite Lives Trademarks and trade names Word, phrase, jingle or symbol that identifies an enterprise or product Franchises and licences Franchise: contractual arrangement giving the franchisee rights to sell products and use trademarks Licence: government grant to use public property Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Goodwill The value of all favourable attributes of a company Recorded only when a business is purchased Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 9: Long-Lived Assets Determine the cost of property, plant and equipment. Explain and calculate depreciation. Explain the factors that cause changes in periodic depreciation and calculate revisions. Account for the disposal of property, plant and equipment. Calculate and record depreciation of natural resources. Identify the basic accounting issues for intangible assets and goodwill. Illustrate the reporting and analysis of long-lived assets. Copyright John Wiley & Sons Canada, Ltd. 39

Statement Presentation Balance sheet: Property, plant, and equipment often includes natural resources Intangible assets are listed separately as a group Goodwill is also listed separately For assets that are depreciated or amortized: The balances and accumulated depreciation of major classes of assets should be disclosed Depreciation and amortization: Methods used should be described Amount of depreciation and amortization expense for period should be disclosed Impairment policy must be disclosed Copyright John Wiley & Sons Canada, Ltd.

Financial Statement Analysis Asset Turnover Ratio: = Net Sales ÷ Average Total Assets Indicates how efficiently a company is using its assets to generate sales Return on Assets: = Net Income ÷ Average Total Assets Measures overall profitability of assets used in earnings process Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (the Canadian copyright licensing agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these files or programs or from the use of the information contained herein. Prepared by: A. Davis, MSc, BComm, CA, CFE Copyright John Wiley & Sons Canada, Ltd.