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HIGHLIGHTS OF CHAPTER 11: Operational Assets: Utilization & Impairment

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Presentation on theme: "HIGHLIGHTS OF CHAPTER 11: Operational Assets: Utilization & Impairment"— Presentation transcript:

1 HIGHLIGHTS OF CHAPTER 11: Operational Assets: Utilization & Impairment
April 2004

2 SIGNIFICANT ISSUES Cost allocation (Depreciation & Amortization)
Depreciation factors & methods Depletion of natural resources Amortization of intangibles Partial period depreciation Changes in estimates & methods Correction of error Identifying & measuring impairments Income tax accounting (MACRS)

3 DEPRECIATION FACTORS Depreciable base (Cost - Salvage value)
Service/useful lives

4 DEPRECIATION METHODS Activity method Straight-line method
Accelerated methods (Decreasing charge) Group & composite methods

5 DEPLETION BASE Acquisition costs Exploration costs normally expensed
Development costs - tangible equipment Development costs - intangible costs Restoration costs

6 DEPLETION Units of production (activity method) Inventory or expense?
Estimating reserves

7 DEPLETION ISSUES Full cost v successful efforts concepts
Reserve recognition accounting Discovery value accounting

8 AMORTIZATION Over useful life Legal life Economic life
Subject to new standards Indefinite life intangibles

9 DEPRECIATION FOR PARTIAL PERIODS
Allocating for partial years Half-year convention Nearest full month convention

10 CHANGES IN ESTIMATES & METHODS
Recognized prospectively Don’t adjust depreciation already recorded How far should you go? Cumulative effect of change in method

11 CORRECTION OF ERROR Restate prior years
Adjustment to opening retained earnings Disclose

12 IDENTIFYING IMPAIRMENT OF PPE
Recoverability test Carrying amount not recoverable Future net cash flows from use & disposal (not discounted) NBV<net cash flows = no impairment NBV>net cash flows = impairment

13 MEASURING IMPAIRMENT OF PPE
Impairment = Carrying amount - fair value Fair value = market value or PV of future net cash flows Loss recorded in continuing operations Credit goes to Accumulated Depreciation

14 IMPAIRMENT OF LIMITED-LIFE INTANGIBLES
Similar to process on long-term assets Recoverability test - Carrying value in excess of net future cash flows Impairment calculation

15 IMPAIRMENT OF LIMITED-LIFE INTANGIBLES
Impairment test: Fair value Less: Carrying value Record loss in income

16 IMPAIRMENT OF INDEFINITE-LIFE INTANGIBLES
Impairment test at least annually: Fair value Less: Carrying value Record loss in income

17 IMPAIRMENT OF GOODWILL
Previously amortized Currently written down if impaired

18 INCOME TAX ACCOUNTING MACRS (Modified Accelerated Cost Recovery System) Recovery periods v useful life No salvage value Depreciation method depending on property class Half year convention

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