1. Reporting and Analysing Long-Lived Assets CHAPTER 9

2. Tangible Assets Tangible assets are long-lived assets used in the operation of a business; not intended for sale to customersTangible assets are long-lived assets used in the operation of a business; not intended for sale to customers They are also referred to as: property, plant, and equipment; fixed assets; and capital assetsThey are also referred to as: property, plant, and equipment; fixed assets; and capital assets The textbook uses the term property, plant, and equipmentThe textbook uses the term property, plant, and equipment

3. Property, Plant, and Equipment Land improvements Buildings Equipment Land

4. Property, Plant, and Equipment Record at cost—cost principleRecord at cost—cost principle Cost consists of all expenditures necessary to acquire asset and make it ready for its intended useCost consists of all expenditures necessary to acquire asset and make it ready for its intended use Cost is measured by:Cost is measured by: –Cash paid in a cash transaction –Cash equivalent price paid when noncash assets are used in payment Cash equivalent price is equal to the fair market value of the asset given up, or if this is not determinable, fair market value of the asset receivedCash equivalent price is equal to the fair market value of the asset given up, or if this is not determinable, fair market value of the asset received

5. Property, Plant and Equipment Impairment lossImpairment loss –Permanent decline in the market value of an asset –Write down to the new market value during the year in which the decline occurs –Never write up asset

6. Land Cost of land includesCost of land includes –Purchase price –Closing costs such as title and legal fees

7. Land Improvements The costs of structural additions made to land (e.g. paving, fencing)The costs of structural additions made to land (e.g. paving, fencing) These are recorded separately from landThese are recorded separately from land The cost of land improvements is amortized over their limited useful livesThe cost of land improvements is amortized over their limited useful lives

8. Buildings All necessary expenditures relating to the purchase or construction of a building When a building is purchased such costs include –Purchase price –Closing costs (legal fees, title, insurance)

9. Buildings When a building is constructed, its cost consists of: –Contract price –Architect's fees –Building permits –Excavation cost –Interest costs during construction

10. Equipment Costs include: Purchase price Provincial sales tax Freight charges and insurance during transit paid by the purchaser Expenditures required in assembling Installing and testing the unit

11. Amortizable Assets Revenue producing ability of an asset declines during its useful life because of:Revenue producing ability of an asset declines during its useful life because of: –Wear and tear –Obsolescence

12. Amortization Allocating to expense the cost of an asset over its useful life in a rational and systematic manner, in accordance with the matching principleAllocating to expense the cost of an asset over its useful life in a rational and systematic manner, in accordance with the matching principle This is a process of cost allocation, not asset valuationThis is a process of cost allocation, not asset valuation Not a cash fundNot a cash fund Note: Do not amortize land since its useful life is indefinite. In addition, its usefulness and revenue producing ability generally remain intact, or increase.

13. Straight-lineStraight-line Declining-balanceDeclining-balance Units-of-activityUnits-of-activity Amortization Methods

14. Straight-Line Method Salvage value represents the anticipated cash value of the asset at the end of its useful lifeSalvage value represents the anticipated cash value of the asset at the end of its useful life Useful life is the expected years of service of the assetUseful life is the expected years of service of the asset Amortization expense is constant for each year of the asset's useful lifeAmortization expense is constant for each year of the asset's useful life Amortization is calculated as: Cost of the Asset - Salvage Value Years of Useful Life

15. Declining-Balance Method Amortization using this method produces larger amortization expense in earlier yearsAmortization using this method produces larger amortization expense in earlier years Amortization is calculated by multiplying the asset’s net book value by a multiple of the straight-line rate (1  useful life), or other predetermined rateAmortization is calculated by multiplying the asset’s net book value by a multiple of the straight-line rate (1  useful life), or other predetermined rate

16. Units-of-Activity Method Useful life is expressed in terms of total units of production or activity expected from the assetUseful life is expressed in terms of total units of production or activity expected from the asset Calculation of amortization is:Calculation of amortization is: Cost of the Asset - Salvage Value Total Estimated Units of Output Units of output can be kilometres driven, units produced, etc.Units of output can be kilometres driven, units produced, etc. Amortization expense will vary each year with changes in the level of activityAmortization expense will vary each year with changes in the level of activity

17. Amortization and Income Taxes Declining-balance method (called capital cost allowance) is required on corporate income tax return, with specified rates, regardless of which method is chosen for financial reportingDeclining-balance method (called capital cost allowance) is required on corporate income tax return, with specified rates, regardless of which method is chosen for financial reporting Choose method for financial reporting based on GAAPChoose method for financial reporting based on GAAP Income tax regulations do not adhere to GAAPIncome tax regulations do not adhere to GAAP

18. Revising Periodic Amortization Revisions made in current and future years but not to prior periodsRevisions made in current and future years but not to prior periods Revised amortization expense = Net book value at time of revision – Revised salvage value Remaining useful life What is the effect of extending an asset's estimated life on the statement of earnings? In total over the life of the asset?

19. Types of Expenditures Operating expendituresOperating expenditures –Current period expenditure –Immediately charged against revenue as an expense Capital expenditures –Capitalized as an asset –Increases the company’s investment in productive activity

20. Types of Expenditures Two criteria apply when determining operating or capital expenditure: Frequency of cost—one time or recurring Frequency of cost—one time or recurring Benefit period—the life of the asset or 1 year Benefit period—the life of the asset or 1 year

21. Expenditures During Useful Life Ordinary repairsOrdinary repairs Additions and improvementsAdditions and improvements

22. Ordinary Repairs Expenditures to maintain operating efficiency and expected productive life of the assetExpenditures to maintain operating efficiency and expected productive life of the asset Usually small in amount and occur frequently throughout service lifeUsually small in amount and occur frequently throughout service life ExpenseExpense

23. Additions and Improvements Costs that are incurred in order to increase:Costs that are incurred in order to increase: –Operating efficiency –Productive capacity –Expected useful life of the tangible capital asset Usually material in amount and occur infrequentlyUsually material in amount and occur infrequently Capitalize as an asset (capital expenditure)Capitalize as an asset (capital expenditure)

24. Disposals of Property, Plant, and Equipment Amortization for the fraction of the year to the date of disposal must be recorded Amortization Expense xxx Accumulated Amortization xxx Calculate net book value: Net Book Value = Cost – Accumulated Amortization

25. Disposals of Property, Plant, and Equipment Compare net book value to sale proceeds Proceeds > Net book value = gain (Cr.) Proceeds < Net book value = loss (Dr.) Record disposition, removing cost of asset and accumulated amortization, and record proceeds (if any) and gain or loss on disposition (if any) Cash xxx Accumulated Amortization xxx Asset Asset xxx Gain on Disposal Gain on Disposal xxx

26. Rights, privilegesRights, privileges Competitive advantages that result from ownership of long-lived assets that do not possess physical substanceCompetitive advantages that result from ownership of long-lived assets that do not possess physical substance Intangible Assets

27. Accounting for Intangibles Accounting for intangible assets parallels accounting for tangible assetsAccounting for intangible assets parallels accounting for tangible assets Intangible assets are recorded at cost and upon disposal the book value is eliminated and any gain/loss is recordedIntangible assets are recorded at cost and upon disposal the book value is eliminated and any gain/loss is recorded

28. Types of Intangible Assets Limited livesLimited lives –Patents –Research and development costs –Copyrights © Indefinite livesIndefinite lives –Trademarks and trade names ™® –Franchises and licenses –Goodwill

29. Intangibles with Limited Lives PatentsPatents –Exclusive right to produce for 20 years Research and development costsResearch and development costs –Research costs: record as an expense when incurred –Development costs: capitalize if associated with an identifiable, feasible product. Otherwise, expense Copyrights ©Copyrights © –Protection for the life of the creator + 50 years

30. Amortization for Intangibles Limited lifeLimited life –Straight-line method –Allocated over the shorter of a) estimated useful life and b) legal life –Credit intangible asset account instead of accumulated amortization account

31. Intangibles with Indefinite Lives Trademarks and trade names ™®Trademarks and trade names ™® –Word, jingle, symbol that distinguishes business FranchisesFranchises –Contractual agreement to sell products or services LicensesLicenses –Operating rights GoodwillGoodwill –Record only in an exchange transaction that involves purchase of entire business –Excess of cost over fair market value of net assets (assets less liabilities) acquired

32. Amortization for Intangibles Indefinite lifeIndefinite life –Do not amortize –Test for impairment at least annually –Record impairment loss if fair value less than carrying value

33. Presentation of Long-Lived Assets In the balance sheet, long-lived assets are normally reported under the headings, Property, Plant, and Equipment and Intangible AssetsIn the balance sheet, long-lived assets are normally reported under the headings, Property, Plant, and Equipment and Intangible Assets Disclose balances and accumulated amortization of the major classes of assetsDisclose balances and accumulated amortization of the major classes of assets Amortization methods as well as the amount of amortization expense for the period should be disclosedAmortization methods as well as the amount of amortization expense for the period should be disclosed Any impairment losses should be disclosedAny impairment losses should be disclosed

34. Analysing Assets Return on Assets = Net Earnings Average Total Assets Asset Turnover = Net Sales Average Total Assets