1. Non-current Assets- Acquisition u By the end of today’s class you should understand… –the basic issues in accounting for the acquisition, –capitalize or expense decision –How to value self constructed assets including R&D and software u Types of Operational Assets –PPE incl. Natural resources –Intangible Assets

2. Capitalization u Recognition –Expenditures that provide future benefits u Measurement – All costs incurred until asset is ready for use must be capitalized. u Types of PPE –Equipment –Land –Land Improvements –Buildings –Natural Resources – acquisition costs, exploration costs, development costs u Types of Intangibles –Goodwill,Patents, Copyrights, Trademarks, Franchises (initial fee plus legal cost), Organization costs

3. Accounting for Long- Lived Assets u Types of Acquisition –Lump-sum purchase »Unbundle individual asset value. –Non-cash acquisitions –use fair value of assets given or received whichever is more reliable »Deferred Payments eg. If note is long term use present value »Issuance of Equity Securities u Use market value of stock »Donated Assets u Recognize revenue or gain (SFAS 116) »Acquisition by exchange (Trade in) u Commercial asset exchange – recognize gains or loss on transaction. Assumes sale of old asset and purchase of new at fair market value. If FMV of new not available use FMV of old plus cash given (recd) u Non-commercial asset exchange – next slide

4. Non-commercial asset exchange u Compute gain/loss on transaction = (FMV –BV) of old asset u If (FMV-BV) < 0 recognize loss immediately u If (FMV –BV) > 0 then –If cash paid but not recd, no gain recognized, reduce value of new asset by amount of gain –If cash is received, then portion of gain recognized. »Gain = {Cash/ (Cash +FMV of new asset)}* Total gain »Alternatively Gain = {Cash / FMV of old asset)* Total Gain » If Cash/ (Cash +FMV of new asset) > 0.25 then recognize Total gain

5. Accounting for Long- Lived Assets u Self-Constructed Asset(FAS 34) –Overhead allocation. Value includes labor, materials and overhead –Interest capitalization »Applied during the period of construction based on when the funds were applied »Interest capitalization is not dependent on whether you borrowed specific construction funds or not »If money is not borrowed then use weighted cost of interest from existing borrowing »If average accumulated expenditure is greater then borrowing, then interest is determined: u Specific loan at borrowing rate + Expenditure in excess of borrowing * weighted cost of existing debt »Show example in class

6. Accounting for Long- Lived Assets u Research and Development (FAS2) –Determine R&D costs »Expense all costs prior to commercial production »Capitalize after commercial production as asset –R&D for others »Capitalize as inventory until project completed –Software development costs(FAS 86) »Expense costs until technological feasibility, capitalize following technological feasibility until commercial production (intangible), then capitalize as inventory »Intangible has to be amortized using percentage of revenue method or straight line (time) whichever is greater