1. Non-current Assets- Utilization and Disposition By the end of today’s class you should understand… –the basic issues in accounting for utilization, and disposal of fixed assets –various depreciation methods –How to analyze the PPE and Accumulated Depreciation accounts

2. Long-Lived Assets Plant and Equipment –Accumulated Depreciation Natural resources –Depletion Intangible Assets –Amortization Depreciation requires knowledge of useful life, depreciable basis, method choice

3. Depreciation Methods- Determining depreciation expense Straight Line –Depreciation Expense = [Cost- Salvage]/Estimated Useful Life Use (Production) Method Sum of Years Digit (SYD) –Depreciation Expense = [Number of years left/ Sum of (1.. Useful life)]*[Cost - Salvage] Double Declining Balance –Depreciation Expense = 2*(Cost - A/D) / Estimated useful Life

4. Additional Issues Partial periods Revisions in Estimates –Treated prospectively Change in Depreciation method –Cumulative Effect of Accounting Change Error correction –Reverse entries and correct. Retroactively restate F/S, If RE needs change do prior period adjustment, Disclosure reqd. Impairment –Recognize loss if permanent

5. Subsequent Expenditures and Disposition Difference between repairs and maintenance (expense) and improvements (capitalize) Capitalize –Additions – add cost to asset –Betterment – add cost to asset –Extraordinary expense – reduce acc. Depreciation of asset –Depreciation is now based on new value Disposition –Either dump it or sell –Trade in (already discussed in Ch10)

6. Choosing a Method Matching Principle Effect on Ratios Effect on Market Perceptions of the company –Aggressive or conservative accounting Effect on Management Compensation Effect on Deferred Tax

7. Analysis of Fixed Asset Disclosures Since firms use various depreciation methods and estimates of useful periods and salvage, only a broad analysis is possible –Estimate the average age of assets Avg age = A/D / Depr. Exp –Estimate Relative age of asset Avg age % = {A/D}/Gross PPE –Estimate Useful Life Avg Useful Life = Gross PPE/Depr. Exp Average age data is useful for three reasons: –older assets are less efficient, inefficient, or obsolete reducing competitiveness – Can forecast financing requirements for future capital expenditure needs –Allows comparison with industry peers

8. Take Home Point Fixed assets can make up a large portion of a company’s B/S Depreciation choices can have significant interperiod effects on income –but over time the differences cancel out Understand how F/S information on PPE, Acc. Depr., Depr. Exp., and Cash flow from disposition are related