LM 6: Analysis of Long-Term Assets

Question 1

What type of assets are used for depreciation?

Answer 1

tangible assets

Question 2

What type of assets are used for amortization?

Answer 2

intangible assets

Question 3

Which 2 models does IFRS allow you to value long-lived assets on the balance sheet?

Answer 3

1. cost model
2. reevaluation model

Question 4

What is the revaluation model?

Answer 4

long-lived assets are reported at fair value rather than at the historical cost

Question 5

Which model does US GAAP allow you to value long-lived assets on the balance sheet?

Answer 5

cost model only

Question 6

What 4 criteria’s under IFRS does intangible assets must meet? IUEC

Answer 6

1. identifiable
2. under control of company
3. expected to generate future economic benefits that will flow to company
4. cost of asset can be readily measured

Question 7

What are the 3 ways to acquire intangible assets? TDB

Answer 7

1. transaction sale
2. developed internally
3. business combination

Question 8

How are intangible assets purchased by transaction sale recorded?

Answer 8

recorded on the balance sheet at its fair value (aka purchase price) when acquired

Question 9

How should the cost of intangible assets internally developed usually be recorded?

Answer 9

costs should be expensed as they are incurred.

Question 10

Under IFRS how must research and development costs be recorded?

Answer 10

research stage: costs expensed

development stage: costs capitalized after technical feasibility

Question 11

Under US GAAP how must research and development costs be recorded?

Answer 11

expense both research and development costs

Question 12

How are tangible assets given through other means that purchase recorded when fair value can be determined and when fair value cannot be determined?

Answer 12

if fair value can be determined asset will be recorded at fair value

if fair value cannot be determined asset is valued at the amount of the asset given up (assumes fair trade)

Question 13

What is goodwill in a business combination?

Answer 13

assets that are neither tangible nor identifiable intangible assets

Question 14

What is impairment of assets?

Answer 14

unanticipated value declines in long-lived assets

Question 15

How do you record a long-lived asset deemed to be impaired?

Answer 15

carrying value is reduced on the balance sheet - equivalent reduction in equity

impairment charge recognized as loss on income statement

Question 16

How often must companies assess evidence of impairment and conduct actual impairment tests for property, plant, and equipment (PPE)?

Answer 16

evidence of impairment: end of each reporting period

conduct actual impairment testing: annual only if such indicators are discovered

Question 17

Under IFRS when is a PP&E considered impaired?

Answer 17

impaired if the carrying amount exceeds the recoverable amount

Question 18

What is the impairment loss equation under IFRS?

Answer 18

impairment loss = carrying amount - (recoverable amount (fair value - costs to sell))

Question 19

Under US GAAP when is a PP&E considered impaired?

Answer 19

when the carrying amount exceeds the undiscounted expected future cash flows

Question 20

What is the impairment loss equation under US GAAP?

Answer 20

impairment loss = carrying amount - fair value

Question 21

How is the impairment of intangible assets with a finite life treated?

Answer 21

treated the same as a long-lived asset

assessment of impairment end of each period and testing if evidence annually

Question 22

How is the impairment of intangible assets with an indefinite life treated?

Answer 22

tested annually for impairment (such as goodwill)

Question 23

Under US GAAP when are reversals for impairment of long-lived assets allowed and not allowed?

Answer 23

allowed for assets that have been reclassified as held for sale

not allowed for assets currently in use

Question 24

Under IFRS when are reversals for impairment of long-lived assets allowed and not allowed?

Answer 24

not allowed even if the asset is held for sale or in use

Question 25

What are the 2 requirements for a company to derecognize a long-lived asset? AA

Answer 25

1. asset is sold
2. asset no longer expected to provide future value

Question 26

How do you record a long-lived asset that has been sold?

Answer 26

gain or loss recorded on income statement based on difference between sale proceeds and carrying amount

Question 27

What is the equation for the gain or loss of a long-lived asset for sale that you would record on the income statement?

Answer 27

gain/loss on sale = sale price - net carrying value

carrying value = (gross carrying value - accumulated depreciation)

Question 28

What 11 things must you disclose for each asset class of PP&E under IFRS? MDUGARTCDDC

Answer 28

1. measurement basis
2. depreciation method
3. useful life (depreciation rate)
4. gross carrying amount
5. accumulated depreciation at the beginning and end of the period
6. reconciliation of carrying amount at the beginning & end of the period
7. title restrictions for existing PP&E
8. contracts to acquire new PP&E
9. depreciation method for PP&E
10. depreciation expense for the period
11. carrying amount of major asset classes

Question 29

In addition to the 11 disclosures of IFRS, what 2 other disclosures are required if using the revaluation model for PP&E? DD

Answer 29

1. disclose details of fair value methodology
2. date of revaluation

Question 30

Under IFRS what 6 things must be disclosed for intangible assets with finite lives? UAGAWR

Answer 30

1. Useful lives
2. Amortization methods used
3. Gross carrying amount
4. Accumulated amortization at the beginning and end of the period
5. Where amortization has been recorded on the income statement
6. Reconciliation of carrying amount at the beginning and end of the period

Question 31

Under IFRS what 4 things must be disclosed for intangible assets with indefinite lives? CWTC

Answer 31

1. Carrying amount
2. Why the asset is considered to have an indefinite life
3. Title restrictions and pledges as security
4. Contracts to acquire new intangible assets

Question 32

Under US GAAP what 4 things must be disclosed for intangible assets? GAAE

Answer 32

1. Gross carrying amounts
2. Accumulated amortization
3. Aggregate amortization expense for the period
4. Estimated amortization expense for the next five fiscal years

Question 33

What is the formula for estimated total useful life?

Answer 33

estimated total useful life = historical cost / annual depreciation expense

Question 34

What is the formula for the estimated age of the equipment?

Answer 34

estimate age of equipment = accumulated depreciation / annual depreciation expense

Question 35

What is the formula for the estimated remaining life?

Answer 35

estimated remaining life = Net PPE/ annual depreciation expense

Question 36

When can borrowing costs be capitalized?

Answer 36

if incurred prior to the asset being ready for its intended use

Question 37

What governing body requires you to reduce borrowing costs by investment income when when temporarily investing borrowed funds?

Answer 37

IFRS

Question 38

What impact does capitalization have on expenses in current period?

Answer 38

expenses in current period lower because they are spread out overtime while profits will be higher

Question 39

What impact does capitalization have on assets?

Answer 39

assets on balance sheet when capitalized will be greater because assets are slowly depreciated staying on assets balance sheet longer

Question 40

What impact does capitalization have on profits in later period?

Answer 40

lower profits in later period due to depreciation and amortization

Question 41

What impact does capitalization have on shareholders equity in early years?

Answer 41

greater shareholders equity in early years due to higher profits in current period

Question 42

What impact does capitalization have on operating cash flows?

Answer 42

greater operating cash flows because capital expenditures are treated as investment cash flows

Question 43

What impact does capitalization have on taxes paid in early years?

Answer 43

greater taxes paid in early years due to current period profits being greater

Question 44

How are interest costs recorded when constructing an asset takes a long time?

Answer 44

interest costs will be capitalized along with the asset

Question 45

What is the component method of depreciation?

Answer 45

company must separately depreciate significant components of an asset.

eg. company may have to separate the depreciation for the engine and frame of a ship

Question 46

Under IFRS what 3 things must be disclosed about impairment losses? WAR

Answer 46

1. What led to the impairment
2. Amount of impairment losses
3. Reversals of impairment losses

Question 47

Under US GAAP what 2 things must be disclosed about impairment losses? WA

Answer 47

1. What led to the impairment
2. Amount of impairment losses

Question 48

What costs are expenses and what costs are capitalized?

Answer 48

costs providing less than 1 year of economic benefits should be expensed

costs providing more than 1 year of economic benefits should be capitalized

Question 49

If a company uses the reevaluation model for buying equipment, and the value increases above the purchase price, should the company record a profit?

Answer 49

No, reevaluation would be recorded directly under equity.

Losses would be directly deducted from net income.