Long Term Asset

Question 1

Capitalize

Answer 1

Exp extending asset life. Staff training exp, R&M exp - not to be capitalized

Question 2

SLM

Answer 2

Salvage value deducted. Cost (-) Salvage value / Life

Question 3

Double declining balance method (Accelerated Amortization method)

Answer 3

Salvage value not deducted. (2/Total Life) * Remaining BV of asset. If 3 declining balance method replace 2 with 3. Depreciation wont be charged once BV falls below SV. Adjust it with depn to ensure BV = SV. Profit will be lower in cy compared to future due to higher depreciation. So ROE & ROA will be lower in initial years compared to SLM

Question 4

To change methods

Answer 4

Retrospective application

Question 5

Component method

Answer 5

Add value of part to be replaced with cost of purchase. Cost (-) Salvage value / Total life

Question 6

Non component method

Answer 6

Don’t add future replacement cost with cost of purchase. Provide depreciation separately for replacement. Replacement cost (-) SV (if any) / Life (from replacement yr till next replacement yr). Depreciation for component starts from replacement year

Question 7

Change in SLV or Life

Answer 7

Prospective

Question 8

Interest

Answer 8

Capitalize till asset is ready for use. When constructing an asset for sale, interest is charged as part of inventory. Interest earned during such period will reduce BV

Question 9

Impairment

Answer 9

IFRS - CA > Recoverable Amt (NRV (or) VIU (higher))
US GAAP - CA > Undiscounted FCF. Impairment charge = CA - FV. If FV is not given but discount rate is given discount UFCF to find DFCF which = FV

Question 10

Reversal of impairment

Answer 10

IFRS permit impairment losses to be reversed if the recoverable amount of an asset increases regardless of whether the asset is classified as held for use or held for sale. US GAAP allows reversal only for asset held for sale

Question 11

Revaluation

Answer 11

IFRS only allows it. Upward revaluation will be routed through OCI If previously downward charged to P&L add it back to that extent & balance shall be credited in OCI. Downward always adjust in P&L

Question 12

Revaluation Impact

Answer 12

Downward - ROA, ROE (lower), DE, DA (High)
Upward - ROA, ROE (lower), DE, DA (Low) No impact on profit

Question 13

Impairment effect

Answer 13

Same as downward revaluation effect

Question 14

Asset sales

Answer 14

Sale proceed (-) CA. Charging to P&L

Question 15

Land & Goodwill

Answer 15

No Depreciation & Amortization. Check for Impairment

Question 16

R&D

Answer 16

IFRS. Research phase (Trial going on & technical viability not proven) - P&L. Development phase (Trial over & technical viability proven) - Capitalize & depreciate
US GAAP - Both R&D exp are charged to P&L except in case of software created for sale to others or for internal use (expense in research phase, capitalize in D phase - Capitalized cost include employee cost who help to build software)

Question 17

Ratios

Answer 17

Total Asset Life = GBlock / Depn per year
Remaining life = Net Block / Depn per year
Age of asset = Accumulated Depn / Depn per year

Question 18

Investment Property (Every IP should be valued under same model)

Answer 18

To earn rental income or capital appreciation or both. Cost method (Amortized cost) or Fair Value method (G/L charge to P&L). IP converting to FA or Inventory - Any G/L charged to P&L whether or not cost or FV followed for IP
Inventory to IP - G/L to P&L
FA to IP - G to Revaluation reserve & L to P&L

Question 19

Preference share issued

Answer 19

To construct FA. Dividend wont be capitalized

Question 20

Interest coverage Ratio

Answer 20

Int capitalized shall be added in denominator. When EBIT is given, add back interest capitalized because depreciation is net off interest capitalized

Question 21

Asset retired

Answer 21

Cash wont be received

Question 22

Internally developed ITA

Answer 22

Valued @ lower amt compared to externally acquired. Treated as OCF but if externally acquired treated as ICF

Question 23

R&D phase

Answer 23

Research phase - period during which a company cannot demonstrate that an intangible asset is being created
Development phase - application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use

Question 24

Assets disposed of other than by sale

Answer 24

classified as held for use until disposal or until they meet the criteria to be classified as held for sale or held for distribution. Continue to be depreciated and tested
for impairment, unless their carrying amount is zero. When an asset is retired or abandoned, the accounting is similar to a sale, except that the company does not record cash proceeds. Assets are reduced by the carrying amount of the asset at the time of retirement or abandonment, and a loss equal to the asset’s carrying amount is recorded.

Question 24

Asset held for sale (immediately available for sale in current condition & sale is highly probable)

Answer 24

Reclassified from PPE to NCA held for sale. If the carrying amount at the time of reclassification exceeds the fair value less costs to sell, an impairment loss is recognized and asset is written down to FVLCTS. Long-lived assets held for sale cease to be depreciated or amortized.

Question 24

Exchange of asset

Answer 24

accounting typically involves removing the CA of the asset given up, adding a fair value for the asset acquired, and reporting any difference between the carrying amount and the fair value as a gain or loss. The fair value used is the fair value of the asset given up unless the fair value of the asset acquired is more clearly evident. If no reliable measure of fair value exists, the acquired asset is measured at the carrying amount of the asset given up.