Académique Documents
Professionnel Documents
Culture Documents
7
Long-Lived Non-monetary Assets and Their Amortization
McGraw-Hill/Irwin
Capital assets provide benefits to future periods. Amortization is the process of matching costs incurred for capital assets with revenues obtained from their use.
1-2
Intangible asset
Intellectual property. No physical substance
Examples are patent rights, copyrights
1-3
Amortization
View capital asset as bundle of services. Similar to prepaid expenses, cost is expensed as company benefits from services.
1-4
Intangible Assets
Limited life Intangible assets amortization Indefinite life Intangible assets no amortization, impairment tests Deferred charges amortization Research & development not capitalized
1-5
Basket purchase:
Allocate cost based on FMV of acquired assets.
1-7
Depreciation
Gradual conversion of cost into expense. Depreciation is a cost consumed by an entity during an accounting period. Systematic allocation of original cost of an asset to periods in which asset provides benefit to the entity.
1-8
Definitions
Deterioration = physical process of wearing out. Obsolescence = loss of usefulness because of change in technology or tastes. Physical life = time until asset wears out. Service life = shorter of either time until asset becomes obsolete or time until asset wears out. Book value = net book value = original cost accumulated depreciation to date.
1-9
Judgments required
Service life of asset. Residual value at the end of its service life.
Net cost = original cost - residual value.
1-10
Depreciation methods
Straight line method:
(original cost - residual value) /service life
Accelerated methods:
Declining balance methods. Sum of the years or years digits methods.
1-11
1-12
1-13
1-14
Depreciation Accounting
Acquire an asset for $1,000 and depreciate straight line over 5 years. Each years depreciation: Depreciation expense 200 Accumulated depreciation 200
1-15
Depreciation Miscellany
Theoretically: selection that results in best matching. Changes in estimated life:
Not unusual. Affect future, not past depreciation.
Fully depreciated assets on BS until disposal. Half year convention: record a half years depreciation in year of acquisition and disposition. Disclosure: amount of depreciation expensed in year, & original cost, & accumulated depreciation by category.
1-16
Impaired Assets
Impaired if remaining benefits, as measured by sum of future cash flows generated by use of asset, is less than its book value. If entity expects to hold asset:
Write asset down to fair value
1-18
Group Depreciation
Treats all similar assets as a pool or group rather than calculating for each item separately (unit or item depreciation). No gain or loss recognized when an individual item is disposed.
Credit asset account for original cost. Debit cash for amount of proceeds. Debit accumulated depreciation for difference.
1-20
Accumulated Depreciation
Does not represent accumulation of any tangible thing. Sum of original cost that has been expensed. Funding purchase of new asset is usually unrelated to depreciation.
1-21
Natural Resources
Measure cost same as other assets. Oil exploration costs:
Full cost method:
All costs of exploration allocated to and capitalized as the value of reserves discovered during the year.
Depletion
Amortizing costs of natural resources.
Units of production method ordinarily used.
Depletion for a period = (Cost of reserve / estimated units, say barrels) * number of barrels extracted during period.
Accretion = increase in value arising from natural growth (e.g. timber, agricultural products)
Not recognized in accounts until sold. Costs incurred are capitalized.
1-25
1-26
Categories of Intangibles
Intangible assets with limited lives. Intangible assets with indefinite lives. Goodwill.
1-27
1-28
1-29
Goodwill
When one company buys another. Goodwill = Purchase price of company fair value of net assets.
Net assets include tangible assets and recognized intangible assets net of liabilities assumed by the purchaser.
Recorded as an asset upon acquisition. Not amortized. Annual impairment test. Any write down is charged against income.
1-30
Leasehold improvements
Improvements made to leased property. Revert to owner at end of lease. Amortized over the shorter of useful life or length of lease. If renewal is likely, amortize through renewed period.
1-31
Deferred Charges
Start-up Costs in pre-operating period.
Expense or Capitalize and amortize over a short period (rarely more than 5 years).
1-32
GAAP:
Expense since future benefits uncertain.
Other R&D
R&D for customer under contract:
Inventory until sold.
Software development:
Costs are expensed until technological feasibility of product has been established. Costs after feasibility established until product is available for release to customer are capitalized. Amount of amortization for year is the greater of:
Straight line or ratio of years revenues to total anticipated revenues
1-34