HIGHLIGHTS OF CHAPTER 10:
Operational Assets
Acquisition & Disposition
April 2004
SIGNIFICANT ISSUES
Types of OA
Costs included in OA
Allocation of lump-sum purchase
Cost under deferred payment contract
Exchange for stock & donations
Dispositions & exchanges
Self-constructed assets
Interest capitalization
Costs of purchased & internal intangibles
CHARACTERISTICS OF PPE
For use & not resale
Long-term
Subject to depreciation
Physical existence
CHARACTERISTICS OF
INTANGIBLE ASSETS
Lack physical substance
Not financial instruments
Long-term
Subject to amortization
. . . or not?
COSTS INLUDED
Historical cost
Desired location and
condition for use
COSTS INLUDED
Equipment
Land
Buildings
Natural resources
NATURAL RESOURCES
Acquisition costs
Exploration costs
Development costs
Asset retirement obligation
IDENTIFIABLE
INTANGIBLE ASSETS
Patents
Copyrights
Trademarks, tradenames
Franchises, license
Goodwill
Customer related (customer lists,
backlogs)
CONCEPT OF
GOODWILL
Value of existing business in excess
of value of individual assets
Products
Brand names
Employees & management
Customer base
Structure
RECORDING GOODWILL
Can’t record internally
generated goodwill
Capitalize only purchased
goodwill
RECORDING GOODWILL
Revalue acquired assets &
liabilities
Goodwill is “excess of cost
over fair value of net assets
acquired”
NEGATIVE GOODWILL
Unusual situation
“excess of fair value of net
assets acquired over cost”
Record in income as an
extraordinary gain
GOODWILL
Amortize or record
impairment in value . . .?
OTHER VALUATION
ISSUES
Lump sum purchase
Issuance of stock
Donations of assets
Deferred payment contracts (Notes payable)
Net cash discounts
Exchanges of nonmonetary assets
FIXED-ASSET TURNOVER
RATIO
Net Sales
Fixed-asset turnover ratio = -----------------------Average fixed assets
DISPOSING OF OA
Gain/loss on disposal
OA held for sale
Impairment loss
Not depreciated or amortized
Involuntary conversions
(Extraordinary gain/loss?)
EXCHANGES OF
NONMONETARY ASSETS
Dissimilar - Recognize gains/losses
Similar - Defer gains/Recognize losses
Similar assets with cash(“boot”) Partial recognition of gains/Recognize
losses
SELF-CONSTRUCTED
ASSETS
Direct costs
Fixed overhead
How far should you go?
INTEREST
CAPITALIZATION
Qualifying assets
Construction period
Amount to capitalize
Lower of actual or avoidable
Weighted average expenditures
Interest rate - specific or average?
INTEREST CAP EXAMPLE
WEIGHTED-AVERAGE EXPENDITURES
Date
1-1
3-1
5-1
12-31
Amount
Paid
$210,000
300,000
540,000
450,000
$1,500,000
Period
12/12
10/12
8/12
0
Weighted
Average
Cost__
$210,000
250,000
360,000
0__
820,000
INTEREST CAP EXAMPLE
WEIGHTED-AVERAGE INTEREST RATE
Principal
15% construction loan $750,000
Interest
$112,500
10% 5-year note
12% 10-year bond
55,000
72,000
$127,000
550,000
600,000
$1,150,000
Weighted-average rate = 127,000/1,150,000= 11.04%
INTEREST CAP EXAMPLE
AVOIDABLE INTEREST COMPUTATION
Weighted
Average
Cost
$750,000
_70,000
$820,000
Interest
Rate
15%
11.04%
Avoidable
Interest
$112,500
7,728
$120,228
INTEREST CAP EXAMPLE
MAXIMUM INTEREST CAP ALLOWED
Principal Interest
15% construction loan $750,000 $112,500
10% 5-year note
550,000
55,000
12% 10-year bond
600,000
72,000
$239,500
Avoidable interest $120,228 < $239,500
OTHER INTEREST
CAPITALIZATION POINTS
Disclosure of interest capitalized
Net interest income
RESEARCH &
DEVELOPMENT COSTS
Generally expense as incurred
Alternative future use, then
capitalize (amortize or depreciate)
R&D performed for others
Purchased R & D
COSTS SIMILAR TO R&D
Start-up costs
Initial operating losses
Computer software costs
COMPUTER SOFTWARE
COSTS
External use
 Expense until technologically
feasible
Alternative use - capitalize
Amortize based on greater of % of
revenue or straight-line
Value at lower of amortized cost or
net realizable value
COMPUTER SOFTWARE
COSTS
Internal use
 SOP 98-1
Expense preliminary project costs
Capitalize application development
costs
Expense training & application
maintenance costs
OIL & GAS ACCOUNTING
Successful efforts
Full-cost