CHAPTER
9
Reporting and Analysing
Long-Lived Assets
Tangible Assets
• Tangible assets are long-lived assets used in
the operation of a business; not intended for
sale to customers
• They are also referred to as: property, plant,
and equipment; fixed assets; and capital
assets
• The textbook uses the term property, plant,
and equipment
Property, Plant, and Equipment
Buildings
Land
Land improvements
Equipment
Property, Plant, and Equipment
• Record at cost—cost principle
• Cost consists of all expenditures necessary to
acquire asset and make it ready for its intended
use
• Cost is measured by:
– Cash paid in a cash transaction
– Cash equivalent price paid when noncash
assets are used in payment
• Cash equivalent price is equal to the fair market
value of the asset given up, or if this is not
determinable, fair market value of the asset
received
Property, Plant and Equipment
• Impairment loss
– Permanent decline in the market value of an
asset
– Write down to the new market value during the
year in which the decline occurs
– Never write up asset
Land
• Cost of land
includes
– Purchase price
– Closing costs such
as title and legal
fees
Land Improvements
• The costs of structural
additions made to land
(e.g. paving, fencing)
• These are recorded
separately from land
• The cost of land
improvements is
amortized over their
limited useful lives
Buildings
• All necessary
expenditures relating to
the purchase or
construction of a building
• When a building is
purchased such costs
include
– Purchase price
– Closing costs (legal fees,
title, insurance)
Buildings
• When a building is constructed, its cost
consists of:
–
–
–
–
–
Contract price
Architect's fees
Building permits
Excavation cost
Interest costs during construction
Equipment
Costs include:
• Purchase price
• Provincial sales tax
• Freight charges and
insurance during transit paid
by the purchaser
• Expenditures required in
assembling
• Installing and testing the
unit
Amortizable Assets
• Revenue producing ability of
an asset declines during its
useful life because of:
– Wear and tear
– Obsolescence
Amortization
• Allocating to expense the cost of an asset
over its useful life in a rational and
systematic manner, in accordance with the
matching principle
• This is a process of cost allocation, not
asset valuation
• Not a cash fund
Note: Do not amortize land since its useful
life is indefinite. In addition, its usefulness
and revenue producing ability generally
remain intact, or increase.
Amortization Methods
• Straight-line
• Declining-balance
• Units-of-activity
Straight-Line Method
Amortization is calculated as:
Cost of the Asset - Salvage Value
Years of Useful Life
• Salvage value represents the anticipated cash
value of the asset at the end of its useful life
• Useful life is the expected years of service of the
asset
• Amortization expense is constant for each year
of the asset's useful life
Declining-Balance Method
• Amortization using this method produces
larger amortization expense in earlier years
• Amortization is calculated by multiplying the
asset’s net book value by a multiple of the
straight-line rate (1  useful life), or other
predetermined rate
Units-of-Activity Method
• Useful life is expressed in terms of total units of
production or activity expected from the asset
• Calculation of amortization is:
Cost of the Asset - Salvage Value
Estimated Units of Output
Total
• Units of output can be kilometres driven, units
produced, etc.
• Amortization expense will vary each year with
changes in the level of activity
Amortization and Income Taxes
• Declining-balance method (called capital cost
allowance) is required on corporate income tax
return, with specified rates, regardless of which
method is chosen for financial reporting
• Choose method for financial reporting based on
GAAP
• Income tax regulations do not adhere to GAAP
Revising Periodic Amortization
• Revisions made in current and future years but not
to prior periods
Revised amortization expense =
Net book value at time of revision – Revised salvage value
Remaining useful life
What is the effect of extending an asset's estimated
life on the statement of earnings? In total over the
life of the asset?
Types of Expenditures
• Operating expenditures • Capital expenditures
– Capitalized as an
– Current period
asset
expenditure
–
Increases
the
– Immediately charged
company’s
against revenue as
investment in
an expense
productive activity
Types of Expenditures
Two criteria apply when determining
operating or capital expenditure:
• Frequency of cost—one time or recurring
• Benefit period—the life of the asset or 1 year
Expenditures During Useful Life
• Ordinary repairs
• Additions and
improvements
Ordinary Repairs
• Expenditures to maintain operating
efficiency and expected productive life
of the asset
• Usually small in amount and occur
frequently throughout service life
• Expense
Additions and Improvements
• Costs that are incurred in order to increase:
– Operating efficiency
– Productive capacity
– Expected useful life of the tangible capital
asset
• Usually material in amount and occur
infrequently
• Capitalize as an asset (capital expenditure)
Disposals of Property, Plant, and
Equipment
Amortization for the fraction of the year to the
date of disposal must be recorded
Amortization Expense
Accumulated Amortization
xxx
xxx
Calculate net book value:
Net Book Value =
Cost – Accumulated Amortization
Disposals of Property, Plant, and
Equipment
Compare net book value to sale proceeds
Proceeds > Net book value = gain (Cr.)
Proceeds < Net book value = loss (Dr.)
Record disposition, removing cost of asset and
accumulated amortization, and record proceeds
(if any) and gain or loss on disposition (if any)
Cash
Accumulated Amortization
Asset
Gain on Disposal
xxx
xxx
xxx
xxx
Intangible Assets
• Rights, privileges
• Competitive advantages that result from
ownership of long-lived assets that do not
possess physical substance
Accounting for Intangibles
• Accounting for intangible assets parallels
accounting for tangible assets
• Intangible assets are recorded at cost and upon
disposal the book value is eliminated and any
gain/loss is recorded
Types of Intangible Assets
• Limited lives
– Patents
– Research and development costs
– Copyrights ©
• Indefinite lives
– Trademarks and trade names ™®
– Franchises and licenses
– Goodwill
Intangibles with Limited Lives
• Patents
– Exclusive right to produce for 20 years
• Research and development costs
– Research costs: record as an expense when
incurred
– Development costs: capitalize if associated with
an identifiable, feasible product. Otherwise,
expense
• Copyrights ©
– Protection for the life of the creator + 50 years
Amortization for Intangibles
• Limited life
– Straight-line method
– Allocated over the shorter of a) estimated
useful life and b) legal life
– Credit intangible asset account instead of
accumulated amortization account
Intangibles with Indefinite Lives
• Trademarks and trade names ™®
– Word, jingle, symbol that distinguishes business
• Franchises
– Contractual agreement to sell products or services
• Licenses
– Operating rights
• Goodwill
– Record only in an exchange transaction that involves
purchase of entire business
– Excess of cost over fair market value of net assets
(assets less liabilities) acquired
Amortization for Intangibles
• Indefinite life
– Do not amortize
– Test for impairment at least annually
– Record impairment loss if fair value less than
carrying value
Presentation of Long-Lived Assets
• In the balance sheet, long-lived assets are
normally reported under the headings, Property,
Plant, and Equipment and Intangible Assets
• Disclose balances and accumulated
amortization of the major classes of assets
• Amortization methods as well as the amount of
amortization expense for the period should be
disclosed
• Any impairment losses should be disclosed
Analysing Assets
Return on Assets =
Net Earnings
Average Total Assets
Asset Turnover =
Net Sales
Average Total Assets