Financial Accounting:: Tools For Business Decision-Making

Financial
Accounting:1
Tools for Business DecisionMaking
Fifth Canadian Edition
Prepared By:
Debbie Musil
Kwantlen Polytechnic
University
Copyright John Wiley & Sons

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CHAPTER
CHAPTER
Reporting and
1
Analyzing Long-Lived
Assets
Study Objectives
1. Determine the cost of property, plant and equipment.

2. Explain and calculate depreciation.
3. Describe other accounting issues related to depreciation.
4. Account for the disposal of property, plant and
equipment.
5. Identify the basic accounting issues for intangible assets
and goodwill.
6. Illustrate how long-lived assets are reported in the
financial statements.
7. Describe the methods for evaluating the use of assets.
2

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Property, Plant, and Equipment

1
Long-lived resources that:
Are controlled by the company
Have physical substance
Are used in the operation of a business
Are not intended for sale to customers
Provide benefits over many years

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Determining the Cost of Property,

Plant and Equipment 1
Record at cost, which includes:
Purchase price, including taxes and
duties, less discounts or rebates
Expenditures necessary to bring asset to
its intended location and make it ready
for its intended use

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Types of Expenditures
1
Operating expenditures
Benefit only the current period
Immediately charged against revenue
as an expense
Capital expenditures
Capitalized as an asset
Benefit future periods
Increases a companys investment in
productive activity

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Land
1
Cost of land includes
Purchase price
Closing costs such as title and legal fees
Additional costs to prepare land for its
intended use (less any proceeds from
salvage)
Land has an unlimited life, therefore

it is not depreciated

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Land Improvements
1
The costs of structural additions
made to land (e.g. paving, fencing)
These decline in service potential
over time
They are recorded separately from land
Depreciated over their useful lives

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Buildings
1
All expenditures related to the
purchase or construction of a
building
When a building is purchased such
costs include:
Purchase price
Closing costs (legal fees, title, insurance)
Costs required to make building ready
for its intended use
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Buildings (Continued)
1
When a building is constructed, its
cost consists of:
Contract price
Architect's fees
Building permits
Excavation cost
Interest costs during construction

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Equipment
1
Costs include:
Purchase price
Freight charges and insurance during
transit paid by the purchaser
Assembling
Installing and testing
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Asset Retirement Costs

1
Cost of any obligation to dismantle,
remove or restore a long-lived asset
when it is retired
These costs are estimated in
advance and included as part of the
cost of the asset
11

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Discussion Question
1
What are some of the expenditures
that would be included in the cost of
a specialized piece of equipment that
a company ordered and had delivered
from another country?
12

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Buy or Lease?
1
Advantages of leasing
Reduced risk of obsolescence
100% financing
Income tax
Off-balance sheet financing
Terminology
Lessor owner of asset for lease
(e.g., landlord)
Lessee company leasing asset from
owner (e.g., tenant)
13

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Buy or Lease? (Continued)

1
Operating lease
Treated as rental by lessee
Periodic payment (dr. rent expense/cr.
cash)
Finance lease
Treated as purchase by lessee (dr.
asset/cr. liability)
Periodic payment (dr. liability and
interest expense/cr. cash)
14

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Depreciation
1
Systematic allocation of the cost of
property, plant and equipment over
the assets useful life
A process of cost allocation, not
asset valuation
Does not use or provide cash to
replace the asset
15

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Factors In Calculating Depreciation

Illustration 9-2
16

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Depreciation Methods
1
Straight-line
Used by the majority of Canadian
publicly-traded companies
Diminishing-balance
Units-of-production
17

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Example Depreciation Methods

1
A delivery van was bought on Jan. 1,
2012
Cost
$33,000
Estimated residual value
$3,000
Estimated useful life (in years)
5
Estimated useful life (in kilometres)
100,000
18

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Straight-Line Method
Illustration 9-3
Depreciation is constant for each year of the
asset's useful life
19

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Diminishing-Balance Method
1
Produces a decreasing annual depreciation
expense over an assets useful life
Depreciation is calculated based on the assets
carrying amount, which diminishes each year as
accumulated depreciation increases
Annual depreciation expense is calculated

by multiplying the carrying amount by the
depreciation rate
Residual value is not included in the calculation
Can be applied using different rates

Depreciation rate = Straight-line rate x
multiplier
20

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Diminishing-Balance Method (Continued)

Illustration 9-5
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Units-of-Production Method
1
Useful life is expressed in terms of
total units of production or activity
expected from the asset
Such as units produced or machinehours worked
Useful for factory machinery,

vehicles, airplanes
22

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Units-of-Production Method
23

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Discussion Question
1
What would be the best choice of

depreciation method for a fleet of
company trucks if a company wanted
the depreciation expense to track the
wear and tear of the trucks?
24

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Other Depreciation Issues

1
Significant components
May be depreciated separately
Income tax
Impairments
When carrying amount of asset
exceeds its recoverable amount
Cost vs. revaluation model

Revaluation model allowed under IFRS
Allows revaluation to fair market value
25

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Revising Periodic Depreciation

Revisions needed if:
Capital expenditures during useful life

Impairment losses
Change in estimated useful life or residual
value
Change in the pattern in which the assets
economic benefits are consumed
Accounted for as a change in estimate

Change made in current and future years,
but not to prior periods (prospectively)
26

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Disposals of Property, Plant, and

Equipment
1
1. Update depreciation
Depreciation for the fraction of the year

to the date of disposal must be recorded
2. Calculate carrying amount

Carrying amount = Cost Accumulated
depreciation
3. Calculate gain or loss

Proceeds carrying amount = gain (loss)
Proceeds > carrying amount = Gain (Cr.)
Proceeds < carrying amount = Loss (Dr.)
27

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Disposals of Property, Plant, and

Equipment
1
4. Record disposal
Remove cost of asset and accumulated
depreciation. Record proceeds (if any)
and gain or loss on disposition (if any)
28
Cash
xxx
Accumulated Depreciation
Asset
Gain on Disposal
xxx

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CHAPTER
Intangible Assets and Goodwill

1
Do not have physical substance
Rights, privileges and/or
competitive advantages
For example, intellectual property in a
production process
Must be identifiable either:

Can be separated from company and
sold; or
Based on contractual or legal rights
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Accounting for Intangible Assets

1
Accounting for intangible assets
parallels accounting for tangible assets
Recorded at cost including all costs to
make asset ready for use
If intangible asset has a finite (limited)

life, its cost must be systematically
allocated over its useful life
For intangible assets, this is referred to as
amortization rather than depreciation
Intangible assets with an indefinite

(unlimited) life are not amortized
30

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Amortization for Intangibles

1
Amortize over shorter of
Estimated useful life
Legal life
Test for impairment
31

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Intangibles with Finite Lives

1
Patents
Exclusive right to produce for 20 years
Research and development costs

All research costs are expensed
Development costs are capitalized only
if associated with an identifiable,
feasible product
Copyrights
Protection for the life of the creator +
50 years
32

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Intangibles with Indefinite Lives

1
Trademarks and trade names
Word, jingle, symbol that distinguishes
business
Franchises
Contractual agreement to sell products
or services
Licences
Operating rights
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Goodwill
1
Asset representing future economic
benefits arising from the purchase of
a business
Excess of cost over fair market value of
net assets (assets less liabilities) acquired
Represents the extra value relating to a
business when it is purchased
Only identified with the business as a
whole
Not amortized, but subject to an

annual test for impairment
34

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CHAPTER
Presentation of Long-Lived
Assets
1
Statement of Financial Position
Reported as
Property, Plant and Equipment
Intangible Assets
Goodwill
Disclose cost and accumulated

depreciation (amortization) of each
major class of assets
Either in statement or in notes
IFRS also requires additional disclosures

35

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CHAPTER
Presentation of Long-Lived
Assets
1
Income Statement
Depreciation expense, gains and losses
on disposal and impairment losses are
included in the operating section
Statement of Cash Flows

Cash flows from the purchase and sale
of long-lived assets are reported in the
investing section
36

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Return on Assets
1
Measures overall profitability
Profit
.
Return on Assets = Average Total
Assets
Higher is better
37

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Asset Turnover
1
Measures how efficiently a company
uses its assets
Asset Turnover =
Net Sales
Average Total
Assets
Higher is better
38

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Profit Margin Revisited

1
Together, profit margin and asset
turnover explain the return on
assets ratio:
Profit x Asset
Margin Turnover
39

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Return on
Assets
CHAPTER
Comparing IFRS and ASPE
40

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Comparing IFRS and ASPE (Continued)
41

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Copyright Notice
Copyright 2012 John Wiley & Sons Canada, Ltd. All rights reserved.
Reproduction or translation of this work beyond that permitted by
Access Copyright (The Canadian Copyright Licensing Agency) is
unlawful. Requests for further information should be addressed to the
Permissions Department, John Wiley & Sons Canada, Ltd. The
purchaser may make back-up copies for his or her own use only and
not for distribution or resale. The author and the publisher assume no
responsibility for errors, omissions, or damages caused by the use of
these programs or from the use of the information contained herein.
42

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CHAPTER

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Financial

Copyright John Wiley & Sons

1. Determine the cost of property, plant and equipment.

Copyright John Wiley & Sons

Property, Plant, and Equipment

Provide benefits over many years

Copyright John Wiley & Sons

Determining the Cost of Property,

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Land has an unlimited life, therefore

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Asset Retirement Costs

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Buy or Lease? (Continued)

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Factors In Calculating Depreciation

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Example Depreciation Methods

Copyright John Wiley & Sons

Copyright John Wiley & Sons

Annual depreciation expense is calculated

Can be applied using different rates

Copyright John Wiley & Sons

Diminishing-Balance Method (Continued)

Copyright John Wiley & Sons

Useful for factory machinery,

Copyright John Wiley & Sons

Copyright John Wiley & Sons

What would be the best choice of

Copyright John Wiley & Sons

Other Depreciation Issues

Cost vs. revaluation model

Copyright John Wiley & Sons

Revising Periodic Depreciation

Capital expenditures during useful life

Accounted for as a change in estimate

Copyright John Wiley & Sons

Disposals of Property, Plant, and

Depreciation for the fraction of the year

2. Calculate carrying amount

3. Calculate gain or loss

Copyright John Wiley & Sons

Disposals of Property, Plant, and

Copyright John Wiley & Sons

Intangible Assets and Goodwill

Must be identifiable either:

Copyright John Wiley & Sons

Accounting for Intangible Assets

If intangible asset has a finite (limited)

Intangible assets with an indefinite

Copyright John Wiley & Sons

Amortization for Intangibles

Test for impairment

Copyright John Wiley & Sons