Study Session 8 - Long Lived Assets - 2022 - 1A

Study Session 8:
FINANCIAL REPORTING AND

ANALYSIS
Reading 22
Long-Lived Assets
New Frontiers Learning Centre 1

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Introduction
 Long-lived assets (LLA) / non-current assets / long-term assets - assets expected to provide economic
benefits over a future period of time, typically greater than one year. LLA could be
 Tangible: property, plant, and equipment (PPE). Includes land, buildings, furniture and fixtures,
machinery and equipment, and vehicles;
 Intangible: lack physical substance. Patents, copyrights, franchises, trademarks etc.
 Long-lived financial assets: Investments in equity or debt securities issued by other companies (not
covered here).
 The first issue in accounting for a LLA is determining its cost at acquisition.
 The second issue is how to allocate the cost to expense over time. The costs of most LLA are
capitalised and then allocated as expenses in the profit or loss (income) statement over the period of
time during which they are expected to provide economic benefits. The two main types of LLA with
costs that are typically not allocated over time are land, which is not depreciated, and those
intangible assets with indefinite useful lives.

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2. ACQUISITION OF LONG-LIVED ASSETS
2.1. Property, Plant, and Equipment
A key concept in accounting for expenditures related to LLA is whether and when such
expenditures are capitalised versus expensed.
 When PPE is purchased, the buyer records the asset at cost. Acquisition costs include
invoice, taxes, shipping, installation and testing. All the expenditures necessary to get the
asset ready for its intended use are capitalized.
 Subsequent expenditures capitalised if they are expected to provide benefits beyond one
year in the future and are expensed otherwise. Expenditures that extend the original life
of the asset are typically capitalised. Cash outflow is CFI.
 Typically expensed costs include: training of staff, routine maintenance/repairs and
insurance. Cash outflow is CFO.

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Practice Questions
1. Which of the following would not be capitalized?

A. Routine maintenance
B. Acquisition costs
C. Subsequent improvements
Answer: A
Routine maintenance costs would be expensed, not capitalized.
2. Which of the following would not be expensed?
A.Insurance
B.Training
C.Taxes on an acquisition
Answer: C
Taxes on an acquisition would be capitalized not expensed.

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Financial Statement Effects

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2.1. PPE – Capitalized Borrowing Costs.
 Borrowing costs related to constructing/acquiring an asset are capitalized as part of its costs as
follows:
 Held-for-use asset: included in PPE & depreciated.
 Held-for-sale asset: included in inventory & expensed as COGS
 Cash outflows prior to completion are CFI
 Interest rate can be:
 Project-specific rate, if applicable
 General borrowing rate
 If borrowed funds are reinvested, interest earned from temporarily investing the funds is
deducted from capitalized interest under IFRS, but not under US GAAP.
 Other interest is expensed:
 Cash outflows are CFF (IFRS) or CFO (US GAAP, IFRS).

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2.1. PPE – Capitalized Borrowing Costs.
 Analytical issues
 Classification of cash flow
 Different companies may classify cash flows differently
 Analyst should make adjustments before comparing
 Interest coverage ratios
 Capitalized interest is generally excluded
 Analyst may include capitalized interest and recompute coverage ratios

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Example: JPG&R Records borrows £5 million to construct a building to house their
recording studio. The interest is 5% compounded annually, with loan payments
starting when construction is completed, which takes 2 years. During construction,
JPG&R invests the unused loan proceeds in money market securities and earns
£90,000 the first year and £40,000 the second.
Under IFRS and US GAAP, how much interest will JPG&R capitalize each year?
 Year 1: £5,000,000 × 5% = £250,000. £250,000 − £90,000 = £160,000. US

GAAP: £250,000; IFRS: £160,000.
 Year 2: £5,250,000 × 5% = £262,500. £262,500 − £40,000 = £222,500. US

GAAP: £262,500; IFRS: £222,500.

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2.2. Intangible Assets
Under IFRS, identifiable intangible assets must meet three definitional criteria. They must be
(1) identifiable (either capable of being separated from the entity or arising from contractual or
legal rights),
(2) under the control of the company, and
(3) expected to generate future economic benefits.
In addition, two recognition criteria must be met:
(4) It is probable that the expected future economic benefits of the asset will flow to the
company, and
(5) the cost of the asset can be reliably measured.
Intangible assets may have finite (amortized over the life) or indefinite life (not amortized, tested
for impairment).

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2.2. Intangible Assets
2.2.1. Intangible Assets Purchased in Situations Other Than Business Combinations

 E.g. Buying a patent. Treated at acquisition the same way as tangible LLA. i.e. recorded
at FV. Assumed to be equivalent to the purchase price.
 If several intangible assets are acquired as part of a group, the purchase price is allocated
to each asset on the basis of its FV. No goodwill.
2.2.2. Intangible Assets Developed Internally

 Costs to internally develop are generally expensed when incurred.
 In some cases, can be capitalised. The general analytical issues related to the capitalising-
versus-expensing decision apply here—namely, comparability across companies and the
effect on an individual company’s trend analysis.

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2.2.2. Intangible Assets Developed Internally (2 stages – Research & Development)
“Research” means creating an idea and determining whether it is feasible; “development” means taking an idea
that has been shown to be feasible and turning it into a practical product/service.
 Cash outflow is CFO
 Research & Development (R& D) under IFRS
 Research costs expensed
 Development costs may be capitalized
• R & D under US GAAP

 Generally expensed as incurred
 For-sale software costs expensed until technological feasibility is established, capitalized thereafter.
 Internal software costs expensed until probable completion and use as intended, capitalized thereafter.

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2.2.3. Intangible Assets Acquired in a Business Combination
Under the acquisition method, the company identified as the acquirer allocates the
purchase price to each asset acquired (and each liability assumed) on the basis of its
FV. If the purchase price exceeds the sum of the amounts that can be allocated to
individual identifiable assets and liabilities, the excess is recorded as goodwill.
 IFRS
 If identifiable, capitalized at fair market value
 If not identifiable, goodwill
 US GAAP
 Capitalized at fair market value separate from goodwill
1. Arises from legal/contractual rights
2. Separable from acquired company
 Otherwise, goodwill
N.B: Goodwill is not amortized but tested for impairment at least annually.
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Practice Questions
3. Which of the following types of intangible assets would be expensed?
A. Acquired through business combination

B. Acquired through means other than a business combination
C. Developed internally
Answer: C
Only intangible assets developed internally would be expensed.
4. The cost of which of the following assets is least likely expensed over time?
A. Intangible assets with a definite useful life

B. Land acquired with the intent to construct a factory on it
C. Machinery with a useful life of 5 years
Answer: B
Land is a non-depreciable asset.
Intangible assets with a definite useful life are amortized over time.
Machinery with a useful life of more than 1 year is depreciated over its
useful life.

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C. Under IFRS, research and development costs are expensed until certain
criteria are met, including that technical feasibility has been established
and the company intends to use it.

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3. DEPRECIATION AND AMORTISATION OF LONG-LIVED ASSETS
Depreciation & amortisation are effectively the same concept. One is for tangible & the other for
intangibles. For Natural resources (wasting assets), it is called ...
 They are non-cash expenses & do not affect CFS. Only effect is on taxable income and taxes payable.
 Are added back in the section of the CFS that reconciles net income to operating CF (Indirect
method).
3.1. Depreciation Methods and Calculation of Depreciation Expense
Depreciation methods include the:

 straight-line method, in which the cost of an asset is allocated to expense evenly over its useful
life;
 accelerated methods, in which the allocation of cost is greater in earlier years (DDB, 150%,
etc.); and
 the units-of-production method (units of activity), in which the allocation of cost corresponds
to the actual use of an asset in a particular period.

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The choice of depreciation method affects the amounts reported on the financial statements: i.e., the amounts for
reported assets and operating and net income & consequently a variety of financial ratios. E.g., fixed asset turnover,
total asset turnover, operating profit margin, operating return on assets, and return on assets.
 Factors
 Original cost
 Salvage (residual) value
 Useful life (years)
 Lifetime production
 Depreciation method
Depreciable value(cost) = Original cost − Salvage value

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$
Purchase price +
X
installation costs + Historic cost
(X)
transport costs Accumulated dep
Net book value X
Cumulative total of
depreciation expensed
to I/S
B/S value, carrying value,
book value

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 Straight-line
 Same depreciation every year
Depreciable Value
Annual Depreciation 
Useful Life
Original Cost  Salvage Value


Useful Life
 Depreciation for a fraction of a year

 Use that fraction of the annual depreciation
 Aggressive depreciation method

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 Double declining balance

 Same proportion of beginning book value every year
2
Annual Depreciation   Beginning Book Value
Useful Life
 Do not depreciate below salvage value
Annual Depreciation 
 2 
  Beginning Book Value, 
Min Useful Life
 
 Remaining Depreciable Value 

 Use that fraction of the annual depreciation
 Conservative depreciation method

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 Units of production/activity
 Units depend on the nature of the asset
 Items produced (e.g., ball bearings produced by a
machine)
 Distance (e.g., mileage traveled by a delivery truck)
 Hours (e.g., electric generator)
 Depreciation is proportional to units of activity
Annual Units
Annual Depreciation   Depreciable Value
Lifetime Units

 No adjustment necessary
 May be aggressive or conservative, depending on production
 Ensure you do not depreciate lower than salvage value.

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Example: On 1/7/07, Tripling Systems purchases a tennis ball–making
machine for a total cost of $1,000,000. They expect the machine to have a
useful life of 10 years (during which time it is expected to manufacture 10
million tennis balls) and a salvage value of $200,000. Through the end of
2007 (the end of their fiscal year), the machine produces 450,000 tennis
balls. The production for subsequent years is:
Compute Tripling’s depreciation expense each year using the straight-line,

double declining balance, and units-of-production methods.

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Example (cont.)
Depreciable value = $1,000,000 − $200,000 = $800,000
Straight-line
$800,000
Annual depreciation   $80,000 / year
10 years
They owned the machine for 6 months in 2007, so

6
2007 depreciation  $80,000   $40,000
12
Depreciation for 2008–2014 is $80,000/year.

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Example (cont.)
Double declining balance
The proportion of the book value depreciated each year is 2/10 = 20%. The
first full year’s depreciation would be
$1,000,000 × 20% = $200,000
Because they owned it for 6 months, the 2007 depreciation is
6/12 × $200,000 = $100,000
and the ending book value is
$1,000,000 − $100,000 = $900,000

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Example (cont.)
Double declining balance (cont.)
*20% of $235,930 = $47,186, which would drop the book value below the
salvage value.

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Example (cont.)
Units of production
As with double declining balance, units-of-production is best shown in a table:

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Example (cont.)

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Example (cont.)

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Practice Question
5. On Jan 1, 2013, Carlton Tuxedos purchased machinery at a cost of $2 million. They

expect it to have a useful life of 10 years and a salvage value of $100,000. The
amounts shown by Carlton for depreciation expense on this machinery in 2014 using
the straight-line and the double declining balance methods, respectively, are closest to:
Straight-line DDB
A. $190,000 $304,000
B. $190,000 $320,000
C. $200,000 $320,000
Answer: B.
Straight-line depreciation = ($2 million − $100,000)/10 years
= $190,000/year
DDB depreciation, 2013 = $2 million × 2/10 = $400,000
DDB depreciation, 2014 = ($2 million − $400,000) × 2/10 = $320,000

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3. DEPRECIATION AND AMORTISATION OF LONG-
LIVED ASSETS

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Estimates, Component Depreciation
 Estimates
 Useful life
 Longer useful life: aggressive
 Shorter useful life: conservative
 Salvage (residual) value
 Higher salvage value: aggressive
 Lower salvage value: conservative
 Given longer useful life or higher salvage value:
 Depreciation is lower
 EBIT, net income, and ROE are higher
 Shorter life or lower salvage value has opposite effects
 Changes in estimates are shown prospectively
 No need to restate past financial statements
 Component depreciation
 Depreciating each component (e.g., engine, transmission, body/frame of a delivery truck) separately
 Required under IFRS
 Allowed, but seldom used, under US GAAP
Issue: The firm must estimate the useful lives of each component and depreciate each separately.
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Change in Estimate
Example: Seaview Manufacturing bought a machine on Jan 1, 2010 for $500,000; they use
straight-line depreciation with a useful life of 6 years and a salvage value of $80,000. On Jan
1, 2014, they change their estimates to a remaining useful life of 4 years and a salvage value
of $100,000. What effect will this have on Seaview’s financial statements?
The original depreciable value was $500,000 − $80,000 = $420,000, and the annual
depreciation was $420,000/6 years = $70,000/year. After 4 years, the remaining book value
was:
$500,000 − 4($70,000) = $220,000
The new depreciable value is $220,000 − $100,000 = $120,000, and the new annual
depreciation is $120,000/4 years = $30,000/year. There will be no immediate change to the
financial statements, but the annual depreciation, starting in 2014, will drop to $30,000.

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AMORTISATION
 Intangible assets with finite useful lives
 Acquired patents or copyright with specific expiration date
 Acquired customer list expected to provide benefits for a specific period
 Acquired license with specific expiration date and no right to renew
 Acquired trademark for a product company plans to phase out over a specific period.
 Factors
 Original cost
 Residual value
 Useful life: based on expected use of asset, considering factors that may limit the life of the asset, such as
legal, regulatory, contractual, competitive, or economic factors
 Amortized over the useful life
 Straight-line
 Accelerated (declining balance)
 Units-of-activity
 Intangible assets with indefinite useful lives (tested for impairment)
 Acquired license with specific expiration date but can be renewed at little or no cost
 Acquired trademark with specific expiration date but can be renewed at minimal cost & relates to a
product the firm plans to continue selling for the foreseeable future.
 Goodwill

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4. THE REVALUATION MODEL
 Cost model
 Carrying value is original cost less accumulated depreciation/amortization
 Revaluation model
 Carrying value is fair market value at revaluation date less subsequent accumulated
depreciation/amortization.
 On disposal of asset, Revaluation surplus transferred to Rtd. Earnings.
 Rarely used for tangible assets, more rarely for intangibles
 US GAAP
 Cost model only
 IFRS
 Cost model or revaluation model
 May use both models, but only one per asset class
 If using the revaluation model on an asset class, all assets in that class must be
revalued simultaneously

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 Accounting treatment
 Revaluation that decreases value
 Loss appears on income statement
 Subsequent reversal (up to the amount of the loss for that asset class) appears
on the income statement
 Subsequent reversal (beyond the amount of the loss for that asset class) goes to
equity, Revaluation Surplus
 Revaluation that increases value
 Gain goes to equity, Revaluation Surplus
 Subsequent reversal (up to the amount of the gain for that asset class) goes to
equity, Revaluation Surplus
 Subsequent reversal (beyond the amount of the gain for that asset class) appears
on income statement

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Example: On 2/1/08, See-Saw Systems (S 3) purchased a patent valued at €8 million; it
had a useful life of 8 years with zero residual value, and S 3 used straight-line
depreciation. On 2/1/10, the fair value of the patent had decreased to €4.5 million. On
2/1/12, the fair value had increased to €6 million, and on 2/1/14, the fair value had
dropped to €1 million. Assuming S 3 uses the revaluation model, determine how the
gains and losses are reported.
Straight-line amortization is €8 million ÷ 8 years = €1 million per year, so the book

value on 2/1/10 is:
€8 million − 2(€1 million) = €6 million
The revaluation to €4.5 million results in a €1.5 million loss, which appears on S 3’s
income statement.

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Example:
Straight-line amortization is now €4.5 million ÷ 6 years = €750,000 per year. On 2/1/12
the book value is:
€4.5 million − 2(€750,000) = €3 million
The revaluation to €6 million results in a €3 million gain. Because S 3 had a previous

€1.5 million loss on its income statement, the first €1.5 million of the gain is shown on
the income statement to reverse the loss; the remaining €1.5 million gain goes to the
Revaluation Surplus account on S 3’s balance sheet.
Straight-line amortization is now €6 million ÷ 4 years = €1.5 million per year.

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Example:
On 2/1/14 the book value is:
€6 million − 2(€1.5 million) = €3 million
The revaluation to €1 million results in a €2 million loss. Because S3 had a previous

€1.5 million gain in the Revaluation Surplus account in equity, the first €1.5 million
of the loss reduces the Revaluation Surplus account to zero. The remaining
€500,000 million loss is shown on S3’s income statement.

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Practice Questions
6. Which of the following statements about upward revaluations of long-lived assets is most accurate?
A. US GAAP only allows reversal of impairment losses for assets held for sale.
B. IFRS only allows increases in the value of long-lived assets to the extent of previously recognized
revaluation losses.
C. Under IFRS, reversal of revaluation loss does not affect shareholders’ equity.
Answer: A
Under IFRS, upward revaluations do impact shareholders’ equity (either directly through the revaluation
surplus) or indirectly (through the income statement). Further, under IFRS, revaluations may take the
value of an asset beyond its historical cost.
7. The gains and losses for the year resulting from revaluation of assets are most likely:
A. Shown on the consolidated statement of recognized income and expense
B. Reflected on the consolidated income statement
C. Reported on the consolidated balance sheet
Answer: A
The gains and losses resulting from revaluation of asset are recognized directly in equity and shown on
the consolidated statement of recognized income and expense as well as in the notes to the financial
statements.
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62. A company, which prepares its financial statements in accordance with
IFRS uses the revaluation model to value land. At the end of the current
year, the value of the land has increased and will be adjusted on the
balance sheet. Which of the following statements is most accurate? In the
current period, the revaluation of land will:
A. Increase the return on sales

B. Decrease the return on sales
C. Decrease the debt-to-equity ratio.

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5. IMPAIRMENT OF ASSETS
Impairment charges reflect an unanticipated decline in the value of an asset.
 Tangible assets held for use – Accounting Standards do not require annual tests except when
there are indications of asset impairment (e.g., obsolescence, decline in demand)
 IFRS
 Recoverable amount is the greater of
 Fair value less selling costs
 Value in use (= PV of future cash flows)
 If carrying amount > recoverable amount, asset is impaired
 Write down to recoverable amount
 Show loss on income statement
 Subsequent reversal is allowed
 US GAAP
 If carrying value > undiscounted future cash flows, asset is impaired
 If impaired, write down to fair value (or value in use—discounted future cash flows—if fair
value is unknown)
 Show loss on income statement
 No reversal is allowed
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 Tangible assets held for sale
 Moved from PPE to non-current asset held for sale
 No longer depreciated/depleted
 Impaired if carrying value > fair value less selling costs
 If impaired, write down to fair value less selling costs
 Loss shown on income statement
 Losses can be reversed (IFRS and US GAAP)
 Intangibles with finite lives
 Not tested annually, tested only upon significant event
 Treatment is the same as tangible assets
 Intangibles with indefinite lives
 Not amortized, tested at least annually

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 Effect on balance sheet
 Decreased assets
 Decreased equity
 Possible decreased liabilities (deferred tax liabilities)
 Effect on income statement
 Year of impairment
 Lower income from continuing operations
 Lower net income
 Subsequent years
 Higher income from continuing operations (lower depreciation)
 Effect on statement of cash flows
 None
 Disclosure
 Footnotes
 MD&A New Frontiers Learning Centre 46
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Example: Mingus Products (MP) has cat food manufacturing equipment valued at
$28 million. MP depreciates this equipment straight-line with a remaining useful
life of 6 years and a salvage value of $4 million. A newly developed canning
process reduces the fair value to $22 million, with $300,000 expected as selling
costs; the undiscounted value of the future cash flows is $25 million, and the
discounted value of the future cash flows is $21 million.
1. Under IFRS and US GAAP, what will be the effects on MP’s financial
statements (if any) this year and next year?
2. Without any impairment, the value of the equipment on the balance sheet will
be $28 million, and next year’s depreciation expense will be $4 million [= ($28
million − $4 million)/6].

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IFRS
The recoverable value is the larger of $21.7 million (= $22 million − $300,000) and $21
million, or $21.7 million. Thus, MP will reduce the value of the equipment to $21.7 million,
they will record a loss on this year’s income statement of $6.3 million (= $28 million − $21.7
million), and next year’s depreciation will be $2.95 million [= ($21.7 million − $4
million)/6]. This will increase next year’s pretax income by $1.05 million (= $4 million −
$2.95 million). Cash flow will be unchanged.
US GAAP
To determine whether there is an impairment, we compare the carrying of $28 million to the
undiscounted future cash flows of $25 million; the carrying value is higher, so the asset is
impaired. MP will write it down to its fair value: $22 million. They will record a loss on this
year’s income statement of $6 million (= $28 million − $22 million), and next year’s
depreciation will be $3 million [= ($22 million − $4 million)/6]. This will increase next
year’s pretax income by $1 million (= $4 million − $3 million). Cash flow will be
unchanged.
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Practice Questions
8. Which of the following statements about reversals of impairment losses is least accurate?
A.IFRS allows reversals of impairment losses only for assets held for sale.
B.US GAAP does not allow reversals of impairment losses for assets held for use.
C.US GAAP allows reversals of impairment losses for assets held for sale.
Answer: A
IFRS allows reversals of impairment losses if the values of assets increase, regardless of their classification.
9. Which of the following is least likely regarding the effects of impairment recognition on a company’s
financial statements?
A. The carrying value of noncurrent assets decreases.

B. Net income falls.
C. Cash flow from operating activities falls.
Answer: C
Impairment recognition does not affect a company’s cash flows.
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Practice Questions
10. Bowstern, Inc. has experienced sharp declines in demand for one of its product
lines. As a result, many of its manufacturing assets have become impaired.
Compared to the values without the impairment, Bowstern’s debt-to-equity
ratio in the year of the impairment and its ROA in the following year will most
likely be:
Debt-to-equity ROA
A. Lower Lower
B. Higher Lower
C. Higher Higher
Answer: C
In the year of the impairment, Bowstern’s assets and equity will be lower with the
impairment than without, and its debt will be unchanged; thus, its debt-to-equity
ratio will be higher.
In the following year, its net income will be higher because of lower depreciation,
and its assets will be lower; thus, its ROA will be higher.

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62. A Canadian printing company which prepares its financial statements according to IFRS has
experienced a decline in the demand for its products. The following information relates to the
company’s printing equipment as of 31 December 2010.
C$
Carrying value of equipment (net book value) 500,000
Undiscounted expected future cash flows 550,000
Fair value 480,000
Costs to sell 50,000
Value in use 440,000
The impairment loss (in C$) is closest to:
A. 0
B. 60,000
C. 70,000

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6. DERECOGNITION OF LLA
 Derecognition
 Asset removed from balance sheet
 Accumulated depreciation/amortization removed from balance sheet
 Possible gain/loss recognized on income statement
 Possible cash flow recognized on cash flow statement
 Methods of disposal
 Sale
 Exchange
 Abandonment
 Spin off.
 For disposals by selling, classify as held-for-sale when they meet accounting criteria
(immediately AFS in current condition & sale is highly probable). For others leave as
held-for-use until disposal.

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Sale
Gain/loss = Net proceeds − Carrying value
Carrying value = Original cost – Accum. depreciation/amortization (for cost model. For revaluation model,
most recent valuation less subsequent depreciation)
Net proceeds = Sale price – selling costs

Net proceeds is CFI
Exchange
Gain/loss = Fair value of asset received − Carrying value. (No CFS effect)
Abandonment
Accounting is identical to a sale
Net proceeds = 0 − cost of disposal
Net proceeds is CFI
In a spin-off, an entire cash-generating unit of a Coy is separated into a new entity, with shareholders of
the parent Coy receiving a proportional number of shares in the new Coy. All the assets of the new
entity are removed from the balance sheet of the parent at the time of the spin-off.
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13. Moussilauke Diners Inc., a hypothetical company, as a result of revamping its
menus to focus on healthier food items, sells 450 used pizza ovens and reports
a gain on the sale of $1.2 million. The ovens had a carrying amount of $1.9
million (original cost of $5.1 million less $3.2 million of accumulated
depreciation). At what price did Moussilauke sell the ovens?
A. $0.7 million
B. $3.1 million
C. $6.3 million
Solution:
B is correct. The ovens had a carrying amount of $1.9 million, and Moussilauke
recognized a gain of $1.2 million. Therefore, Moussilauke sold the ovens at a price
of $3.1 million. The gain on the sale of $1.2 million is the selling price of $3.1
million minus the carrying amount of $1.9 million. Ignoring taxes, the cash flow
from the sale is $3.1 million, which would appear as a cash inflow from investing.

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Example: TJ Hair Products has three machines that they want to replace with newer models. Machine 1
has a net book value of £2 million and a fair value of £2.5 million; TJ exchanges it for a newer machine
with a fair value of £2.5 million. Machine 2 has a net book value of £1.2 million; TJ sells it for £900,000
and pays £20,000 to ship it to the buyer. Machine 3 has a net book value of £500,000 and is in such poor
shape that there is no market for it. TJ pays a scrap dealer £10,000 to haul it away. Determine the effect
of these transactions on TJ’s financial statements.
Machine 1
TJ removes the original cost of Machine 1 and its accumulated depreciation from its balance sheet. TJ
records £2.5 million of PP&E for the new machine on its balance sheet. TJ shows a gain of £500,000 (=
£2.5 million – £2 million) on its income statement. TJ’s cash flow statement is unaffected by this
transaction.

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Machine 2
TJ removes the original cost of Machine 2 and its accumulated depreciation from its balance
sheet. TJ shows a loss of £320,000
[= (£900,000 – £20,000) – £1.2 million] on its income statement. TJ shows a CFI inflow of
£880,000 (= £900,000 – £20,000) on its cash flow statement.
Machine 3
TJ removes the original cost of Machine 3 and its accumulated depreciation from its balance
sheet. TJ shows a loss of £510,000
[= (£0 – £10,000) – £500,000] on its income statement. TJ shows a CFI outflow of £10,000
(= £0 – £10,000) on its cash flow statement.

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Practice Questions
11. Which of the following is not a result of derecognition of a long-lived asset?
A. Asset removed from balance sheet
B. Accumulated depreciation/amortization removed from income statement
C. Possible gain/loss recognized on income statement
Answer: B
Asset removed from balance sheet
Accumulated depreciation/amortization removed from balance sheet
Possible gain/loss recognized on income statement
Possible cash flow recognized on cash flow statement
12. Bortech Systems is replacing all of the computers in its offices with newer models. They record a loss on the sale of
the old computers of $100,000. The original cost was $400,000 and the accumulated depreciation was $250,000.
The cash flow that Bortech will record for the sale of the computers is closest to a:
A.$100,000 CFI outflow

B.$50,000 CFO inflow
C.$50,000 CFI inflow
Answer: C
The cash flow is classified as CFI. The carrying value of the computers was:
$400,000 − $250,000 = $150,000
The proceeds from the sale were:
$150,000 − $100,000 = $50,000

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7. PRESENTATION AND DISCLOSURES
Under IFRS, for each class of PPE, a company must disclose the measurement bases, the depreciation method, the useful lives
(or, equivalently, the depreciation rate) used, the gross carrying amount and the accumulated depreciation at the beginning and
end of the period, and a reconciliation of the carrying amount at the beginning and end of the period.
In addition, disclosures of restrictions on title and pledges as security of PPE and contractual agreements to acquire PPE are
required. If the revaluation model is used, the date of revaluation, details of how the fair value was obtained, the carrying amount
under the cost model, and the revaluation surplus must be disclosed.
The disclosure requirements under US GAAP are less exhaustive. Depreciation expense for the period, the balances of major
classes of depreciable assets, accumulated depreciation by major classes or in total, and a general description of the depreciation
method(s) used WRT major asset classes
Under IFRS, for each class of intangible assets, a company must disclose whether the useful lives are indefinite or finite.
If finite, for each class of intangible asset, a company must disclose the useful lives (or, equivalently, the amortisation rate) used,
the amortisation methods used, the gross carrying amount and the accumulated amortisation at the beginning and end of the
period, where amortisation is included on the income statement, and a reconciliation of the carrying amount at the beginning and
end of the period.
If an asset has an indefinite life, the company must disclose the carrying amount of the asset and why it is considered to have an
indefinite life. Disclosure on restrictions and revaluation also apply as for PPE.
Under US GAAP, companies are required to disclose the gross carrying amounts and accumulated amortization in total and by
major class of intangible assets, the aggregate amortization expense for the period, and the estimated amortization expense for the
next five fiscal years
Disclosure about impairments also differs under IFRS & US GAAP. New Frontiers Learning Centre 60
2022
7. PRESENTATION AND DISCLOSURES
If cost model used for PPE and Straight-line depreciation;

Estimated total useful life = Time elapsed since purchase (Age) + Estimated remaining life
Historical cost ÷ annual = Estimated total useful life

depreciation expense
Historical cost = Accumulated depreciation + Net PPE
Equivalently

Estimated total useful life = Estimated age of equipment + Estimated remaining life
Historical cost ÷ annual = Accumulated depreciation ÷ annual + Net PPE ÷annual depreciation expense
depreciation expense depreciation expense

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8. INVESTMENT PROPERTY
IFRS –
 Property that is owned (or, in some cases, leased under a finance lease) for the purpose of
earning rentals or capital appreciation or both. Excludes tangible LLA held for sale in the
ordinary course of biz.
 Recognized using cost or FV model. FV model Revaluation model.
 If cost used, disclose FV
 Firm must use same model for Investment property (cost or FV) and cannot change choice after
one model chosen.
 In FV method, all changes in the FV of the asset affect net income.
 To use the FV model, Coy must be able to reliably determine the property’s FV on a continuing
basis. Firm must disclose how fair value is determined & reconcile beginning and ending values
US GAAP - No specific definition of investment property. Most operating companies and real
estate companies in the US that hold investment-type property use the historical cost model.

2022
8. INVESTMENT PROPERTY
Issues reclassifying to and from investment property

2022

Study Session 8 - Long Lived Assets - 2022 - 1A

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Study Session 8:

FINANCIAL REPORTING AND

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1. Which of the following would not be capitalized?

2. Which of the following would not be expensed?

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 Year 1: £5,000,000 × 5% = £250,000. £250,000 − £90,000 = £160,000. US

 Year 2: £5,250,000 × 5% = £262,500. £262,500 − £40,000 = £222,500. US

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2.2.1. Intangible Assets Purchased in Situations Other Than Business Combinations

2.2.2. Intangible Assets Developed Internally

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• R & D under US GAAP

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2. Separable from acquired company

A. Acquired through business combination

A. Intangible assets with a definite useful life

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3.1. Depreciation Methods and Calculation of Depreciation Expense

Depreciation methods include the:

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Depreciable value(cost) = Original cost − Salvage value

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Original Cost  Salvage Value

 Depreciation for a fraction of a year

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 Double declining balance

 Do not depreciate below salvage value

 Depreciation for a fraction of a year

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 Depreciation for a fraction of a year

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Compute Tripling’s depreciation expense each year using the straight-line,

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Depreciable value = $1,000,000 − $200,000 = $800,000

They owned the machine for 6 months in 2007, so

Depreciation for 2008–2014 is $80,000/year.

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Double declining balance

$1,000,000 × 20% = $200,000

Because they owned it for 6 months, the 2007 depreciation is

6/12 × $200,000 = $100,000

and the ending book value is

$1,000,000 − $100,000 = $900,000

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Double declining balance (cont.)

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As with double declining balance, units-of-production is best shown in a table:

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5. On Jan 1, 2013, Carlton Tuxedos purchased machinery at a cost of $2 million. They

DDB depreciation, 2013 = $2 million × 2/10 = $400,000