Operational Assets:

Utilization and Impairment

Sid Glandon, DBA, CPA

Assistant Professor of Accounting
Depreciation, Depletion and
Amortization

 Means of cost allocation

 Not a method of valuation
 Matching Principle
 Allocation of cost in systematic and
rational manner to the accounting
periods expected to benefit from use of
the asset
Measuring Cost Allocation
 Estimated service life
 Depreciable base
 Original cost less salvage value
 Allocation method
 Time-based methods
 Activity-based methods
Time-Based: Straight-Line Method
 Calculate depreciable base
 Original cost
 Less: salvage or disposal value
 Determine estimated service life
 Divide depreciable base by number
of years in estimated service life
 Equals annual depreciation expense
Time-Based: Declining Balance
 Multiply the straight-line rate by
factor (2 Xs = double declining)
 Current year depreciation
 Multiply the result times the beginning
book value of the asset
 Reduce book value by current year
depreciation
 Repeat the process
Time-Based: Sum of the Years Digits

 Sum the years

 Create fraction
 Numerator-declining number with first
year as the largest number
 Denominator-the sum of the years
 Multiply the declining fraction by the
depreciable base
 Example: Fact Pattern

Original cost $200,000

Salvage 50,000
Depreciable base $150,000
Service life 5 years
Straight Line Depreciation

Depreciable base
Service life

$150,000
= $30,000
5
 Double Declining Balance
Beginning Annual Ending
Book Value DDB Rate Depreciation Balance
$200,000 40% $80,000 $120,000
120,000 40% 48,000 72,000
 Sum of the Years Digits
Depreciation for Year 1
Depreciable base $150,000
SYD Faction for Year 1 33%
Depreciation expense $50,000

Analysis of Sum of Years

Year 1 5
SYD Fraction for Year 1
Year 2 4 Number of years left 5
33%
Year 3 3 Sum of years 15
Year 4 2
Year 5 1
Sum of years 15
Activity-Based
 Output based
 Units of production
 Input based
 Number of hours of service
 Number of miles of service
Activity-Based Methods
 Determine depreciable base
 Determine units of measurement
 Divide depreciable base by units of
measurement
 Equals depreciation per unit
 Determine number of units in year
 Multiply number of units in year by
depreciation per unit
 Activity Based Depreciation
Fact Pattern
Original cost $200,000
Depreciation per unit:
Salvage 50,000 Depreciable base $150,000
Depreciable base $150,000 = $0.50
Estimated units of production 300,000 Estimated units 300,000

First year depreciation:

Production in first year 100,000
Depreciation per unit $0.50
Depreciation expense $50,000
Depletion of Natural Resources
 Cost basis expensing of natural
resources
 Natural resources
 Complete removal of asset
 Replacement only by an act of nature
Depletion
 Activity-based method
 Divide depletion base by estimated
number of units to be extracted
 Equals, depletion per unit
Amortization of Intangible Assets
 Finite useful life intangible assets
 Useful life
 Legal, regulatory, or contractual
 Residual value
 Usually zero
 Allocation method
 Usually straight line
 Exception-software development costs
Intangible Assets
Not Subject to Amortization

 Indefinite life intangible assets

 Goodwill
Partial Year Depreciation
 If asset is placed in service during
year
 Calculate depreciation for full year
 Allocate between years
 Half-year convention
Revision of Depreciation Estimates
 Initial estimates change
 Life
 Salvage value
 Apply prospectively
 Recompute current year depreciation
 Changes do not affect prior periods
Change in Depreciation Method
 Change in accounting principle
resulting in a change in estimate
 Apply prospectively
 Recompute current year depreciation
 Changes do not affect prior periods
Correction of an Error
 Restate all prior periods presented
in the financial statements
 Prior period adjustment to retained
earnings for the earliest period
reported
Impairment of Value
 Carrying value of asset is not
recoverable
 Operational assets held and used in
operations
 Operational assets held for sale
 Intangibles with finite life
Tangible Operational Assets
Finite Life Intangible Assets

 Recovery Test
 If undiscounted sum of future cash
flows is less than book value an
impairment loss is indicated
 Fair Value Test
 The measurement of the impairment
loss is the book value less the fair value
Fair Value
 Market value if there is a market
 Fair value estimate if there is no
market
 Present value of the estimated future
cash flows
Indefinite Life Intangible Assets
 Should be tested for impairment at
least annually
 Impairment loss
 Book value exceeds fair value
Goodwill
 Should be tested for impairment at
least annually
 Impairment loss
 Book value of the reporting unit
exceeds its implied fair value
Operational Assets Held for Sale
 Impairment when classified as held
for sale
 Impairment loss
 Book value exceeds fair value less cost
of disposal
Expenditures
Subsequent to Acquisition

 Repairs and Maintenance

 Expensed as incurred
 Additions
 Capitalized and depreciated over remaining
service life
 Improvements
 Capitalized and depreciated over remaining
service life
 Rearrangements
 Capitalized if they increase future benefits
Cost of Defending Intangible Rights

 Successful defense is capitalized

and amortized over remaining
service life
 Unsuccessful defense is expensed