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Chapter 9-1

9
REPORTING AND ANALYZING LONG-LIVED ASSETS

Chapter 9-2

Financial Accounting, Sixth Edition

Study Objectives
1. 2. Describe how the cost principle applies to plant assets. Explain the concept of depreciation.

3.

Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.
Describe the procedure for revising periodic depreciation. Explain how to account for the disposal of plant assets. Describe methods for evaluating the use of plant assets. Identify the basic issues related to reporting intangible assets.

4. 5. 6. 7.

8.

Indicate how long-lived assets are reported in the financial statements.

Chapter 9-3

Reporting and Analyzing Long-Lived Assets

Plant Assets
Determining the cost of plant assets Accounting for plant assets Analyzing plant assets

Intangible Assets
Accounting for intangibles assets Types of intangibles assets Financial statement presentation of long-lived assets

Chapter 9-4

Chapter 9-5 . plant and equipment. and fixed assets. plant. and equipment. except for land. are not intended for sale to customers. Referred to as property.Plant Assets Plant assets are resources that have     Section One physical substance (a definite size and shape). are used in the operations of a business. are expected to provide service to the company for a number of years.

Plant Assets Section One Plant assets are critical to a company’s success Illustration 9-1 Chapter 9-6 .

Determining the Cost of Plant Assets Cost Principle . .costs included in a plant asset account. Capital expenditures . Revenue expenditure – costs incurred to acquire a plant asset that are expensed immediately. Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.requires that companies record plant assets at cost. Chapter 9-7 SO 1 Describe how the cost principle applies to plant assets.

Determining the Cost of Plant Assets
Cost - cash paid in a cash transaction or the cash
equivalent price paid.
Cash equivalent price is the
 

fair value of the asset given up or fair value of the asset received,

whichever is more clearly determinable.

Chapter 9-8

SO 1 Describe how the cost principle applies to plant assets.

Determining the Cost of Plant Assets
Land
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account. Costs typically include:
1) cash purchase price, 2) closing costs such as title and attorney’s fees,

3) real estate brokers’ commissions, and
4) accrued property taxes and other liens on the land assumed by the purchaser.
Chapter 9-9

SO 1 Describe how the cost principle applies to plant assets.

Determining the Cost of Plant Assets
Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000

($7,500 in costs less $1,500 proceeds from salvaged materials).
Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000.

Required: Determine the amount to be reported as the cost of
the land.

Chapter 9-10

SO 1 Describe how the cost principle applies to plant assets.

Determining the Cost of Plant Assets
Required: Determine amount to be reported as the cost of the land.

Land
Cash price of property ($100,000) Net removal cost of warehouse ($6,000) Attorney's fees ($1,000) Real estate broker’s commission ($8,000) Cost of Land $100,000 6,000 1,000 8,000 $115,000

Chapter 9-11

SO 1 Describe how the cost principle applies to plant assets.

  Limited useful lives. fences. landscaping. . Expense (depreciate) the cost of land improvements over their useful lives. parking lots.Determining the Cost of Plant Assets Land Improvements Includes all expenditures necessary to make the improvements ready for their intended use.  Examples: driveways. Chapter 9-12 SO 1 Describe how the cost principle applies to plant assets. and underground sprinklers.

Determining the Cost of Plant Assets Buildings Includes all costs related directly to purchase or construction.  Construction costs:  Contract price plus payments for architects’ fees.) and real estate broker’s commission. Remodeling and replacing or repairing the roof. building permits. and plumbing. title insurance. closing costs (attorney’s fees. electrical wiring. floors. Chapter 9-13 . SO 1 Describe how the cost principle applies to plant assets. etc. Purchase costs:  Purchase price. and excavation costs.

and testing the unit. installing. SO 1 Describe how the cost principle applies to plant assets. Expenditures required in assembling.Determining the Cost of Plant Assets Equipment Include all costs incurred in acquiring the equipment and preparing it for use. Freight charges. Insurance during transit paid by the purchaser. Costs typically include:      Cash purchase price. Sales taxes. Chapter 9-14 .

320.Determining the Cost of Plant Assets Illustration: Lenard Company purchases a delivery truck at a cash price of $22. Truck Cash price Sales taxes $22. .000 1.820 SO 1 Describe how the cost principle applies to plant assets. and a three-year accident insurance policy $1.000. Compute the cost of the delivery truck.320 Painting and lettering Cost of Delivery Truck Chapter 9-15 500 $23. motor vehicle license $80. Related expenditures are sales taxes $1.600. painting and lettering $500.

and a three-year accident insurance policy $1. Equipment License expense 23. painting and lettering $500.320. motor vehicle license $80.600.000. Prepare the journal entry to record these costs.Determining the Cost of Plant Assets Illustration: Lenard Company purchases a delivery truck at a cash price of $22.600 25.500 SO 1 Describe how the cost principle applies to plant assets. .820 80 Prepaid insurance Cash Chapter 9-16 1. Related expenditures are sales taxes $1.

Little or no down payment. Shared tax advantages.lessees show the asset and liability on the balance sheet. 4. Capital lease . Reduced risk of obsolescence. Chapter 9-17 SO 1 Describe how the cost principle applies to plant assets. Some advantages of leasing 1. 2. 3. . Assets and liabilities not reported.Determining the Cost of Plant Assets To Buy or Lease? A lease is a contractual agreement in which the owner of an asset (lessor) allows another party (lessee) to use the asset for a period of time at an agreed price.

Chapter 9-18 .

Accounting for Plant Assets Depreciation Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. not land.  Depreciable.   Process of cost allocation. and equipment. buildings. . Applies to land improvements. not asset valuation. Chapter 9-19 SO 2 Explain the concept of depreciation. because the revenue-producing ability of asset will decline over the asset’s useful life.

Accounting for Plant Assets Factors in Computing Depreciation Illustration 9-6 Cost Useful Life Salvage Value Chapter 9-20 SO 2 Explain the concept of depreciation. .

S. companies Chapter 9-21 SO 3 . Examples include: (1) Straight-line method.Accounting for Plant Assets Depreciation Methods Management selects the method it believes best measures an asset’s contribution to revenue over its useful life. (2) Declining-balance method. Illustration 9-7 Use of depreciation methods in major U. (3) Units-of-activity method.

Required: Compute depreciation using the following.Accounting for Plant Assets Illustration: Bill’s Pizzas purchased a small delivery truck on January 1. . (b) Units-of-Activity. (a) Straight-Line. and contrast its expense pattern with those of other methods. Chapter 9-22 SO 3 Compute periodic depreciation using the straight-line method. 2012. (c) Declining Balance.

Illustration 9-8 Chapter 9-23 SO 3 Compute periodic depreciation using the straight-line method.Accounting for Plant Assets Straight-Line   Expense is same amount for each year. Depreciable cost = Cost less salvage value. and contrast its expense pattern with those of other methods. .

000 12.200 9.400 2.400 2.800 7.400 4.000 12.000 20% 20 20 20 20 $ 2.400 $ 2. . and contrast its expense pattern with those of other methods.000 2.000 Depreciation expense Accumulated depreciation 2.000 12. Book Value 2012 2013 2014 2015 2016 2012 Journal Entry Chapter 9-24 $ 12. Deprec.600 8.600 12.Accounting for Plant Assets Illustration: (Straight-Line Method) Illustration 9-9 Year Depreciable Cost x Rate = Annual Expense Accum.400 2.200 5.400 $ 10.400 1.400 SO 3 Compute periodic depreciation using the straight-line method.400 2.000 12.800 3.

000 12.600 9.400 2.400 2.000 Journal entry: 2012 Chapter 9-25 Depreciation expense Accumultated depreciation 1. 2010.800 4.000 12.400 2.000 11.800 SO 3 . Deprec.400 2.400 12.800 1. $ 1.400 600 $ 12.400 2.400 2.Accounting for Plant Assets Illustration: (Straight-Line Method) Partial Year Assume the delivery truck was purchased on April 1.000 12.000 12. Year 2012 2013 2014 2015 2016 2017 Depreciable Cost $ 12.200 6.000 Accum.800 2.400 2.000 12.000 x x x x x x Rate 20% = 20% = 20% = 20% = 20% = 20% = Annual Expense $ 2.400 2.400 x 3/12 = x Partial Year 9/12 = Current Year Expense $ 1.

and contrast its expense pattern with those of other methods.Accounting for Plant Assets Declining-Balance   Accelerated method. Chapter 9-26 SO 3 Compute periodic depreciation using the straight-line method.  Double declining-balance rate is double the straight-line rate. . Decreasing annual depreciation expense over the asset’s useful life.  Rate applied to book value.

685 40% 40 40 40 40 $ 5.800 4.315 12.680 2.200 5.Accounting for Plant Assets Illustration: (Declining-Balance Method) Beginning Book value Declining Balance x Rate = Illustration 9A-2 Year Annual Expense Accum. Book Value 2012 2013 2014 2015 2016 2012 Journal Entry Chapter 9-27 13.200 SO 3 * Computation of $674 ($1.872 1.123 685* $ 5.200 3.000 Depreciation expense Accumulated depreciation 5.120 1. Deprec.808 1. .685 x 40%) is adjusted to $685.200 8.808 1.192 11.680 2.320 10.800 4.685 1.000 $ 7.000 7.

Accounting for Plant Assets Units-of-Activity  Companies estimate total units of activity to calculate depreciation cost per unit. Illustration 9A-3   Chapter 9-28 SO 3 Compute periodic depreciation using the straight-line method. . Expense varies based on units of activity. Depreciable cost is cost less salvage value. and contrast its expense pattern with those of other methods.

000 0.12 0.000 Depreciation expense Accumulated depreciation 1.400 $ 1.800 12.12 0.Accounting for Plant Assets Illustration: (Units-of-Activity Method) Illustration 9A-4 Hours Year Used x Rate per Hour = Annual Expense Accum. Deprec.600 2.200 10.800 $ 11.12 0.000 30.800 5.200 2015 2016 2012 Journal Entry Chapter 9-29 25. .12 $ 1.000 20.000 1.800 3. Book Value 2012 2013 2014 15.800 2.000 $ 0.400 7.000 10. and contrast its expense pattern with those of other methods.800 SO 3 Compute periodic depreciation using the straight-line method.600 5.12 3.200 7.200 1.000 1.

Chapter 9-30 SO 3 .Accounting for Plant Assets Illustration 9-12 Comparison of Depreciation Methods Illustration 9-13 Each method is acceptable because each recognizes the decline in service potential of the asset in a rational and systematic manner.

Chapter 9-31 SO 3 Compute periodic depreciation using the straight-line method. . IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS). and contrast its expense pattern with those of other methods.Accounting for Plant Assets Depreciation and Income Taxes IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. MACRS is NOT acceptable under GAAP.

. and contrast its expense pattern with those of other methods.Accounting for Plant Assets Depreciation Disclosure in the Notes Illustration 9-14 Chapter 9-32 SO 3 Compute periodic depreciation using the straight-line method.

  Not handled retrospectively. Chapter 9-33 SO 4 Describe the procedure for revising periodic depreciation. Not considered error. .Accounting for Plant Assets Revising Periodic Depreciation  Accounted for in the period of change and future periods (Change in Estimate).

Questions:  What is the journal entry to correct the prior years’ depreciation? Calculate the depreciation expense for 2012. Depreciation has been recorded for 7 years on a straight-line basis. . purchased equipment for $510. it is determined that the total estimated life should be 15 years with a salvage value of $5.000 which was estimated to have a useful life of 10 years with a salvage value of $10.Accounting for Plant Assets Illustration: Arcadia HS. No Entry Required  Chapter 9-34 SO 4 Describe the procedure for revising periodic depreciation.000 at the end of that time. In 2012 (year 8).000 at the end of that time.

000 at date of change in estimate.000 SO 4 Describe the procedure for revising periodic depreciation. establish NBV .000 x 7 years = $350. 31. .000 Balance Sheet (Dec.Accounting for Plant Assets Equipment cost Salvage value Depreciable base Useful life (original) Annual depreciation After 7 years $510.000 $160.000 350.000 10 years $ 50. 500. 2011) Plant Assets: Equipment Accumulated depreciation Net book value (NBV) Chapter 9-35 $510.000 First.10.

375 19.375 SO 4 Describe the procedure for revising periodic depreciation. Depreciation expense Accumulated depreciation Chapter 9-36 19.Accounting for Plant Assets Net book value Salvage value (new) Depreciable base Useful life remaining Annual depreciation $160.000 5. . Journal entry for 2012 and future years.000 8 years $ 19.000 155.375 After 7 years Depreciation Expense calculation for 2012.

SO 4 Describe the procedure for revising periodic depreciation.  Chapter 9-37 Debit .  Debit . or useful life of a plant asset.costs incurred to increase the operating efficiency.the plant asset affected. Additions and Improvements . productive capacity.Accounting for Plant Assets Expenditure During Useful Life Ordinary Repairs . .expenditures to maintain the operating efficiency and productive life of the unit.Repair (or Maintenance) Expense.

Chapter 9-38 .

the company writes the asset down to its new fair value during the year in which the decline in value occurs. Chapter 9-39 SO 4 Describe the procedure for revising periodic depreciation.Accounting for Plant Assets Impairments Permanent decline in the fair value of an asset. . So as not to overstate the asset on the books.

Accounting for Plant Assets Plant Asset Disposals Companies dispose of plant assets in three ways —Retirement. Sale. Illustration 9-16 Record depreciation up to the date of disposal. and (2) crediting the asset account. or Exchange (appendix). Eliminate asset by (1) debiting Accumulated Depreciation. . Chapter 9-40 SO 5 Explain how to account for the disposal of a plant asset.

 If proceeds exceed the book value. a loss on disposal occurs. .Plant Asset Disposals Sale of Plant Assets Compare the book value of the asset with the proceeds received from the sale. Chapter 9-41 SO 5 Explain how to account for the disposal of a plant asset.  If proceeds are less than the book value. a gain on disposal occurs.

000 Chapter 9-42 SO 5 Explain how to account for the disposal of a plant asset. 2012. July 1 Depreciation expense 8.000. Depreciation for the first six months of 2012 is $8. The office furniture originally cost $60. As of January 1.000. 2012. Wright Company sells office furniture for $16. Prepare the journal entry to record depreciation expense up to the date of sale.000. .000 Accumulated depreciation 8.Plant Asset Disposals Illustration: On July 1. it had accumulated depreciation of $41.000 cash.

Plant Asset Disposals Illustration 9-17 Computation of gain on disposal Illustration: Wright records the sale as follows.000 5.000 60. July 1 Cash Accumulated depreciation Equipment Gain on disposal Chapter 9-43 16. .000 49.000 SO 5 Explain how to account for the disposal of a plant asset.

000 49.000.Plant Asset Disposals Illustration: Assume that instead of selling the office furniture for $16.000 60.000 Chapter 9-44 SO 5 Explain how to account for the disposal of a plant asset.000. Wright sells it for $9. Illustration 9-18 Computation of loss on disposal July 1 Cash Accumulated depreciation Equipment Loss on disposal 9. .000 2.

 Chapter 9-45 SO 5 Explain how to account for the disposal of a plant asset. .Plant Asset Disposals Retirement of Plant Assets   No cash is received. Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset. Decrease (credit) the asset account for the original cost of the asset.

000. The journal entry to record this retirement is? Accumulated depreciation Printing equipment 32. The accumulated depreciation on these printers is $32. .000.000 Question: What happens if a fully depreciated plant asset is still useful to the company? Chapter 9-46 SO 5 Explain how to account for the disposal of a plant asset.000 32.Plant Asset Disposals Illustration: Assume that Hobart Enterprises retires its computer printers. which cost $32.

.Analyzing Plant Assets Return on Asset Ratio indicates the amount of net income generated by each dollar of assets. Illustration 9-19 Chapter 9-47 SO 6 Describe methods for evaluating the use of plant assets.

Chapter 9-48 .

.Analyzing Plant Assets Asset Turnover Ratio indicates how efficiently a company uses its assets to generate sales. Illustration 9-20 Chapter 9-49 SO 6 Describe methods for evaluating the use of plant assets.

how much income each dollar of sales provides.Analyzing Plant Assets Profit Margin Ratio Revisited Tells how effective a company is in turning its sales into income— that is. Illustration 9-21 Illustration 9-22 You can evaluate the return on assets ratio by evaluating its components. . Chapter 9-50 SO 6 Describe methods for evaluating the use of plant assets.

Common types of intangibles:    Patents Copyrights Franchises or licenses    Trademarks Trade names Goodwill Chapter 9-51 SO 7 Identify the basic issues related to reporting intangible assets. . privileges. Limited life or an indefinite life.Intangible Assets Section Two Intangible assets are rights. and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.

 Chapter 9-52 . Indefinite-Life Intangibles:  No foreseeable limit on time the asset is expected to provide cash flows. No amortization. Credit asset account or accumulated amortization. SO 7 Identify the basic issues related to reporting intangible assets.Accounting for Intangible Assets Amortization of Intangibles Limited-Life Intangibles:   Amortize to expense.

Chapter 9-53 SO 7 Identify the basic issues related to reporting intangible assets. .  Legal fees incurred successfully defending a patent are capitalized to Patent account.Types of Intangible Assets Patents  Exclusive right to manufacture. or otherwise control an invention for a period of 20 years from the date of the grant. whichever is shorter. sell.  Expense any R&D costs in developing a patent.  Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life.

Dec.000 on June 30. 31 Amortization expense Patent Chapter 9-54 Cost Useful life Annual expense 6 months Amortization 3. Prepare the journal entry to record the amortization for the six-month period ended December 31.Types of Intangible Assets Illustration: National Labs purchases a patent at a cost of $60.750 SO 7 .750 $60.500 x 6/12 $ 3.750 3.000 / 8 $ 7. National estimates the useful life of the patent to be eight years.

and new products. All R & D costs are expensed when incurred.   new processes. .Types of Intangible Assets Research and Development Costs Expenditures that may lead to   patents. Chapter 9-55 SO 7 Identify the basic issues related to reporting intangible assets. copyrights.

. Chapter 9-56 SO 7 Identify the basic issues related to reporting intangible assets. Granted for the life of the creator plus 70 years.    Capitalize costs of acquiring and defending it.Types of Intangible Assets Copyrights  Give the owner the exclusive right to reproduce and sell an artistic or published work. Amortized to expense over useful life.

Sunkist. phrase.   Chapter 9-57 .Types of Intangible Assets Trademarks and Trade Names  Word. Coca-Cola. Capitalize acquisition costs. SO 7 Identify the basic issues related to reporting intangible assets. No amortization. Monopoly. or symbol that identifies a particular enterprise or product. jingle. ► Wheaties.  Legal protection for indefinite number of 20 year renewal periods. Big Mac. Kleenex. and Jeep.

and Marriott are franchises. Franchise with an indefinite life should be carried at cost and not amortized. Shell. ► Toyota. Subway. .  Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.Types of Intangible Assets Franchises and Licenses  Contractual arrangement between a franchisor and a franchisee.  Chapter 9-58 SO 7 Identify the basic issues related to reporting intangible assets.

purchase price over the FMV of the identifiable net assets acquired.. .Types of Intangible Assets Goodwill Includes exceptional management. etc. good customer relations. Chapter 9-59 SO 7 Identify the basic issues related to reporting intangible assets. skilled employees. Goodwill is recorded as the excess of . high-quality products. Internally created goodwill should not be capitalized. desirable location. Only recorded when an entire business is purchased..

Types of Intangible Assets Illustration: Identify the term most directly associated with each statement. Rights. privileges. An exclusive right granted by the federal government to reproduce and sell an artistic or published work. 3. The allocation to expense of the cost of an intangible asset over the asset’s useful life. and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. . 2. Chapter 9-60 Amortization Intangible Assets Copyrights SO 7 Identify the basic issues related to reporting intangible assets. 1.

. Franchise Research and Development Costs Chapter 9-61 SO 7 Identify the basic issues related to reporting intangible assets.Types of Intangible Assets Illustration: Identify the term most directly associated with each statement. 5. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area. Costs incurred by a company that often lead to patents or new products. 4. These costs must be expensed as incurred.

Chapter 9-62 .

.Statement Presentation of Long-Lived Assets Illustration 9-23 Chapter 9-63 SO 8 Indicate how long-lived assets are reported in the financial statements.

Statement Presentation of Long-Lived Assets A difference between accrual-accounting net income and net cash provided by operating activities is caused by depreciation and amortization expense. Chapter 9-64 SO 8. .

  Rate applied to book value. .appendix 9A Declining-Balance  Calculation of Depreciation Using Other Methods Decreasing annual depreciation expense over the asset’s useful life. Illustration 9-A1 Chapter 9-65 SO 9 Compute periodic depreciation using the decliningbalance method and the units-of-activity method. Double declining-balance rate is double the straight-line rate.

315 12.872 $ 5.680 40% 40 40 $ 5.appendix 9A Calculation of Depreciation Using Other Methods Illustration: (Declining-Balance Method) Beginning Book value Declining Balance x Rate = Illustration 9-A2 Year Annual Expense Accum.800 4.200 1. Book Value 2012 2013 2014 13.000 7.808 2015 2016 2012 Journal Entry Chapter 9-66 2.000 Depreciation expense Accumulated depreciation 5.800 4.685 40 40 1.200 3.000 5.680 2. Deprec.192 $ 7.120 1.685 1.123 685* 11.320 10.200 * Computation of $674 ($1.685 x 40%) is adjusted to $685.808 1. .200 8.

724 11.640 2.966 x 1.900 7.900 3.310 786 179 12.540 9.900 Chapter 9-67 SO 9 Compute periodic depreciation using the decliningbalance method and the units-of-activity method.100 x 5. .900 3.276 x 1.000 $ Accum.000 x 9.184 1.Partial Year appendix 9A Illustration: (Declining-Balance Method) Declining Beginning Year 2012 2013 2014 2015 2016 2017 Book Value $ 13.184 1. Deprec. 3.460 x 3.000 Journal entry: 2012 Depreciation expense Accumultated depreciation 3.200 x 3.034 11.310 786 472 Plug $ Partial Year 9/12 = $ Purchased on 4/1/12 Current Year Expense 3.821 12.640 2.179 x Balance Rate 40% 40% 40% 40% 40% 40% = = = = = Annual Expense = $ 5.

Depreciable cost is cost less salvage value. Illustration 9A-3    Chapter 9-68 SO 9 Compute periodic depreciation using the decliningbalance method and the units-of-activity method.appendix 9A Units-of-Activity  Calculation of Depreciation Using Other Methods Suited to equipment whose activity can be measured in units of output. Expense varies based on units of activity. miles driven. Calculate depreciation cost per unit. or hours in use. .

200 2015 2016 2012 Journal Entry Chapter 9-69 25.800 5.000 10.12 0.600 5.12 0.600 2.200 10. Deprec.800 1.800 Compute periodic depreciation using the decliningbalance method and the units-of-activity method.800 12.appendix 9A Calculation of Depreciation Using Other Methods Illustration 9A-4 Illustration: (Units-of-Activity Method) Hours Year Used x Rate per Hour = Annual Expense Accum.200 1.000 $ 0.000 0.200 7.000 2.12 3.800 3. Book Value 2012 2013 2014 15.000 Depreciation expense Accumulated depreciation SO 9 1.000 1.800 $ 11. .000 30.12 $ 1.400 $ 1.000 20.12 0.400 7.

IFRS converged to GAAP requirements in this area. IFRS. like GAAP. capitalizes all direct costs in self-constructed assets such as raw materials and labor. IFRS does not address the capitalization of fixed overhead. interest costs incurred during construction are capitalized.    Chapter 9-70 . Both international standards and GAAP follow the cost principle when accounting for property. and equipment at date of acquisition.Key Points  The definition for plant assets for both IFRS and GAAP is essentially the same. Under both IFRS and GAAP. Recently. plant.

rather than salvage value. However. and units-of-activity) as GAAP. a major difference is that IFRS requires component depreciation. straight-line. Component depreciation is allowed under GAAP but is seldom used.. Component depreciation specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. IFRS permits the same depreciation methods (e.g. accelerated.  Chapter 9-71 .Key Points  IFRS also views depreciation as an allocation of cost over an asset’s useful life. IFRS uses the term residual value.

Assets that are experiencing rapid price changes must be revalued on an annual basis.Key Points  IFRS allows companies to revalue plant assets to fair value at the reporting date. otherwise less frequent revaluation is acceptable. it must be applied to all assets in a class of assets. Companies that choose to use the revaluation framework must follow revaluation procedures. Under both GAAP and IFRS. Prior periods are not affected.  Chapter 9-72 . If revaluation is used. GAAP recently conformed to international standards in the accounting for changes in depreciation methods. changes in the depreciation method used and changes in useful life are handled in current and future periods.

Initial costs to acquire natural resources are essentially the same under IFRS and GAAP. are essentially the same under IFRS and GAAP.Key Points  The accounting for subsequent expenditures. Chapter 9-73 . The accounting for plant asset disposals is essentially the same under IFRS and GAAP.    The definition of intangible assets is essentially the same under IFRS and GAAP. such as ordinary repairs and additions.

transferred. In addition.Key Points  Intangibles generally arise when a company buys another company. Chapter 9-74 . In this case. Both GAAP and IFRS follow the same approach to make this separation. that is. companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold. rented. companies recognize acquired in-process research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably. or exchanged. licensed. specific criteria are needed to separate goodwill from other intangibles. under both GAAP and IFRS.

however. costs in the development phase are capitalized as Development Costs once technological feasibility is achieved.  Chapter 9-75 . Costs in the research phase are always expensed under both IFRS and GAAP. GAAP prohibits revaluation of intangible assets. IFRS permits revaluation of intangible assets (except for goodwill).Key Points  As in GAAP. under IFRS the costs associated with research and development are segregated into the two components. Under IFRS.

Under GAAP.Key Points  IFRS requires an impairment test at each reporting date for plant assets and intangibles and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell or its value-in-use. Chapter 9-76 . discounted to present value. Value-in-use is the future cash flows to be derived from the particular asset. impairment loss is measured as the excess of the carrying amount over the asset’s fair value.

This is the same framework used in IFRS. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal. The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP.Key Points  IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset.  Chapter 9-77 . Under GAAP. impairment losses cannot be reversed for assets to be held and used. the impairment loss results in a new cost basis for the asset.

Looking into the Future It is too early to say whether a converged conceptual framework will recommend fair value measurement (and revaluation accounting) for plant assets and intangibles. Thus. IFRS permits more recognition of intangibles compared to GAAP. Chapter 9-78 . it will be challenging to develop converged standards for intangible assets. The IASB and FASB have identified a project that would consider expanded recognition of internally generated intangible assets. given the long-standing prohibition on capitalizing internally generated intangible assets and research and development costs in GAAP.

and equipment but not intangible assets. and equipment but not intangible assets. and equipment and intangible assets (except for goodwill). plant. c) Both IFRS and GAAP permit revaluation of property. and equipment and intangible assets (except for goodwill).Which of the following statements is correct? a) Both IFRS and GAAP permit revaluation of property. Chapter 9-79 . plant. d) GAAP permits revaluation of property. b) IFRS permits revaluation of property. plant. plant.

b) expensed under IFRS.Research and development costs are: a) expensed under GAAP. c) expensed under both GAAP and IFRS. d) None of the above. Chapter 9-80 .

c) future cash flows discounted to present value. Chapter 9-81 . d) total future undiscounted cash flows. value-in-use is defined as: a) net realizable value.Under IFRS. b) fair value.

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