Long Lived Assets

• assets expected to provide future economic benefits for more than 1 year

  long lived assets
• may be tangible, intangible or financial assets

  long lived assets
• types of long lived asset

  tangible, intangible or financial asset
• Upon acquisition, Long Lived Assets are recorded on the Balance Sheet at cost or same Fair Value at the time of acquisition.
• Intangible asset's Fair Value depends on the method of acquisition.
• Method of acquisition for Intangible Asset:

  • Developed internally
  • Purchased
  • Through business combination
• Property, Plant and Equipment is recorded at cost which also includes expenditures necessary to get assets ready for use.
• PPE amount is capitalized if the benefit is beyond one year, otherwise, it is expensed.
• Companies might have difference approaches towards expensing or capitalizing cost.
• Constructed asset's interest cost during construction are capitalized as part of asset cost.
• interest cost is the rate of borrowing related to construction during construction. if there is no construction, interest cost is based on existing unrelated debt for the period
• under IFRS, interest on short term lending offsets capitalized costs. it causes higher income and greater interest coverage ratio during capitalization period. higher asset values and depreciation results to lower EBIT and interest coverage in the subsequent period.
• interest cost is not reported as an expense as the asset is depreciable then it is expensed
• lacks physical substance

  intangible assets
• intangible asset acquired through business combination is recorded at fair value, similar to long lived asset. determination of fair value requires judgment and estimates
• intangible asset acquired through purchase is recorded at fair value.
• intangible asset developed internally:


  IFRS: research cost is expensed as incurred and development cost is capitalized

  US GAAP: research and development cost is capitalized
• cost incurred to develop software for sale:

  IFRS: expensed until product's tech feasibility is established then subsequent cost is capitalized
• cost incurred to develop software for internal use:

  IFRS: capitalized once feasibility is established

  US GAAP: capitalize all development cost
• capitalized cost of tangible asset is expensed through depreciation and amortized for intangible asset

  cost model of reporting long lived asset
• carrying amount reported on the balance sheet

  book value
• the historical cost of an asset, less any amounts recorded for depreciation, amortization, or depletion

  net book value
• net book value formula


  $net book value =$$historical cost - accumulated depreciation$
• book value formula

  $book value=$$total cost - accumulated depreciation$
• also known as the carrying amount

  net book value
• cost of asset allocated evenly over useful life

  straight line depreciation
• high depreciation during the early years of an asset

  accelerated depreciation
• salvage value formula


  $salvage value=$$InitialPrice*$$(1-Depreciation)^numberofyears$
• depreciation is based on the amount of output it can produce

  units of production (output) method
• depreciation component method

  IFRS: depreciated items are presented separately

  US GAAP: allows clubbed reporting but is seldom used in practice
• counterpart of depreciation

  amortization
• intangible assets with finite useful lives

  amortized using straight line method
• intangible assets with infinite useful lives

  tested for impairment
• alternative to cost model for periodic valuation and reporting of long lived asset

  revaluation model
• revaluation model


  IFRS : either revaluation or cost model

  US GAAP: cost model only
• changes the carrying amounts of classes of long lived assets to FV
• carrying amounts are the FV at the date of revaluation less any subsequent depreciation or amortization
• revaluation method is used when FV is determined through market prices
• reflect the unanticipated decline in the value of asset

  impairment charges
• Impairment of asset


  IFRS and US GAAP: require companies to write down the carrying amount of the impaired asset

  IFRS: allows reversal of write down

  US GAAP: no reversal of write down