Why do I Need Accounting? and Sarbanes-Oxley Act of 2002

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Financial Accounting: Tools for Business Decision Making

Eighth Edition

Kimmel ● Weygandt ● Kieso

Chapter 9

Reporting and Analyzing Long-Lived Assets

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Financial Accounting: Tools for Business Decision Making

Chapter Outline:

Learning Objectives

Explain the accounting for plant asset expenditures.

Apply depreciation methods to plant assets.

Explain how to account for the disposal of plant assets.

Identify the basic issues related to reporting intangible assets.

Discuss how long-lived assets are reported and analyzed.

L O 1: Explain How Companies Recognize Accounts Receivable

Plant assets are resources that have

physical substance (a definite size and shape),

are used in the operations of a business,

are not intended for sale to customers,

are expected to provide service to the company for a number of years, except for land.

Referred to as property, plant, and equipment; plant and equipment; and fixed assets.

Plant Assets

Plant assets are critical to a company’s success.

The Cost of Plant Assets (1 of 10)

Historical Cost Principle

Requires that companies record plant assets at cost.

Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.

Revenue expenditure – costs incurred to acquire a plant asset that are expensed immediately.

Capital expenditures - costs included in a plant asset account.

The Cost of Plant Assets (2 of 10)

Cost is measured by the 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.

International Note

I F R S is flexible regarding asset valuation. Companies revalue to fair value when they believe this information is more relevant.

The Cost of Plant Assets (3 of 10)

Land

All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.

Costs typically include:

cash purchase price,

closing costs such as title and attorney’s fees,

real estate brokers’ commissions, and

accrued property taxes and other liens on the land assumed by the purchaser.

The Cost of Plant Assets (4 of 10)

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.

The Cost of Plant Assets (5 of 10)

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

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

The Cost of Plant Assets (6 of 10)

Land Improvements

Includes all expenditures necessary to make the improvements ready for their intended use.

Examples: driveways, parking lots, fences, landscaping, and underground sprinklers.

Limited useful lives.

Expense (depreciate) the cost of land improvements over their useful lives.

The Cost of Plant Assets (7 of 10)

Buildings

Includes all costs related directly to purchase or construction.

Purchase costs:

Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s commission.

Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.

Construction costs:

Contract price plus payments for architects’ fees, building permits, and excavation costs.

The Cost of Plant Assets (8 of 10)

Equipment

Include all costs incurred in acquiring the equipment and preparing it for use.

Costs typically include:

Cash purchase price.

Sales taxes.

Freight charges.

Insurance during transit paid by the purchaser.

Expenditures required in assembling, installing, and testing the unit.

The Cost of Plant Assets (9 of 10)

Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Compute the cost of the delivery truck.

Blank	Truck
Cash price	$22,000
Sales taxes	1,320
Painting and lettering	500
Blank	Blank
Cost of Delivery Truck	$23,820

The Cost of Plant Assets (10 of 10)

Equipment

23,820

License Expense

Prepaid Insurance

1,600

Cash

25,500

Expenditure During Useful Life

Ordinary Repairs are expenditures to maintain the operating efficiency and productive life of the unit.

Debited to Maintenance and Repairs Expense.

Additions and Improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.

Debited to the plant asset affected.

Anatomy of a Fraud (1 of 2)

Bernie Ebbers was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the stock price increase dramatically. However, because the acquired companies all had different accounting systems, WorldCom’s financial records were a mess. When WorldCom’s performance started to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits.

Total take: $7 billion

The Missing Controls

Documentation procedures. The company’s accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities.

Anatomy of a Fraud (2 of 2)

Total take: $7 billion

The Missing Controls

Independent internal verification. A fraud of this size should have been detected by a routine comparison of the actual physical assets with the list of physical assets shown in the accounting records.

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.

Some advantages of leasing

Reduced risk of obsolescence.

Little or no down payment.

Shared tax advantages.

Assets and liabilities not reported.

Accounting Across the Organization (1 of 2)

Many U.S. Firms Use Leases

Leasing is big business for U.S. companies. For example, in a recent year leasing accounted for about 33% of all business investment ($264 billion). Who does the most leasing? Interestingly, major banks such as Continental Bank, J.P. Morgan Leasing, and US Bancorp Equipment Finance are the major lessors. Also, many companies have established separate leasing companies, such as Boeing Capital Corporation, Dell Financial Services, and John Deere Capital Corporation. As an example of the magnitude of leasing, leased planes account for nearly 40% of the U.S. fleet of commercial airlines. Lease Finance Corporation in Los Angeles owns more planes than any airline in the world. Leasing is also becoming increasingly common in the hotel industry. Marriott, Hilton, and InterContinental are increasingly choosing to lease hotels that are owned by someone else.

L O 2: Apply Depreciation Methods to Plant Assets

Depreciation

Process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner.

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and equipment, not land.

Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life.

▼ Helpful Hint

Land does not depreciate because it does not wear out.

Factors in Computing Depreciation

▼ Helpful Hint

Depreciation expense is reported on the income statement. Accumulated depreciation is reported on the balance sheet as a deduction from plant assets.

Depreciation Methods (1 of 2)

Management selects the method it believes best measures an asset’s contribution to revenue over its useful life.

Examples include:

Straight-line method.

Declining-balance method.

Units-of-activity method.

Depreciation Methods (2 of 2)

Illustration: Bill’s Pizzas purchased a small delivery truck on January 1, 2017.

Cost	$13,000
Expected salvage value	$1,000
Estimated useful life (in years)	5
Estimated useful life (in miles)	100,000

Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance.

Straight-Line Method (1 of 3)

Expense is same amount for each year.

Depreciable cost = Cost less salvage value.

Straight-Line Method (2 of 3)

Illustration:

End of Year

Year	Depreciable Cost	×	Rate	=	Annual Expense	Accum. Deprec.	Book Value
2017	$ 12,000	Blank	20%	Blank	$ 2,400	$ 2,400	$ 10,600
2018	12,000	Blank	20	Blank	2,400	4,800	8,200
2019	12,000	Blank	20	Blank	2,400	7,200	5,800
2020	12,000	Blank	20	Blank	2,400	9,600	3,400
2021	12,000	Blank	20	Blank	2,400	12,000	1,000

2017 Journal Entry

Depreciation Expense

2,400

Accumulated Depreciation

2,400

Straight-Line Method (3 of 3)

Partial Year

Illustration: Assume the delivery truck was purchased on April 1, 2017.

Year	Depreciable Cost	Blank	Rate	Blank	Annual Expense	Blank	Partial Year	Blank	Current Year Expense	Accum Deprec.
2017	$12,000	×	20%	=	$ 2,400	×	9/12	=	$ 1,800	$1,800
2018	12,000	×	20%	=	2,400	Blank	Blank	Blank	2,400	4,200
2019	12,000	×	20%	=	2,400	Blank	Blank	Blank	2,400	6,600
2020	12,000	×	20%	=	2,400	Blank	Blank	Blank	2,400	9,000
2021	12,000	×	20%	=	2,400	Blank	Blank	Blank	2,400	11,400
2022	12,000	×	20%	=	2,400	×	3/12	=	600	12,000
Blank	Blank	Blank	Blank	Blank	Blank	Blank	Blank	Blank	$12,000	Blank

Journal entry:

2017

Depreciation Expense

1,800

Accumulated Depreciation

1,800

Declining-Balance Method (1 of 3)

Accelerated method.

Decreasing annual depreciation expense over the asset’s useful life.

Double declining-balance rate is double the straight-line rate.

Rate applied to book value.

Declining-Balance Method (2 of 3)

Illustration:

End of Year

Year	Beginning Book value	×	Declining Balance Rate	=	Annual Expense	Accum. Deprec.	Book Value
2017	13,000	Blank	40%	Blank	$ 5,200	$ 5,200	$ 7,600
2018	7,800	Blank	40	Blank	3,120	8,320	4,680
2019	4,680	Blank	40	Blank	1,872	10,192	2,808
2020	2,808	Blank	40	Blank	1,123	11,315	1,685
2021	1,685	Blank	40	Blank	685*	12,000	1,000

2017 Journal Entry

Depreciation Expense

5,200

Accumulated Depreciation

5,200

* Computation of $674 ($1,685 x 40%) is adjusted to $685.

Declining-Balance Method (3 of 3)

Illustration: Partial Year Purchased on 4/1/17

End of the year

Year	Beginning Book value	Blank	Declining Balance Rate	Blank	Annual Expense	Blank	Partial Year	Blank	Current Year Expense	Accum. Deprec.
2017	$13,000	×	40%	=	$ 5,200	×	9/12	=	$ 3,900	$ 3,900
2018	9,100	×	40%	=	3,640	Blank	Blank	Blank	3,640	7,540
2019	5,460	×	40%	=	2,184	Blank	Blank	Blank	2,184	9,724
2020	3,276	×	40%	=	1,310	Blank	Blank	Blank	1,310	11,034
2021	1,966	×	40%	=	786	Blank	Blank	Blank	786	11,820
2022	1,180	×	40%	=	472	×	plug		Implies 180	12,000
Blank	Blank	Blank	Blank	Blank	Blank	Blank	Blank	Blank	$12,000	Blank

Journal entry:

2017

Depreciation Expense

3,900

Accumulated Depreciation

3,900

Units-of-Activity Method (1 of 3)

Companies estimate total units of activity to calculate depreciation cost per unit.

Expense varies based on units of activity.

Depreciable cost is cost less salvage value.

Units-of-Activity Method (2 of 3)

Illustration:

End of Year

Year	Miles Driven	×	Rate per Mile	=	Annual Expense	Accum. Deprec.	Book Value
2017	15,000	Blank	$0.12	Blank	$ 1,800	$ 1,800	$ 11,200
2018	30,000	Blank	0.12	Blank	3,600	5,400	7,600
2019	20,000	Blank	0.12	Blank	2,400	7,800	5,200
2020	25,000	Blank	0.12	Blank	3,000	10,800	2,200
2021	10,000	Blank	0.12	Blank	1,200	12,000	1,000

2017 Journal Entry

Depreciation Expense

1,800

Accumulated Depreciation

1,800

Management’s Choice (1 of 2)

Year	Straight-Line	Declining-Balance	Units-of-Activity
2017	$ 2,400	$ 5,200	$ 1,800
2018	2,400	3,120	3,600
2019	2,400	1,872	2,400
2020	2,400	1,123	3,000
2021	2,400	685	1,200
Blank	$12,000	$12,000	$12,000

Annual depreciation expense varies considerably among the methods, but total depreciation expense is the same ($12,000) for the five-year period.

Management’s Choice (2 of 2)

Depreciation and Income Taxes

I R S does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

I R S requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (M A C R S).

M A C R S is NOT acceptable under G A A P.

Depreciation Disclosure in the Notes

Revising Periodic Depreciation (1 of 4)

Accounted for in the period of change and future periods (Change in Estimate).

Not handled retrospectively.

Not considered error.

Revising Periodic Depreciation (2 of 4)

Illustration: Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2017 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.

Questions:

What is the journal entry to correct the prior years’ depreciation?

No Entry Required

Revising Periodic Depreciation (3 of 4)

Calculate the depreciation expense for 2017.

Equipment cost	$510,000
Salvage value	− 10,000
Depreciable base	500,000
Useful life (original)	10 years
Annual depreciation	$ 50,000

$ 50,000 × 7 years = $350,000

First, establish NBV at date of change in estimate.

After 7 years

Balance Sheet (Dec. 31, 2016)

Plant Assets:
Equipment	$510,000
Accumulated depreciation	350,000
Net book value (NBV)	$160,000

Revising Periodic Depreciation (4 of 4)

Net book value	$160,000
Salvage value (new)	5,000
Depreciable base	155,000
Useful life remaining	8 years
Annual depreciation	$ 19,375

Depreciation Expense calculation for 2017.

Journal entry for 2017 and future years.

Depreciation Expense

19,375

Accumulated Depreciation

19,375

Impairments

Permanent decline in the fair value of an asset.

So as not to overstate the asset on the books, the company writes the asset down to its new fair value during the year in which the decline in value occurs.

Do It! 2b: Revised Depreciation

Chambers Corporation purchased a piece of equipment for $36,000. It estimated a 6-year life and $6,000 salvage value. Thus, straight-line depreciation was $5,000 per year [($36,000 − $6,000) ÷ 6]. At the end of year three (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be $2,000. Compute the revised depreciation.

Original depreciation expense = [($36,000 − $6,000) ÷ 6] = $5,000

Accumulated depreciation after 2 years = 2 × $5,000 = $10,000

Book value = $36,000 − $10,000 = $26,000

Book value after 2 years of depreciation	$26,000
Less: New salvage value	2,000
Depreciable cost	$24,000
Remaining useful life	8 years
Revised annual depreciation ($24,000 ÷ 8)	$ 3,000

L O 3: Explain How to Account for the Disposal of Plant Assets

Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange.

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.

Sale of Plant Assets (1 of 4)

Compare the book value of the asset with the proceeds received from the sale.

If proceeds exceed the book value, a gain on disposal occurs.

If proceeds are less than the book value, a loss on disposal occurs.

Sale of Plant Assets (2 of 4)

Illustration: On July 1, 2017, Wright Company sells office furniture for $16,000 f January 1, 2017, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2017 icash. The office furniture originally cost $60,000. As os $8,000. Prepare the journal entry to record depreciation expense up to the date of sale, July 1.

Depreciation Expense

8,000

Accumulated Depreciation—Equipment

8,000

Sale of Plant Assets (3 of 4)

Cost of office furniture	$60,000
Less: Accumulated depreciation ($41, 000 + $8,000)	49,000
Book value at date of disposal	11,000
Proceeds from sale	16.000
Gain on disposal of plant asset	$ 5,000

Illustration: Wright records the sale as follows on July 1.

Cash

16,000

Accumulated Depreciation—Equipment

49,000

Equipment

60,000

Gain on Disposal of Plant Assets

5,000

Sale of Plant Assets (4 of 4)

Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.

Cost of office furniture	$60,000
Less: Accumulated depreciation	49,000
Book value at date of disposal	11.000
Proceeds from sale	9,000
Loss on disposal of plant asset	$ 2,000

Cash

9,000

Accumulated Depreciation—Equipment

49,000

Loss on Disposal of Plant Assets

2,000

Equipment

60,000

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.

Do It! 3: Plant Asset Disposal (1 of 2)

Overland Trucking has an old truck that cost $30,000 and has accumulated depreciation of $16,000. Assume two different situations:

The company sells the old truck for $17,000 cash.

The truck is worthless, so the company simply retires it.

What entry should Overland use to record scenario 1?

Cash

17,000

Accumulated Depreciation—Equipment

16,000

Equipment

30,000

Gain on Disposal of Plant Assets

3,000

Do It! 3: Plant Asset Disposal (2 of 2)

Overland Trucking has an old truck that cost $30,000 and has accumulated depreciation of $16,000. Assume two different situations:

The company sells the old truck for $17,000 cash.

The truck is worthless, so the company simply retires it.

What entry should Overland use to record scenario 2?

Accumulated Depreciation—Equipment

16,000

Loss on Disposal of Plant Assets

14,000

Equipment

30,000

L O 4: Identify the Basic Issues Related to Reporting Intangible Assets

Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.

Limited life or an indefinite life.

Common types of intangibles:

Patents

Copyrights

Franchises or licenses

Trademarks

Trade names

Goodwill

Accounting For Intangibles

Limited-Life Intangibles:

Amortize to expense.

Credit asset account or accumulated amortization.

Indefinite-Life Intangibles:

No foreseeable limit on time the asset is expected to provide cash flows.

No amortization.

Types of Intangibles (1 of 7)

Patents

Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.

Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.

Expense any R&D costs in developing a patent.

Legal fees incurred successfully defending a patent are capitalized to Patent account.

Types of Intangibles (2 of 7)

Illustration: National Labs purchases a patent at a cost of $60,000 on June 30. National estimates the useful life of the patent to be eight years. Prepare the journal entry to record the amortization for the six-month period ended December 31.

Cost

$60,000

Useful life

Annual expense

$ 7,500

6 months

Amortization

Dec. 31

Amortization Expense

3,750

Patents

3,750

Types of Intangibles (3 of 7)

Research and Development Costs

Expenditures that may lead to

patents,

copyrights,

new processes, and

new products.

All R&D costs are expensed when incurred.

▼ Helpful Hint

Research and development costs are not intangible costs, but because these expenditures may lead to patents and copyrights, we discuss them in this section.

Types of Intangibles (4 of 7)

Copyrights

Give the owner the exclusive right to reproduce and sell an artistic or published work.

Granted for the life of the creator plus 70 years.

Capitalize costs of acquiring and defending it.

Amortized to expense over useful life.

Types of Intangibles (5 of 7)

Trademarks and Trade Names

Word, phrase, jingle, or symbol that distinguishes or identifies a particular enterprise or product.

Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep.

Legal protection for indefinite number of 20 year renewal periods.

Capitalize acquisition costs.

No amortization.

Types of Intangibles (6 of 7)

Franchises

Contractual arrangement between a franchisor and a franchisee.

Toyota, Shell, Subway, and Marriott are franchises.

Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.

Franchise with an indefinite life should be carried at cost and not amortized.

Types of Intangibles (7 of 7)

Goodwill

Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc.

Only recorded when an entire business is purchased.

Goodwill is recorded as the excess of ...

purchase price over

the FMV of the identifiable net assets acquired.

Internally created goodwill should not be capitalized.

Do It! 4: Classification Concepts (1 of 2)

Match the term most directly associated with each statement.

Copyright	Amortization
Intangible assets	Franchise
Research and development costs	Blank

The allocation to expense of the cost of an intangible asset over the asset’s useful life.

Amortization

Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

Intangible assets

An exclusive right granted by the federal government to reproduce and sell an artistic or published work.

Do It! 4: Classification Concepts (2 of 2)

Match the term most directly associated with each statement.

Copyright	Amortization
Intangible assets	Franchise
Research and development costs	Blank

A right to szell certain products or services or to use certain trademarks or trade names within a designated geographic area.

Franchise

Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.

Research and development costs

L O 5: Discuss How Long-Lived Assets Are Reported and Analyzed

Analysis 1

Return on Assets indicates the amount of net income generated by each dollar of assets.

Accounting Across the Organization (2 of 2)

Marketing R O I as Profit Indicator

Marketing executives use the basic finance concept underlying return on assets to determine “marketing return on investment (R O I).” They calculate marketing R O I as the profit generated by a marketing initiative divided by the investment in that initiative. It can be tricky to determine what to include in the “investment” amount and how to attribute profit to a particular marketing initiative. However, many firms feel that measuring marketing R O I is worth the effort because it allows managers to evaluate the relative effectiveness of various programs. In addition, it helps quantify the benefits that marketing provides to the organization. In periods of tight budgets, the marketing R O I number can provide particularly valuable evidence to help a marketing manager avoid budget cuts.

Source: James O. Mitchel, “Marketing R O I,” LIMRA’s Market Facts Quarterly (Summer 2004), p. 15.

Analysis 2 (1 of 3)

Asset Turnover indicates how efficiently a company uses its assets to generate sales.

Analysis 2 (2 of 3)

Profit Margin Revisited

Profit margin tells how effective a company is in turning its sales into income—that is, how much income each dollar of sales provides.

Analysis 2 (3 of 3)

Profit Margin Revisited

Southwest was more effective at generating sales from its assets, while JetBlue was better at deriving profit from its sales.

Do It! 5: Asset Turnover

Paramour Company reported net income of $180,000, net sales of $420,000, and had total assets of $460,000 on January 1, 2017, and total assets on December 31, 2017, of $540,000. Determine Paramour’s asset turnover for 2017.

Solution

The asset turnover is computed as follows.

Net Sales ÷ Average Total Assets = Asset Turnover

L O 6: Appendix 9A: Compute Periodic Depreciation Using the Declining-Balance Method and the Units-Of-Activity Method

Previously illustrated in Learning Objective 2.

A Look at I F R S-L O-7: Compare the Accounting For Long-lived Assets Under G A A P and I F R S

Key Points

Similarities

The definition for plant assets for both I F R S and G A A P is essentially the same.

Both I F R S and G A A P follow the historical cost principle when accounting for property, plant, and equipment at date of acquisition. Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

A Look at I F R S (1 of 10)

Similarities

Under both I F R S and G A A P, interest costs incurred during construction are capitalized. Recently, IFRS converged to GAAP requirements in this area.

The accounting for subsequent expenditures (such as ordinary repairs and additions) is essentially the same under IFRS and G A A P.

I F R S also views depreciation as an allocation of cost over an asset’s useful life. IFRS permits the same depreciation methods (e.g., straight-line, accelerated, and units-of-activity) as G A A P.

A Look at I F R S (2 of 10)

Similarities

Under both G A A P and I F R S, changes in the depreciation method used and changes in useful life are handled in current and future periods. Prior periods are not affected. G A A P recently conformed to international standards in the accounting for changes in depreciation methods.

The accounting for plant asset disposals is essentially the same under I F R S and G A A P.

The definition of intangible assets is essentially the same under I F R S and G A A P

A Look at I F R S (3 of 10)

Similarities

The accounting for exchanges of nonmonetary assets has recently converged between I F R S and G A A P. G A A P now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in I F R S.

Differences

I F R S uses the term residual value rather than salvage value to refer to an owner’s estimate of an asset’s value at the end of its useful life for that owner.

A Look at I F R S (4 of 10)

Differences

I F R S allows companies to revalue plant assets to fair value at the reporting date. Companies that choose to use the revaluation framework must follow revaluation procedures. If revaluation is used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.

I F R S requires component depreciation. Component depreciation specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. Component depreciation is allowed under G A A P but is seldom used.

A Look at I F R S (5 of 10)

Differences

As in G A A P, under I F R S the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both I F R S and G A A P. Under I F R S , however, costs in the development phase are capitalized as Development Costs once technological feasibility is achieved.

I F R S permits revaluation of intangible assets (except for goodwill). G A A P prohibits revaluation of intangible assets.

A Look at I F R S (6 of 10)

Looking To The Future

The I A S B and F A S B have identified a project that would consider expanded recognition of internally generated intangible assets. I F R S permits more recognition of intangibles compared to G A A P.

A Look at I F R S (7 of 10)

I F R S Practice

Which of the following statements is correct?

a) Both I F R S and G A A P permit revaluation of property, plant, and equipment and intangible assets (except for goodwill).

b) IFRS permits revaluation of property, plant, and equipment and intangible assets (except for goodwill).

c) Both I F R S and G A A P permit revaluation of property, plant, and equipment but not intangible assets.

d) G A A P permits revaluation of property, plant, and equipment but not intangible assets.

A Look at I F R S (8 of 10)

I F R S Practice

Which of the following statements is correct?

a) Both I F R S and G A A P permit revaluation of property, plant, and equipment and intangible assets (except for goodwill).

b) IFRS permits revaluation of property, plant, and equipment and intangible assets (except for goodwill).

c) Both I F R S and G A A P permit revaluation of property, plant, and equipment but not intangible assets.

d) G A A P permits revaluation of property, plant, and equipment but not intangible assets.

A Look at I F R S (9 of 10)

I F R S Practice

Research and development costs are:

a) expensed under G A A P.

b) expensed under I F R S.

c) expensed under both G A A P and I F R S.

d) None of the above.

A Look at I F R S (10 of 10)

I F R S Practice

Research and development costs are:

a) expensed under G A A P.

b) expensed under I F R S.

c) expensed under both G A A P and I F R S.

d) None of the above.

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$115,000

$23,820

$12,000

$160,000

$ 19,375

$24,000

$3,000

$ 5,000

$ 2,000

÷ 8

× 6/12

$ 3,750

$460,000$540,000

$420,000.84

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