Wiley - Chapter 12: Intangible Assets

Chapter 11-1

Depreciation, Impairments, Depreciation, Impairments, and Depletionand Depletion

Depreciation, Impairments, Depreciation, Impairments, and Depletionand Depletion

ChapteChapter r

1111

Chapter 11-2

Allocating costs of long-term assets:

Fixed assets = Depreciation expense

Intangibles = Amortization expense

Natural resources = Depletion expense

Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.

Depreciation - Method of Cost Depreciation - Method of Cost AllocationAllocation


Chapter 11-3



Three basic questions:

Factors Involved in the Depreciation Process

(1) What depreciable base is to be used?

(2) What is the asset’s useful life?

(3) What method of cost allocation is best?

Chapter 11-4



The profession requires the method employed be “systematic and rational.” Examples include:

Methods of Depreciation

(1) Activity method (units of use or production).

(2) Straight-line method.

(3) Sum-of-the-years’-digits.

(4) Declining-balance method.

(5) Group and composite methods.

(6) Hybrid or combination methods.

Accelerated Accelerated methodsmethods

Special methodsSpecial methods

Chapter 11-5



E11-5 (Depreciation Computations—Four Methods): Maserati Corporation purchased a new machine for its assembly process on August 1, 2012. The cost of this machine was $150,000. The company estimated that the machine would have a salvage value of $24,000 at the end of its service life. Its life is estimatedat 5 years and its working hours are estimated at 21,000 hours. Year-end is December 31.Instructions: Compute the depreciation expense under the

following methods.

(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.

(b) Activity method (d) Double-declining

balance.

Chapter 11-6



Current

Depreciable Annual Partial Year Accum.Year Base Years Expense Year Expense Deprec.

2012 126,000$ / 5 = 25,200$ x 5/12 = 10,500$ 10,500$

2013 126,000 / 5 = 25,200 25,200 35,700

2014 126,000 / 5 = 25,200 25,200 60,900

2015 126,000 / 5 = 25,200 25,200 86,100

2016 126,000 / 5 = 25,200 25,200 111,300

2017 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000

126,000$

J ournal entry:

2012 Depreciation expense 10,500

Accumultated depreciation 10,500

Straight-line Method

Chapter 11-7



Exercise (Activity Method):Depreciation expense= Estimated cost per unit * actual units used in period

Where, Estimated cost per unit = (depreciable base/estimated total units of use)

Chapter 11-8



Exercise (Sum-of-the-years’-digits Method)Depreciation Exp = [Number of years left/ Sum of (years digits in Useful life)] * Depreciable base

Chapter 11-9



# Declining Balance MethodDepreciation Exp = # * 1/Useful life * Book Value

Where # = the desired speed of the decline

Chapter 11-10



See Exercise 11-1 for similar example

Chapter 11-11

Changes in Depreciation Rate

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

Not handled retrospectively

First, establish NBV at date of change in First, establish NBV at date of change in estimate. (estimate. (Requires calculation of past depreciation based on old assumptions)

Second, use NBV and new assumptions to calculate depreciation from date of change

Example of change in estimate in Chapter 4 and Ex Example of change in estimate in Chapter 4 and Ex 11-1111-11

Depreciation – Other IssuesDepreciation – Other IssuesDepreciation – Other IssuesDepreciation – Other Issues

Chapter 11-12

ImpairmentsImpairmentsImpairmentsImpairments

When the carrying amount of an asset is not recoverable, a company records a write-off

referred to as an impairment.

Examples of events that may lead to an impairment:

a. Decrease in the market value of an asset.

b. Change in the manner in which an asset is used.

c. Adverse change in legal factors or in the business climate.

d. An accumulation of costs in excess of the amount originally expected to acquire or construct an asset.

e. A projection or forecast that demonstrates continuing losses associated with an asset.

Chapter 11-13


Measuring Impairments (BE 11-8)

1. Review events for possible impairment.

2. If the review indicates impairment, apply the recoverability test.

i) If the sum of the expected future net cash flows from the long-lived asset is less than the carrying amount of the asset, an impairment has occurred.

3. Assuming an impairment, the impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value is the market value or the present value of expected future net cash flows.

Chapter 11-14


Illustration 11-16

Accounting for Impairments

Chapter 11-15


Ex 11-16 is example of impairment for asset Ex 11-16 is example of impairment for asset used in operationsused in operations

Ex 11-17 is example of impairment for asset Ex 11-17 is example of impairment for asset held for resaleheld for resale

Chapter 11-16



Large corporations owning many long-term assets have a choice as to whether to record depreciation on an asset-by-asset basis, or on a group basis using composite/group methods.

Group method used when the assets are similar in nature and have approximately the same useful lives.

Composite approach used when the assets are dissimilar and have different lives.

Group/Composite Depreciation Methods

Chapter 11-17



1. Record original assets as Asset Group

2. Compute depreciation rate based on original group

i) Calculate and sum straight line depreciation for each individual asset in original group

ii) Divide result by total cost of group of assets

3. Depreciation expense is total cost * depreciation rate.

4. If group has dissimilar assets with differing useful lives, calculate composite life by dividing depreciable base of group by the annual depreciation expense calculated

5. See BE 11-6 and extension for future purchases and sales

Group/Composite Depreciation Methods

Chapter 11-18

Presentation of Property, Plant, Equipment, and Natural Resources

PresentationPresentationPresentationPresentation

Basis of valuation (cost)

Pledges, liens, and other commitments

Depreciation expense for the period.

Balances of major classes of depreciable assets.

Accumulated depreciation.

A description of the depreciation methods used.

Depreciating assets, use Accumulated Depreciation.

Depleting assets may include use of Accumulated Depletion account, or the direct reduction of asset.

DisclosuresDisclosures

Chapter 11-19

Under both iGAAP and U.S. GAAP, interest costs incurred during construction must be capitalized.

iGAAP, like U.S. GAAP, capitalizes all direct costs in self-constructed assets.

The accounting for exchanges of nonmonetary assets has recently converged between iGAAP and U.S. GAAP.

iGAAP permits the same depreciation methods (straight-line, accelerated, units-of-production) as U.S. GAAP.

Chapter 11-20

As discussed in the Chapter 4 Convergence Corner, iGAAP permits asset revaluations (which are not permitted in U.S. GAAP). Consequently, companies that use the revaluation framework must follow revaluation depreciation procedures.

iGAAP also uses a fair value test to measure the impairment loss. However, iGAAP does not use the first-stage recoverability test used under U.S. GAAP—comparing the undiscounted cash flows to the carrying amount. Thus, the iGAAP test is more strict than U.S. GAAP.

Wiley - Chapter 12: Intangible Assets

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