Reading26. Long-Lived Assets

26.1 长期资产的初始取得成本

26.1.1 资本化与费用化（Capitalizing vs Expensing）

• Capitalizing
  • An expenditure that is expected to provide a future economic benefit over multiple accounting periods is capitalized, recognized as an asset on the balance sheet.
  • purchase price
  • delivery cost
  • installation and test cost
  • Rebuilding and update cost
• Expensing
  • If the future economic benefit is unlikely or highly uncertain, the expenditure is expensed when incurred.
  • Maintenance and training cost are expensed when incurred.

26.1.2 利息资本化

• When a firm constructs an asset for its own use or resale, the interest that accrues during the construction period, must be capitalized as a part of the asset’s cost.
  • Income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalization.
  • Once construction interest is capitalized, the interest cost is allocated to the income statement through depreciation expense (if the asset is held for use), or COGS (if the asset is held for sale).

26.1.3 资本化与费用化对财务报表的影响

• Effect on financial statement of Capitalizing Interest Costs

  	Capitalized	Expensed
  B/S
  Assets	Higher	Lower
  Equity	Higher	Lower
  I/S
  Interest Expense	Lower	Higher
  Derpeciation Expense	Higher	Lower
  Net income（first year）	Higher	Lower
  Net income（Subsequent years）	Lower	Higher
  Income variability	Lower	Higher
  CFS	The same	The same
  CFO	Higher	Lower
  CFI	Lower	Higher
  CFF	The same	The same
  Debt ratio& debt-to-equity	Lower	Higher
  Interest coverage （first year)	Higher	Lower
  Interest coverage （ subsequentyear）	Lower	Higher

26.1.4 无形资产的取得成本

• Patents, brand names, copyrights, and franchises.

• Classification

  • A finite-lived intangible asset is amortized over its useful life.
  • Indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually.
  • Identifiable intangible asset
    • Capable of being separated from the firm or arise from a contractual or legal right.
    • Controlled by the firm.
    • Expected to provide future economic benefits.
    • Unidentifiable intangible asset is one that cannot be purchased separately and may have an indefinite life.
  • Goodwill is tested for impairment at least annually.

• Recognition

  • Intangible assets created internally

    	IFRS	U.S. GAAP
    Research costs	Expensed	Expensed
    Development costs	Capitalized	Expensed Exception: Software for sale

    • The financial statement effects of capitalizing intangible assets are the same as the effects of capitalizing other expenditures.

  • Purchased intangible assets

    • Recorded on the balance sheet at its fair value.
    • If the intangible asset is purchased as part of a group, the total purchase price is allocated to each asset on the basis of its fair value.

  • Intangible assets obtained in a business combination

    • Goodwill

26.2 长期资产的折旧（Depreciation）与摊销（Amortization）

26.2.1 固定资产（PPE）的折旧

• Carrying value= historical cost—accumulated depreciation

一、直线折旧法（Straight-Line Method）

$$depreciationexpense=\frac{originalcost-salvagevalue}{depreciablelife}$$

二、加速折旧法（Accelerated Method / double-declining balance）

$$DDBdepreciationinyearx=\frac{2}{depreciablelifeinyears}\ast bookvalueatbeginningofyearx$$

三、产量折旧法（Units-of-Production Depreciation）

$$unitsofproductiondepreciation=\frac{originalcost-salvagevalue}{lifeoutputunits}\ast outputunitsintheperiod$$

26.2.2 Effect of depreciation methods on net income

• N ↑ or salvage values ↑, Depreciation↓ net income ↑, equity ↑, asset ↑ ROE ↑, and ROA ↑.
  • A longer estimated useful life decreases annual depreciation and increases reported net income, while a shorter estimated useful life will have the opposite effect.
  • A higher estimate of the salvage value will also decrease depreciation and increase net income, while a lower estimate of the salvage value will increase depreciation and decrease net income.
• A change in an accounting estimate, such as useful life or salvage value, is put into effect in the current period and prospectively.
  • Average life= accumulated depreciation/depreciation expense
  • Total useful life=historical cost/depreciation expense
  • Remaining useful life=ending PP&E/depreciation expense

26.3 长期资产的计量模式

26.3.1 成本模式（Cost model）

$$Cost=originalcost-accumulateddepreciation-anyimpairment$$

26.3.2 公允价值模式（Fair value model）

• Permit a long-lived asset to be reported at its fair value.

26.3.3 重估模式（Revaluation Model）

• IFRS：long lived asset can use revaluation model or cost model except investment property

• U.S.GAAP : can use cost model only

• First revaluation date

  • Fair value< carrying value
    • A loss is reported on the income statement.
  • Fair value > carrying value
    • Revaluation surplus, a component of equity, net income is not affected.

• Subsequent revaluation dates

  • Fair value > carrying value
    • a gain is first reported on the income statement to the extent it reverses any previously recorded loss from revaluation.
    • If the revaluation gain is greater than prior losses reported in the income statement that have not been reversed, the excess is reported in the revaluation surplus account.
  • Fair value< carrying value
    • The difference first goes to reduce any existing balance in the revaluation surplus account.
    • Any remaining difference in excess of the balance in the revaluation surplus account is reported on the income statement as a loss.
    • 不管怎么重估，资产的价值在原始账面价值以上的变动，都记入OCI，而在原始账面价值以下的变动，都计入利润表。

• Revaluing an asset’s value upward

  • Balance sheet
    • Assets↑, equity↑; Debt to asset ratio↓, debt-to-equity ratio↓
  • Income statement
    • Revaluation surplus↑Depreciation↑; Net income↓; ROA↓, ROE↓
    • Gain↑Depreciation↑Net income↑; ROA↑, ROE↑

26.4 长期资产的减值（Impairment）

26.4.1 Impairments under IFRS

• lower of carrying value and recoverable amount

• Impairments
  $$\begin{gathered} Min(carryingvalue,recoverableamount) \\ \Downarrow \\ Max(fairvalue-sellingcosts,valueinuse) \end{gathered}$$

  • Value in use is the present value of its future cash flow stream from continued use

• If impaired

  • I/S: An impairment loss is recognized in the income statement
  • B/S: the asset’s value must be written down on the balance sheet to the recoverable amount
  • the loss can be reversed, but cannot exceed the carrying value before the impairment loss was recognized.

26.4.2 Impairments under U.S. GAAP

一、Conditions

• Step 1: Recoverability test
  • If carrying value＞future undiscounted cash flow, the asset is impaired.
• Step 2
  • If impaired, the asset’s value is written down to fair value on the balance sheet and a loss is recognized in the income statement.
    • Loss recoveries(reverse) are typically not permitted.

26.4.3 Intangible Assets with Indefinite Lives

• Intangible assets with indefinite lives are not amortized.
• They are tested for impairment at least annually.
• An impairment loss is recognized in the income statement when the carrying amount exceeds fair value.

26.4.4 IFRS VS U.S. GAAP

	IFRS		U.S. GAAP
	Revaluation model	Cost model	Cost model
Reverse	√	√	×Exception: long-lived assets held for sale
impairment	√	√	√

26.5 长期资产的终止确认（Derecognition）

26.5.1 Long-lived assets held for sale

• The asset is no longer depreciated or amortized, tested for impairment.
• If carrying value＞net realizable value(fair value- selling costs), the asset is written down to net realizable value and the loss is recognized in the income statement.
• The loss reversal is allowed under IFRS and U.S. GAAP. However, the loss reversal is limited to the original impairment loss.

26.5.2 Derecognition

一、出售方式（Sell）

• The asset is removed from the balance sheet and the difference between the sale proceeds and the carrying value of the asset is reported as a gain or loss in the income statement.

二、弃置（Abandon）

• The treatment is similar to a sale, except there are no proceeds.

三、交换（Exchange）

• The carrying value of the old asset is removed from the balance sheet and the new asset is recorded at its fair value.

26.6 Concepts

• Under IFRS, property that a firm owns for the purpose of collecting rental income, earning capital appreciation, or both, is classified as investment property.
  • Cost model or a fair value model
  • Revaluation above historical cost is recognized as a gain on the income statement.
  • Firms are required to disclose which valuation model they use for investment property.
• U.S. GAAP does not distinguish investment property from other kinds of long-lived assets.