1、11-1PowerPoint Authors:Susan Coomer Galbreath,Ph.D.,CPACharles W.Caldwell,D.B.A.,CMAJon A.Booker,Ph.D.,CPA,CIACynthia J.Rooney,Ph.D.,CPAProperty,Plant,and Equipmentand Intangible Assets:Utilizationand Impairment11Copyright 2011 by the McGraw-Hill Companies,Inc.All rights reserved.McGraw-Hill/Irwin11
2、-2Some of the cost is expensed each period.Cost Allocation An OverviewExpenseAcquisitionCost(Balance Sheet)(Income Statement)The matching principle requires that part of the acquisition cost of property,plant,and equipment and intangible assets be expensed in periods when the future revenues are ear
3、ned.Depreciation,depletion,and amortization are cost allocation processes used to help meet the matching principle requirements.11-3 Caution!Depreciation,depletion,and amortizationare processes of cost allocation,not valuation!Depreciation on the Balance SheetCost Allocation An Overview11-4Cost allo
4、cation requires three piecesof information for each asset:Total amount of cost to be allocated.Cost-Residual Value(at end of useful life)The systematic approach used for allocation.Allocation BaseService LifeAllocation MethodMeasuring Cost Allocation11-5Time-based MethodslStraight-line(SL)lAccelerat
5、ed MethodsSum-of-the-years digits(SYD)Declining Balance(DB)Activity-based methodsUnits-of-production method(UOP).Group andcomposite methodsDepreciation11-6Straight-LineOn January 1,we purchase equipment for$50,000 cash.The equipment has an estimated service life of 5 years and estimated residual val
6、ue of$5,000.What is the annual straight-line depreciation?11-7AccumulatedAccumulatedUndepreciatedDepreciationDepreciationDepreciationBalanceYear(debit)(credit)Balance(book value)50,000$19,000$9,000$9,000$41,000 29,000 9,000 18,000 32,000 39,000 9,000 27,000 23,000 49,000 9,000 36,000 14,000 59,000 9
7、,000 45,000 5,000 45,000$45,000$BV=Residual Value at the end of the assets useful life.Straight-LineLife in YearsDepreciation11-8Accelerated MethodsNote that total depreciation over the assets usefullife is the same as the straight-line method.Accelerated methods result in more depreciation in the e
8、arly years of an assets useful life and less depreciation in later years of an assets useful life.Sum-of-the-years-digits(SYD)depreciation=SYD DepreciationResidual Value Cost(Remaining Years of Useful LifeSum-of-the-Years Digits*)11-92Sum-of-the-Years Digits(SYD)On January 1,we purchase equipment fo
9、r$50,000 cash.The equipment has a service life of 5 years and an estimated residual value of$5,000.Using SYD depreciation,compute depreciation for the first two years.11-10Sum-of-the-Years Digits(SYD)11-11Life in YearsDepreciationSum-of-the-Years Digits(SYD)11-12Declining-Balance(DB)MethodsDB deprec
10、iation Based on the straight-line rate multiplied by an acceleration factor.Computations initially ignore residual value.Stop depreciating when:BV=Residual ValueDouble-Declining-Balance(DDB)depreciationis computed as follows:Note that the Book Value will get lower each year.11-13On January 1,we purc
11、hase equipment for$50,000 cash.The equipment has a service life of 5 years and an estimated residual value of$5,000.What is depreciation for the first two years usingdouble-declining-balance?Declining-Balance(DB)Methods11-14Depreciation forced so that BV=Residual Value.Life in YearsDepreciationDecli
12、ning-Balance(DB)Methods11-15Units-of-Production11-16On January 1,we purchased equipment for$50,000 cash.The equipment is expected to produce 100,000 units during its life and has an estimated residual value of$5,000.If 22,000 units were produced this year,what is the amount of depreciation?Units-of-
13、Production11-17Use of Various Depreciation Methods11-18U.S.GAAP vs.IFRSComponent depreciation is allowed but not often used in practice.The depreciable base is determined by subtracting estimated residual value from cost.Annual reviews of residual values are not required.Each component of an item of
14、 property,plant,and equipment is depreciated separately if its cost is significant to the total cost of the item.Depreciable base is determined by subtracting estimated residual value from cost.IFRS requires a review of residual values annually.Component Depreciation,Depreciable Base,and Residual Va
15、lue11-19Group and Composite Methods Assets are grouped by common characteristics.An average depreciation rate is used.Annual depreciation is the average rate the total group acquisition cost.Accumulated depreciation records are not maintained for individual assets.If assets in the group are sold,or
16、new assets added,the composite rate remains the same.When an asset in the group is sold or retired,debit accumulated depreciation for the difference between the assets cost and the proceeds.11-20U.S.GAAP vs.IFRSProperty,plant,and equipment is reported in the balance sheet at cost less accumulated de
17、preciation(book value).Revaluation is prohibited.Property,plant,and equipment may be reported at cost less accumulated depreciation,or alternatively,at fair value(revaluation).If revaluation is chosen,all assets within a class of property,plant,and equipment must be revalued on a regular basis.Valua
18、tion of Property,Plant,and Equipment11-21The approach is based on the units-of-production method.Depletion of Natural ResourcesAs natural resources are“used up,”or depleted,the cost of the natural resources must be allocated to the units extracted.11-22ABC Mining acquired a tract of land containing
19、ore deposits.Total costs of acquisition and development were$1,100,000.ABC estimated the land contained 40,000 tons of ore,and that the land will be sold for$100,000 after the coal is mined.What is ABCs depletion rate?Depletion rate=1,000,000 40,000 Tons=$25 Per TonDepletion of Natural ResourcesFor
20、the year ABC mined 13,000 tons.What is the total amount of depletion for the year?Depletion=13,000 tons$25per ton =$325,00011-23U.S.GAAP vs.IFRSBiological assets,such as timber tracts,are valued at cost less accumulated depletion.Biological assets are valued at fair value less estimated costs to sel
21、l.Valuation of Biological Assets11-24Amortization of Intangible AssetsThe amortization process uses the straight-line method,but usually assumes residual value=0.Amortization period is the shorter ofthe assets legal or contractual life.The amortization entry is:A contra-asset account is generally no
22、t used when recording the amortization of intangible assets.Amortization expense .$Intangible asset.$To record amortization expense.11-25Torch,Inc.has developed a new device.Patent registration costs consisted of$2,000 in attorney fees and$1,000 in federal registration fees.The device has a contract
23、ual(useful)life of 5 years.The legal life is 20 years.For year 1,what is Torchs amortization expense?Amortization of Intangible AssetsAmortization expense .600Patent.600To record amortization of patent.11-26Not amortized.Subject to assessment for impairment ofvalue and may bewritten down.Goodwill an
24、d TrademarksIntangible Assets notSubject to Amortization11-27U.S.GAAP vs.IFRSIntangible assets are reported at cost less accumulated amortization.U.S.GAAP prohibits revaluation of any intangible asset.Intangible assets may be reported at (1)cost less accumulated amortization or(2)fair value,if fair
25、value can be determined in an active market.If revaluation is chosen,all assets within the class of intangibles must be revalued on a regular basis.Goodwill cannot be revalued.Valuation of Intangible Assets11-28Partial-Period Depreciation Half-Year ConventionTake of a year of depreciation in the yea
26、r of acquisition,and the other in the year of disposal.Pro-rating the depreciation based on the date of acquisition is time-consuming and costly.A commonly used alternative is the.11-29ESTIMATED service lifeESTIMATED residual valueChanges in estimates are accounted for prospectively.The book value l
27、ess any residual value at the date of change is depreciated over the remaining useful life.A disclosure note should describe the effect of a change.On January 1,equipment was purchased that cost$30,000,has a useful life of 10 years and no salvage value.At the beginning of the fourth year,it was deci
28、ded that there were only 5 years remaining,instead of 7 years.Calculate depreciation expense for the fourthyear using the straight-line method.Changes in Estimates11-30What happens if we change depreciation methods?Changes in Estimates11-31Change in Depreciation MethodWe account for these changes ex
29、actly as we would any other change in estimate.A change in depreciation,amortization,or depletion method is considered a change in accounting estimate that is achieved by a change in accounting principle.On January 1,2009,Matrix,Inc.,purchased equipment for$400,000.Matrix expected a residual value$4
30、0,000,and a service life of 5 years.Matrix uses the double-declining-balance method to depreciate this type of asset.During 2011,the company switched from double-declining balance to straight-line depreciation.The residual value remained at$40,000.Lets determine the amount of depreciation to be reco
31、rded at the end of 2011.11-32Change in Depreciation MethodDecember 31,2011:Depreciation expense .34,667Accumulated depreciation.34,667To record depreciation expense.11-33Error CorrectionErrors found in a subsequent accounting period are corrected by.Entries that restate the incorrect account balance
32、s to the correct amount.Restating the prior periods financial statements.Reporting the correction as a prior period adjustment to Beginning R/E.11-34Impairment of ValueAccounting treatment differs.Long-term assetsto be held and usedLong-term assetsheld for saleTangible andintangible with finiteusefu
33、l livesIntangiblewithindefiniteuseful livesGoodwillTest for impairmentof value when consideredfor sale.Test for impairment of value at least annually.Test for impairment of value when it is suspected that book value may not be recoverable11-35Finite-life Assets to be Held and UsedAn asset is impaire
34、d when.The undiscounted sum of its estimated future cash flows Measurement Step 1Itsbookvalue11-36Impairmentloss=BookvalueFairvalueMeasurement Step 2$0$250$125Case 1:$50 book value.No loss recognizedCase 2:$150 book value.No loss recognizedCase 3:$275 book value.Loss=$275-$125Fair ValueUndiscounted
35、futurecash flowsMarket value,price of similar assets,or PV of future net cash inflows.Reported as partof income from continuing operations.Finite-life Assets to be Held and Used11-37Impairmentloss=BookvalueFair value lesscost to sellAssets held for saleinclude assets that managementhas committed to
36、sell immediately intheir present condition andfor which sale is probable.Assets Held for Sale11-38U.S.GAAP vs.IFRSAssets are tested for impairment when events or changes in indicators suggest that book value may not be recoverable.An impairment loss is required when an assets book value exceeds the
37、undiscounted sum of the estimated future cash flows.Assets must be assessed for circumstances of impairment at the end of each reporting period.An impairment loss is required when an assets book value exceeds the higher of the assets value-in-use(present value of estimated future cash flow)and fair
38、value less costs to sell.Impairment of Value:Property,Plant,and Equipment and Finite-life Intangible Assets11-39U.S.GAAP vs.IFRSThe impairment loss is the difference between book value and fair value.Reversals of impairment losses are prohibited.The impairment loss is the difference between book val
39、ue and the recoverable amount,the higher of the assets value-in-use and fair value less costs to sell.An impairment loss is reversed if the circumstances that caused the impairment is resolved.Impairment of Value:Property,Plant,and Equipment and Finite-life Intangible Assets11-40Finite-life Assets t
40、o be Held and UsedStep 1$140 million FV,impairment indicated.Other IndefiniteLife Intangibles One-step ProcessIf BV of asset FV,recognize impairment loss.Indefinite-life Intangibles11-43U.S.GAAP vs.IFRSIndefinite-life intangible assets other than goodwill are tested for impairment at least annually.
41、The impairment loss is the difference between book value and fair value.Indefinite-life intangible assets other than goodwill are tested for impairment at least annually.The impairment loss is the difference between book value and the recoverable amount,the higher of the assets value-in-use(present
42、value of estimated future cash flows)and fair value less costs to sell.Impairment of Value:Indefinite-life Intangible Assets Other than Goodwill11-44U.S.GAAP vs.IFRSReversals of impairment losses are prohibited.If certain criteria are met,indefinite-life intangible assets are combined for the requir
43、ed annual impairment test.An impairment loss is reversed if the circumstances that caused the impairment is resolved.Indefinite-life intangible assets may not be combined with other indefinite-life intangible assets for the required annual impairment test.Impairment of Value:Indefinite-life Intangib
44、le Assets Other than Goodwill11-45U.S.GAAP vs.IFRSGoodwill is tested for impairment at least annually.Reversals of impairment losses are prohibited.The level of testing(reporting unit)is a segment or a component of an operating segment for which discrete financial information is available.Goodwill i
45、s tested for impairment at least annually.Reversals of impairment losses are prohibited.The level of testing(cash-generating unit)is the smallest identifiable group of assets that generates cash flows that are largely independent of the cash flows from other assets.Impairment of Value:Goodwill11-46U
46、.S.GAAP vs.IFRSMeasurement of an impairment loss is a two-step process.In step one the fair value of the reporting unit is compared to its book value.A loss is indicated if the fair value is less than the book value.In step two,the impairment loss is calculated as the excess of book value of goodwil
47、l over the implied fair value of goodwill.Measurement of an impairment loss is a one-step process.The recoverable amount of the cash-generating unit is compared to its book value.If the recoverable amount is less,goodwill is reduced before other assets are reduced.Impairment of Value:Goodwill11-47Im
48、pairment of GoodwillStep 1$500 million$400 millionImpairment loss is indicated.Simmons Company recorded$150 million of goodwill when it acquired Blake Company.Blake continues to operate as a separate company and is considered to be a reporting unit.At the end of the current year Simmons noted the fo
49、llowing related to Blake:(1)book value of net assets,including$150 million of goodwill is$500 million;(2)fair value of Blake is$400 million;and(3)fair value of Blakes identifiable net assets,excluding goodwill is$350 million.Is goodwill impaired and if so,by what amount?11-48Impairment of GoodwillSi
50、mmons Company recorded$150 million of goodwill when it acquired Blake Company.Blake continues to operate as a separate company and is considered to be a reporting unit.At the end of the current year Simmons noted the following related to Blake:(1)book value of net assets,including$150 million of goo
