fsa 7: analysis of long term assets

What are intangible assets?

Non-monetary assets without physical substance, such as patents, copyrights, trademarks, and franchises.

Under IFRS, what are the 3 criteria for an identifiable intangible asset?

• Identifiable (separable or arises from legal/contractual rights)

• Under control of the company

• Expected to generate future economic benefits

What are the recognition criteria for an intangible asset under IFRS?

• Probable future economic benefits will flow to the company

• Cost can be reliably measured

What is goodwill?

the excess of purchase price over the fair value of net identifiable assets acquired in a business combination

How are purchased intangible assets (outside business combinations) initially recorded?

At fair value, usually equal to purchase price.

From an analyst perspective, what is more important than exact valuation of intangible assets?

Understanding the types of assets acquired (e.g., brands, patents) and strategic implications.

How are internally developed intangible assets generally treated under IFRS?

Expensed as incurred (with some exceptions for development phase).

How does expensing internally developed intangibles affect financial statements vs purchasing intangibles?

• Lower assets on balance sheet

• Operating cash outflow instead of investing cash outflow

how does IFRS treat research and development

Research:

• Original investigation to gain new scientific or technical knowledge

• always expensed

Development:

• capitilised when technical feasibility is demonstrated and future economic benefits probable

How does US GAAP treat R&D costs generally?

Expensed as incurred

What exception exists under US GAAP for intangible-related costs?

Software development costs may be capitalised

• after technological feasibility

• or probable completion for internal use software

Under IFRS, when is an intangible asset recognized separately in a business combination?

If it is

• identifiable

• controlled

• expected to generate future benefits

• meets recognition criteria.

  • Probable future economic benefits will flow to the company

  • Cost can be reliably measured

e.g: Patents, copyrights, franchises, trademarks, licenses, domain names, audiovisual materials.

else recognised as goodwill

Under US GAAP, what qualifies an intangible asset for separate recognition in a business combination?

It must arise from contractual/legal rights OR be separable.

What is impairment of an asset?

A decline in asset value where carrying amount exceeds recoverable amount.

How is impairment different from depreciation/amortization?

Depreciation/amortization: allocates cost over time

Impairment: reflects an unexpected loss in value.

can impairment be reversed under IFRS or US GAAP?

IFRS: Yes except goodwill

US GAAP: No for assets held for use, yes for assets held for sale.

When is PPE tested for impairment?

Only when indicators of impairment exist, not annually.

What are examples of impairment indicators for PPE?

• Obsolescence

• demand decline

• technological changes.

how will the amount of the impairment loss affect

1. balance sheet

2. income statement

3. CFO

• reduce the carrying amount of the asset on the balance sheet

• reduce net income on the income statement

• non-cash item and will not affect cash from operations.

How is recoverable amount defined under IFRS?

Higher of:

• Fair value less costs to sell

• Value in use (PV of future cash flows)

How is IFRS impairment loss calculated for PPE?

Carrying amount − Recoverable amount.

How is recoverability tested under US GAAP?

if carrying amount > undiscounted future cash flows - impair

If asset is not recoverable under US GAAP, how is impairment measured?

written down to fair value

loss = Carrying amount − Fair value.

How are finite-life intangible assets tested for impairment?

Only when indicators exist (same as PPE).

How are indefinite-life intangible assets treated?

• Not amortized- carried at historical cost on balance sheet

• tested annually for impairment.

Impairment trigger for indefinite-life intangibles?

Carrying amount > fair value.

When is an asset classified as held for sale and how is it treated?

When sale is highly probable and asset is available for immediate sale.

• Tested for impairment

• No depreciation or amortization

How is impairment measured for held-for-sale assets?

Carrying amount − Fair value less costs to sell.

When is an asset derecognised?

When it is disposed of or no future economic benefits are expected

How is gain or loss on sale of PPE calculated?

Sale proceeds − Carrying amount of PPE (Historical cost − accumulated depreciation)

Where is gain/loss on sale reported?

Income statement (often in other gains/losses).

How is impairment treated in cash flow statement?

Non-cash → added back in operating cash flow adjustments.

How is sale of PPE treated in cash flow statement (indirect method)?

• Gain/loss removed from operating cash flow

• Cash proceeds shown in investing activities

How is an abandoned asset accounted for?

Written off; loss equals carrying amount.

How are exchanged assets accounted for?

• Asset given up removed

• new asset recorded at fair value

• gain/loss recognized.

How are spin-offs treated?

• No gain or loss recognized

• assets/liabilities transferred to shareholders.

What must IFRS disclose for each class of PPE?

• Measurement basis

• Depreciation method

• Useful life or depreciation rate

• Gross carrying amount (beginning & end)

• Accumulated depreciation (beginning & end)

• Reconciliation of carrying amount

• Restrictions on title

• Assets pledged as security

• Contractual commitments to acquire PPE

• Depreciation expense for the period

• Description of depreciation methods used

What extra disclosures are required if PPE is revalued under IFRS?

• Date of revaluation

• How fair value was determined

• Carrying amount under cost model

• Revaluation surplus

What must IFRS disclose for intangible assets with finite lives?

• Useful life or amortization rate

• Amortization method

• Gross carrying amount (beginning & end)

• Accumulated amortization

• Reconciliation of carrying amount

How do IFRS and US GAAP intangible asset disclosures differ?

IFRS:

• Useful life (finite or indefinite)

• Gross carrying amount & amortization

• Reconciliation of carrying amounts

• Reason if indefinite life

• Depreciation/amortization method

US GAAP:

• Gross carrying amount & accumulated amortization

• Total amortization expense

• Expected amortization for next 5 years

How are impairment disclosures different under IFRS and US GAAP?

IFRS:

• Impairment losses AND reversals must be disclosed

• By asset class

• Reasons for impairment/reversal

US GAAP:

• No reversal of impairment for assets held for use

• Must disclose:

  • asset description

  • reason for impairment

  • fair value method

  • impairment amount

Where are PPE and intangible asset disclosures found in financial statements?

• Balance sheet: carrying value

• Income statement: depreciation/amortization (sometimes separate, sometimes embedded in expenses)

• Cash flow statement: investing outflows/inflows + depreciation add-back (indirect method)

• Notes: accounting policies, useful lives, cost breakdown, accumulated depreciation, and expense detail

What does fixed asset turnover measure?

How efficiently a company generates revenue from its investment in PPE

higher = better

fixed asset turnover formula?

$$\frac{\text{total revenue}}{\text{average net PPE}}$$

average net PPE = $\frac{\text{beginning net PPE+ end net PPE}}{2}$

What do asset age ratios measure?

indicate how old a company’s asset base is and future reinvestment needs.

formula for historical cost

Historical Cost=Accumulated Depreciation+Net PPE

formula for average age

$$\frac{\text{Accumulated Depreciation​}}{\text{annual depreciation expense}}$$

formula for estimated total useful life?

$$\frac{\text{historical cost}}{\text{annual depreciation expense}}$$

formula for estimated remaining useful life

$$\frac{\text{Net PPE​}}{\text{annual depreciation expense}}$$