Chp 11: Ppe And Intangible Assets: Utilization And Impairment

Front 1

Service Life or useful life(interchangeable)

Back 1

Estimated use the company expects to receive from the asset before disposing of it.

Expressed in units of time or activity

Physical life: Provides the upper bound for service life of tangible, long-lived assets. Will vary according to the purpose for which the asset is required and the environment in which it is operated.

Service life may be less than physical life for a variety of reasons, such as expected obsolescence or:

1. more efficient technology

2. market that demands new products, limiting current machinery's usefulness.

3. Economic feasibility of extraction methods

4. For intangibles, legal or contractual life is limiting factor

5. Management intent

Range of service lives for different categories of assets are disclosed by companies.

Front 2

Allocation base

Back 2

value of the usefulness that is expected to be consumed

initial value less salvage value

Front 3

Allocation method

Back 3

pattern in which the usefulness is expected to be consumed.

Should be systematic and rational and correspond to the pattern of asset use.

Objective is to allocate cost to the period in an amount that is proportional to the amount of benefits generated by the asst during the period relative to the total benefits provided by the asset during its life.

two approaches:

1. time based

2. activity based

Front 4

Salvage value or residual value

Back 4

amount the company expects to receive for the asset at the end of its service life less any anticipated disposal costs.

In certain situations, residual value can be estimated by referring to a company's prior experience or to publicly available information concerning reseal values of various types of assets.

However, estimating residual value for many assets can be very difficult due to uncertainty about the future. Thus, along with this reason and the fact that residual values are immaterial, many companies simply assume a residual value of zero.

Front 5

time based

Back 5

passage of time

Front 6

activity-based

Back 6

input or output

Front 7

Sum-of-the-years' digit (SYD) method

Back 7

Multiplies depreciable base by a declining fraction, resulting in depreciation that decreased by the amount year.

accelerates depreciation in systematic manner

denominator remains cost, while numerator decreases each year

denominator is the sum of one to n

numerator begins with value of n and decreases each year.

no logical foundation

Front 8

Straight line

Back 8

Allocates an equal amount of depreciable base to each year of the asset's service life.

Front 9

Double-declining balance(DDB) method

Back 9

When 200% is used as the multiple for the straight line rate, it's twice the straight line rate.

Front 10

Group Depreciation Method

Back 10

Defines the collection as depreciable assets that share similar service lives and other attributes, such as for a fleet of vehicles or machinery.

Front 11

Composite depreciation method

Back 11

Used when assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation, such as for all the depreciable assets in a manufacturing plant, even though the individual assets in the composite may have widely diverse service lives.d

Front 12

Depletion

Back 12

Allocation of cost of natural resources.

Units of production method

Service life is estimated amount natural resource to be extracted.

Depletion base is cost less residual value

Residual value could be significant if cost includes land that has a value after the natrual resource has been extracted.

Credit is usually to asset, but contra account(accumulated depletion) is acceptable as well.

Depletion is a product cost and included in the cost of the inventory of coal and when sold is included in COGS.

Excavation equipment that can be moved and used on future projects has a depreciable base that should be allocated over its useful life.

If it can't be moved, then it's depreciated over useful life or the life of the natural resource, whichever is shorter.

The units of production method often is used to determine depreciation and amortization on assets used in the extraction of natural resources; activity base same as that used for depletion of natural resources.

Front 13

Amortization

Back 13

Allocation the cost of intangible assets.

For an finite life intangible asset, we allocate its capitalized cost less any residual value to periods in which the asset is expected to contribute to the company's revenue generating activities.

1. Useful Life

2. residual value

3. allocation method

Front 14

Half Year convention

Back 14

A simplifying convention used to compute partial year's depreciation by recording one-half of a full year's depreciation in the year of acquisition and another half year in the year of disposal.

Front 15

Additions(subsequent expenditures)

Back 15

Involve adding a new major component to an existing asset and should be capitalized because future benefits are increased.

ex: security system to builidng, refrigeration unit to truck, etc.

Capitalized cost includes all necessary expenditures to bring the addition to a condition and location for use, such as tearing down and removing a wall of an existing building for a building addition.

Capitalized cost is depreciated over the remaining useful life of the original asset or its own useful life, whichever is shorter.

Front 16

Improvements(subsequent expenditures)

Back 16

Involve the replacement of a major component of an asset.

Replacement can be a new component with the same traits as the old component or a new component with enhanced operating capabilities.

In either case, it usually increases future benefits and should be capitalized by increasing the book value of the related asset and depreciated over the useful life of the improved asset.

Three methods to record cost of improvements:

· Substitution

· Capitalization of new cost

· Reduction of accumulated depreciation

Front 17

Rearrangements(subsequent expenditures)

Back 17

Expenditures made to restructure an asset without addition, replacement, or improvement

Objective is to create new capability for an asset and not necessarily extend useful life.

If material and clearly increase future benefits, then they're capitalized and expensed in future periods benefited.

If not material or it's not certain that future benefits have increased, they should be expensed in the period incurred.

Cost of material rearrangements should be capitalized, while immaterial rearrangements should be expensed.