ACCTG 326: ch 11 part 2
service life for the depletion of natural resources is the estimated amount of natural resource to be
extracted (for example, tons of minerals or barrels of oil)
the units-of-production method is often used to determine depreciation and amortization on assets used in the
extraction of natural resources
IFRS allows a company to report property, plant, and equipment at book value or, alternatively, at its
fair value (reevaluation)
additions to the group will be recorded by increasing the
group asset account for the cost of the addition. depreciation is determined by multiplying the group rate by the total cost of assets in the group for that period
sometimes companies adopt a simplifying assumption, or convention, for computing partial year's depreciation and use it consistently. a common convention is to record
one-half of a full year's depreciation in the year of acquisition and another half year in the year of disposal (half-year convention)
amortization under IFRS typically occurs over the useful life of the software, based on the
pattern of benefits, with straight-line as the default
the method of amortization should reflect the
pattern of use of the asset in generating benefits. most companies use the straight-line method to calculate amortization expense
goodwill is an intangible asset whose cost is not expensed through
periodic amortization
for intangibles used in the. manufacture of a product, amortization is a
product cost and is included in the cost of inventory (and does not become an expense until the inventory is sold)
if financial statements are again prepared prior to the sale, we reassess the asset's fair value less selling costs. if further decline has occurred we recognize,
another loss
for intangible assets not used in production, such as the franchise cost, periodic amortization is
expensed in the period incurred
group and comoposite depreciation methods aggregate assets to reduce the
recordkeeping costs of determining periodic depreciation
if the reevaluation option is chosen, the way the company reports the difference between fair value and book value depends on
which amount is higher
If fair value is higher than book value, the difference is reported as other comprehensive income (OCI), which then accumulates in a
"revaluation surplus" account in equity
depletion is included in cost of goods sold in the income statement
when the natural resource is sold
IFRS allows a company to value an intangible asset subsequent to initial valuation at
1) cost less accumulated amortization or 2) fair value, if fair value can be determined by reference to an active market
the asset is classified as "held for sale" in the period in which all of the following criteria are met:
1. management commits to a plan to sell the asset 2. the asset is available for immediate sale in its present condition 3. an active plan to locate a buyer and sell the asset has been initiated 4. the completed sale of the asset is probable and typically expected to occur within one year 5. the asset is being offered for sale at a reasonable price relative to its current fair value 6. management's actions indicate the plan is unlikely to change significantly or be withdrawn
capitalized software development costs are amortized based on whichever of the following two methods produce a greater amount:
1. the ratio of current revenues to current and anticipated revenues (percentage of revenue method), or 2. the straight-line method based on the estimated useful life of the asset
if the fair value of an asset held for sale has increased since the previous measurement, we recognize
a gain, but limited to the cumulative amount of any previous losses
if the fair value of an asset held for sale is below book value we recognize
a loss in the current period
the allocation of intangible asset cost is called
amortization
intangible assets with finite useful lives will be amortized, and those with indefinite useful lives will not be
amortized
intangible assets with an indefinite useful life are those with no forseeable limit on the period of time over which the
asset is expected to contribute to cash flows of the entity
The expected residual value of most intangible assets is zero. this may not be the case though, if at the end of its useful life to the reporting entity the asset will
benefit another entity
a gain or loss is recognized for the difference between the consideration received and the asset's
book value
because depreciation records are not kept on an individual asset basis, dispositions are recorded under the assumption that the
book value of the disposed item exactly equals any proceeds received and no gain or loss is recorded
software development costs incurred after the point of technological feasibility and before the product is available for sale are
capitalized
like depletion, amortization expense traditionally is credited to the asset account itself rather than to accumulated amortization. however, the use of a
contra account is acceptable
we allocate the capitalized cost less any estimated residual value of an intangible asset to periods in which the asset is expected to
contribute to the company's revenue-generating activities
depletion base is
cost - any anticipated residual value *residual value could be significant if costs includes land that has a value after the natural resource has been extracted
under US GAAP, a timber tract is valued at
cost less accumulated depletion and a fruit orchard at cost less accumulated depreciation
under GAAP, a company reports PP&E in the balance sheet at
cost less accumulated depreciation (book value)
Group depreciation method
defines the collection as depreciable assets that share similar service lives and other attributes
allocation of the cost of natural resources is called
depletion
an asset that is classified as held for sale is no longer
depreciated or amortized
many companies choose to report intangible assets for their net amount on the face of the balance sheet and then report the amount of amortization in a
disclosure note
group depreciation rate is determined by
dividing the depreciation per year by the total cost
if book value is higher than fair value, the difference is reported as an expense in the income statement. An exception is when a revaluation surplus account relating to the same asset has a balance from a previous increase in fair value, that balance is
eliminated before debiting revaluation expense
the group and composite method simplify the recordkeeping of depreciable assets. this simplification justifies any
errors in income determination
under IFRS, biological assets are valued at their fair value less
estimated costs to sell, with changes in fair value included in the calculation of net income
to record the revaluation of franchise to its fair value
if the fair value is higher than book value, the difference is reported as other comprehensive income (OCI) and then accumulates in a revaluation surplus account in equity if book value is higher than fair value, the difference is expensed after reducing any existing revaluation surplus for the asset
the gain on the sale of an asset before the end of its useful life is usually reported
in the income statement as a separate component of operating income
goodwill is the most common intangible asset with an
indefinite useful life
trademarks or tradenames often are considered to have
indefinite useful lives and the cost of the trademark is not amortized
depletion is a product cost and is included in the cost of the
inventory of the natural resource, just as depreciation on manufacturing equipment is included in inventory cost
legal, regulatory, or contractual provisions often limit the useful life of an intangible asset. on the other hand, useful life might sometimes be
less than the asset's legal or contractual life
most intangible assets have a finite useful life. this means their estimated useful life is
limited in nature
biological assets
living animals and plants, including the trees in a timber tract or in a fruit orchard, are referred to as biological assets
Statutory depletion is the
maximum amount of depletion that may be reported in financial statements prepared according to GAAP for income tax purposes for oil, gas, and most mineral natural resources
the cost of an intangible asset with an indefinite useful life is
not amortized
at the time of retirement, the asset account and the corresponding accumulated depreciation account are
removed from the books and a loss equal to the remaining book value of the asset is recorded because there will be no monetary consideration received
no gain or loss is recorded when a group or composite asset is
retired or sold
if revaluation is chosen, all assets within that class of intangibles must be revalued on a regular basis. goodwill, however, cannot be
revalued. US GAAP prohibits revaluation of any intangible asset
even with partial-year depreciation, the total depreciation over the asset's total life is the
same, whether the asset is purchased a the beginning of a year or during the year
we allocate the cost of an intangible asset over its
service or useful life
the capitalized cost of software developed for internal purposes or as part of cloud computing arrangement is amortized over the
software's expected useful life, generally using straight-line amortization
both composite and group depreciation involve applying a single
straight-line rate based on the average service lives in the group or composite
once the group or composite rate and the average service life are determined, they normally are continued despite
the addition or disposition of individual assets
a gain on the sale of a depreciable asset simply means the asset was sold for more than its book value. in other words,
the asset being received, and recorded (such as cash) is greater than the recorded book value of the asset being sold and written off. the net increase in the book value of total assets is an accounting gain (not an economic gain)
the group will be depreciated over the average service life of
the assets in the group
the group's average service life is calculated by dividing
the depreciable base by the depreciation per year
an asset classified as held for sale is reported at
the lower of its current book value or its fair value less any cost to sell
property, plant, and equipment or an intangible asset to be disposed of by sale is classified as held for sale and measured at
the lower of the assets book value or the assets fair value less cost to sell
if equipment can be moved from the site and used of future projects, the equipment's depreciable base should be allocated over its useful life. if the asset is not movable,
then it should be depreciated over its useful life or the life of the natural resource, whichever is shorter
use ratio of (fair value/book value) to adjust both the equipment and the accumulated depreciation accounts
to fair value
the depreciation rate is applied to the ______ of the group or composite for the period
total cost
depletion of the cost of natural resources usually is determined using the
units-of-production method
composite depreciation method
used when assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation