Accounting 302 Chapter 11

Modified half-year convention

record full year expense when the asset is acquired in the first half of the year or sold in the second half. no expense is recorded with it is acquired in the second half of the year

Change in depreciation method

prospectively, depreciating the remaining depreciable base over there revised remaining service life, disclosure note

Amortization base of intangibles

cost

Repairs and maintence

expenditures made to maintain a given level of benefits provided by the asset, but don't increase future benefits. They are expensed for the period incurred

Rearrangements

expenditures to restructure plant and equipment without addition, replacement or improvement. The objective is to create a new capability for the asset and not to extend the useful life. The cost is capitalized if they increase future benefits.

depletion refers to

natural resources

What happens to intangibles with no legal life

not amotized

What happens when determining impairment loss and no fair value

present value all the future cash flows from the asset or group of assets

Depreciation refers to

property, plant, and equipment

Change in service life is treated

prospectively by depreciating the remaining depreciable base

Impairment of PP&E and Intangibles with finite lives

recognize impairment loss when undercounted sum of future cash flows is less than the asset's book value. Loss is recognized by the amount the book value exceeds the fair value of the asset or group of assets.

Three characteristics that need to be established at the time the asset it put into use are

1. Service (useful) life: The estimated use that the company expects to receive from the asset. 2. Allocation Base: the value of the usefulness that is expected to be consumed 3. Allocation method: The pattern in which the usefulness is expected to be consumed.

Explain: depreciation is a process of cost allocation, not valuation.

Depreciation is not measured as decline in value from one period to the next. It involves the distribution of the cost of an asset, less anticipated residual value over the asset's estimated useful life in a systematic and rational manner that attempts to match revenues with the use of the asset.

Cmoposite Approach

dissimilar operating assets

Improvements

expenditures for the replacement of a major component of plant and equipment. They are capitalized

Depletion

Allocation of the cost of a natural resource, activity based is dominate

Impairment

when there has been a decline in value below carrying value

Depreciation of Aggregate assets- Group Approach

- applied to a collection of depreciable assets that share similar service lives and other attributes

Why do companies prefer strait line depreciation

- the benefits from the assets are even over their useful lives - easiest to understand and apply- effect on net income (higher net invome in the early years of the asset's life) - higher net income can affect bonuses paid to management - INCOME TAXES ARE NOT A FACTOR because can use different methods for financial reporting and income tax purposes

Factors that influence the estimation of service life for a depreciable asset

- the purpose for which the asset is acquired - the environment it is used in

Why is time based allocation methods more preferred to activity based allocation methods

Activity based, while it would provide a better of matching of revenues and expenses, would be too costly and infeasible to use, and it is hard to determind the machine hours

Strait line depreciation method

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

Activity based allocation method

Estimate service life in terms of some measure of productivity. Periodic depreciation/depletion is determined based on the actual productivity generated by the asset during the period

Time based allocation method

Estimates the service life in terms of years. Periodic depreciation/amortization is determined based on the passage of time.

Amortization

Finite-life intangible assets, allocated to the periods the company expects the asset to contribute to its revenue generating activities.

GAAP vs IFRS Goodwill impairment

GAAP: 1. look at FV and BV of goodwill. If FV is less than BV, impairment. 2. Then, look at what the FV total is vs the FV of the total net assets, that's your implied goodwill 3. Then, the difference between the Goodwill recorded and the implied goodwill is your loss on impairment IFRS: one step comparing the recoverable amount of cash generating unit to bv. if the recoverable amount is less, then reduce the goodwill first, then the other assets. the recoverable amount is the higher of the fair value minus the costs to sell and value-in-use (pv future cash flows)

Impairment for Good Will

Loss is indicated if FC is less than BC. It is measured as the excess of BV of goodwill over its implied fair value. The loss is measured as the excess of Book value over the implied fair value

Impairment for intangible assets with indefinite useful lives

Other than good will, if BC is greater than FC, loss is recognized for differences

Half Year Convention

Record one half of a full years expenses in the years of acquisition and disposal, to calculate depreciation on the actual number of days months or years it was used

Additions on buildings

adding a major component and are capitalized.

Accelerated depreciation method

allocates higher portions of depreciable base tot he early years of the asset's life and lower amounts of depreciable base to later years. Total depreciation is the same as strait line.

IFRS- pp&e and intangibles

allow a company to call pp&e and intangibles subsequent to initial valuation at: cost - a/d, or fair value (revaluation)

Residual/salvage value

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

GAAP vs IFRS- impairment

impairment loss for pp&e and finite life intangibles is measured as the diff between bv and fv - IFRS: impairment is measured as the difference between bc and the recoverable amount- the higher of the asset's value in use (pv of estimated future cash flows) and fair value less costs to sell

amortization refers to

intangibles

Depreciable base

the total amount of depreciation to be recorded during an asset's service life. It is the difference between the initial value of the asset at its acquisition (in cost) and its residual value.

Similarities among depreciation, depletion and amortization

they all refer to the process of allocating the cost of property, plant, and equipment and finite-life intangible assets to periods of use. They are different because they refer to different types of long lived assets

IFRS Litigation costs

those to successfully defend are expensed, except when they increase future benefits.

Error

treat it retrospectively and restate to reflect the correction