Long-Term Operating Assets

Property, Plant, and Equipment: (PP&E)

Tangible and include: land, building, structures and equipment, machinery, furniture and tools

Natural Resources,

Physical rights to minerals rights, water, lumber, oil…

Intangibles:

Legal rights to copyrights, patents, franchises, goodwill…

Acquisition Cost

Initially valued at historical cost. • Historical cost includes: the asset’s cash or cash equivalent price (net present value), and • the cost of readying the asset for use The basic rule is that the exchange must be based on: 1. the fair value of the asset given up, or 2. the fair value of the asset received whichever is clearly more evident.

Exchanges

For financial report: “Like kind”--defer gains & losses Dissimilar--recognize gain to extent cash receive, recognize losses For tax purposes: Like kind trade your “gains”, sell your “Losses”.

Depreciation, Depletion, Amortization

• Limited Life Assets are expensed: • Straight-line: (Cost-Salvage)/Life • Life may be stated in years or units.

• Financial report: May use a faster rate: 200%, 150% or some other systematic method.

• Tax rules set the legal expense rates and the life.

Costs Subsequent to Acquisition

If cost incurred increase future benefits, capitalize costs.

If costs maintain a given level of services, expense costs.

Valuation of Intangible Assets

Intangibles Purchased Specifically Identifiable Capitalize Internally Created Goodwill type assets Capitalize Specifically Identifiable Expense, except direct costs Goodwill type assets Expense

Amortization of Intangible Assets

• Intangibles are written off (SL) over their useful lives, where the assets have determinable useful lives.

• Where the intangibles have indefinite useful lives, they are not amortized, but valued each year.

• Acquired intangibles should not be written off at acquisition.

Goodwill

• Goodwill is the most intangible of all assets.

• Goodwill can be sold only with the business.

• Goodwill is the excess of: • the cost (purchase price) over • the amounts (price) assigned to tangible and intangible net assets.

• Goodwill has an indefinite life and should not be amortized.

Goodwill Write-Off

• Acquired goodwill has an indefinite life and should not be amortized but is subject to impairment .

• Impairment test should be performed at least annually.

• If applicable, loss recorded.

Impairments: The Recoverability Test

Impairment?

Sum of expected future net cash flows from use and disposal of asset is less than the carrying amount Sum of expected future net cash flows from use and disposal of asset is equal to or more than the carrying amount Impairment has occurred No impairment

Impairment: Accounting

Impairment has occurred Assets are held for use 1. Loss = Carrying value less Fair value 2. Depreciate new cost basis 3. Restoration of impairment loss is NOT permitted Assets are held for sale 1. Loss = Carrying value less Fair Value less cost of disposal 2. No depreciation is taken 3. Restoration of impairment loss is permitted