Textbook Notes (368,463)
Canada (161,897)
Administration (1,247)
ADM1340 (150)
Chapter 9

ADM1340 Chapter 9: The Purpose and Use of Financial Statements - Lamia Chorou
Premium

by Bruna
7 Pages
61 Views
Unlock Document

Department
Administration
Course
ADM1340
Professor
Lamia Chourou
Semester
Winter

Description
Chapter 9 - Reporting and Analysing Long -Lived Assets Reporting and Analysing Long -Lived Assets • Property, Plant, and Equipment o Determining Cost o Depreciation o Derecognition • Intangible Assets and Goodwill o Accounting for intangible assets o Goodwill • Statement Presentation of Long -Lived Assets o Statement of financial position o Income statement o Statement of cash flows • Analysing assets o Return on assets o Asset turnover o Profit margin revisited Property, Plant, and Equipment • These are the resources that a company controls, are tangible, and are not for sale to the customers • These are used for production, and the sale of goods and services • This assets provides benefits for many years • Determining Cost o Determining the price consists of three steps • The purchase price, including tax • The expenditures to bring the asset to the required location • An estimate of any future obligations, to remove to fix the asset o Usually only costs that benefit are expensed • Operating expenditures § The cost of operating the asset • Capital expenditures § The cost that benefit future periods are capitalized in a long -lived asset account • Insurance should also be included since you can benefit from it • However, the training for the employees would not be added since the costs were to get the employees ready o At the end of the life of the asset, there might be some obligations to remove or restore it • This is asset retirement c osts o Subsequent to acquisition of a long -lived asset, the same distinction exists between operating and the capital expenditures • Operating expenses benefit only in the current period • Capital expenses would include costs that increase the life of an asset or its productivity or efficiency o Property, plant, and equipment are subdivided in 4 classes • Land § This includes all purchases related to land, including all legal fees § If some clearing is needed, it is also added to the Land Account § When recorded, Land is debited, and Cash is credited • Land improvements § This are the additions made to the land, it can be anything from driveways, to sidewalks, fences, or lighting § This will be added the Land Improvements § Since things may damage, and ne ed replacement, its recorded separately from land since it will be depreciated over the useful life • Buildings § This is all the purchases related to construction § The costs include the price of the building and other legal fees • This can include remodelling , or repairing anything § All of these are put in the Buildings account § When a building is built, you also have to pay for contracts, and architect fees • Also loans, if applicable § If the land and building are purchases together, the fair value of each must be determined and recorded separately • Equipment § This include the fees for the equipment, and the delivery § Some equipment can be vehicles that the company will use • It can fall into two accounts • Equipment or Vehicles § You debit the vehicle expense, and c redit cash o To buy or lease? • In this agreement, the owner of the assets agrees to let someone rent the asset § The lessor is the party allowing the asset to be leased, the lessee if the party paying to rent the asset • Leasing is a common practice in the business world • There are some advantages of leasing rather than purchasing an asset § Reduced risk of obsolesce • Obsolesce is the process of an asset becoming out of date, with leasing you can always ask for a more modern asset § 100% financing • Leasing does not require a down payment, which helps conserve cash § Income tax advantage • If the company has borrowed to purchase an asset, it can also deduct the interest expense on the borrowed funds. When a company leases an asset, it simply deducts t he rent paid on its income tax return. In some years, this deduction may be greater than the deductions taken if the asset was owned. § Off-balance sheet financing • If you rent it, you don’t have a liability, bank loan, and it won't show on your financial statement • Under IFRS, lease transactions must be accounted for § If the risks and rewards of ownership are transferred to the lessee, then the lased asset must be treated like a purchased financed with a loan provided by the seller of the asset • If the risks and rewards are not transferred, this is called an operating lease • No asset or liability is recorded • It is recorded as rent • Depreciation o Companies have two models to choose when accounting of PPE • The cost model § This is more commonly used under IFRS § This records PPE when acquired § Depreciation is recorded each period § Depreciation is the systematic allocation of the cost of PPE over the asset's useful life • Depreciation expense is debited, and accumulated depreciation is credited • Depreciation is a process of cost allocation, not a process of determining an asset's fair value • Depreciation neither uses up nor provides cash to replace the asset • The revaluation model § This is used on a limited basis • This is mainly used by companies c ertain industries, like investments, real estate § The carrying amount of PPE is adjusted to reflect its fair value • This can only be applied to assets whose fair value can be reliably measured § Revaluation gains or write -ups are also recorded o Depreciation only applies to land improvement, buildings, and equipment o Factors in calculating depreciation • Cost § The price paid for the asset • Useful life § How long will this asset be available to use • Residual value § The amount the asset is worth at the end of its usefu l life o Depreciation methods • There are three methods § Straight-line • This is the most common depreciation method • This calculates depreciation in two steps • Cost - Residual Value = Depreciable Amount • Depreciable Amount/Useful Life = Depreciation Expense • You can also divide 100% by the useful life, to see how % it will go down per year • The depreciation method must be consistent with the pattern in which the economic benefits from owning the assets § Diminishing-balance • This produces an annual decreasing de preciation over the useful life • The depreciation rate remains constant from year to year, but the carrying amount that the rate is applied to declines each year • The residual value is not used in determining the amount that the diminishing -balance rate is applied to • To calculate this you need to use the straight -line rate • Depreciation rate = Straight -line rate x multiplier • Carrying Amount at Beginning of Year x Depreciation rate = depreciation expense § Units-of-production • The useful life is expressed usin g a measure of output, like units produced, rather than number of years • This works well for vehicles, where depreciation is measured in kilometres driven • This is not something to use on buildings or furniture • To use this, you need to fund the total unit production for the entire useful life • Which is estimated • Cost - Residual Value = Depreciable Amount • Depreciable Amount/Estimated Total Units of Activity = Depreciable Amount per Unit • Depreciable Amount per Unit x Unit of Activity During the Year = Deprec iation Expense • With this method, the depreciation can be different every year • An asset can become more or less valuable o Other depreciation issues • There are other issues that can occur related to depreciation • Significant components § This is when individual parts of the asset have different useful lives • The cost of the item should be allocated § This allows all components to be depreciated separately over different useful life § A component with a shorter useful life can be changed, with out having to toss out the whole machine • Depreciation and income tax § Depreciation amount should be determined by using tax regulations • This is used so when preparing for tax return, the companies cannot deduct the depreciation expense • They must deduct the income tax of depreciation • Impairments § Sometimes the PPE is undervalued on the statement, carrying a lower than fair value • Its not fair to overvalued the asset § Companies have to determine indicators of impairment on a regular basis § The recoverable amount can be determined by observing the fair value less selling costs of similar assets in an active market § Impairment loss is when a long-lived asset it impaired, and its recorded to equal the amount by which the
More Less

Related notes for ADM1340

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit