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Financial Reporting and Analysis 6e Long-Lived Assets

CHAPTER 10

LONG-LIVED ASSETS

CHAPTER OVERVIEW

Generally accepted accounting principles for long–lived assets are far from perfect. The need

for reliable (unbiased and accurate), cost–effective, and objective (verifiable) numbers causes

these assets to be measured in terms of the economic sacrifice incurred to obtain them—their

historical cost—rather than in terms of their current expected benefit—or worth—to the firm.

Since it is uncertain whether future benefits result from research and brand development costs,

these costs are generally expensed in the period incurred. Consequently, the balance sheet–

carrying amounts for intangible assets often differ from their real value to the firm. Analysts

must scrutinize disclosures of R&D expenses to undo the overly conservative accounting.

Changes in the amount of capitalized interest from one period to the next can distort earnings

trends. A thorough understanding of how the GAAP measurement rules are applied allows

statement readers to avoid pitfalls in trend analysis when investment in new assets is sporadic.

When comparing return on assets (ROA) ratios across firms, one must remember that – all other

factors being equal – there is an upward drift in reported ROA as assets age. So analysts must

determine whether the average age of the long-lived assets for firms being analyzed is stable or

rising. Inflation also injects an upward bias into reported ROA.

Asset impairment write-downs depend on subjective forecasts and could be used to manage

earnings. Similarly, an understanding of differences in depreciation choices across firms permits

better interfirm comparisons. When making interfirm comparisons, analysts should use

footnote disclosures to overcome differences in the long-lived asset useful lives chosen b each

firm and, when possible, in their depreciation patterns.

Finally, international practices for long-lived assets are sometimes very different from those

in the United States. Statement users who make cross-country comparisons must exercise

caution. IFRS allows much greater use of fair value than does U.S. GAAP. Some of the key

differences between IFRS and GAAP relate to the revaluation of tangible assets, investment

property, capitalization of intangible development costs, and impairment losses.

CHAPTER OUTLINE

I. MEASUREMENT OF THE CARRYI NG AMOUNT OF LONG-LIVED ASSETS

A. Long-lived assets are expected to yield their economic benefits (or service potential) over

a period longer than one year.

B. There are two ways that long-lived assets could be measured.

1. Under the expected benefits approach, assets would be reflected at their estimated

value of future cash flows generated by the asset and/or the expected resale value of

the asset.

One example of this approach is discounted present value, where the value of an

asset is measured as the discounted present value of future net operating cash inflows

expected to be generated from using it.

Another variant of this approach reflects long-lived assets at their net realizable

value—the amount that would be received if the asset were sold in the used asset

market.

Corporations may use a combination of (a) and (b) basing the value on both the future

operating cash flow and the residual value of the asset in the used asset market. Under both

approaches, the income statement effect is the change in the value of the asset.

Financial Reporting and Analysis 6e Long-Lived Assets

2. Under the economic sacrifices approach, assets would be measured at their

estimated cost in a market where assets are purchased (e.g., an input market).

a. This approach measures the amount of resources necessary to acquire an asset.

b. One example of this approach is historical cost—that is, the historical amount

that was expended to buy the asset.

c. Another variant of this approach involves measuring the current (replacement)

cost of the asset.

d. Companies used a bartering approach to increase revenue causing an

overstatement of assets on the balance sheet and an inflation of earnings.

C. The Approach Used by GAAP: GAAP uses historical cost—an economic sacrifices

approach—for measuring long-lived assets in almost all circumstances.

1. Accounting numbers are widely used in contracts and so they must be neutral

(unbiased) and free from error (accurate) – both are ingredients of faithful

representation.

2. Historical costs basis is the only long-lived asset measurement method that survives

the dual screens of reliability

and verifiability is the economic sacrifices approach called historical cost.

3. Reliability implies that the numbers are not prone to manipulation.

4. Verifiability implies that the numbers are objective rather than subjective.

5. Users should not expect these assets to necessarily approximate their real economic

worth.

Teaching Tip: While historical cost is reliable, it is often criticized as being irrelevant.

Managers presumably make decisions based on market values. Since the economic sacrifice

approach provides market values, it appears that managers would prefer the expected

benefits approach. Of course, the trade-off with the expected benefits approach is that the

numbers may not be reliable. This is of particular concern when the transactions are

between related parties and involve a swap that is not measured with a cash transfer.

Property for property swaps may inflate earnings and balance sheet valuations.

II. LONG-LIVED ASSET MEASUREMENT RULES ILLUSTRATED

A. Two rules govern the determination of the initial carrying amount of a long-lived asset.

1. All costs necessary to acquire the asset and make it ready for use are included in

the asset account (capitalized).

a. The way that construction is financed defines the cost capitalized under

GAAP.

b. Capitalization of interest costs is limited to the total actual interest arising

from actual borrowings from outsiders.

c. The actual amount of interest that can be capitalized is the lower of actual

interest incurred or avoidable interest (i.e., the product of the interest rate

times cumulative weighted average expenditures).

d. Avoidable interest is the portion of the interest costs that would have been

avoided if the asset had not been built (or constructed for others) and the

related cash would have been used to retire existing debt.

e. Interest capitalization is restricted to interest arising from actual borrowings

from outsiders.

f. Imputed interest (when there are no outstanding debts) is not allowed under

GAAP.

Financial Reporting and Analysis 6e Long-Lived Assets

g. Capitalizing interest decreases interest expense, and increases income.

Hence the year-to–year profit change is partially unrelated to operating

activities and may not be sustainable.

2. Joint costs incurred in acquiring more than one asset are apportioned among the

acquired assets on a relative fair value basis or a similar proxy.

a. For financial reporting purposes, the manner in which joint costs are allocated

is guided by which one generated the cost.

b. Tax versus Financial Reporting Incentives: For tax purposes the

incentives for allocating costs between land and building asset categories are

completely different, because the tax objective is to minimize tax payments,

not to “correctly” allocate costs.

3. Transfer costs occur when a related entity provides a good or service for another

in an exchange that may not be arms length.

B. Capitalization Criteria – An Extension: GAAP capitalizes an expenditure on a long–

lived asset when the expenditure causes any of the following conditions:

1. The useful life of the asset is extended.

2. The capacity of the asset is increased (when attainable units of output increases).

3. The efficiency of the asset is increased (when fewer inputs are required).

4. There is any other type of increase in the future service potential value of the asset

that results as a consequence of the expenditure.

5. Failing the above criteria, the expenditure is treated as period expense and charged

to income.

This causes a potential increase in revenue because of capitalizing a fixed cost that is

absorbed into the asset value.

III. INTANGIBLE ASSETS

A. When one firm purchases an intangible asset from another firm, few new

accounting or

reporting issues arise.

1. The acquired intangible asset is recorded at the arms-length transaction price

and is amortized (if amortizable) over their expected useful lives. Indefinite-

lived intangible assets are not amortized but are evaluated annually for

impairment.

2. Goodwill is another type of intangible asset, which represents the difference

between the purchase price of an acquired business and the fair value of its

identifiable net assets. Accounting for goodwill is discussed in Chapter 16.

3. If purchased with other assets in combination, the purchase price should be

allocated among assets based on their relative fair values.

B. Difficult financial reporting issues arise when intangible assets are developed

internally.

1. Difficulties arise from the treatment of the expenditures that ultimately create the

valuable intangible.

2. The FASB requires that virtually all R&D expenditures be expensed as incurred,

as a practical way of dealing with the risks of nonrecoverability of R&D

expenditures.

a. Research findings uniformly indicate that existing GAAP for both R&D

and software development is too conservative.

b. The expenditures create assets that do not appear on balance sheets and

current as well as future years’ income is misstated.

Financial Reporting and Analysis 6e Long-Lived Assets

c. The GAAP bias that leads to an understatement of internally developed

assets can fool analysts who are not acquainted with it.

3. When past cash outflows successfully create assets, the outflows have already

been expensed and there are usually few remaining future outflows to

capitalize.

a. Companies developing computer software may capitalize development costs

after establishing the technological feasibility of a computer software

product.

b. Costs incurred in the early development stage may be considerable since

technological feasibility may not be established until late in the expenditure

cycle, leaving few costs left to capitalize.

c. Accordingly, the recorded intangible software asset may be far less than its

value to the software development firm, just as in other (non-software) R&D

settings.

4. While purchased in-process research and development costs were written off in a

merger, a new FASB standard states that the acquiring company must recognize

the acquiree’s intangible assets that are identifiable.

5. In the pre-Codification document, the FASB justified expensing all R&D

because:

a. The future benefits accruing from these expenditures are highly uncertain.

b. A causal relationship between current R&D and future revenue has not been

demonstrated.

c. Whatever benefits may arise cannot be objectively measured.

6. Even though the potential assets associated with R&D expenditures are not

recognized under GAAP, research suggests that the adjusted number reflecting

R&D capitalization (and subsequent amortization) were strongly associated with

stock prices and returns and were, therefore, relevant to investors.

7. Research indicates that GAAP for both R&D and software development is

conservative.

8. These expenditures create assets that do not appear on balance sheets, and the

net income in the current and future years is misstated.

9. Analysts can use these GAAP disclosures to reconstruct what asset and

amortization amounts would be if GAAP allowed full capitalization.

IV. ASSET IMPAIRMENT: TANGIBLE AND AMORTIZABLE INTANGIBLE ASSETS

A. Due to verifiability concerns, long-lived assets are carried at depreciated historical cost

instead of net realizable value. Faithful representation outweighs verifiability if the

carrying value exceeds the expected future economic benefits in which case the asset is

reduced to its fair value, and the new value is then depreciated over its remaining

useful life.

B. Measuring impairment encompasses five stages.

1. Stage A: Authoritative accounting literature requires an impairment review

whenever external events raise the possibility that an asset’s carrying value is

unrecoverable.

2. Stage B: This stage defines the threshold loss level is established that will trigger a

write-down.

3. Stage C: This threshold is triggered when the estimated future undiscounted net

cash flows expected from the use of the asset are lower than the carrying amount of

Financial Reporting and Analysis 6e Long-Lived Assets

the asset, then impairment has occurred.

4. Stage D: When an impairment loss is recognized, the long-lived asset is written

down.

5. Stage E: This stage defines the amount of the write-down that must be recognized.

The amount of the impairment loss is the difference between the fair value of the

asset and the carrying value of the asset.

a. Firms will often have to use an “expected present value technique” to

estimate fair value.

b. Once an asset is written down, it cannot later be written back up to the

original higher carrying amount if the fair value recovers.

C. Impairment write-downs provide opportunities for earnings management.

1. The standard for determining when assets are impaired and the guidelines for

reporting impairment amounts are summarized in Figure 10.2.

D. Indefinite-Lived Intangible Assets: Indefinite-lived intangible assets must be

evaluated for impairment annually using a two-step process:

1. Assess qualitative factors to determine necessity for the quantitative impairment

test – the qualitative tests whether it is more likely than not that impairment has

occurred.

2. The quantitative test calculates the fair value of the asset and if the book value

exceeds its fair value, then impairment is considered to have occurred. Then the

book value amount is reduced to the fair value and a loss is recorded.

E. Management Judgments and Impairments: Write-downs present management with

another set of potential earnings management opportunities.

1. Auditors and analysts should be alert to the opportunistic use of write-offs.

V. OBLIGATIONS ARISING FROM RETIRING LONG–LIVED ASSETS

A. Historically, there were no GAAP to guide the accounting for required outflows at the end of

an asset’s live, so no liability appeared on the firms’ books. Current GAAP requires firms to

record a liability when certain assets are placed into service.

1. These outflows are discounted using a credit-adjusted-risk-free rate. The liability’s

discounted present value is recorded along with an increase in the carrying value of the

related long-lived asset.

VI. ASSETS HELD FOR SALE

A. When firms actively try to sell some of the assets they currently own, these

asset groups generally should be classified in the balance sheet as “held for sale” at the lower

of book value or fair value (less costs to sell) if they are expected to sell within one year.

B. Segregating the assets held for sale on the balance sheet and the income statement results

helps analysts better understand past firm performance and assess future prospects.

VII. DEPRECIATION

A. In accordance with the matching principle, the cost of long-lived assets must be

apportioned to the periods in which they provide benefits.

1. For tangible assets, this matching process is called depreciation.

2. For intangible assets, this allocation is referred to as amortization.

3. For mineral deposits and other wasting assets, this allocation process is called

Financial Reporting and Analysis 6e Long-Lived Assets

depletion.

B. Depreciation is a process of cost allocation, not asset valuation.

1. Consequently, depreciation is not intended to track the asset’s declining market

value.

2. The objective of depreciation is to spread the original cost over the period of

asset use.

C. The depreciation process requires three estimates of future events:

1. The expected useful life of the asset (in years or units).

2. The depreciation pattern which will reflect the asset’s declining service potential.

3. The expected salvage value that will exist at the time the asset is retired.

D. Figure 10.3 illustrates the effects of alternative depreciation methods on depreciation

expense and book value.

1. Depreciation expense under the straight-line method is constant over time.

2. Depreciation expense under accelerated methods declines over time.

a. Amounts exceed straight-line depreciation in early years.

b. Amounts are lower than straight-line depreciation in later years.

3. Assets depreciated under accelerated methods have lower book values in the

early years than assets depreciated under the straight-line method.

4. Most firms use straight-line depreciation.

5. The units-of-production method is often used in extractive industries.

E. Disposition of Long-Lived Assets: When a long-lived asset is disposed of, the

difference between its net book value and the proceeds is treated as a gain or loss.

1. Net book value is historical cost minus accumulated depreciation.

2. These gains and losses are reported “above the line” as nonoperating gains and

losses on the income statement.

F. Financial Analysis and Depreciation Differences: Differences in depreciation

methods and useful lives make valid comparisons across firms difficult.

1. While firms in the same industry often use the same depreciation methods, the

estimated useful lives that they use are often different.

2. Analysts, by making reasonable assumptions, try to undo differences in depreciable

lives in order to make more meaningful comparisons.

VIII. EXCHANGES OF NONMONETARY ASSETS

A. Generally, the recorded cost of a nonmonetary asset acquired in exchange for another

nonmonetary asset is the fair value of the asset given up unless the fair value of the asset

received is more clearly evident. Resulting gain or loss on the exchange is recognized.

B. FASB issued rules that require companies to record certain exchanges of nonmonetary

assets at their existing book value of the relinquished asset if the following conditions

apply:

1. The fair value of neither asset is determinable within reasonable limits

2. The transaction lacks commercial substance

3. The exchange transaction is made to facilitate sales to customers.

4. To prevent the manipulation of asset exchange rules to overstate revenues and

income, FASB issued rules that now require companies to record certain exchanges

of nonmonetary assets at the existing book value of the asset given up if any of the

following conditions apply:

a. The fair value of neither the asset(s) received nor the asset(s) relinquished is

determinable within reasonable limits.

Financial Reporting and Analysis 6e Long-Lived Assets

b. The transaction lacks commercial substance.

c. The exchange is made to facilitate sales to customers (sales in the ordinary

course of business).

C. Exchanges Recorded at Book Value – Fair Value Not Determinable

If the fair value of the exchanged assets cannot be determined, the acquired asset is

recorded at the sum of the book value of the relinquished asset plus the cash given.

D. The Commercial Substance Criterion: Booking exchanges transactions at fair value

introduces the possibility of gains (or losses) on the transaction. GAAP requires that the

transaction possess commercial substance (future cash flows will change significantly

from the exchange). A significant cash flows change exists if either:

a. The configuration (risk, timing, and amount) of future cash flows of the assets

received differs significantly from those of the assets transferred.

b. The entity-specific value of the assets received differs from the entity-specific

value of the assets transferred, and the difference is significant in relation to the

fair values of the assets exchanged.

c. If both conditions are not met, the transaction is recorded using the book value of

the assets relinquished. No gains are to be recognized.

E. Exchange Transaction to Facilitate Sales to Customers

This type of exchange does not culminate an earning process. No gain is reported – the

new assets are recorded at the book value of the relinquished asset. Any apparent gain on

the swap will be recognized only when the plasma sets are ultimately sold to customers.

F. Cash Received –

When cash is received as well as a new asset, a percentage of the cash received out of the

total proceeds is used to determine the amount of gain to be recognized.

IX. Global Vantage Point

A. Comparison of IFRS and GAAP Long-Lived Asset Accounting: Although

there are many similarities between U.S. GAAP and IFRS, numerous important

differences exist.

1. Tangible Long-Lived Assets: IAS 16 contains the guidance to accounting

for tangible long-lived assets. It has two different models:

a. Cost Method carries assets at cost less accumulated depreciation under

U.S. GAAP

b. Reevaluation Method carries the asset at its revalued amount reflecting

its fair value at the evaluation date. Future depreciation are based on the

fair value and not the original cost.

B. IFRS allows more choice in valuation models and has different specific

guidance for issues such as impairments.

1. U.S. GAAP requires historical cost.

2. IAS 16 permits two different accounting models for long lived tangible assets.

a. The cost method carries assets at cost less accumulated depreciation as

under U.S. GAAP.

b. The revaluation method carries the asset at a revalued amount reflecting fair

market value at the revaluation date. Subsequent depreciation is based on the fair

value and not the original cost. The difference between depreciation based on the

revalued carrying amount of the asset and depreciation based on the asset’s

original cost is transferred from the revaluation surplus to retained earnings as the

asset is depreciated.

Financial Reporting and Analysis 6e Long-Lived Assets

C. IAS 16 requires firms to depreciate significant components of assets separately if they have

different lives. To adopt the components approach, U.S. firms would incur substantial costs to

value the individual components, revise their depreciation policies, and modify their

accounting systems.

D. Under IFRS, investment properties are assets that are not used to produce or supply goods or

services, nor are they held for sale in the ordinary course of business and so they are measured

at cost but subsequently, firms have the choice under IAS 40 to carry these properties at either

amortized cost or fair value.

E. Intangible Long-Lived Assets: The accounting under IAS 38 – Intangible assets is very

similar to the accounting under U.S. GAAP. Assets are generally carried at amortized cost.

A revaluation method is allowed, but an active market must be available for the intangible.

a. For internally developed intangibles, IAS 38 distinguishes between R&D in

determining when expenditures may be capitalized.

– Research is defined as “original and planned investigation undertaken with the

prospect of gaining new scientific or technical knowledge and understanding.”

– Development is defined as “the application of research findings or other

knowledge to a plan or design for the production of new or substantially improved

materials, devices, products, processes, systems or services before the start of

commercial production or use.”

b. Research must be expensed, but some development expenditures may be capitalized.

F. IFRS accounting for indefinite–lived intangible assets is similar to GAAP.

G. To capitalize development expenditures, firms must demonstrate all of the following:

a. Technical feasibility

b. Intention to complete and use or sell the asset

c. Ability to use or sell the asset

d. How the intangible asset will generate probable future economic benefits

e. The technical and financial resources necessary to complete development

f. Ability to measure reliably expenditures related to the intangible asset during

development

I. Users of financial data must be cognizant of these differences before meaningful

comparisons can be made across firms in different countries. To make IFRS

firms comparable to U.S. firms, the analyst would remove the net book value

of the capitalized costs from assets, add back the current year’s after–tax

amortization, and treat the current year’s capitalized amount as an expense.

J. Impairments: For tangible and amortizable intangible assets, IFRS is similar to U.S.

GAAP. However for IFRS, Stage C recognizes an impairment loss if the carrying value

exceeds the recoverable amount (higher of the asset’s fair value (less costs to sell) and

its value in use (discounted net cash flows in Stage B). This triggers an impairment that

would not be triggered under U.S. GAAP. We would expect to see more frequent, but

smaller, impairments under IFRS than under U.S. GAAP. IFRS rules also permit

reversals of previously recognized impairment losses when there has been a change in the

estimates that were previously used to measure the loss. The reversal increases net

income.

Financial Reporting and Analysis 6e Long-Lived Assets

CHAPTER QUIZ

1. A building suffered uninsured fire damage. The damaged portion of the building was

refurbished with higher quality materials. The cost and related accumulated depreciation of

the damaged portion are identifiable. To account for these events, the owner should:

a. Reduce accumulated depreciation equal to the cost of refurbishing.

b. Record a loss in the current period equal to the sum of the cost of refurbishing and the

carrying amount of the damaged portion.

c. Capitalize the cost of the refurbishing and record a loss in the current period equal

to the carrying amount of the damaged portion of the building.

d. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the

building.

2. Phil Company started construction of a new office building on January 1, 2015 and moved

into thefinished building on July 1, 2017. Of the building’s $5,000,000 total cost,

$4,000,000 was incurred by December 31, 2015, in even increments throughout the year.

Phil’s weighted average borrowing rate was 12% throughout 2015, and the actual amount of

interest incurred by Phil during 2015 was $270,000. What amount should Phil report as

capitalized interest at December 31, 2015?

a. $240,000.

b. $270,000.

c. $300,000.

d. $480,000.

3. One objective of financial statements is to provide information about cash flows. However,

one criticism of interest capitalization is that this process may artificially create a difference

between earnings and cash flows. Which of the following is true?

a. Interest capitalization does not induce a difference between earnings and cash flows

since interest expense is a close approximation to the cash paid for interest.

b. Interest capitalization causes interest expense to differ from cash paid for interest by a

greater amount than would otherwise be true.

c. Interest capitalization is an accrual accounting method, so there is no effect on the

presentation of cash flows.

d. Interest capitalization induces differences between earnings and cash flows because it is

treated differently for tax accounting and financial reporting purposes.

4. U.S. West spent several billion dollars over the past five years upgrading its long-term

assets in order to improve its competitiveness and profitability. What impact did this

strategy have on U.S. West’s return on assets (i.e., earnings before interest and taxes •*•

beginning-of-year assets)?

a. ROA decreased.

b. ROA increased.

c. ROA remained unchanged.

d. It is difficult to determine without more information.

5. DEF, Inc. capitalizes computer software development costs. The carrying value of capitalized

costs was $98,408 and $100,989 at June 30, 2015 and 2014, respectively. Amortization

expense for the year ended June 30, 2015 was $48,433. DEF also disclosed that it performed

$548 of R&D in fiscal year 2015 that will be reimbursed by third parties. Calculate DEF’s

fiscal 2015 total R&D costs if R&D expense was reported to be $1,062.

Financial Reporting and Analysis 6e Long-Lived Assets

a. $45,852.

b. $46,366.

c. $46,914.

d. $47,462.

6. Which of the following is true of the full cost and successful efforts accounting methods?

a. In any given year, income under the full cost method is always higher than under the

successful efforts method.

b. Larger oil and gas companies are quite sensitive to the full cost /successful efforts

choice since the amounts of their exploration and development costs are large in

comparison to their total assets.

c. Cumulative income is the same under both the full cost and the successful efforts

methods.

d. Firms using the full cost method report higher assets, which makes them look bigger.

7. Why do asset exchanges have the potential to overstate revenues?

a. The variable cost of the transaction could have been avoided.

b. The fixed cost of the transaction could have been avoided.

c. The swap transaction resulted in a current revenue source while the corresponding

asset may be allocated over several years.

d. The transaction amount may be understated.

8. On January 2, 2012, Reed Co. purchased a machine for $800,000 and established an annual

depreciation charge of $100,000 over an 8-year life. During 2015, after issuing its 2014

annual financial statements, Reed concluded that (1) the machine suffered permanent

impairment of its operational value, (2) $200,000 is a reasonable estimate of the machine’s

market value at the time of impairment, and (3) the original useful life was still appropriate.

In Reed’s December 31, 2015 balance sheet, the machine should be reported at a carrying

amount of:

a. $0.

b. $100,000.

c. $160,000.

d. $400,000.

9. The underlying principle of depreciation is that profits would be overstated if no allowance

were made for the replacement of the asset. Therefore, periodic depreciation expense

segregates a portion of earnings for reinvestment, “protecting” that sum from being

distributed as dividends and taxes. Should this be interpreted to mean that money equivalent

to the periodic depreciation expense is set aside and earmarked for investment in

replacement assets?

a. Yes. Since income tax expense and income tax payable are lower because of the

depreciation deduction, money is set aside for asset replacement.

b. Yes. Since lower earnings “protect” amounts from being paid out as dividends, money

is set aside for asset replacement.

c. No. This should not be interpreted in the literal sense, but rather that the definition of

income requires a subtraction for asset replacement.

d. No. Only the tax-effected amount of the annual depreciation charge is set aside for

asset replacement.

10. On January 1, 2011, Crater Inc. purchased equipment having an estimated salvage value

Financial Reporting and Analysis 6e Long-Lived Assets

equal to 20% of its original cost at the end of its 10-year life. The equipment was sold

December 31, 2016 for 50% of its original cost. If the equipment’s disposition resulted in a

reported loss, which of the following depreciation methods did Crater use?

a. Straight-line.

b. Double-declining balance.

c. Sum-of-the-years’–digits.

d. Composite.

QUIZ ANSWERS:

1. c. Since the cost and related accumulated depreciation of the damaged portion are

identifiable, the owner should capitalize the cost of the refurbishing and record a loss in

the current period equal to the carrying amount of the damaged portion of the building.

Financial Reporting and Analysis 6e Long-Lived Assets

consent of McGraw-Hill Education.

balance and sum-of– the-years’-digits methods. The composite method is not applicable

since this method relates to a collection of assets that are dissimilar in nature, and no gain

or loss is recorded on the sale of an individual item from that collection.

RECOMMENDED EXHIBITS

Exhibit 10.3—Hypothetical Long-Lived Asset Carrying Amounts

Exhibit 10.8— Depreciation Example

Figure 10-1— Impact of Worldcom’s Misapplication of Asset Capitalization Rules

Figure 10.2—Long-Lived Asset Impairment Guidelines.

Figure 10.3 – Alternative Depreciation Methods