Analysis of Long-Term Assets

Property, plant and equipment, intangible assets and goodwill are often the largest items on a balance sheet, and the accounting choices around them shape reported profit, cash flow and returns for years. This module shows how intangibles are recognized depending on how they were obtained, how capitalization and depreciation choices flow through the statements, how impairment, revaluation and derecognition work under IFRS and US GAAP, and how to use the notes to judge the age and efficiency of a company's asset base.

Start this lesson free Practice questions

What you will learn

1. Compare the accounting for intangible assets that are purchased separately, developed internally or acquired in a business combination, including goodwill.

Research is expensed under both frameworks; IFRS capitalizes development costs once strict criteria are met.
US GAAP expenses R&D, except certain software costs (software for sale after technological feasibility, internal-use software in development).
Internally generated brands and customer lists are never capitalized; acquired ones are, at fair value.
Goodwill = consideration paid - fair value of identifiable net assets; not amortized, tested at least annually.
Capitalizing development costs raises assets, equity, early-year earnings and operating cash flow relative to expensing.

2. Explain how capitalizing versus expensing costs and the choice of depreciation method and estimates affect a company's financial statements and ratios.

Capitalize purchase price, delivery, installation, testing and qualifying borrowing costs; expense training and maintenance.
Capitalizing raises current income, assets, equity and operating cash flow relative to expensing.
DDB rate = 2 / useful life, applied to the opening carrying amount.
Longer lives and higher residual values reduce depreciation and raise earnings.
Changes in estimates are prospective; IFRS requires component depreciation.

3. Explain how impairment of property, plant and equipment, intangible assets and goodwill is tested and recognized under IFRS and US GAAP, and evaluate its effects on financial statements and ratios.

IFRS: loss = carrying amount - recoverable amount (higher of fair value less costs of disposal and value in use).
US GAAP: impaired only if carrying amount > undiscounted cash flows; loss = carrying amount - fair value.
IFRS allows reversals except for goodwill; US GAAP prohibits reversals for assets held for use.
Goodwill and indefinite-lived intangibles are tested at least annually; goodwill impairments are never reversed.
Impairment is non-cash; it lowers current income and future depreciation, raising future ROA and turnover.

4. Explain the revaluation model and the derecognition of long-term assets, and evaluate their effects on financial statements and ratios.

US GAAP prohibits upward revaluation of PP&E; IFRS allows the revaluation model by asset class.
Revaluation increases go to OCI (revaluation surplus) unless they reverse a prior loss in profit or loss.
Revaluation decreases go to profit or loss unless they reverse an existing surplus.
Gain or loss on sale = proceeds - carrying amount; proceeds are an investing inflow.
Held-for-sale assets: lower of carrying amount and fair value less costs to sell; depreciation stops.

5. Analyze long-term asset disclosures to estimate the age and remaining life of a company's asset base and to interpret investment and efficiency ratios.

Total life = gross PP&E / depreciation; average age = accumulated depreciation / depreciation; remaining life = net PP&E / depreciation.
Exclude land, which is not depreciated, before computing the ratios.
Old asset bases signal upcoming capital spending and flatter fixed asset turnover and ROA.
Capex / depreciation persistently above 1 suggests growth; persistently below 1 may signal under-investment.
The estimates assume straight-line depreciation and are best used for trends and close peers.

Module at a glance

Research is always expensed; IFRS capitalizes qualifying development costs, US GAAP expenses most R&D.
Acquired intangibles are recognized at fair value; goodwill is the residual and is never amortized by public companies.
Capitalizing raises current income, assets and operating cash flow relative to expensing.
Depreciation method, useful life and residual value are judgments; changes in estimates are prospective.
IFRS impairment: carrying amount vs recoverable amount, reversals allowed except goodwill; US GAAP: undiscounted test, fair value loss, no reversals.
IFRS permits revaluation of PP&E (increases to OCI, decreases to profit or loss, with reversals); US GAAP does not.
Average age, total life and remaining life come from the PP&E note; exclude land.

This free module has 5 lessons, 15 practice questions with full explanations.

Start the lesson