Chap011 jpm-f2011


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  • Chapter 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment.Chapter 11 completes the discussion of accounting for property, plant, and equipment and intangible assets by addressing the allocation of the cost of these assets to the periods benefitted by their use. Expenditures subsequent to acquisition and impairment are also covered in this chapter.
  • After a plant asset is purchased, the company may incur additional expenditures on that asset. The accounting issue is deciding whether to capitalize these expenditures or to expense them in the period incurred. We normally use the following procedures: expenditures for maintenance and ordinary repairs are normally expensed. These types of expenditures maintain the normal operating condition and do not extend the useful life beyond the original estimate. expenditure for additions usually increase the productive capacity and are capitalized. expenditures for improvements, replacements, and extraordinary repairs either increase the useful life beyond the original estimate, or increase productive output, or both. These expenditures are normally capitalized. rearrangements are changes made in an existing process for improved output or improved efficiency. Normally, the cost of rearrangements are capitalized.
  • End of chapter 11.
  • Chap011 jpm-f2011

    1. 1. 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Major Topics 1) Cost allocation – in general 2) Depreciation methods 3) Changes: estimates, methods, error corrections 4) Impairments11 - 2
    3. 3. Topic #1: Cost Allocation Overview The matching principle requires that part of the acquisition cost of property, plant, and equipment and intangible assets be expensed in periods when the future revenues are earned. Depreciation, depletion, and amortization are cost allocation processes used to help meet the matching principle requirements. Some of the cost is expensed each period. Acquisition Expense Cost11 - 3 (Balance Sheet) (Income Statement)
    4. 4. Cost Allocation – An Overview Asset Account Credited Category Debit Property, Plant, & Accumulated Depreciation Equipment Depreciation Natural Resource Natural Resource Depletion Asset Intangible Amortization Intangible Asset Caution! Depreciation, depletion, and amortization are processes of cost allocation, not valuation! Depreciation on the Balance Sheet11 - 4
    5. 5. Topic #2: Depreciation Methods • Text pages 560-564 • Example: Exercise 11-1 (page 598)11 - 5
    6. 6. Exercise 11-1 (page 598)11 - 6
    7. 7. Topic #3a: Changes in Estimates ESTIMATED ESTIMATED service life residual value • Changes in estimates are accounted for prospectively. • The book value less any residual value at the date of change is depreciated over the remaining useful life. •A disclosure note should describe the effect of a change.11 - 7
    8. 8. Topic # 3b: Change in Write-Off Method A change in depreciation, amortization, or depletion method is considered a change in accounting estimate We account for these changes prospectively, exactly as we would any other change in estimate.11 - 8
    9. 9. Example: Exercise 11-20 (page 602) Exercise 11-20: Change in Depreciation Method original cost 2,560,000 acc depr to end of 2010 (1,801,000) sub-total 759,000 residual value (160,000) remainder to be depreciated 599,000 remaining life 3 years annual straight-line depr amount 199,66711 - 9
    10. 10. Topic #3c: Error Correction Errors found in a subsequent accounting period are corrected by . . .  Entries that  Restating the  Reporting the restate the prior period’s correction as a incorrect account financial prior period balances to the statements. adjustment to correct amount. Beginning R/E. In addition, a disclosure note is needed to describe the nature of the error and the impact of its correction on net income, income before extraordinary items, and earnings per share.11 - 10
    11. 11. Topic #4: Testing for “Impairment” • What is the difference between “allocation methods” and “impairment write-offs”?? • When to test for impairment? –See list on page 58111 - 11
    12. 12. 4a) Impairment Test for Finite-life Assets to be Held and Used Measurement – Step 1 (recoverability test) An asset is impaired when . . . The undiscounted Its sum of its estimated future cash flows < book value11 - 12
    13. 13. Measurement Step 2: Is only taken if Step 1 “signals” impairment Impairment Book Fair loss = value – value Reported as part of income from Market value, price of similar assets, continuing operations. or PV of future net cash inflows.11 - 13
    14. 14. Examples of the Two Step Process Re: Impairment Measurement • On your own: review Illustr. 11-9 on page 582 • We will do Exercise 11-24 (page 602) • Step #1: – Future cash flows compared to book value – $15 million is less than $18.3 million – yes, there is impairment – Go to Step #2 • Step #2: – Compare market value to book value – $11 million is less than $18.3 = $7.3 million loss11 - 14
    15. 15. Exercise 11-24 (concluded) • Journal Entry: – Loss on Impair 7.3 million – Acc Depr 14.2 million – Plant assets 21.5 million Note: new book value = $11 million = fair value • Requirement 5 • Step #1: – Future cash flows compared to book value – $19 million is greater than $18.3 million – no, there is no impairment – Do not go to Step #211 - 15
    16. 16. 4b) Impairment Testing for Assets Held for Sale (not in use) • Assets that management intends to sell in their existing condition • The two-step process is NOT used • Impairment loss is measured by comparing: – Book value, and – Fair value (less cost to sell, if any)11 - 16
    17. 17. 4c) Annual Impairment Testing For Indefinite-life Intangibles Other Indefinite Goodwill Life Intangibles Step 1 If BV of reporting unit is less than its One-step Process FV, impairment is indicated. If BV of asset is less than Step 2 Loss = BV of FV, recognize goodwill less implied value impairment loss. of goodwill.11 - 17
    18. 18. Impairment of Goodwill • Read pages 584-585 to see why impairment testing for “regular assets” & goodwill is so different. • On your own: review Illustr. 11-10 on page 585 • We will do Exercise 11-25 (page 603)11 - 18
    19. 19. Exercise 11-25 (page 603) • Step 1: – Compare book value of the unit to its fair value – $250 million is greater than $220 (signals possible loss) - Go to Step 2 • Step 2: Measure the loss by comparing: – Book value of the Goodwill = $50 million, and – Implied value of the Goodwill: • Fair value of the unit $220 • Fair value of net assets without Goodwill -200 • Implied Goodwill $20 – Therefore, Impairment loss = $30 million11 - 19
    20. 20. Summary of Accounting Treatments: Expenditures Subsequent to Acquisition (pages 589-592) Type of Expenditure Definition Usual Accounting Treatment Repairs and Expenditures to maintain Expense in the period incurred Maintenance a given level of benefits Additions The addition of a new major Capitalize and depreciate over the component to an existing asset remaining useful life of the original asset, or over the useful life of the addition, whichever is shorter Improvements The replacement of Capitalize and depreciate over the a major component useful life of the improved asset Rearrangements Expenditures to restructure If expenditures are material and an asset without addition, clearly increase future benefits, replacement, or improvement capitalize and depreciate over the future periods benefited11 - 20
    21. 21. End of Chapter 11