This document provides an introduction to long-term assets. It defines long-term assets as resources used to generate revenue for more than one period, such as property, plant, equipment, intangibles, and investments. It discusses the common types of long-term assets and the accounting processes of capitalization, allocation, and impairment. Capitalization defers costs to future periods, allocation expenses deferred costs through depreciation, amortization, and depletion, and impairment writes down assets if cash flows do not support book value.
4. Long-term Assets:
Long-term assets are resources that are used to
generate operating revenues (or reduce
operating costs) for more than one period.
Major long-term assets include property, plant,
equipment, intangibles, investments, and deferred
charges.
5. Common types of long-term assets
Tangible fixed assets
Intangible assets
Tangible fixed assets
such as property, plant, and equipment.
Intangible assets
such as patents, trademarks, and goodwill.
6. Accounting for Long-Term Assets
This section explains the concept of long-term
assets and the process of
Capitalization
Allocation
Impairment
7.
8. Capitalization :
capitalization is the process of deferring a
cost that incurred in the current period, but
whose benefits are expected to extend to one or
more future periods.Directly effect on balance
sheet rather than immediate record in income
statement.
• Soft assets:
such as R&D and wages cost capitalization
is more problemetic.
9. • Hard assets :
such as PPE, this process is relatively
simple; the asset is recorded at its purchase
price.
Allocation:
Allocation is the process of periodically
expensing a deferred cost(asset) to one or more
future expected benefit period. This allocation
process is called
10. • Depreciation:
Applied on tangible fixed assets.
• Amortization:
Applied on intandible assets.
• Depletion:
Applied on natural resources. such as gas, oil etc.
Three factors determine the cost allocation
amount_1) useful life, 2) salvage value, 3)
allocation method.each factors requires estimates-
estimates that involve managerial discretion and
effect of these estimates on financial statement,
especially when estimates change.
11. Impairment :
Impairment is the process of writing down
the book value of the asset when its expected cash
flows are no longer sufficient to recover the remaining
cost reported on the balance sheet.
when the depreciated amount of an asset is estimated to be
higher than its current estimated value (often, its market
value), then its amount on the balance sheet is written
down to reflect its current value. Such a write-down (or
write-off) is termed impairment.