BU.210.620 Chap.6 Long-Term Assets and Depreciation
Long-Term Assets and Depreciation
Recording the cost
Module 6 follows a long-lived asset through its life. Tangible assets such as land, buildings and equipment and intangible assets such as patents and trademarks are recorded at acquisition cost: the price actually paid after discounts plus taxes, legal fees, transport and installation, but not financing charges. The same rule applies whether the asset is bought with cash, a note or shares.
Later spending is split in two: ordinary repairs that maintain capacity are expensed, while improvements that extend life or raise efficiency are capitalised. Capitalising raises current income and taxes; expensing lowers both.
Depreciation as allocation
Depreciation spreads cost, less residual value, over the useful life so expense matches the revenue the asset helps earn. It is not a measure of market value.
Straight-line depreciation is the method the course emphasises, with declining-balance as the accelerated alternative. Net book value is cost minus accumulated depreciation, a contra-asset. Land is never depreciated.
Companies commonly use straight-line in their reports and accelerated methods for tax, which creates a deferred tax liability.
When things change
Estimates are revisited as conditions change, and the course treats every revision the same way. Changes in useful life or residual value are applied prospectively over the remaining life.
An asset is impaired when its book value exceeds its expected future cash flows; the loss is book value minus fair value, and US GAAP does not allow a later write-up. On disposal, depreciation is first updated to the sale date, then cost and accumulated depreciation are removed and a gain or loss recorded.
That gain or loss is an accounting figure; the cash received appears in investing activities.
Intangibles and natural resources
Definite-life intangibles are amortised; goodwill and other indefinite-life intangibles are tested for impairment instead. Research and development is expensed under US GAAP.
Natural resources are depleted, usually per unit extracted, and the depletion is added to inventory before it reaches cost of goods sold. GAAP keeps long-lived assets at cost with no write-ups, whereas IFRS lets a company elect fair value.
What this chapter covers
- 01
Tangible and intangible long-lived assets
- 02
Acquisition cost and capitalisation
- 03
Repairs versus improvements
- 04
Straight-line and declining-balance depreciation
- 05
Changes in estimates and impairment
- 06
Disposals, intangibles and depletion
Worked example · free
Depreciate, then dispose of a machine
- 2Annual depreciation: (70,000 − 10,000) ÷ 6 = $10,000.
- 2Accumulated depreciation after three years $30,000; book value 70,000 − 30,000 = $40,000.
- 2Proceeds $38,000 below book value $40,000: a $2,000 loss on disposal.
Key terms
- Acquisition cost
- Acquisition cost is the price paid for a long-lived asset plus all expenditures needed to prepare it for its intended use, excluding financing charges.
- Accumulated depreciation
- Accumulated depreciation is the contra-asset total of depreciation recorded to date, subtracted from cost to give net book value.
- Impairment loss
- An impairment loss is the amount by which an asset's net book value exceeds its fair value once the asset fails the recoverability test.
- Goodwill
- Goodwill is the excess of the price paid for an acquired business over the fair value of its net assets; it is not amortised.
- Residual value
- Residual value is the amount a company expects to recover when it disposes of an asset at the end of its useful life; it is excluded from depreciable cost.
Long-Term Assets and Depreciation FAQ
Is depreciation the fall in an asset's market value?
No. It allocates the asset's cost less residual value across the periods that benefit from it, so book value and resale value usually differ, sometimes widely.
What happens to past depreciation when an estimate changes?
Nothing. The change is prospective: the remaining book value less the new residual value is spread over the remaining useful life, and earlier statements are not restated.
Are research and development costs capitalised?
Not under US GAAP, which expenses them because future benefits are too uncertain. IFRS expenses research but can capitalise development once specific conditions are met.
How is an impairment loss measured?
First test recoverability: the asset is impaired only if its book value exceeds expected future cash flows. The loss is then book value minus fair value, and the lower amount becomes the base for later depreciation.
Exam move
Follow one asset from purchase to sale on a single page: acquisition cost, a depreciation table, one change in estimate, an impairment test and the disposal entry. Redo it with a different sale price to see a gain turn into a loss.
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