, CHAPTER 9
LONG-LIVED ASSETS
CHAPTER STUDY OBJECTIVES
1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment
includes all costs that are necessary to acquire the asset and make it ready for its intended use. All
costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset.
When applicable, cost also includes asset retirement costs. When multiple assets are purchased in one
transaction, or when an asset has significant components, the cost is allocated to each individual
asset or component using their relative fair values.
2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are
accounted for using the cost model or the revaluation model. Depreciation is recorded and assets are
carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-lived
asset to expense over its useful life (its service life) in a rational and systematic way. Depreciation is
not a process of valuation and it does not result in an accumulation of cash. There are three
commonly used depreciation methods:
Effect on Annual
Method Depreciation Calculation
Straight-line Constant amount (Cost − residual value) ÷
estimated useful life
(in years)
Diminishing- Diminishing Carrying amount at
balance amount beginning of year ×
diminishing-balance rate
Units-of- Varying (Cost − residual value) ÷
production amount total estimated units-of-
production × actual
activity during the year
Each method results in the same amount of depreciation over the asset’s useful life. Depreciation
expense for income tax purposes is called capital cost allowance (CCA).
3. Explain the factors that cause changes in periodic depreciation and calculate revised
depreciation for property, plant, and equipment. A revision to depreciation will be required if there
are (a) capital expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c)
changes in the asset’s fair value when using the revaluation model; and/or (d) changes in the
appropriate depreciation method, estimated useful life, or residual value. An impairment loss must be
recorded if the recoverable amount is less than the carrying amount. Revisions of periodic
9-1
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
mynursytest.store
,depreciation are made in present and future periods, not retroactively. The new annual depreciation
is determined by using the depreciable amount (carrying amount less the revised residual value), and
the remaining useful life, at the time of the revision.
4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for
the disposal of a piece of property, plant, or equipment through retirement or sale is as follows:
(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.
(b) Calculate the carrying amount (cost – accumulated depreciation).
(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on disposal.
(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the
proceeds received and the gain or loss, if any.
An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The new
asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash received).
The fair value of the asset given up is compared with its carrying amount to calculate the gain or loss.
If the fair value of the new asset or the asset given up cannot be determined, the new long-lived asset
is recorded at the carrying amount of the old asset that was given up, plus any cash paid (or less any
cash received).
5. Record natural resource transactions and calculate depletion. The units-of-production method of
depreciation is generally used for natural resources. The depreciable amount per unit is calculated by
dividing the total depreciable amount by the number of units estimated to be in the resource. The
depreciable amount per unit is multiplied by the number of units that have been extracted to
determine the annual depreciation. The depreciation and any other costs to extract the resource are
recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of
resource sold on the income statement. Revisions to depreciation will be required for capital
expenditures during the asset’s useful life, for impairments, and for changes in the total estimated
units of the resource.
6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for
tangible and intangible assets is much the same. Intangible assets are reported at cost, which includes
all expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite
life is amortized over the shorter of its useful life and legal life, usually on a straight-line basis. The
extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether the
intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill are
not amortized and are tested at least annually for impairment. Impairment losses on goodwill are
never reversed under both IFRS and ASPE.
7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and
equipment, and natural resources to be combined in financial statements under the heading
“property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “intangible assets” or are listed separately. Goodwill must be presented
separately. Either on the balance sheet or in the notes, the cost of the major classes of long-lived
9-2
, assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must
be disclosed either in the balance sheet or in the notes. The depreciation and amortization methods
and rates, as well as the annual depreciation expense, must also be indicated. The company’s
impairment policy and any impairment losses should be described and reported. Under IFRS,
companies must include a reconciliation of the carrying amount at the beginning and end of the
period for each class of long-lived assets and state whether the cost or revaluation model is used.
The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies to
show how efficiently they are using their assets to generate sales revenue. A second ratio, return on
assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its
assets to generate profit.
9-3
LONG-LIVED ASSETS
CHAPTER STUDY OBJECTIVES
1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment
includes all costs that are necessary to acquire the asset and make it ready for its intended use. All
costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset.
When applicable, cost also includes asset retirement costs. When multiple assets are purchased in one
transaction, or when an asset has significant components, the cost is allocated to each individual
asset or component using their relative fair values.
2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are
accounted for using the cost model or the revaluation model. Depreciation is recorded and assets are
carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-lived
asset to expense over its useful life (its service life) in a rational and systematic way. Depreciation is
not a process of valuation and it does not result in an accumulation of cash. There are three
commonly used depreciation methods:
Effect on Annual
Method Depreciation Calculation
Straight-line Constant amount (Cost − residual value) ÷
estimated useful life
(in years)
Diminishing- Diminishing Carrying amount at
balance amount beginning of year ×
diminishing-balance rate
Units-of- Varying (Cost − residual value) ÷
production amount total estimated units-of-
production × actual
activity during the year
Each method results in the same amount of depreciation over the asset’s useful life. Depreciation
expense for income tax purposes is called capital cost allowance (CCA).
3. Explain the factors that cause changes in periodic depreciation and calculate revised
depreciation for property, plant, and equipment. A revision to depreciation will be required if there
are (a) capital expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c)
changes in the asset’s fair value when using the revaluation model; and/or (d) changes in the
appropriate depreciation method, estimated useful life, or residual value. An impairment loss must be
recorded if the recoverable amount is less than the carrying amount. Revisions of periodic
9-1
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
mynursytest.store
,depreciation are made in present and future periods, not retroactively. The new annual depreciation
is determined by using the depreciable amount (carrying amount less the revised residual value), and
the remaining useful life, at the time of the revision.
4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for
the disposal of a piece of property, plant, or equipment through retirement or sale is as follows:
(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.
(b) Calculate the carrying amount (cost – accumulated depreciation).
(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on disposal.
(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the
proceeds received and the gain or loss, if any.
An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The new
asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash received).
The fair value of the asset given up is compared with its carrying amount to calculate the gain or loss.
If the fair value of the new asset or the asset given up cannot be determined, the new long-lived asset
is recorded at the carrying amount of the old asset that was given up, plus any cash paid (or less any
cash received).
5. Record natural resource transactions and calculate depletion. The units-of-production method of
depreciation is generally used for natural resources. The depreciable amount per unit is calculated by
dividing the total depreciable amount by the number of units estimated to be in the resource. The
depreciable amount per unit is multiplied by the number of units that have been extracted to
determine the annual depreciation. The depreciation and any other costs to extract the resource are
recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of
resource sold on the income statement. Revisions to depreciation will be required for capital
expenditures during the asset’s useful life, for impairments, and for changes in the total estimated
units of the resource.
6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for
tangible and intangible assets is much the same. Intangible assets are reported at cost, which includes
all expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite
life is amortized over the shorter of its useful life and legal life, usually on a straight-line basis. The
extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether the
intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill are
not amortized and are tested at least annually for impairment. Impairment losses on goodwill are
never reversed under both IFRS and ASPE.
7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and
equipment, and natural resources to be combined in financial statements under the heading
“property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “intangible assets” or are listed separately. Goodwill must be presented
separately. Either on the balance sheet or in the notes, the cost of the major classes of long-lived
9-2
, assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must
be disclosed either in the balance sheet or in the notes. The depreciation and amortization methods
and rates, as well as the annual depreciation expense, must also be indicated. The company’s
impairment policy and any impairment losses should be described and reported. Under IFRS,
companies must include a reconciliation of the carrying amount at the beginning and end of the
period for each class of long-lived assets and state whether the cost or revaluation model is used.
The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies to
show how efficiently they are using their assets to generate sales revenue. A second ratio, return on
assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its
assets to generate profit.
9-3
