...expenditure transaction has resulted in control over a noncurrent tangible asset and that instead of the transaction being recorded in full within the corresponding purchase period’s Income Statement, it will be recognised annually within Balance Sheet as a depreciated expense for the operating life of the asset. (Marshall et al 2010, Averkamp n.d.) To be capitalised, the purchased asset must meet certain conditions: it will generate value for the business; is non-current as it will remain in the business for longer than 12 months; has a value that is significantly large to be of material interest (Marshall et al 2010). Most typically, expenditure will be capitalised for tangible assets such as land; buildings and equipment. The capitalisation process occurs in accordance with the matching principle; depreciation costs are allocated within the periods of use and business benefit from the asset. What does it mean to state that balance sheet values may not represent the current market values of long-lived assets? Long-lived assets, specifically non-current tangible assets are commonly capitalised and are recorded as depreciated expense, as described above. (e.g. If a business purchases a truck costing $100,000 and it is expected to be used for 5 years, the business might have depreciation expense of $20,000 in each of the five years (Averkamp n.d.).) Depreciation computation may differ between asset classes within a business and may also vary for tax purposes; be specified...
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...Audit Considerations PCAOB – Public Company Accounting Oversight Board Staff Audit Practice Alert No. 3 – Audit Considerations in the Current Economic Environment (December 5, 2008) Representation Letter A letter from management to the auditor representing that the financial statements are fairly presented. The letter is addressed to the independent auditor, and dated at the date of the auditor's report. It is signed by members of management whom the auditor believes are responsible for, and knowledgeable about, matters covered (chief executive officer and chief financial officer). Specific items included in the representation letter are: - All items requiring disclosure (such as loss contingencies, illegal acts, and related party transactions) have been properly disclosed. - All accounting records, financial data, and minutes of directors’ meetings have been made available to the auditors. - Financial statements are completed and prepared in conformity with generally accepted accounting principles - Management's responsibility for the significant assumptions used in forecasting future cash flows. Consult Specialist The auditor's considerations should be based on knowledge of the entity, its business and management. When reviewing cash flow estimates, auditors should ensure they have the expertise to make critical assessments of the company's work. If necessary, they should contact industry experts or financial consultants specializing in valuation...
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...Part 1: Asset Group An asset group is the unit of accounting for a long-lived asset or assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. https://asc.fasb.org/glossarysection&trid=2155835&id=SL2269348-110220 05-3 Property, plant, and equipment typically consist of long-lived tangible assets used to create and distribute an entity's products and services and include: * a. Land and land improvements * b. Buildings * c. Machinery and equipment * d. Furniture and fixtures. 05-6 This Subsection provides guidance that focuses on developing estimates of future cash flows used to test for recoverability, including the: * a. Cash flow estimation approach * b. Cash flow estimation period * c. Types of asset-related expenditures that should be considered in developing estimates of future cash flows. Transactions 15-4 The guidance in the Impairment or Disposal of Long-Lived Assets Subsections applies to the following transactions and activities: * a. Except as indicated in (b) and the following paragraph, all of the transactions and activities related to recognized long-lived assets of an entity to be held and used or to be disposed of, including: * 1. Capital leases of lessees * 2. Long-lived assets of lessors subject to operating leases * 3. Proved...
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...Auto Corporation Date: March 31, 2010 Prepared by: Joe Expert Senior Reviewed by: Manager XWZ CPA Adam Smith ISSUE: Grouping of long-lived assets to be held and used for impairment testing purposes. BRIEF BACKGROUND OF HISTORY A2 Auto Corporation (“A2 Auto”) is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”), A2 Auto has disclosed within Note 24, Segment Information, that it has four operating segments: (1) A2 Americas, (2) A2 Asia Pacific, (3) A2 Others, and (4) Financial Services. Note 12, Goodwill and Other Intangibles, disclose that A2 Auto has the same four reporting units. ACCOUNTING QUESTIONS 1. What are the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes? 2. On the basis of the information in A2 Auto’s 2010 Form 10-K, what is the appropriate grouping for purposes of recognizing and measuring an impairment loss? 3. What audit considerations should be made when testing the appropriate grouping of long-lived assets for purposes of recognition and measurement of an impairment loss? 4. Is A2 Auto’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used appropriate? 5. After the A2 Americas $1.76 billion impairment loss was recognized, strategy refocus...
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...disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents assets to be disposed of together as a group in a single transaction and liabilities directly associated with those assets that will be transferred in the transaction. Note: The following definition is Pending Content; see Transition Guidance in 205-20-65-1. A disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents assets to be disposed of together as a group in a single transaction and liabilities directly associated with those assets that will be transferred in the transaction. A disposal group may include a discontinued operation along with other assets and liabilities that are not part of the discontinued operation. A disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents assets to be disposed of together as a group in a single transaction and liabilities directly associated with those assets that will be transferred in the transaction. Note: The following definition is Pending Content; see Transition Guidance in 205-20-65-1. A disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents assets to be disposed of together as a group in a single transaction and liabilities directly associated with those assets that will be transferred in the transaction. A disposal group may include a discontinued operation along with other assets and liabilities that...
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... In addressing this question, consider: * What assets and liabilities should be included in the “asset group” as defined by ASC 360-10 for purposes of performing the recoverability test? 360-10-35-21 According to ASC 360-10-35-23 a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. According to ASC 360-10-20 Glossary: An asset group is the unit of accounting for a long-lived asset or assets to be hold and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Need explain non-recourse So “asset group” should include: cruise ship, net book value of the cruise ship 4.6 million, net working capital directly attributed to the cruise ship 0.1 million. Total value of asset group: 4.7 million. * What should the multiple operating scenarios impact the recoverability test? 360-10-35-17 According to ASC 360-10-35-29 Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall include only the future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group). Those estimates shall exclude interest charges...
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...Accounting – Asset Impairment Background: Smooth Sailing is a privately-held cruise operator. The company operates a sole cruise ship that was purchased using non-recourse debt from a bank. Nonrecourse debt is secured by the collateral. In the event of default, the lender can only seize the collateral and no further action can be taken against smooth sailing. Smooth Sailing believes their ship is independent of all of their other asset groups. The ship generates its own cash flows. In the current operating year, pirates have entered the area where the cruise ship operates. As a result of this incursion, the ship experienced thirty percent lower cash flows of $1.0 million in the current year. The company does not anticipate this will change in the near-term. This change may require the company to consider an impairment loss on the asset since the fair value (future cash flows) does not exceed the carrying cost of the boat. The boat currently carrying value is $4.6 million while the initial estimate of the fair value is $3.0 million. The debt also carries a value of $4.0 million. This initial estimate leads me to believe that this asset needs to be tested for impairment. The future cash flows should be used from the probability table (Exhibit A) in order to determine the value of the asset. Statement of research problem or question: What does US GAAP say about: 1. How does management perform asset impairment testing? 2. What categories of assets and liabilities...
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...accounting for impairment of long-lived assets in accordance with ASC 360-10. Applicable Professional Pronouncements ASC 360-10, Property, Plant, and Equipment: Overall (ASC 360-10) ASC 360-10 provides guidance on accounting for property, plant, and equipment, and the related accumulated depreciation on those assets. This Subtopic also includes guidance on the impairment or disposal of long-lived assets. ASC 360-10 notes that long-lived tangible assets include land and land improvements, buildings, machinery and equipment, and furniture and fixtures. ASC 820, Fair Value Measurements and Disclosures (ASC 820) ASC 820, Fair Value Measurements and Disclosures, applies to U.S. GAAP that require or permit fair value measurements or disclosures and provides a single framework for measuring fair value and requires disclosures about fair value measurement. The Topic defines fair value on the basis of an "exit price" notion and uses a "fair value hierarchy," which results in a market-based — rather than entity-specific — measurement. IAS 36, Impairment of Assets (IAS 36) To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is determined. Discussion 1 — Impairment Assessment for a Long-Lived Asset How should Smooth Sailings’ management perform the recoverability test for the cruise ship as of December 31, 2010? In addressing this question, consider: •What assets and liabilities should be...
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...Ahead As defined in the FASB Codification, ASC 360-10-20, an asset group is “the unit of accounting for a long-lived asset or assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities”. Therefore, after reading this definition, the assets and liabilities that are included in the asset group calculation for purposes performing the recoverability test are: Net Book Value of the Asset $4.6 Million Net Working Capital Directly Attributed to the Asset $0.1 Million Total Amount of Asset Group $4.7 Million After reading ASC 360-10-35-21, a “long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable”. The following are examples of such events or changes in circumstances in which this case shows that they needed to be tested for recoverability: B.) A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition E.) A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group) F.) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly...
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...IMPAIRMENT OF LONG-LIVED ASSETS AT-A-GLANCE Increasing globalization coupled with related regulations continues to put pressure on moving towards a common global accounting framework – International Financial Reporting Standards (IFRS). Currently, more than 100 countries use IFRS, so if your business goals include global expansion, it is critical to educate yourself about the impact of IFRS on your financial reporting processes and business now. To gain a better understanding of what IFRS means for your organization, we have prepared a series of comparisons dedicated to highlighting significant differences between IFRS and U.S. generally accepted accounting principles (GAAP). This particular comparison focuses on the significant differences between U.S. GAAP and IFRS when accounting for the impairment of long-lived assets. For other comparisons available in this series, refer to our U.S. GAAP vs. IFRS comparisons at-a-glance series. A discussion about U.S. GAAP and IFRS would not be complete without mentioning the status of the Securities and Exchange Commission’s (SEC) activities focused on determining whether the application of IFRS by U.S. registrants should be required or allowed. While the SEC has not made any final decisions with respect to use of IFRS by U.S. registrants, its activities are ongoing. For more information, refer to our IFRS Resource Center. The guidance related to accounting for the impairment of goodwill and indefinite-lived intangible assets in U.S. GAAP...
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...impairment of a long-lived asset (group) to be held and used: Step 1: Indicators of impairment — FASB ASC 360-10-35-21 “A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.” * In this case, there is a possibility of impairment because of an increased presence of pirates in the area in which Smooth Sailing cruises, the cruise ship’s operating performance has significantly declined, which has directly contributed to a decline in its overall fair value. Step 2: Test for recoverability “If indicators are present, perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset (group) in question to their carrying amounts “ * In this case, $2.3million < $4.0million Step 3: Measurement of an impairment “If the undiscounted cash flows used in the test for recoverability are less than the long-lived asset’s (group’s) carrying amount, determine the fair value of the long-lived asset (group) and recognize an impairment loss if the carrying amount of the long-lived asset (group) exceeds its fair value.” • What assets and liabilities should be included in the “asset group” as defined by ASC 360-10 for purposes of performing the recoverability test? FASB ASC 360-10-35-23 “For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets shall be grouped...
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...SUBJECT: JOHNSON & JOHNSON CASE ASSIGNMENT This memorandum has been created to investigate the long-lived assets and implications associated with Johnson and Johnson’s accounting methods. In this memo we would like to cover five main topics: long-lived assets, depreciation and amortization, J&J policies regarding intangible assets, cash flow statements, and asset turnover/ return on assets. In 2013, J&J reported three different types of long-lived assets on their Consolidated Balance Sheet. The first kind reported was Plant, Property, and Equipment. The second one was Intangible Assets and third was Goodwill. We will be investigating these three assets in further detail. J&J reported $16,710 million net worth of PP&E. Within this major asset category are many sub accounts: Land & Improvements, Building & Building Equipment, and Construction in Progress, Machine & Equipment, and Depreciation. Johnson & Johnson uses the straight-line depreciation method for its assets. In 2013, there was $2.7 billion of accumulated depreciation and amortization of capitalized interested; it increased about $.2 billion since 2012. Table 1 lays out the estimated useful lives of the assets. The company capitalizes certain computer software and development cost which are amortized over the span of 3-8 years. Next, we will be discussing Intangible Assets of the company. J&J reports $1,363 million worth of amortization expense. In 2012, they reported about...
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...Chapter 6 Property and Equipment and Other Assets Overview 6.01 Health care entities use various kinds of property and equipment. Those assets are generally significant to the financial position of institutional health care entities, such as hospitals and nursing homes. Typical accounts used to record property and equipment transactions are land, land improvements, buildings and improvements, leasehold improvements, equipment (fixed and movable), leased property and equipment, accumulated depreciation and amortization, and construction in progress. Health care entities also have intangible assets, which may be acquired in connection with business combinations or purchases, or developed from other resources of the entity. Intangibles with finite lives are amortized according to their useful life. Examples of intangibles include: Health Plans customer relationships, such as employer groups or members provider networks trademarks trade names software licenses favorable leases non-compete agreements goodwill Hospitals and other health care facilities licenses certificates of need managed care contracts goodwill Physician practices medical charts non-compete agreements managed care contracts goodwill 6.02 6.03 Supplies inventories are generally not very significant to the financial position of health care entities. However, because of the volume and cost of supplies used, they may be much more significant to operating expenses and the statement of operations. Supplies typically...
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...recoverability under U.S. GAAP. According to FASB 360 Property, Plant, and Equipment 10 Overall 35 Subsequent Measurement 21, A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: * a. A significant decrease in the market price of a long-lived asset (asset group) (Maybe address d,e,f,g, say they are not applicable to this situation, but say a is sufficient enough to address the issue) In the case, it states that “In December 2010, one of Ida’s competitors sold its commercial building for an amount significantly less than its asking price. The competitor’s building is located across the street from Ida’s building, has approximately the same square footage, and was built five years after Ida’s building was constructed”, it clearly is a significant decrease in the market price of a long-lived asset as indicated in the FASB. Since the competitor’s circumstance indicates that Ida’s carrying amount may not be recoverable, Ida should test for recoverability under U.S. GAAP. Secondly, as of December 31, 2010, Ida needs to test the U.S. commercial building for recoverability under IFRSs as well. According to International Accounting Standard 36 Impairment of Assets (IAS 36) 8, An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12-14 describe some indications that an...
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...ancillary parts. In its Form 10-K, filed with the SEC, the following information was disclosed. First, on the basis of assumptions underlying the acceleration of the Company’s strategy refocus, management projects a decline in the net cash flows for the A2 Americas segment. As a result, in the third quarter of 2010, management has tested the long-lived assets of this segment for recoverability. They recorded a pretax impairment charge of $1.76 billion in cost of sales. Secondly, during the third quarter of 2010, management also reviewed their business plan for the Alpha and Beta operating units. These units projected lower sales, a decline in net cash flows, and currency exchange deterioration. As a result, they tested the long-lived assets of these units for recoverability and recorded a pretax impairment loss of $1.28 billion. Lastly, during 2009, management updated their Asia Pacific Improvement Plan for the Alpha and Beta operating units. They projected a decline in net cash flows for these units based on market projections that reflected the recent market performance for Alpha. As a result, management tested the long-lived assets for impairment and recorded a pretax impairment charge of $1.04 billion. After this 10-K was filed with the SEC, the SEC responded to the Company and required them to explain the inconsistencies of this reporting. The SEC noted that the Company had determined the appropriate amount of impairment for the A2 Americas segment for the Americas...
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