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Chapter 8: Long-Term Assets

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  • Chris Burnley

    FINANCIALACCOUNTING

    Understanding

    CANADIAN EDITION

  • CH

    AP

    TER

    Long-Term Assets LEARNING OBJECTIVES After studying this chapter, you should be able to:

    CORE QUESTIONS If you are able to answer the following questions, then you have achieved the related learning objectives.

    j What are the various types of long-term assets? j Why are long-term assets of signi cance to users?

    Identify and distinguish between the various types of long-term assets.

    1

    Describe the valuation methods for property, plant, and equipment, including identifying costs that are usually capitalized.

    2

    Explain why property, plant, and equipment assets are depreciated.

    3

    Identify the factors that in uence the choice of depreciation method and implement the most common methods of depreciation.

    4

    Explain what it means if property, plant, and equipment assets are impaired.

    6

    Account for the disposal of property, plant, and equipment. 7

    Explain the effect of depreciation on income taxes. 8

    Describe and implement changes in depreciation estimates and methods.

    5

    INTRODUCTION

    VALUATION OF PROPERTY, PLANT, AND EQUIPMENT

    8

    j At what amount are property, plant, and equipment re ected on the statement of nancial position?

    j What is included in cost? j What happens when a company purchases multiple assets for a single price? j How do we account for costs subsequent to purchase?

    DEPRECIATION

    DEPRECIATION METHODS

    CHANGES IN DEPRECIATION METHODS

    IMPAIRMENT

    DISPOSAL OF PP&E

    DEPRECIATION AND INCOME TAXES

    j Why do we depreciate property, plant, and equipment?

    j What are the methods used to depreciate property, plant, and equipment? j How do we choose a depreciation method? j How do we record depreciation expense? j Does an assets carrying amount tell me what it is worth? j How do we determine depreciation for partial periods?

    j Can we change depreciation estimates and methods?

    j What does it mean if an asset is impaired?

    j How do we account for disposals of property, plant, and equipment?

    j Do depreciation decisions affect corporate income taxes? j Can a company carry property, plant, and equipment at their fair values?

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  • More than 9 in 10 Canadians live within 15 minutes of a Canadian Tire store. Over the companys 90-year history, it has grown to 490 stores from coast to coast. The Canadian Tire Corporation Limited family of companies now includes the clothing retailer Marks Work Wearhouse, acquired in 2001, and FGL Sports (formerly the Forzani Group Ltd.), which it bought in 2011. Marks now has more than 380 stores, and FGL Sports, which includes Sport Chek and Sports Experts, has more than 400 stores across the country, making it Canadas largest sporting goods retailer.

    All of these ventures have substantial long-term assets, which consist of prop-erty, plant, and equipment; intangible assets; and goodwill.

    Canadian Tires property, plant, and equipment includes land, store buildings, and xtures and equipment. In 2013, the company had $3.5 billion in property and equipment on its consolidated balance sheets. Canadian Tire depreciates its buildings, xtures, and equipment using the declining-balance method. (Land is never depreciated because its useful life is inde nite.)

    Canadian Tire also has considerable intangible assets (those with no physical form) such as trademarks, including the iconic logo of a red triangle and green maple leaf, and the various banners and brands, including Marks private-label brands. These

    intangible assets are considered long-term assets. The Company expects these assets to generate cash ows in perpetuity. Therefore, these intangible assets are con-sidered to have inde nite useful lives, Canadian Tire said in its 2013 annual report.

    The last type of long-term asset is goodwill, which companies like Canadian Tire acquire when purchasing other companies. Goodwill is the difference between what an acquiring company paid for the acquisition and what the acquired companys net assets are worth. Canadian Tire calculates the fair value of the assets it acquired on the transaction date, including trademarks and brands, whose value can only be estimated. When Canadian Tire acquired FGL Sports, for example, it recognized $308.4 million in goodwill, which it said was attributable mainly to the expected future growth potential from the expanded customer base of FGL Sports banners/brands, the network of stores which are predominantly mall-based and access to the important 1835 year old customer segment. In fact, it was this expanded access that sealed the deal for Canadian Tire to buy FGL Sports. By acquiring Forzani we gain access to a new set of customerspeople at a point in their lives that typically dont shop our stores extensively today for sporting goods, Canadian Tire CEO Stephen Wetmore said at the time.1

    A Canadian Icons Long-Term Assets

    j LEARNING OBJECTIVE 1Identify and distinguish between the various types of long-term assets.

    INTRODUCTION Our opening story describes some accounting issues associated with recording and reporting long-term assets at Canadian Tire Corporation, which has signifi cant amounts invested in the assets that form its extensive retail network. This chapter will discuss the measurement, recording, and reporting issues that all companies encounter with their long-term assets.

    What are the various types of long-term assets? There are three main categories of long-term assets, also known as capital assets :

    1. Property, plant, and equipment 2. Intangible assets 3. Goodwill Property, plant, and equipment (PP&E) are also known as tangible assets as they have a physical

    presence. This category includes such things as land, buildings, machinery, furniture, computer equipment,

    j What is the relative age of the companys long-term assets? j How effectively has the company used its long-term assets?

    Assess the average age of property, plant, and equipment; calculate the xed asset turnover ratio; and assess the results.

    11

    FINANCIAL STATEMENT ANALYSIS

    Explain the accounting treatment for goodwill, including impairment.

    10

    GOODWILL

    j What is goodwill? j At what amount is goodwill re ected on the statement of nancial position? j How is goodwill treated differently than other long-term assets?

    Explain the accounting treatment for intangible assets, including amortization.

    9

    INTANGIBLE ASSETS

    j What are intangible assets? j At what amount are intangible assets re ected on the statement of nancial position?

    j How is accounting for intangible assets different than accounting for property, plant, and equipment?

    LEARNING OBJECTIVES (continued)CORE QUESTIONS (continued)

    A building:- is purchased to generate

    revenues in future periods.- has physical form.

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    3Introduction

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  • 4 CHAPTER 8 - LONG-TERM ASSETS

    vehicles, planes, boats, and so on. Companies purchase these assets to use them to generate revenues over multiple future periods. Assets are used in a number of ways, such as to produce goods, to serve as the locations for the sale of goods, or to be the tools that enable companies to provide services. While these assets may be sold when the company has fi nished using them, these assets are not purchased for resale. (Otherwise, they would be considered to be inventory, as discussed in Chapter 7.)

    Intangible assets are those long-term assets without physical form and include things such as trade-marks, patents, copyrights, licences, franchise rights, and customer lists. Intangible assets must be sepa-rately identifi able from other assets, which means that they can be resold, licensed, or rented. Very often, intangible assets have legal or contractual rights associated with them. For technology companies such as Waterloo, Ontariobased BlackBerry Limited , intangible assets are the companys most signifi cant assets.

    In BlackBerrys case, it had more than $1.4 billion of intangible assets on its statement of fi nancial position at March 1, 2014, which represented more than 19% of the companys total assets.

    Goodwill is a long-term asset that arises when two businesses are combined. It represents the expected future economic benefi ts that will arise from the combination that cannot be separately identifi ed as either PP&E or an intangible asset. The easiest way to think about goodwill is that it is the premium or excess paid by one business when it is acquiring another that is related to factors such as management expertise, corporate reputation, or customer loyalty.

    Why are long-term assets of signifi cance to users? As just mentioned, companies invest in long-term assets to generate future revenues. These assets gener-ally have signifi cant costs and will impact a companys operations for many years into the future. They are often critical to a companys future success and need to be understood by fi nancial statement users.

    Users will want to monitor t