Long Lived Assets

an expenditure that is expected to provide a future economic benefit over multiple accounting periods is capitalized

if the future economic benefit is unlikely or highly uncertain, the expenditure is expensed in the period incurred.

are long-term assets that lack physical substance, such as patents, brand names, copyrights, and franchises. Some intangible assets have finite lives while others have indefinite lives.

Capable of being separated from the firm or arise from a contractual or legal right.
Controlled by the firm.
Expected to provide future economic benefits.

An unidentifiable intangible asset is one that cannot be purchased separately and may have an indefinite life. The most common example of an unidentifiable intangible asset is goodwill

Under IFRS, research costs, which are costs aimed at the discovery of new scientific or technical knowledge and understanding, are expensed as incurred. However, development costs may be capitalized.
Development costs are incurred to translate research findings into a plan or design of a new product or process. To recognize an intangible asset in development, a firm must show that it can complete the asset and intends to use or sell the completed asset, among other criteria.

both research and development costs are generally expensed as incurred. However, the costs of creating software for sale to others are treated in a manner similar to the treatment of research and development costs under IFRS.
Costs incurred to develop software for sale to others are expensed as incurred until the product's technological feasibility has been established, after which the costs of developing a salable product are capitalized

The acquisition method is used to account for business combinations
Under the acquisition method, the purchase price is allocated to the identifiable assets and liabilities of the acquired firm on the basis of fair value. Any remaining amount of the purchase price is recorded as goodwill.

Goodwill is said to be an unidentifiable asset that cannot be separated from the business itself

Capitalizing an expenditure delays the recognition of an expense in the income statement. Thus the firm will report higher net income compared to immediately expensing. In subsequent periods, the firm will report lower net income compared to expensing, as the capitalized expenditure is allocated to the income statement through depreciation expense.
Conversely, if a firm expenses an expenditure in the current period, net income is reduced by the after-tax amount of the expenditure. In subsequent periods, no allocation of cost is necessary. Thus, net income in future periods is higher than if the expenditure had been capitalized.

Because capitalization results in higher net income in the period of the expenditure compared to expensing, it results in higher shareholders' equity because retained earnings are greater.
If the expenditure is immediately expensed, retained earnings and shareholders' equity will reflect the entire reduction in net income in the period of the expenditure.

A capitalized expenditure is usually reported in the cash flow statement as an outflow from investing activities. If immediately expensed, the expenditure is reported as an outflow from operating activities. Thus, capitalizing an expenditure will result in higher operating cash flow and lower investing cash flow compared to expensing.

is the systematic allocation of an asset's cost over time

Carrying (book) value
Historical cost

The net value of an asset or liability on the balance sheet. For property, plant, and equipment, carrying value equals historical cost minus accumulated depreciation

The original purchase price of the asset including installation and transportation costs. Historical cost is also known as gross investment in the asset.

which is the actual decline in the value of the asset over the period

With an accelerated depreciation method, more depreciation expense is recognized in the early years of an asset's life and less depreciation expense in the later years.

the useful life of each component is estimated and depreciation expense is computed separately for each.

A change in an accounting estimate, such as useful life or salvage value, is put into effect in the current period and prospectively. That is, the change in estimate is applied to the asset's carrying (book) value and depreciation is calculated going forward using the new estimate

IFRS provides an alternative, the revaluation model, that permits a long-lived asset to be reported at its fair value, as long as an active market exists for the asset so its fair value can be reliably (and somewhat objectively) estimated

When there have been no prior revaluations and fair value is less than the carrying value (cost minus accumulated depreciation as of the first revaluation date), a loss is recorded on the income statement, much like an impairment charge.
If fair value at the first revaluation date is greater than the carrying value of the asset, the difference is recorded as revaluation surplus, a component of equity, so net income is not affected.

On a revaluation date after the first revaluation, if fair value is greater than the carrying value, a gain is first reported on the income statement to the extent it reverses any previously recorded loss from revaluation.
If the revaluation gain is greater than prior losses reported in the income statement that have not been reversed, the excess is reported in the revaluation surplus account.
If fair value on a revaluation date after the first revaluation date is less than the carrying value, the difference first goes to reduce any existing balance in the revaluation surplus account. Any remaining difference in excess of the balance in the revaluation surplus account is reported on the income statement as a loss.

For example, there may have been a significant decline in the market value of the asset or a significant change in the asset's physical condition. If so, the asset's value must be tested for impairment.

An asset is impaired when its carrying value (original cost less accumulated depreciation) exceeds the recoverable amount

The recoverable amount is the greater of its fair value less any selling costs and its value in use.

The value in use is the present value of its future cash flow stream from continued use.

Recoverability test
Measuring the loss

The asset is tested for impairment by applying a recoverability test.

An asset is considered impaired if the carrying value (original cost less accumulated depreciation) is greater than the asset's future undiscounted cash flow stream.

If impaired, the asset's value is written down to fair value on the balance sheet and a loss, equal to the excess of carrying value over the fair value of the asset (or the discounted value of its future cash flows if the fair value is not known), is recognized in the income statement.

The held-for-sale asset is impaired if its carrying value exceeds its net realizable value (fair value less selling costs). If impaired, the asset is written down to net realizable value and the loss is recognized in the income statement.

For long-lived assets held for sale, the loss can be reversed under IFRS and U.S. GAAP if the value of the asset recovers in the future.

occurs when assets are sold, exchanged, or abandoned.

The carrying value is equal to original cost minus accumulated depreciation and any impairment charges.

Under U.S. GAAP, most long-lived assets are reported on the balance sheet at depreciated cost using the cost model (original cost less accumulated depreciation and impairment charges). Revaluing long-lived assets upward is generally prohibited. One exception relates to long-lived assets held for sale, for which prior impairment losses can be reversed.
Under IFRS, firms can choose to use the revaluation model and report long-lived assets at their fair values. Firms can choose depreciated cost for some asset classes and fair value for others.

Higher total assets and higher shareholders' equity.
Lower leverage ratios as measured by the debt ratio (total debt / total assets) and the debt-to-equity ratio (higher denominators).
Higher depreciation expense and thus lower profitability in periods after revaluation.
Lower ROA and ROE in periods after revaluation (lower numerators and higher denominators). However, if the increase in the asset value is the result of higher operating capacity, such higher capacity should result in higher revenues and thus higher earnings.

Under the cost model, the carrying (book) value of a long-lived asset is its historical cost minus accumulated depreciation or amortization, adjusted for any impairment charges taken. Under the revaluation model, the carrying value of an asset is its value as of the last revaluation date, less any subsequent depreciation or amortization.
The difference between the sale price and the carrying value is reported as a gain or loss on the income statement. Such gains and losses may be reported in other income or losses or as a separate line item if the amount is material. When an asset is abandoned, the treatment is the same, but the sale price is zero and the loss is equal to the carrying value.

Basis for measurement (usually historical cost).
Useful lives or depreciation rate.
Gross carrying value and accumulated depreciation.
Reconciliation of carrying amounts from the beginning of the period to the end of the period
Title restrictions and assets pledged as collateral
Agreements to acquire PP&E in the future

The revaluation date
How fair value was determined
Carrying value using the historical cost model

Amounts of impairment losses and reversals by asset class
Where the losses and loss reversals are recognized in the income statement
Circumstances that caused the impairment loss or reversal

Depreciation expense by period
Balances of major classes of assets by nature and function, such as land, improvements, buildings, machinery, and furniture
Accumulated depreciation by major classes or in total
General description of depreciation methods used

A description of the impaired asset.
Circumstances that caused the impairment.
How fair value was determined.
The amount of loss.
Where the loss is recognized in the income statement.

Older, less-efficient assets may make a firm less competitive.
The average age of assets helps an analyst to estimate the timing of major capital expenditures and a firm's future financing requirements.

Average Age
Total Useful Life
Remaining Useful Life

Under IFRS, property that a firm owns for the purpose of collecting rental income, earning capital appreciation, or both, is classified as investment property
U.S. GAAP does not distinguish investment property from other kinds of long-lived assets

either the cost model or the fair value model