Chapter 11-1 CHAPTER 11 DEPRECIATION, IMPAIRMENTS, AND DEPLETION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 11-2 Learning Learning Objectives Objectives Explain the concept of depreciation Identify the factors involved in the depreciation process Compare activity, straight-line, and decreasing-charge methods of depreciation Explain special depreciation methods Explain the accounting issues related to asset impairment Explain the accounting procedures for depletion of natural resources Explain how to report and analyze property, plant, equipment, and natural resources Chapter 11-3 Depreciation, Depreciation, Impairments, Impairments, and and Depletion Depletion Depreciation Impairments Depletion Factors involved Methods of depreciation Special methods Recognizing impairments Measuring Impairments Restoration of loss Assets to be disposed of Establishing a base Write-off of resource cost Estimating reserves Liquidating dividends Continuing controversy Special issues Chapter 11-4 Presentation and Analysis Presentation Analysis Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset Allocating costs of long-term assets: Fixed assets = Depreciation expense Intangibles = Amortization expense Natural resources = Depletion expense Chapter 11-5 LO Explain the concept of depreciation Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Factors Involved in the Depreciation Process Three basic questions: (1) What depreciable base is to be used? (2) What is the asset’s useful life? (3) What method of cost allocation is best? Chapter 11-6 LO Identify the factors involved in the depreciation process Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Factors Involved in the Depreciation Process Depreciable Base Illustration 11-1 Chapter 11-7 LO Identify the factors involved in the depreciation process Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Factors Involved in the Depreciation Process Estimation of Service Lifes Service life of an asset often differs from its physical life Companies retire assets for two reasons: physical factors (such as casualty or expiration of physical life) and economic factors (obsolescence) Chapter 11-8 LO Identify the factors involved in the depreciation process Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Methods of Depreciation The profession requires the method employed be “systematic and rational.” Examples include: (1) Activity method (units of use or production) (2) Straight-line method (3) Sum-of-the-years’-digits (4) Declining-balance method (5) Group and composite methods (6) Hybrid or combination methods Chapter 11-9 Accelerated methods Special methods LO Compare activity, straight-line, and decreasingcharge methods of depreciation Depreciation Depreciation Method Method of of Cost Cost Allocation Allocation Activity Method Illustration 11-2 Stanley Coal Mines Facts Illustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is: Illustration 11-3 Chapter 11-10 LO Compare activity, straight-line, and decreasingcharge methods of depreciation Presentation Presentation and and Analysis Analysis The assets turnover is a measure of a firm’s ability to generate sales from a particular investment in assets Illustration 11-20 Chapter 11-43 Solution on notes page LO Explain how to report and analyze property, plant, equipment, and natural resources Presentation Presentation and and Analysis Analysis The profit margin on sales is a measure of the ability to generate operating income from a particular level of sales Illustration 11-21 Chapter 11-44 Solution on notes page LO Explain how to report and analyze property, plant, equipment, and natural resources Presentation Presentation and and Analysis Analysis Rate of Return on Assets measures a firm’s success in using assets to generate earnings Illustration 11-22 Chapter 11-45 Solution on notes page LO Explain how to report and analyze property, plant, equipment, and natural resources Presentation Presentation and and Analysis Analysis The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows: Rate of Return on Assets Net Income Average Total Assets Chapter 11-46 = = Profit Margin on Sales Net Income Net Sales x x Asset Turnover Net Sales Average Total Assets LO Explain how to report and analyze property, plant, equipment, and natural resources Presentation Presentation and and Analysis Analysis The analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows: Rate of Return on Assets $64.2 = = ($811.8 + 665.3) / 8.7% Chapter 11-47 Profit Margin on Sales $64.2 x x 15.28% $420.1 ($811.8 + 665.3) / $420.1 = Asset Turnover x 569 LO Explain how to report and analyze property, plant, equipment, and natural resources Chapter 11-48 Under both iGAAP and U.S GAAP, interest costs incurred during construction must be capitalized iGAAP, like U.S GAAP, capitalizes all direct costs in selfconstructed assets The accounting for exchanges of nonmonetary assets has recently converged between iGAAP and U.S GAAP iGAAP permits the same depreciation methods (straight-line, accelerated, units-of-production) as U.S GAAP Chapter 11-49 As discussed in the Chapter Convergence Corner, iGAAP permits asset revaluations (which are not permitted in U.S GAAP) Consequently, companies that use the revaluation framework must follow revaluation depreciation procedures iGAAP also uses a fair value test to measure the impairment loss However, iGAAP does not use the first-stage recoverability test used under U.S GAAP—comparing the undiscounted cash flows to the carrying amount Thus, the iGAAP test is more strict than U.S GAAP Modified Accelerated Cost Recovery System MACRS differs from GAAP in three respects: a mandated tax life, which is generally shorter than the economic life; cost recovery on an accelerated basis; and an assigned salvage value of zero Chapter 11-50 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Tax Lives (Recovery Periods) Chapter 11-51 Illustration 11A-1 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Tax Depreciation Methods Illustration 11A-2 Chapter 11-52 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Illustration: Computer and peripheral equipment purchased by Denise Rode Company on January 1, 2009 Chapter 11-53 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Illustration: Chapter 11-54 Illustration 11A-3 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Illustration: Using the rates from the MACRS depreciation rate schedule for a 5-year class of property, Rode computes depreciation as follows Illustration 11A-4 Illustration 11A-5 Chapter 11-55 LO Describe income tax methods of depreciation Modified Accelerated Cost Recovery System Additional Issues Optional straight-line method Tax versus book depreciation Chapter 11-56 LO Describe income tax methods of depreciation Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 11-57 .. .CHAPTER 11 DEPRECIATION, IMPAIRMENTS, AND DEPLETION Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 11- 2 Learning Learning Objectives... cash flows Chapter 11- 28 LO Explain the accounting issues related to asset impairment Impairments Impairments Illustration 11- 16 Accounting for Impairments Chapter 11- 29 LO Explain the accounting. .. Allocation Straight-Line Method Illustration 11- 2 Stanley Coal Mines Facts Illustration: Stanley computes depreciation as follows: Illustration 11- 4 Chapter 11- 11 LO Compare activity, straight-line,