35 Analysis of Long-Term Assets

Mammoth, Inc. and Software Development Costs

• For companies reporting under U.S. GAAP or IFRS, the costs of developing software are expensed until technological feasibility.
• Once technological feasibility is established, these costs are capitalized.

Average Age of PP&E

• The average age of a firm's property, plant, and equipment (PP&E) is calculated as accumulated depreciation divided by annual depreciation expense.

Intangible Assets with Indefinite Life

• Acquired patents represent intangible assets with a finite life because they are intended to be used over a specified period.
• Goodwill is an example of an intangible asset with an indefinite life because it is not amortized.
• Trademarks that can be renewed at minimal cost are considered intangible assets with indefinite lives.

Impairment Write-Downs

• An impairment write-down reduces a company's equity but does not affect its debt.
• It will least likely decrease a company's debt-to-equity ratio.

Marcel Inc. and Asset Revaluation

• Marcel Inc. has long-lived assets valued at $600 million, including $80 million in previously recognized impairment losses.
• The original cost of the assets was $750 million, with a fair value determined by appraisal at $690 million.
• The new appraisal of the assets' value will likely result in no change to Marcel's financial statements because U.S. GAAP generally prohibits upward revaluation of assets in use.

Estimating Remaining Useful Life

• The ratio of net PP&E to annual depreciation expense best estimates the remaining useful life of an asset.
• The formula is: Remaining useful life = ending net PP&E / annual depreciation expense

Estimating Financing Requirements

• The average age of depreciable assets helps estimating financing required for major capital expenditures in the near term to replace depreciated assets

Amortization of Intangible Assets

• Under GAAP, purchased, identifiable intangible assets with a finite life are amortized over their useful life.
• Costs to develop trademarks are expensed when incurred.
• Patents expiring in the current period should not be recognized as assets because they do not provide future benefits.

Trademark Costs on the Balance Sheet

• The amortized cost of a trademark is least likely to appear on a firm's balance sheet if the trademark was developed internally, this is because costs are expensed incurred.
• The value of a trademark can appear on the balance sheet if it was purchased or obtained in a business acquisition.

Ranchero Corporation and Equipment Revaluation

• Ranchero Corporation purchased equipment for £3 million and later determined its fair value was greater than its book value.
• IFRS impacts on Ranchero is that both the total asset turnover ratio and return on equity will decrease when reporting the equipment at fair value.

Varin, Inc.'s Franchise and Trademark

• Varin, Inc. purchases franchise rights with an estimated useful life of ten years and a trademark that can be renewed every five years for a nominal fee.
• According to the IFRS, Varin will recognize amortization expense on only the franchise.
• Trademarks that can be renewed at a nominal cost amount should be amortized.

Impairment of Long-Lived Assets

• Taking an impairment of long-lived assets will result in a higher future return on assets.
• The debt-to-equity ratio increases as equity decreases, while debt remains unchanged.

Capitalizing vs. Expensing

• Lower net income and lower return on assets is the most likely result in the years after the expenditure for capitalizing when comparing the financial statement effects of expensing versus capitalizing an expenditure.
• Capitalizing results in depreciation being deducted against net income, and increases total assets, lowering ROA.

Revaluing Long-Lived Assets

• Revaluing a firm's long-lived assets upward will least likely result in higher profitability in the periods after revaluation because the higher depreciable base now means higher depreciation expense which brings about lower profitability in the periods after revaluation.
• Solvency ratios (debt to equity) will decrease given the increase in assets balanced by an increase in equity.