Answer these: What can be challenging about reporting and interpreting Long term assets? What can be challenging about property, plant and equipment and depreciation? What are some challenges encountered with understanding long term investments, and intangible assets?
Reporting and Interpreting Long-Term Assets
The use of long-term assets is necessary for most companies to conduct business. Long-term assets are any assets that do not qualify as current assets and, therefore, typically have a lifetime of 1 year or longer. Long-term assets include fixed assets, intangible assets, and long-term investments. Fixed assets and intangible assets typically contribute to the bottom line in that they facilitate the ordinary course of business and thus help to generate sales. Two important principles must be adhered to when accounting for long-term assets: the matching principle and the cost principle. The matching principle states that expenses must be “matched with revenues in the period when efforts are expended to generate revenues” (Kimmel, Weygandt, & Kieso, 2009, p. 163) and the cost principle states that “assets be recorded at their cost” (Kimmel et al., 2009, p. 68). Therefore, when long-term assets are purchased, they must be recorded at their cost in accordance with the cost principle and the cost of those assets must be allocated to all of the periods of benefit per the matching principle.
Property, Plant, and Equipment and Depreciation
Fixed assets, also called plant assets, are tangible assets or property, such as a plant or equipment. Fixed assets have a physical substance, are long-term in nature, and are used in the business and not held for resale. Property, plant, and equipment includes, among other assets, buildings, machinery and equipment, furniture and fixtures, vehicles, and land. Property, plant, and equipment are recorded at historical cost in accordance with the cost principle. The cost principle dictates that all reasonable and necessary expenditures made in acquiring and preparing an asset for its intended use should be capitalized as part of the cost of the asset (Libby, Libby, & Short, 2004). Subsequent expenditures that are made to increase the productive life, operating efficiency, or capacity of the asset are considered capital expenditures and are added to the asset account; ordinary repairs and maintenance are considered to be an expense in the period incurred (Libby et al., 2004). Many assets may appreciate in market value, but the cost principle requires that the assets not be written up to market. The only time that appreciation in value is recognized is when the asset is sold and the selling price exceeds the cost of the asset. At the time of the disposition of an asset, a gain or loss is recorded.
Except for land, all property, plant, and equipment are considered depreciable. Depreciation is “the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner” (Kimmel et al., 2009, p. 439). Depreciation matches the effort of an asset against the benefit received from use. Land is never depreciated because “its usefulness and revenue-producing ability generally remain intact as long as the land is owned” (Kimmel et al., 2009, p. 439). Depreciation is commonly thought of as the devaluation of an asset, but in accounting terminology, it is more specific than that. For accounting purposes, depreciation does not match an asset’s value to market but rather brings down its carrying value (cost minus previously recorded depreciation) over its useful life.
There are several methods of depreciation that can be used to calculate the amount of depreciation expense for a period, including straight-line depreciation, accelerated methods (such as sum-of-the-years-digits and double-declining-balance methods), and units of production.
·The straight-line method is the most commonly used method by businesses because it is relatively easy to calculate. Under the straight-line method, the depreciation expense taken for each period of an asset’s useful life is the same.
·Accelerateddepreciation methods allow for more depreciation expense to be taken at the beginning of the life of the asset than at the end. The assumption is that the asset is more productive at the beginning of the life and will have more repairs and maintenance expense toward the end of its life, thus evening out the costs over the life of the asset.
·Units of production methods allocate depreciation in fixed amounts by units instead of years.
Long-term investments are typically investments in the debt or equity instruments of other companies that are intended to be held for more than 1 year, or long-term tangible assets that a company is not currently using in operations (Kimmel et al., 2009). How the long-term investments section is presented on the balance sheet is dependent upon the types of long-term investments owned by the corporation.
Intangible assets are future potential economic benefits that do not have physical substance. Examples of intangible assets include patents, copyrights, trademarks, franchises, and goodwill. Intangible assets may be classified as having indefinite or limited useful lives. The useful life of an intangible asset frequently differs from the legal life of an intangible asset. Since many intangible assets are exclusivity rights that are granted by the U.S. government, they have limited legal lives. For example, a patent is a right to exclusively use technology or an invention for a period of 20 years; 20 years is therefore the legal life of the patent. Copyrights are exclusive rights to an artistic work that have a legal life of the life of the creator, plus 70 years. It is important to remember that an intangible asset cannot be expensed over a period of more than its legal life.
The process of “expensing” an intangible asset is called amortization. Amortization expense is calculated on a straight-line basis for all intangible assets with limited (finite) useful lives as part of the adjustment process. To record amortization, amortizationexpense is debited, and the asset account is credited directly. Goodwill is considered to have an indefinite useful life, so it is no longer amortized, according to Generally Accepted Accounting Principles.
The accountant exhibits significant judgment over accounting for long-term assets because of the various estimates that are used in accounting for long-term assets. The accountant estimates the useful life of assets to be depreciated, chooses the depreciation methodology, determines the lives of intangible assets, estimates salvage values of fixed assets, and classifies investments. Due professional care should be used whenever making such assessments and the accountant must remember to act with objectivity and conservatism.
Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley and Sons, Inc.
Libby, R., Libby, P., & Short, D. (2004).
Financial accounting (4th ed.). Boston: McGraw-Hill/Irwin
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