Operational Assets:
Acquisition
• Tangible
Property, plant and equipment
Natural resources
• Intangible
MBA 303--SUMMER 2002 1
Presentation
• Tangible
Less: accumulated depreciation
• Intangible
Net
MBA 303--SUMMER 2002 2
Acquisitions in General
• Methods of acquisition
Purchase
Exchange
Lease
Donation
Self-construction
Business combination
• See table on page 464
MBA 303--SUMMER 2002 3
Special Considerations
• Lump-sum: relative mkt. value %
• Deferred payments:
Imputed interest or implicit rate of interest
• Equity: value of assets received
• Donated assets: revenue considerations
• Exchanges
MBA 303--SUMMER 2002 4
Exchanges
• Gain or loss; $ given or received
• Dissimilar
See Handout
D1 - D4
and
• Similar
pages 478-485
S1 - S4
MBA 303--SUMMER 2002 5
Decision Making
• Fixed asset turnover
Net Sales
Average Fixed Assets
• Repair & maintenance efficiency ratio
Repair & maintenance expense
Gross depreciable assets
MBA 303--SUMMER 2002 6
Research & Development
• SFAS 2: expense as incurred
• Generally up to the start of
commercial production
• R & D for others is capitalized
MBA 303--SUMMER 2002 7
Start Up Expenditures
• SOP 98-5: expense as incurred
MBA 303--SUMMER 2002 8
Software Development
Expenditures
• SFAS 86: developed for others
Capitalize after achieving technological
feasibility
Amortized over useful life of product
• SOP 98-1: developed for internal
use
Essentially for SFAS 86
• IPR & D: purchased R&D-expense
MBA 303--SUMMER 2002 9
Cost Allocation
• Service life
• Allocation base (& residual value)
• Allocation method
MBA 303--SUMMER 2002 10
Depreciation
• Time based vs. activity based
• Time based
Straight line-S/L
Sum of the years’ digits-SYD
Declining balance-DDB
• Activity based
Units of production
MBA 303--SUMMER 2002 11
Depletion
• Cost allocation for natural resources
• Units of production for books
• Percentage depletion for taxes
• Traditionally applied directly to asset
account
MBA 303--SUMMER 2002 12
Amortization
• Cost allocation for intangibles
• Excludes goodwill & intangibles with
indefinite lives
• S/L method is used
• Traditionally applied directly to
asset account
MBA 303--SUMMER 2002 13
Partial Periods
• Half-year convention
MBA 303--SUMMER 2002 14
Changes in Estimates
• Revision of estimated useful life
• Reflect in current F/S
• Disclose in footnotes
MBA 303--SUMMER 2002 15
Change in Depr. Method
• Separately reported item:
cumulative effect on prior years’
inc.
• Pro forma prior years’ impact if
material
• Disclose in footnotes
MBA 303--SUMMER 2002 16
Error Correction-Material
• Restatement
• Adjust R/E & Stmt. of S/E
• Disclose in footnotes
MBA 303--SUMMER 2002 17
Goodwill (SFAS 142) &
Impairment
• G/W must be tested annually for
impairment
• Impairment-operational assets & G/W
Triggering event
Recognition requirement
Measurement
MBA 303--SUMMER 2002 18
Maintenance or Betterment
• Addition or betterment, if
Increases output
Improves quality
Extends useful life
Reduces operating cost
• Expense if maintenance
• Capitalize if betterment
MBA 303--SUMMER 2002 19
Additions, Improvements &
Rearrangements
• Additions: capitalize
• Improvements
Substitution
Capitalization
Reduction of accumulated depreciation
• Rearrangements: capitalize if material
• Dispositions: results in gain or loss
MBA 303--SUMMER 2002 20