Question

What are some important things an accountant must consider when accounting for long term assets?

Answer 1

Long-term assets are assets that are not expected to be consumed or converted into cash within one year. Long term assets include tangible property, plant and equipment (PP&E) and intangible long-term assets (Investments).

Long term assets are recorded at purchase costs and adjusted downward by depreciation, amortization, and impairment charges in subsequent years.

Assets other than long-term assets are classified as current assets on the balance sheet of an entity.

Accounting for Long Term Assets:-

a. Acquiring or creating-

Tangible Assets:-

Ownership of tangible property and PP&E can be acquired by purchasing it with cash or third-party debt financing, acquiring it as part of a business acquisition, or constructing it internally. They can also acquire the right to use PP&E through leasing (Capital Leasing).

• Purchasing PP&E with cash: increase PP&E and decrease cash for (Cost of the purchased asset + Delivery + installation costs).
• Purchasing PP&E financed with debt: Increase PP&E and debt increases and cash decreases if there’s a down payment for (Cost of the purchased asset + Delivery + installation costs).
• PP&E is acquired as part of business acquisition: It is recorded at its fair value (the hypothetical price it could be sold for to a third party).
• PP&E is constructed internally: It is recorded at the aggregate cost to complete the construction including capitalized interest deemed attributable to the construction.

Intangible Assets:-

intangible assets purchased from third parties with cash or debt financing or as part of a business acquisition are accounted as the same as PP&E purchases. For leasing or creating intangible assets

• Intangible assets created through advertising: Research cost to develop advertisement until advertisement first used are allowed to be capitalised under US GAAP. All other Research expenses are treated as expense under GAAP and IFRS.
• Intangible assets created through development: Software developed for internal use and software developed to be sold to customers can both be capitalized

b. Depriciating, Amortising and Depleting

Tangible Property and PP&E are depriciated and Intagible assets are amortised over the useful life of the Long term assets.

Entry for depriciation/ amortisation :- Depriciation/ Amortisation expense ------Dr.

To Accumulated Long term asset Depriciation/ Amortisation

c. Impairing and Revaluing

Impairement for long-term asset is recognised when its carrying value (book value) is greater than its recoverable amount - the amount that will be recovered in the future.

Entry for impairement :- Impairement Losses ------Dr.

To Accumulated Long term asset impairement

Under US GAAP, impairments of long-term assets can’t be reversed if a previously impaired asset’s fair value increases above its carrying value at a future date. By contrast, under IFRS, except for goodwill impairments, reversals are generally permitted (up to the accumulated impairments previously recognized).

d. Disposing

Entries to record PP&E and intangible disposals are conceptually the same.

Entry for disposal :- Cash and equivalents ---------------------------------Dr.

  Accumulated Depriciation/ Amortisation----------Dr.

Accumulated impairment ----------------------------Dr.

Gain/ loss on LT asset disposals-------------------Dr.

To Long term asset (Historical Cost)