Home > Accounting, CFA L2, fundamental analysis > Impairment & Revaluation of Long Lived Assets

Impairment & Revaluation of Long Lived Assets

Summary of new* reading in 2011– Long-Lived Assets: Implications for Financial Statements & Ratios – Part 2 of 3

CFA Level 2 – Financial Reporting & Analysis

Study Session 5, Reading 22 in textbook

*(Like the last post, I am certain I have read some of this material before… Yes! CFA Level 1, 2009 – reading 36 in SS9!)

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Terminology & Formula

1. I/S = Income Statement, B/S = Balance Sheet, C/F = Statement of Cash Flows, PPE = Property, Plant & Equipment

2. Historical Cost = Net PPE + Accumulated Depreciation

3. Estimated Total Useful Life = Time Since Purchase (Age) + Estimated Remaining Life

- Which is equivalent to (divide #2 by Annual Depreciation Expense):

4. Estimated Total Useful Life = Historical Cost ÷ Annual Depreciation Expense

5. Average remaining Useful Life of an Asset = Net PPE ÷ Annual Depreciation Expense

6. Average Age of an Asset = Accumulated Depreciation ÷ Annual Depreciation Expense

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IFRS vs. US GAAP

Impairment write-downs are permitted under IFRS & US GAAP. Reversal of impairment write-downs or write-ups is only permitted under IFRS & prohibited by US GAAP.

Revaluing Impaired Assets

Impairment loss:

· reduces the carrying amount of the asset (& equity) on the balance sheet

· reduces net income on the income statement.

· does not affect CFO because it is a non-cash item

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Revaluation of Long-lived Assets

1. Only available under IFRS. (US GAAP only allows historical cost model)

2. Long-lived assets are reported at fair market value less accumulated depreciation & impairment

3. Revaluation should be frequent enough so that reported value is close to fair value

4. Assets within can be valued using either methods based on asset classification (e.g. buildings, land, furniture, etc) but all asset in the same class should use the same method

5. Revaluation is done at asset class level to avoid selective revaluation

Impact of Revaluation on Financials

Increase Carrying Value Decrease Carrying Value
Assets Increase Decrease
Equity Increase Decrease
Net Income Unchanged Decrease
Other Comprehensive Income Increase Decrease

Financial Statement Disclosures of Long-lived Assets

Comparing annual capital expenditures to annual depreciation expense generally indicates:

· whether productive capacity is being maintained

· the rate at which a company is replacing its PPE relative to the rate at which PPE is being depreciated

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