Analysis of Long-Term Assets: formula sheet

Key formulas

Capitalized interest (weighted-average, avoidable interest approach)

Interest capitalized = Weighted average accumulated expenditures × Interest rate (limited to actual interest incurred)

Used mainly under US GAAP and for general borrowings. Weight each expenditure by the fraction of the year it was outstanding. For a specific loan, use the actual interest incurred on that loan (see the next formula).

IFRS net borrowing cost on specific loans

Capitalized borrowing cost = Interest incurred on the specific loan − Investment income on temporary investment of the funds

US GAAP generally does not subtract the investment income.

Capitalized cost of purchased asset

Cost = Purchase price + Costs to bring the asset to location and condition for use

Excludes training, admin overhead and abnormal waste.

Profit effect of capitalizing

Capitalize: expense now = 0, then depreciation over life. Expense: full cost in current-year expense

Total expense over the life is equal; only timing differs.

Cash flow classification

Capitalized cost → investing outflow; expensed cost → operating outflow

Capitalizing raises CFO.

Initial cost of PP&E

Cost = purchase price − trade discounts + import duties and non-refundable taxes + directly attributable costs + initial dismantling/restoration estimate

Exclude training, overhead, advertising and start-up losses. Borrowing costs are capitalized only for qualifying assets.

Straight-line depreciation

Annual depreciation = (Cost − Residual value) ÷ Useful life

Same expense every full year. Book value falls in a straight line to residual value.

Double declining balance rate

DDB rate = 2 ÷ Useful life (in years)

This is twice the straight-line rate. Other declining-balance factors, such as 1.5, use the same logic.

Double declining balance expense

Depreciation = DDB rate × Beginning book value

Do not subtract residual value in the calculation. Stop when book value reaches residual value; never go below it.

Units-of-production depreciation

Depreciation = (Cost − Residual value) ÷ Total expected units × Units produced in the period

Useful life is measured in units (output, hours or kilometres), not years.

Book value (carrying amount)

Book value = Cost − Accumulated depreciation

Under DDB, book value after n years = Cost × (1 − rate)^n, before the residual-value floor.

Carrying amount, cost model

Cost − accumulated depreciation − accumulated impairment losses

Fair value changes are ignored.

Carrying amount, revaluation model

Fair value at last revaluation − later accumulated depreciation − later impairment losses

Applied to the whole asset class, with revaluations regular enough to avoid material differences.

Revaluation gain or loss

Fair value − carrying amount before revaluation

Positive means increase. Negative means decrease.

Increase rule (IFRS)

Increase → OCI (revaluation surplus), except up to any earlier loss on the same asset → profit or loss

Surplus is shown in equity.

Decrease rule (IFRS)

Decrease → profit or loss, except up to any existing surplus on the same asset → OCI

Applied asset by asset.

Depreciation after revaluation

(Revalued carrying amount − residual value) ÷ remaining useful life

Straight-line case. Higher revalued amount means higher expense.

Investment property, fair value model

Gain or loss = change in fair value → profit or loss; no depreciation

IAS 40. Cost model alternative requires depreciation and fair value disclosure.

Goodwill

Goodwill = Consideration transferred + Non-controlling interest (NCI) − Fair value of identifiable net assets (assets − liabilities)

For a 100% acquisition, NCI is zero. Under IFRS, NCI can be measured at fair value (full goodwill method) or at its proportionate share of the identifiable net assets (partial goodwill method). The full goodwill method gives higher goodwill. US GAAP requires NCI at fair value, so it uses full goodwill. A negative result is a bargain purchase gain in profit or loss.

Straight-line amortization

Annual amortization = (Cost − Residual value) ÷ Useful life

Residual value is usually zero for intangibles. Applies only to finite-life intangibles.

Capitalization rule (IFRS)

Research → expense; Development → capitalize once criteria are met

US GAAP generally expenses both, with software exceptions.

Impairment loss (IFRS)

Loss = Carrying amount − Recoverable amount, where recoverable amount is the higher of fair value less costs of disposal and value in use

Goodwill is tested at the cash-generating unit (CGU) level. The CGU's impairment loss is allocated first to goodwill, then to the CGU's other assets. Goodwill impairment is never reversed. Other IFRS impairments may be reversed.

Impairment (US GAAP, goodwill)

Loss = Carrying amount of reporting unit − Fair value of reporting unit (limited to goodwill)

Tested at the reporting unit level.

IFRS recoverable amount

Recoverable amount = max(Fair value − Costs of disposal, Value in use)

Value in use is the present value of expected cash flows from continuing use and final disposal.

IFRS impairment loss

Loss = Carrying amount − Recoverable amount (if positive)

If recoverable amount is higher than carrying amount, no loss.

US GAAP recoverability test (held for use)

Impaired if Carrying amount > Undiscounted expected cash flows

Only if this test fails do you measure the loss.

US GAAP impairment loss (held for use)

Loss = Carrying amount − Fair value

Fair value is the measure, not value in use.

Assets held for sale

Carry at lower of carrying amount and fair value less costs to sell

Applies under both frameworks; no further depreciation. Later increases in fair value less costs to sell can be recognized, limited to the cumulative loss previously recognized.

IFRS reversal cap

Reversal limited so carrying amount ≤ carrying amount had no impairment been recognized (net of depreciation)

Goodwill impairment is never reversed under IFRS. US GAAP bars reversal for held-for-use assets.

Average age of assets (years)

Accumulated depreciation ÷ Depreciation expense

Estimates how long assets have been in use on average. Assumes straight-line depreciation.

Total useful life (years)

Gross PP&E ÷ Depreciation expense

Estimated life of the whole asset base.

Remaining useful life (years)

Net PP&E ÷ Depreciation expense

Equals total useful life minus average age.

Fixed asset turnover

Revenue ÷ Average net fixed assets

Average = (beginning + ending net PP&E) ÷ 2. Use net PP&E.

Total asset turnover

Revenue ÷ Average total assets

Broader efficiency measure.

Net PP&E

Gross PP&E − Accumulated depreciation

Carrying amount before any impairment adjustments noted separately.

Quick revision

• Capitalize a cost if it brings future economic benefits beyond the period; otherwise expense it.
• Capitalizing gives higher current profit, higher assets and higher operating cash flow, with a larger investing cash outflow.
• PP&E initial cost includes purchase price, taxes not recoverable, and costs to bring the asset to working condition.
• Straight-line depreciation = (cost − salvage value) ÷ useful life.
• Carrying amount = cost − accumulated depreciation − accumulated impairment losses.
• Under IFRS, a revaluation increase goes to other comprehensive income (revaluation surplus). It is recognized in profit or loss only up to the amount of a previous revaluation decrease of the same asset that was recognized in profit or loss; any excess goes to OCI.
• Land is not depreciated and is tested for impairment only when there is an indication of impairment; goodwill and indefinite-life intangibles are not amortized and are tested for impairment at least annually.
• Under IFRS, research costs are expensed and qualifying development costs are capitalized; under US GAAP most development costs are expensed.
• Internally generated goodwill is never recognized; goodwill arises only in a business combination.
• IFRS impairment: loss when carrying amount exceeds recoverable amount, which is the higher of fair value less costs of disposal and value in use.
• IFRS allows reversal of impairment losses (not for goodwill); US GAAP does not allow reversal for assets held for use.
• Gain or loss on disposal = proceeds − carrying amount at the date of sale.

Common mistakes

• Capitalizing research costs under IFRS Fix: Research is expensed; only development meeting the criteria is capitalized.
• Capitalizing interest for the full year regardless of timing Fix: Multiply each expenditure by months outstanding ÷ 12 before applying the rate.
• Subtracting salvage value before applying the DDB rate in year 1. Fix: For DDB, apply the rate to full beginning book value. Use salvage only as the floor that book value cannot go below.
• Capitalizing staff training, administrative overhead or initial operating losses into asset cost. Fix: Ask whether the cost is needed to bring the asset to location and working condition. If not, expense it.
• Putting an upward revaluation into profit or loss. Fix: For IAS 16 assets, an increase goes to OCI and revaluation surplus. It goes to profit or loss only to the extent it reverses a prior loss on the same asset.
• Continuing old depreciation after a revaluation. Fix: Depreciate the new carrying amount, less residual value, over the remaining life.
• Amortizing goodwill Fix: Goodwill and indefinite-life intangibles are tested for impairment, not amortized.
• Using book value of net assets to compute goodwill Fix: Use the fair value of identifiable net assets of the target.
• Using the lower of fair value less costs of disposal and value in use as the recoverable amount. Fix: Recoverable amount is the higher of the two, because management could either sell or keep using the asset.
• Booking a US GAAP loss when fair value is below carrying amount without running the recoverability test. Fix: Under US GAAP, first check carrying amount against undiscounted cash flows. If cash flows are at least the carrying amount, there is no loss.

Exam tips

• Always check whether the question says IFRS or US GAAP before choosing the treatment.
• For interest, write the three numbers: weighted expenditure, rate result, actual interest cap.
• Memorize the direction table: capitalizing raises assets, equity, early income and CFO, and lowers CFI. Early ROA is typically higher, but compute it if the question depends on it.
• With three options, eliminate those that contradict direction first, then compute only if two remain.
• Cost questions are usually a list of items. Decide in or out for each one, then add. Expect training, overhead and start-up losses as the traps.
• For DDB, ignore salvage until the last year. Always check whether the final-year charge would push book value below salvage.
• Method-comparison questions ask about early years. Accelerated methods give higher expense, lower net income and lower book value early, while cash flow before tax effects is unchanged.
• Know the IFRS point: component depreciation is required where components are significant and have different lives. US GAAP allows it but it is rare.