Skip to content

CFA Level I · CFA Level I Exam

Analysis of Long-Term Assets for CFA Level I

Analysis of long-term assets covers how a company records, depreciates, revalues, impairs and disposes of assets used for more than one year. You solve questions by identifying whether a cost is capitalized or expensed, applying the right IFRS or US GAAP rule, and tracing the effect on profit, assets and ratios.

What this chapter covers

This chapter sits in Financial Statement Analysis. It asks one big question: when a company spends money, does the cost hit the income statement now, or go onto the balance sheet and reach profit slowly through depreciation or amortization? Every topic in the chapter grows from that choice.

You start with capitalizing versus expensing. Then you learn how property, plant and equipment (PP&E) is measured and depreciated, and how the cost model differs from the revaluation model. Next come intangible assets and goodwill, followed by impairment, derecognition and disposal. The chapter ends with presentation and disclosure, where you use the numbers to judge a company.

The chapter links to the rest of the paper in several ways. Capitalizing a cost raises current profit and operating cash flow but lowers investing cash flow, so it connects to cash flow analysis. Depreciation and impairment choices change ratios such as return on assets, which you meet again in financial ratio analysis. They also affect deferred taxes, and they matter in equity valuation, where earnings quality drives how much you trust a forecast. Financial reporting questions use IFRS unless the question says US GAAP, so learn the differences where they exist.

Financial Statement Analysis is one of the larger topic areas on the exam, and long-term assets appear in both calculation and concept questions. With 180 standalone three-option questions and about 90 seconds each, you need quick, reliable rules. Many items test the effect of a policy choice on profit, assets or ratios, so understanding direction and size of effects earns marks quickly. The calculations (depreciation, impairment, gain or loss on sale) are short and repeatable, which makes this a chapter where careful practice converts directly into correct answers.

Analysis of Long-Term Assets: topics in the order to study them

  1. 1Capitalizing vs Expensing CostsThis is the core logic of the chapter, and every later topic builds on its effects on profit, cash flow and ratios.
  2. 2Property, Plant and Equipment: Cost and DepreciationYou need initial cost and depreciation methods before you can understand carrying amount, revaluation or impairment.
  3. 3Revaluation Model and Cost ModelIt extends PP&E measurement and shows how fair value changes flow through profit or other comprehensive income under IFRS.
  4. 4Intangible Assets and GoodwillIt reuses the capitalize-or-expense idea for items with no physical form, and adds amortization and goodwill rules.
  5. 5Impairment of Long-Term AssetsYou need carrying amounts from the earlier topics to test them against recoverable amounts, and IFRS and US GAAP differ here.
  6. 6Derecognition and Disposal of Long-Term AssetsA gain or loss on disposal is proceeds minus carrying amount, so it only makes sense once depreciation and impairment are clear.
  7. 7Financial Statement Presentation and Analysis of Asset DisclosuresIt pulls everything together so you can read disclosures, compare companies and judge how policies affect ratios.

How to prepare Analysis of Long-Term Assets

Aim to understand the effect of each accounting choice, then drill the short calculations until they are automatic.

  1. Read the capitalize-versus-expense rules first and write down, for each choice, its effect on net income, total assets, operating cash flow and investing cash flow.
  2. Practise depreciation: straight-line, declining balance and units of production. Compute carrying amount after a given number of years until you do it without notes.
  3. Make a two-column table of IFRS versus US GAAP for revaluation, development costs, impairment testing and reversal of impairment losses. Revisit it often.
  4. Work impairment and disposal problems step by step: carrying amount, recoverable amount or test amount, loss, then gain or loss on sale.
  5. Do mixed multiple-choice sets. For each question, compute or trace the result first, then eliminate the options that contradict it.
  6. Finish by reading a real annual report note on PP&E and intangibles, and practise estimating average age and remaining life of assets from the disclosures.
  7. In the last week, redo your mistakes list and the IFRS versus US GAAP table rather than learning new material.

Common mistakes in Analysis of Long-Term Assets

  • Mixing up the direction of effects when a cost is capitalized instead of expensed.

    Fix: Always state four effects: net income now, assets, operating cash flow, and investing cash flow. Remember profit is lower in later years.

  • Forgetting to subtract salvage value in straight-line depreciation, or wrongly subtracting it in declining balance.

    Fix: Write each method with its base: straight-line uses cost minus salvage; declining balance applies the rate to opening carrying amount (salvage is not deducted first), and depreciation stops when carrying amount reaches salvage value.

  • Applying IFRS impairment rules to a US GAAP question, or the reverse.

    Fix: Check the question for 'US GAAP'. If absent, use IFRS. Keep the comparison table for recoverable amount, reversals and development costs.

  • Depreciating or amortizing assets that should not be, such as land or goodwill.

    Fix: Remember that 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.

  • Computing a disposal gain or loss from original cost instead of carrying amount.

    Fix: Update depreciation to the disposal date first, then compare proceeds with the carrying amount.

  • Choosing the answer that sounds most conservative rather than the one the rule produces.

    Fix: Apply the rule step by step, compute or trace the effect, then eliminate the two options that contradict your result.

Last-day revision: Analysis of Long-Term Assets

  • 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.

Analysis of Long-Term Assets practice questions

Analysis of Long-Term Assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Analysis of Long-Term Assets: frequently asked questions

Is Analysis of Long-Term Assets a hard chapter in CFA Level I?

Most candidates find it manageable because the calculations are short. The difficulty is remembering IFRS versus US GAAP differences and the direction of effects on ratios. Steady practice with mixed questions fixes both.

Do I need to know both IFRS and US GAAP for this chapter?

Financial reporting questions use IFRS unless a question says US GAAP. You should still know the main differences, such as the revaluation model, development costs and reversal of impairment losses, because they are common exam points.

Which calculator steps help in this chapter?

Depreciation and carrying amount problems are simple arithmetic, so a basic approach on the TI BA II Plus or HP 12C is enough. Use the memory keys to store annual depreciation and avoid rounding errors in multi-year problems.

How long should I spend on this chapter?

Spend enough time to master the capitalization logic and the main calculations, then revisit it through mixed practice. It is better to review it several times in short sessions than to study it once for a long time.