Presentation and disclosure of long-lived assets

Accounting standards require detailed disclosure of a company’s long-lived assets.

Disclosure requirements for property, plant and equipment

Under IFRS, a company is required to prepare a reconciliation between the gross carrying amount of the asset and associated accumulated depreciation at the start and end of the period for each class of PPE. Additional disclosures include measurement bases, depreciation method, useful lives (i.e. depreciation rate), any restriction on title and pledges, financial statement items in which depreciation expense is included, etc.

When the revaluation model is used, carrying amount under cost model, revaluation date and revaluation basis must be disclosed.

US GAAP disclosure requirements are less extensive, i.e. a company must disclose the depreciation expense, the balances of major classes of depreciable assets, accumulated depreciation by classes or in total, and a description of the depreciation method(s) used.

Disclosure requirements for intangible assets

For intangible assets, IFRS requires a company to state whether a class of assets has an indefinite or finite. For assets with finite useful lives, a company must disclose information similar to property, plant, and equipment. For assets with an indefinite useful life, a company discloses why it has an indefinite useful life and its carrying amount. If the revaluation model is used, disclosure requirements for intangible assets are similar to those of PPE.

Under US GAAP, companies must disclose the gross carrying amounts and accumulated amortization in total and by major classes, the aggregate amortization expense for the period, and the estimated amortization expense for the next five years.

Disclosure of recognition and reversal of impairment

Under IFRS, a company must disclose recognition or reversal of impairment losses for each class of PPE or intangible assets, where these are recognized in financial statements, and what led to the impairment or their reversal.

Under US GAAP, a company discloses a description of the impaired asset, the reason for impairment, the method for determining fair value, impairment loss and where the loss is recognized.

Income statement presentation

When a company uses an income statement by nature, depreciation expense may appear on the face of the income statement, otherwise, it may be included in different expense items (based on their function). Depreciation expense also appears in the indirect method cash flow statement.

Usefulness of long-lived assets disclosure requirements

The extensive disclosures of long-lived assets serve an important purpose. It helps an analyst see how a company’s investments have changed, how it has affected performance, etc.

Important financial ratios related to fixed assets include fixed asset turnover ratio, which equals sales divided by average net fixed assets, and several asset age ratios, ratios which relate depreciation expense and historical cost, and which are useful only under cost model.

Asset age ratios

Asset age ratios (accumulated depreciation divided by depreciation expense) and remaining useful life (net PPE divided by depreciation expense) are important indicators of a company’s need to reinvest in PPE.

The relationship can be expressed as follows:

\[ Estimated\ Total\ Useful\ Life=Asset\ Age\ +\ Remaining\ Useful\ Life \] $$ \frac{Historical\ Cost}{Annual\ Depreciation}=\frac{Accumulated\ Depreciation}{Annual\ Depreciation}+\frac{Net\ Book\ Value}{Annual\ Depreciation} $$

However, these calculations may not be precise in practice because companies may have a number of assets with varying ages, costs, etc. and they may use depreciation methods other than the straight-line method. However, a comparison of annual capital expenditure with depreciation may provide a useful indicator of whether the company is maintaining its productive capacity.

Test

Presentation and disclosure requirements under which of the following accounting standards are less extensive?

IFRS
US GAAP
Both have the same requirements

Show answer

B is correct. US GAAP disclosure requirements are less extensive than IFRS.

Assessment of a company’s need to replace fixed assets using age ratios would be most accurate if the company uses:

Cost model and straight-line depreciation method.
Revaluation model and no salvage value.
Either