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Financial Accounting

(PGDM- 2015-16)

Session -16: Accounting for Long-lived Assets

Sriranga Vishnu
Faculty (F&A Area)
Asset Reporting

• Identification and valuation of Assets is influenced by

two concepts – Historical Cost and Conservatism

• Historical Cost – verifiable, ease of computation, reduces

measurement errors and management's tendency to
overstate the value of resources

• Conservatism concept requires assets to be revalued if

the fair value is lower. No marking up is done. Hence,
assets are reported at lower value as regards the
derivable future benefits
Asset Reporting

• Fair Market Value- It is the price that would be agreed to

in an open and unrestricted market between
knowledgeable and willing parties dealing at arm’s length
(i.e. parties are fully informed and not under any
compulsion to transact)

• Value-in-use: It is the NPV of Cash Flows or other

benefits which can be derived from an asset

• Replacement Value: The amount which would be paid by

a firm to replace an asset in the current period
Asset Reporting

• Criteria for recognition of an asset:

– The firm owns or controls the resources
– Resources are expected to provide future benefits
– These economic benefits can be measured

• Recognition and Valuation of an Asset is difficult when-

– Ownership or control of a resource is uncertain
– Derivable economic benefits are difficult to quantify
– The value of resources have changed
Asset Reporting

• Uncertainty of Ownership/ Control of Resources: In

certain cases, determination of the ownership and
control over a resource is difficult
– Training and Development of Employees - ownership and
measurement issues – hence expensed
– Lease arrangements – difficult to sub-classify the Lease
into Operating (relatively lower stake) and Capital Lease
(higher stake of the lessee)
– Operating Leases are expensed; Capital Leases are shown
at present value of the lease payments and depreciated
over lease term
Asset Reporting
• Criteria for Capital Lease determination:
– Ownership is transferred in the end
– The lease contains a bargain purchase clause
– Lease term if 75% or more of the useful life of the asset
– Present value of lease payments is 90% or more of the fair
value of the asset
Asset Reporting

• Derivable benefits are uncertain or difficult to quantify:

• Tangible Assets – Capital Budgeting decisions are difficult
due future uncertainties; market research is done to
mitigate the risk

• Intangible Assets– Benefits that can derived from

Goodwill, R&D, advertising, etc, is difficult to measure
– R&D for drugs are expensed
– R&D for Software development is capitalized when product
feasibility is certain,
– Advertising is expensed normally, Brands are also
Asset Reporting

• Changes in future economic benefits: Asset value

changes with time leading to revaluation

• As per conservatism concept, assets whose values have

impaired should be written down and removed

• Some countries permit revaluation of fixed assets, but

generally such assets are shown at historical costs

• Marketable securities are shown at current prices