Reading: Long Lived Assets

Disclaimer: Certain materials contained within this text are the copyright property of CFA Institute. The following
is the source for these materials: “CFA® Program Curriculum Level I Volume 3, page no. 377 to 450”.

LOS 1: Distinguish between costs that are capitalised and costs that are expensed in the period in which they
are incurred.
When an asset is expected to provide benefits for only the current period, its cost is expensed on the income
statement for the period.

If an asset is expected to provide benefits over multiple periods, it is capitalized rather than expensed. A firm
should capitalize all costs that provide future economic benefits, including installation costs, freight and taxes.

Following expenses to be charged to income statement directly:

 Training costs: These costs are not incurred to get the asset ready for use. However, these costs are incurred
to get the employees ready to use the asset.
 Repair and maintenance costs: These are operating expenses that do not extend the life of the asset.

Expenses which extends the life of the assets should be capitalized.

When a firm constructs an asset for its own use or, in limited circumstances, for resale, the interest that accrues
during the construction period is capitalized as a part of the asset’s cost. The reasons for capitalizing interest are
to accurately measure the cost of the asset and to better match the cost with the revenues generated by the
constructed asset. The treatment of construction interest is similar under U.S. GAAP and IFRS.

Capitalized interest is not reported in the income statement as interest expense. Once construction interest is
capitalized, the interest cost is allocated to the income statement through depreciation expense (if the asset is
held for use), or COGS (if the asset is held for sale).

LOS 2: Explain and evaluate how capitalising versus expensing costs in the period in which they are incurred
affects financial statements and ratios.
With capitalization, the asset value is put on the balance sheet and the cost is expensed through the income
statement over the asset’s useful life through either depreciation or amortization. Compared to expensing the
asset cost, capitalization results in:
 Lower expense and higher net income in period of acquisition, higher expense (depreciation or amortization)
and lower net income in each of the remaining years of the asset’s life.
 Higher assets and equity.
 Lower CFI and higher CFO because the cost of a capitalized asset is classified as an investing cash outflow.
 Higher ROE and ROA in the initial period, and lower ROE and ROA in subsequent periods because net income
is lower and both assets and equity are higher.
 Lower debt-to-assets and debt-to-equity ratios because assets and equity are higher.

LOS 3: Describe the different depreciation methods for property, plant, and equipment and calculate
depreciation expense.
Depreciation methods:
 Straight-line: Equal amount of expense each period.
( )
Depreciation as per SLM method =

 Accelerated (declining balance): Higher depreciation expense in the early years and lower depreciation
expense in the later years of an asset’s life.
Depreciation as per DDB method = x book value at beginning of year

 Units-of-production: Expense based on percentage usage rather than time.

( )
Depreciation as per units of production method = x output produced
( )

In all the above three methods, the depreciation ends once the estimated residual value has been reached.
 Long Lived Assets

IFRS requires component depreciation, in which significant parts of an asset are identified and depreciated
separately. Under US GAAP, component depreciation is allowed, however, seldom used in practice.

LOS 4: Describe how the choice of depreciation method and assumptions concerning useful life and residual
value affect depreciation expense, financial statements, and ratios.
In the early years of an asset’s life, accelerated depreciation results in higher depreciation expense, lower net
income, and lower ROA and ROE compared to straight-line depreciation.

Cash flow is the same assuming tax depreciation is unaffected by the choice of method for financial reporting.

Firms can reduce depreciation expense and increase net income by using longer useful lives and higher salvage
values.

A change in an accounting estimate, such as useful life or salvage value, is put into effect in the current period
and prospectively. That is, the change in estimate is applied to the asset’s carrying (book) value and depreciation
is calculated going forward using the new estimate. The previous periods are not affected by the change.

LOS 5: Compare the financial reporting of the following types of intangible assets: purchased, internally
developed, acquired in a business combination.
The cost of a purchased finite-lived intangible asset is amortized over its useful life.

Indefinite-lived intangible assets are not amortized but are tested for impairment at least annually.

The cost of internally developed intangible assets is expensed. Important exceptions are research and
development costs (under IFRS) and software development costs (under US GAAP).

Under IFRS, research costs (costs incurred with the objective of discovery of new scientific or technical
knowledge and understanding) are expensed but development costs (costs incurred to translate research
findings into a plan or design of a new product or process) may be capitalized.

Under U.S. GAAP, both research and development costs are expensed as incurred, except in the case of software
created for sale to others.

The acquisition method is used to account for assets acquired in a business combination. The purchase price is
allocated to the fair value of identifiable assets of the acquired firm less its liabilities. Any excess of the purchase
price above the fair value of the acquired firm’s net assets is recorded as goodwill, an unidentifiable intangible
asset that cannot be separated from the business itself.

LOS 6: Describe the different amortisation methods for intangible assets with finite lives and calculate
amortisation expense.
Amortization methods for intangible assets with finite lives are the same as those for depreciation: straight line,
accelerated, or units of production. Calculation of amortization expense for such assets is the same as with
depreciation expense.

LOS 7: Describe how the choice of amortisation method and assumptions concerning useful life and residual
value affect amortisation expense, financial statements, and ratios.
The choice of amortization method will affect expenses, assets, equity, and financial ratios in exactly the same
way that the choice of depreciation method will. Just as with the depreciation of tangible assets, increasing
either the estimate of an asset’s useful life or the estimate of its residual value will reduce annual amortization
expense, which will increase net income, assets, ROE, and ROA for a typical firm.

LOS 8: Describe the revaluation model.

Under IFRS, firms have the option to revalue assets based on fair value under the revaluation model. Firms must
choose the same treatment for similar assets (e.g., land and buildings) so they cannot revalue only specific assets
that are more likely to increase than decrease in value. The revaluation model is rarely used in practice by IFRS
reporting firms.

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U.S. GAAP does not permit revaluation.

The impact of revaluation on the income statement depends on whether the initial revaluation resulted in a gain
or loss. If the initial revaluation resulted in a loss (decrease in carrying value), the initial loss would be recognized
in the income statement and any subsequent gain would be recognized in the income statement only to the
extent of the previously reported loss. Revaluation gains beyond the initial loss bypass the income statement
and are recognized in shareholders’ equity as a revaluation surplus.

If the initial revaluation resulted in a gain (increase in carrying value), the initial gain would bypass the income
statement and be reported as a revaluation surplus. Later revaluation losses would first reduce the revaluation
surplus.

LOS 9: Explain the impairment of property, plant, and equipment and intangible assets.
Under IFRS, an asset is impaired when its carrying value exceeds the recoverable amount. The recoverable
amount is the greater of fair value less selling costs and the value in use (present value of expected cash flows).
If impaired, the asset is written down to the recoverable amount. Loss recoveries are permitted, but not above
historical cost.

Under U.S. GAAP, an asset is impaired if its carrying value is greater than the asset’s undiscounted future cash
flows. If impaired, the asset is written down to fair value. Subsequent recoveries are not allowed for assets held
for use.

Asset impairments result in losses in the income statement. Impairments have no impact on cash flow as they
have no tax or other cash flow effects until disposal of the asset.

Long-Lived Assets Held for Sale

If a firm reclassifies a long-lived asset from held for use to held for sale because management intends to sell it,
the asset is tested for impairment. At this point, the asset is no longer depreciated or amortized. The held-for-
sale asset is impaired if it carrying value exceeds its net realizable value (fair value less selling costs). If impaired,
the asset is written down to net realizable value and the loss is recognized in the income statement.

For long-lived assets held for sale, the loss can be reversed under IFRS and U.S. GAAP if the value of the asset
recovers in the future. However, the loss reversal is limited to the original impairment loss. Thus, the carrying
value of the asset after reversal cannot exceed the carrying value before the impairment was recognized.

LOS 10: Explain the derecognition of property, plant, and equipment and intangible assets.
When a long-lived asset is sold, the difference between the sale proceeds and the carrying (book) value of the
asset is reported as a gain or loss in the income statement.

When a long-lived asset is abandoned, the carrying value is removed from the balance sheet and a loss is
recognized in that amount.

If a long-lived asset is exchanged for another asset, a gain or loss is computed by comparing the carrying value
of the old asset with fair value of the old asset (or fair value of the new asset if more clearly evident).

LOS 11: Explain and evaluate how impairment, revaluation, and derecognition of property, plant, and
equipment and intangible assets affect financial statements and ratios.
Impairment charges decrease net income, assets, and equity, which results in lower ROA and ROE and higher
debt-to-equity and debt-to-assets ratios for a typical firm.

Upward revaluation increases assets and equity, and thereby decreases debt-to-assets and debt-to-equity
ratios. A downward revaluation has opposite effects. The effect on net income and related ratios depends on
whether the revaluation is to a value above or below cost.

Derecognition of assets can result in either a gain or loss on the income statement. A loss will reduce net income
and assets, while a gain will increase net income and assets.

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LOS 12: Describe the financial statement presentation of and disclosures relating to property, plant, and
equipment and intangible assets.
There are many differences in the disclosure requirements for tangible and intangible assets under IFRS and U.S.
GAAP. However, firms are generally required to disclose:
 Carrying values for each class of asset.
 Accumulated depreciation and amortization.
 Title restrictions and assets pledged as collateral.
 For impaired assets, the loss amount and the circumstances that caused the loss.
 For revalued assets (IFRS only), the revaluation date, how fair value was determined, and the carrying value
using the historical cost model.

LOS 13: Analyze and interpret financial statement disclosures regarding property, plant, and equipment and
intangible assets.
Analysts can use disclosures of the historical cost, accumulated depreciation (amortization), and annual
depreciation (amortization) expense to estimate average age of assets, total useful life of assets, and remaining
useful life of assets. These estimates are more accurate for firms that use straight-line depreciation.

Average age =

Total useful life =

Remaining useful life =

LOS 14: Compare the financial reporting of investment property with that of property, plant, and equipment.
Under IFRS (but not U.S. GAAP), investment property is defined as property owned for the purpose of earning
rent, capital appreciation, or both. Firms can account for investment property using the cost model or the fair
value model. Unlike the revaluation model for property, plant, and equipment, increases in the fair value of
investment property above its historical cost are recognized as gains on the income statement if the firm uses
the fair value model.

Transfers to and from Investment Property (Fair Value Model)

Transfers from Transfer to Financial Statement Treatment
Owner-occupied Investment property Treat as revaluation: recognize gain only if it
reverses previously recognized loss
Inventory Investment property Recognize gain or loss if fair value is different
from carrying amount
Investment property Owner-occupied or inventory Fair value of asset at date of transfer will be
its cost under new classification

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Learning Outcome as per CFA Institute:

a. distinguish between costs that are capitalised and costs that are expensed in the period in which they are
incurred;
b. compare the financial reporting of the following types of intangible assets: purchased, internally developed,
acquired in a business combination;
c. explain and evaluate how capitalising versus expensing costs in the period in which they are incurred affects
financial statements and ratios;
d. describe the different depreciation methods for property, plant, and equipment and calculate depreciation
expense;
e. describe how the choice of depreciation method and assumptions concerning useful life and residual value
affect depreciation expense, financial statements, and ratios;
f. describe the different amortisation methods for intangible assets with finite lives and calculate amortisation
expense;
g. describe how the choice of amortisation method and assumptions concerning useful life and residual value
affect amortisation expense, financial statements, and ratios;
h. describe the revaluation model;
i. explain the impairment of property, plant, and equipment and intangible assets;
j. explain the derecognition of property, plant, and equipment and intangible assets;
k. explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment
and intangible assets affect financial statements and ratios;
l. describe the financial statement presentation of and disclosures relating to property, plant, and equipment
and intangible assets;
m. analyze and interpret financial statement disclosures regarding property, plant, and equipment and
intangible assets;
n. compare the financial reporting of investment property with that of property, plant, and equipment.

1. JOOVI Inc. has recently purchased and installed a new machine for its manufacturing plant. The company
incurred the following costs:

The total cost of the machine to be shown on JOOVI’s balance sheet is closest to:
A. $14,180.
B. $14,980.
C. $15,480.

2. Which costs incurred with the purchase of property and equipment are expensed?
A. Delivery charges
B. Installation and testing
C. Training required to use the property and equipment

3. When constructing an asset for sale, directly related borrowing costs are most likely:
A. expensed as incurred.
B. capitalized as part of inventory.
C. capitalized as part of property, plant, and equipment.

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4. BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance the construction of its
manufacturing plant. The loan has the following conditions:

The construction of the plant takes two years, during which time BAURU earned BRL 10 million by
temporarily investing the loan proceeds. Which of the following is the amount of interest related to the
plant construction (in BRL million) that can be capitalized in BAURU’s balance sheet?
A. 130.
B. 140.
C. 210.

5. After reading the financial statements and footnotes of a company that follows IFRS, an analyst identified
the following intangible assets:
● product patent expiring in 40 years;
● copyright with no expira on date; and
● goodwill acquired 2 years ago in a business combina on.
Which of these assets is an intangible asset with a finite useful life?

6. Intangible assets with finite useful lives mostly differ from intangible assets with infinite useful lives with
respect to accounting treatment of:
A. revaluation.
B. impairment.
C. amortization.

7. Costs incurred for intangible assets are generally expensed when they are:
A. internally developed.
B. individually acquired.
C. acquired in a business combination.

8. Under US GAAP, when assets are acquired in a business combination, goodwill most likely arises from:
A. contractual or legal rights.
B. assets that can be separated from the acquired company.
C. assets that are neither tangible nor identifiable intangible assets.

9. All else equal, in the fiscal year when long- lived equipment is purchased:
A. depreciation expense increases.
B. cash from operations decreases.
C. net income is reduced by the amount of the purchase.

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10. Companies X and Z have the same beginning- of- the- year book value of equity and the same tax rate. The
companies have identical transactions throughout the year and report all transactions similarly except for
one. Both companies acquire a £300,000 printer with a three- year useful life and a salvage value of £0 on
1 January of the new year. Company X capitalizes the printer and depreciates it on a straight- line basis, and
Company Z expenses the printer. The following year- end information is gathered for Company X.

Based on the information given, Company Z’s return on equity using year- end equity will be closest to:
A. 5.4%.
B. 6.1%.
C. 7.5%.

11. A financial analyst is studying the income statement effect of two alternative depreciation methods for a
recently acquired piece of equipment. She gathers the following information about the equipment’s
expected production life and use:

Compared with the units- of- production method of depreciation, if the company uses the straight- line
method to depreciate the equipment, its net income in Year 1 will most likely be:
A. lower.
B. higher.
C. the same.

12. A company purchases a piece of equipment for €1,500. The equipment is expected to have a useful life of
five years and no residual value. In the first year of use, the units of production are expected to be 15% of
the equipment’s lifetime production capacity and the equipment is expected to generate €1,500 of revenue
and incur €500 of cash expenses. The depreciation method yielding the lowest operating profit on the
equipment in the first year of use is:
A. straight line.
B. units of production.
C. double- declining balance.

13. Juan Martinez, CFO of VIRMIN, S.A., is selecting the depreciation method to use for a new machine. The
machine has an expected useful life of six years. Production is expected to be relatively low initially but to
increase over time. The method chosen for tax reporting must be the same as the method used for financial
reporting. If Martinez wants to minimize tax payments in the first year of the machine’s life, which of the
following depreciation methods is Martinez most likely to use?
A. Straight- line method.
B. Units- of- production method.
C. Double- declining balance method.

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The following information relates to Questions 14–15

Miguel Rodriguez of MARIO S.A., an Uruguayan corporation, is computing the depreciation expense of a
piece of manufacturing equipment for the fiscal year ended 31 December 2009. The equipment was
acquired on 1 January 2009. Rodriguez gathers the following information (currency in Uruguayan pesos,
UYP):

14. If MARIO uses the straight- line method, the amount of depreciation expense on MARIO’s income statement
related to the manufacturing equipment is closest to:
A. 125,000.
B. 150,000.
C. 168,750.

15. If MARIO uses the units- of- production method, the amount of depreciation expense (in UYP) on MARIO’s
income statement related to the manufacturing equipment is closest to:
A. 118,750.
B. 168,750.
C. 202,500.

16. Which of the following amortization methods is most likely to evenly distribute the cost of an intangible
asset over its useful life?
A. Straight- line method.
B. Units- of- production method.
C. Double- declining balance method.

17. Which of the following will cause a company to show a lower amount of amortization of intangible assets
in the first year after acquisition?
A. A higher residual value.
B. A higher amortization rate.
C. A shorter useful life.

18. A company purchases equipment for $200,000 with a five- year useful life and salvage value of zero. It uses
the double- declining balance method of depreciation for two years, then shifts to straight- line depreciation
at the beginning of Year 3. Compared with annual depreciation expense under the double- declining balance
method, the resulting annual depreciation expense in Year 4 is:
A. smaller.
B. the same.
C. greater.

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19. An analyst in the finance department of BOOLDO S.A., a French corporation, is computing the amortization
of a customer list, an intangible asset, for the fiscal year ended 31 December 2009. She gathers the following
information about the asset:

If the analyst uses the straight- line method, the amount of accumulated amortization related to the
customer list as of 31 December 2009 is closest to:
A. €600,000.
B. €1,200,000.
C. €1,533,333.

20. A financial analyst is analyzing the amortization of a product patent acquired by MAKETTI S.p.A., an Italian
corporation. He gathers the following information about the patent:

If the analyst uses the units- of- production method, the amortization expense on the patent for fiscal year
2009 is closest to:
A. €414,286.
B. €662,857.
C. €828,571.

21. A company acquires a patent with an expiration date in six years for ¥100 million. The company assumes
that the patent will generate economic benefits that will decline over time and decides to amortize the
patent using the double declining balance method. The annual amortization expense in Year 4 is closest to:
A. ¥6.6 million.
B. ¥9.9 million.
C. ¥19.8 million.

22. A company is comparing straight- line and double- declining balance amortization methods for a non-
renewable six- year license, acquired for €600,000. The difference between the Year 4 ending net book
values using the two methods is closest to:
A. €81,400.
B. €118,600.
C. €200,000.

23. MARU S.A. de C.V., a Mexican corporation that follows IFRS, has elected to use the revaluation model for
its property, plant, and equipment. One of MARU’s machines was purchased for 2,500,000 Mexican pesos
(MXN) at the beginning of the fiscal year ended 31 March 2010. As of 31 March 2010, the machine has a fair
value of MXN 3,000,000. Should MARU show a profit for the revaluation of the machine?
A. Yes.
B. No, because this revaluation is recorded directly in equity.
C. No, because value increases resulting from revaluation can never be recognized as a profit.

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24. An analyst is studying the impairment of the manufacturing equipment of WLP Corp., a UK- based
corporation that follows IFRS. He gathers the following information about the equipment:

The amount of the impairment loss on WLP Corp.’s income statement related to its manufacturing
equipment is closest to:
A. £2,300,000.
B. £3,100,000.
C. £4,600,000.

25. Under IFRS, an impairment loss on a property, plant, and equipment asset is measured as the excess of the
carrying amount over the asset’s:
A. fair value.
B. recoverable amount.
C. undiscounted expected future cash flows.

26. A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for 85,000 Argentine pesos
(ARP) on 31 December 2009. The analyst compiles the following information about the vehicle:

The result of the sale of the vehicle is most likely:

A. a loss of ARP 15,000.
B. a gain of ARP 15,000.
C. a gain of ARP 18,333.

27. CROCO S.p.A sells an intangible asset with a historical acquisition cost of €12 million and an accumulated
depreciation of €2 million and reports a loss on the sale of €3.2 million. Which of the following amounts is
most likely the sale price of the asset?
A. €6.8 million
B. €8.8 million
C. €13.2 million

28. The impairment of intangible assets with finite lives affects:

A. the balance sheet but not the income statement.
B. the income statement but not the balance sheet.
C. both the balance sheet and the income statement.

29. The gain or loss on a sale of a long- lived asset to which the revaluation model has been applied is most
likely calculated using sales proceeds less:
A. carrying amount.
B. carrying amount adjusted for impairment.
C. historical cost net of accumulated depreciation.

30. According to IFRS, all of the following pieces of information about property, plant, and equipment must be
disclosed in a company’s financial statements and footnotes except for:
A. useful lives.
B. acquisition dates.
C. amount of disposals.

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31. According to IFRS, all of the following pieces of information about intangible assets must be disclosed in a
company’s financial statements and footnotes except for:
A. fair value.
B. impairment loss.
C. amortization rate.

32. Which of the following is a required financial statement disclosure for long lived intangible assets under US
GAAP?
A. The useful lives of assets
B. The reversal of impairment losses
C. Estimated amortization expense for the next five fiscal years

33. Which of the following characteristics is most likely to differentiate investment property from property,
plant, and equipment?
A. It is tangible.
B. It earns rent.
C. It is long- lived.

34. If a company uses the fair value model to value investment property, changes in the fair value of the asset
are least likely to affect:
A. net income.
B. net operating income.
C. other comprehensive income.

35. Investment property is most likely to:

A. earn rent.
B. be held for resale.
C. be used in the production of goods and services.

36. A company is most likely to:

A. use a fair value model for some investment property and a cost model for other investment property.
B. change from the fair value model when transactions on comparable properties become less frequent.
C. change from the fair value model when the company transfers investment property to property, plant,
and equipment.

37. Under the revaluation model for property, plant, and equipment and the fair model for investment
property:
A. fair value of the asset must be able to be measured reliably.
B. net income is affected by all changes in the fair value of the asset.
C. net income is never affected if the asset increases in value from its carrying amount.

38. Under IFRS, what must be disclosed under the cost model of valuation for investment properties?
A. Useful lives
B. The method for determining fair value
C. Reconciliation between beginning and ending carrying amounts of investment property

39. At the end of the year, a company reported an impairment loss on its manufacturing plant, reducing its
carrying amount by 10%. The impairment loss is least likely to cause the company’s:
A. debt-to-asset ratio to increase.
B. cash flow from operations to decline.
C. fixed asset turnover to increase.

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40. The most appropriate treatment for intangible assets with indefinite useful lives is to:
A. expense.
B. capitalize with no amortization.
C. capitalize and amortize.

41. If a company capitalizes an expenditure related to capital assets instead of expensing it, ignoring taxes, the
company will most likely report:
A. a lower cash flow per share in that period.
B. the same free cash flow to the firm (FCFF) in that period.
C. a higher earnings per share in future periods.

42. The following information applies to a capital asset of a company:

This company uses the straight-line depreciation method for this capital asset.

At the end of 2014, the expected remaining life of the capital asset, in years, is closest to:
A. 17.
B. 20.
C. 6

43. The following selected fixed asset information is available for a company:

The company’s fixed asset turnover ratio is closest to:

A. 1.78.
B. 8.01.
C. 1.51.

44. On 1 January, a company that prepares its financial statements according to International Financial
Reporting Standards (IFRS) arranged financing for the construction of a new plant. The company borrowed
NZ$5,000,000 at an interest rate of 8%, issued NZ$5,000,000 of preferred shares with a cumulative dividend
rate of 6%, and temporarily invested NZ$2,000,000 of the loan proceeds during the first six months of
construction and earned 7% on that amount. The amount of financing costs to be capitalized to the cost of
the plant in the first year is closest to:
A. NZ$400,000.
B. NZ$630,000.
C. NZ$330,000.

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45. A company is selling a long-lived asset with a carrying amount of $70,000 for $80,000. The original cost of
this asset was $120,000. In the year of sale, this event is most likely to be reported on the income statement
as:
A. a gain of $10,000.
B. a loss of $40,000.
C. revenues of $80,000.

46. Two pharmaceutical companies, Company A and Company B, internally develop drugs and drug analytics
software. Company A reports in accordance with IFRS, and Company B reports in accordance with US GAAP.
Which of the following statements is most accurate regarding the development costs of the drug patents
and software development?
A. Company A can capitalize the development costs related to software development if it meets certain
criteria.
B. Company B can capitalize the development costs related to drug development if it meets certain
criteria.
C. Both companies must expense all development costs related to these intangible assets.

47. A company acquires a product patent at the beginning of Year 1 for $5,000,000 and makes the following
assumptions about its use:

The company will experience the highest asset turnover ratio in the first year under which of the following
amortization methods?
A. Double declining balance
B. Straight line
C. Units of production

48. An analyst is reviewing the property, plant, and equipment disclosure related to a company’s warehouse.
The company uses the International Financial Reporting Standards (IFRS) revaluation model. The analyst
would least likely be able to determine:
A. the carrying amount under the cost model.
B. how the fair value was obtained.
C. the original date of acquisition.

49. A company owns its head office building that it purchased in 2011 for $1,000,000. The real estate market
has been volatile in the last few years. The company uses the revaluation model as allowed by IFRS, and the
following table shows the building’s fair market values since 2011:

The net impact (in thousands) on the 2014 net income will most likely be an increase of:
A. $200.
B. $500.
C. $300

50. All else being equal, which of the following depreciation methods is most likely to result in higher operating
margins in the later years of an asset’s useful life?
A. Straight line

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B. Declining balance
C. Units of production

51. A company acquires equipment costing $100,000 with a four-year depreciable life and no salvage value. The
planned annual production is 100, 200, 400, and 300 units, respectively. Under the units-of-production
depreciation method, the Year 4 depreciation expense is closest to:
A. $30,000.
B. $12,500.
C. $25,000.

52. [to be covered after completion of Reading: Income Taxes] At the beginning of the year, a company
purchased a fixed asset for $500,000 with no expected residual value. The company depreciates similar
assets on a straight-line basis over 10 years, whereas the tax authorities allow declining balance
depreciation at the rate of 15% per year. In both cases, the company takes a full year’s depreciation in the
first year. The tax rate is 40%. Which of the following statements concerning this asset at the end of the
year is most accurate?
A. The tax base is $500,000.
B. The deferred tax asset is $10,000.
C. The temporary difference is $25,000.

53. The following information is available for an asset purchased on 1 January in the company’s first year of
operations (Year 1):
Purchase price: $1.5 million
Estimated useful life: 10 years
Estimated residual value: $500,000
If the company uses the double declining balance method of depreciation, the depreciation expense in Year
3 will be closest to:
A. $121,500.
B. $192,000.
C. $128,000.

54. Below are excerpts from a company’s intangible assets note for 2015:

The 2015 opening carrying amount (in millions) of the company’s definite-life intangible assets is closest to:
A. $377.
B. $361.
C. $473.

55. A company purchased a warehouse for €35 million and incurred the following additional costs in getting the
warehouse ready for use:
€2.0 million for upgrades to the building’s roof and windows
€0.5 million to modify the interior layout to meet their needs (moving walls and doors, inserting and
removing partitions, etc.)
€0.1 million on an orientation and training session to familiarize employees with the facility
The cost to be capitalized to the building account (in millions) is closest to:

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 Long Lived Assets

A. €37.6.
B. €37.5.
C. €37.0.

56. [to be solved after Reading: Understanding Cash Flow Statements] Holding all else constant, a company that
develops intangible assets internally rather than purchasing them is most likely to report:
A. lower amounts of assets.
B. higher investing cash outflows.
C. lower operating cash outflows.

57. The following information is available for an asset purchased at the start of its first year of operations (Year
1):
Purchase price: $1.8 million
Estimated useful life: 5 years
Estimated residual value: $500,000
If the company uses the double declining balance method of depreciation, the depreciation expense in Year
3 will be closest to:
A. $187,200.
B. $259,200.
C. $148,000.

58. An analyst is evaluating the amortization of a product patent acquired by a company. She gathers the
following information:

If the analyst uses the units-of-production method, the amortization expense for fiscal year 2014 is closest
to:
A. £662,500.
B. £397,500.
C. £1,590,000.

59. The following information is available concerning a new showroom a company built. Construction started
on 1 January 2012, and the grand opening was on 1 January 2014:

The depreciation expense (in millions) for the showroom in 2014 is closest to:
A. €1.0175.
B. €0.9575.
C. €0.8375

60. A company is purchasing a customer list that it expects will provide economic benefits for the next 5 years.
The company chooses to use an accelerated amortization method. The choice will most likely result in an
amortization expense that will be the:
A. highest in the fifth year.
B. highest in the first year.

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 Long Lived Assets

C. same in all five years.

61. The following excerpt was taken from the notes of a company’s financial statements that were prepared in
accordance with International Financial Reporting Standards. All figures are in thousands of Australian
dollars.

Note 12: Broadcast Licenses

During 2014, the company successfully disposed of broadcast licenses that were held for sale for A$37,900
(net book value of A$23,500). Based on the successful completion of that sale, the impairment losses taken
in 2012 on other licenses have been reversed, restoring those intangible assets to their amortized historical
cost. Broadcast licenses are amortized over a period of 15–25 years.
The note leads an analyst to believe that the rapid reversal of the impairment loss related to the broadcast
licenses arose as an attempt by management to manage earnings.

If the analyst’s belief is correct, her analysis of the original 2013 financial statements would most likely have
shown that, compared with the economic reality in 2013, the company had:
A. understated ROA.
B. understated fixed asset turnover.
C. overstated net profit margin.

62. The following information is available for a company that prepares its financial statements in accordance
with US GAAP:
It has production facilities with a net book value of $28.4 million.
Recently, several other companies have entered the market, and the company now estimates that it will be
able to generate cash flows of only $3 million per year for the next seven years with its facilities.
The firm has a cost of capital of 10%.
Reflecting these recent events related to its production facilities, the company’s financial statements will
most likely report (in millions) a:
A. $13.8 impairment loss on the income statement.
B. $7.4 reduction in the balance sheet carrying amount.
C. $13.8 reduction in operating cash flows.

63. A company owns the following three assets:

 A customer list expected to provide benefits for two years. The company expects to sell products to
customers from this list for the foreseeable future.
 A license that expires in two years but can be renewed at little or no cost and relates to a service the
company plans to market for the foreseeable future.
 A trademark that expires in two years but can be renewed and relates to a product the company plans
to sell for the foreseeable future.
Which of the listed intangible assets is most likely to be amortized?
A. Customer list
B. Trademark
C. License

64. At the end of the year, a company revalued its manufacturing facilities, increasing their carrying amount by
12%. There had been no prior downward revaluation of these facilities. The revaluation will most likely
cause the company’s:
A. return on assets to increase.
B. return on equity to decline.
C. net profit margin to increase.

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 Long Lived Assets

65. A technology company, reporting under US GAAP, has three classes of intangible assets. The table below
shows information on each of the three classes.:

Accumulated Impairment Losses and Amortization (Currency in USD)

Based on the data provided, the intangible asset that has the largest absolute impairment charge for the
period ended 31 December 31 2020, is:
A. computer software.
B. licenses.
C. goodwill.

66. In early January 2015, an analyst sees a news release that a company he follows (which reports under US
GAAP) will be forced to reduce output from one of its major product lines at its highly specialized ceramics
plant in response to a new technology introduced by its major competitor. The table summarizes
information and estimates that the analyst has gathered from various sources about the plant and its future
prospects.
Selected Information Related to the Ceramics Production Plant, End of 2014 ($ thousands)

Carrying amount of plant 1,604

Undiscounted expected future net cash flows 1,350
Present value of expected future net cash flows 1,050
Fair value of plant 1,225
Revised estimate of useful life 4 years
Depreciation method Straight line
Revised estimate of residual value $200
If the above information and estimates prove accurate, the depreciation expense that should be reported
for 2015 related to the plant will be closest to:
A. $213 thousand.
B. $306 thousand.
C. $256 thousand.

67. A company decided to exchange a truck that it had purchased three years earlier for a piece of land owned
by another company. Details related to both items are provided below:

The company that acquires the truck will most likely record its purchase price as:
A. $20,000.
B. $40,000.
C. $24,576.

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 Long Lived Assets

68. [to be solved after Reading: Understanding Cash Flow Statements] The notes to the financial statements of
a company reporting under US GAAP contain the following information for the year 2014:

Note 11. Property and Equipment (all figures in $ thousands)

Depreciation expense for 2014 is $362. This amount includes capitalized interest of $143.
Interest is allocated and capitalized to construction in progress by applying the firm’s cost of borrowing rate
to qualifying assets. Interest capitalized in 2014 is $170.
Ignoring the effects of income taxes, the expensing of previously capitalized interest most likely causes the
company’s cash flow from operations to be:
A. higher.
B. unaffected.
C. lower.

69. [to be solved after Reading: Understanding Cash Flow Statements] A Europe-based telecommunications
provider follows International Financial Reporting Standards (IFRS) and capitalizes new product
development costs. During 2014, it spent €25 million on new product development and reported an
amortization expense related to a prior year’s new product development of €10 million. The company’s
cash flow from operations was €290 million.
An analyst is comparing the European company with a US-based telecommunications provider and has
decided to adjust its financial statements to US GAAP. Under US GAAP, ignoring tax effects, the cash flow
from operations for the European company would be closest to:
A. €265 million.
B. €290 million.
C. €275 million.

70. A company that prepares its financial statements in accordance with International Financial Reporting
Standards (IFRS) uses the revaluation model to value land. At the end of the current year, the value of land,
newly acquired this year, has increased and will be adjusted on the balance sheet. This land is the only asset
in its asset class for revaluation purposes. Which of the following statements is most accurate? In the current
period, the revaluation of the land will:
A. increase return on sales.
B. decrease the debt-to-equity ratio.
C. increase return on assets.

71. A company’s debt covenant requires it to maintain an interest coverage of 2.25; the ratio is calculated using
total interest paid. The following information is taken from the company’s 2014 financial statements:

Note 11: Property and Equipment (all figures in $ thousands)

Depreciation expense for 2014 is $388. This amount includes capitalized interest of $34.
Interest is allocated and capitalized to construction in progress by applying the firm’s cost of borrowing rate
to qualifying assets. Interest capitalized in 2014 is $66.

Note 13: Long-Term Debt

All bonds were issued at par.
The most appropriate statement about the company’s debt covenant restriction in 2014 is that the firm:

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 Long Lived Assets

A. just satisfied it.

B. failed to meet it by at least 5%.
C. exceeded it by at least 5%.

72. Depreciation expense under which of the following methods is least likely affected by the estimate of the
useful life of the asset?
A. Double declining balance method
B. Straight-line method
C. Units-of-production method

73. A company that reports in accordance with IFRS does not use the cost model to value its investment
properties and property, plant, and equipment. Information related to an investment property and a plant
is as follows:

The impact on its net income for the year will most likely be a gain (in thousands) of:
A. €100.
B. €300.
C. €200.

74. An analyst has assembled the following information with respect to a production facility:

Under IFRS, the impairment loss on this production facility (in thousands) will be closest to:
A. £27.
B. £32.
C. £28.

75. A Canadian printing company that prepares its financial statements according to IFRS has experienced a
decline in the demand for its products. The following information (in Canadian dollars) relates to the
company’s printing equipment as of the current fiscal year end:

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 Long Lived Assets

The impairment loss (in C$) is closest to:

A. 0.
B. 70,000.
C. 60,000.

76. A company that prepares its financial statements according to IFRS owns several investment properties on
which it earns rental income. It values the properties using the fair value model based on prevailing rental
markets. After two years of increases the market softened in 2014 and values decreased. A summary of the
properties’ valuations is as follows:

Which of the following best describes the impact of the revaluation on the 2014 financial statements?
A. €4.5 million charge to revaluation surplus and €2.0 million charge to net income
B. €6.5 million charge to revaluation surplus
C. €6.5 million charge to net income

77. The following information is available for a company that has just one type of capital asset on its balance
sheet:

Beginning Asset Net Book Value $1,000,000

Annual Revenue $15,000,000
Annual EBITDA $1,600,000
If during the year the estimated useful life of this asset is reduced from six to four years, and the company
uses straight-line depreciation, this change in estimate will most likely result in a higher:
A. operating profit margin.
B. operating return on assets.
C. total asset turnover ratio.

78. Under IFRS, reversals of impairments of long-lived assets are allowed:

A. for previously recognized impairment losses only.
B. if the recoverable amount exceeds the previous carrying amount.
C. for assets held for sale only.

79. Derecognition of a long-lived asset other than by a sale most likely involves:
A. spinning off a portion of assets from a cash-generating unit of a company.
B. removing the carrying amount of the asset given up, adding a fair value for the asset acquired if an asset
is exchanged, and reporting any difference in values.
C. recording cash proceeds if an asset is retired or abandoned.

80. The following data include excerpts from the annual report for the year ended 31 December 31 20X3 of a
technology company based in the United States.

Net Book Value of Licenses as of 31 December 20X2: $12,118

Cost of Licenses as of 31 December 20X3: $16,435
Excerpts from Notes to the Consolidated Financial Statements

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 Long Lived Assets

Based on the data provided, the carrying value of licenses as of 31 December 20X3 is closest to:
A. 8,967.
B. 13,284.
C. 13,496.

81. [to be solved after Reading: Understanding Cash Flow Statements] Holding all else constant, a company that
acquires a patent through external purchase rather than developing it internally is most likely to report:
A. lower amounts of assets.
B. higher investing cash outflows.
C. higher operating cash outflows.

82. For a company that prepares its financial statements under IFRS, for which of the following assets is it most
likely that it could report using the fair value model?
A. A building the company owns and uses to house its administrative activities
B. A building owned by the company and leased out to tenants
C. Houses built by the company for sale to customers

Solutions
1. B is correct. Only costs necessary for the machine to be ready to use can be capitalized. Therefore, Total
capitalized costs = 12,980 + 1,200 + 700 + 100 = $14,980.

2. C is correct. When property and equipment are purchased, the assets are recorded on the balance sheet at
cost. Costs for the assets include all expenditures required to prepare the assets for their intended use. Any
other costs are expensed. Costs to train staff for using the machine are not required to prepare the property
and equipment for their intended use, and these costs are expensed.

3. B is correct. When a company constructs an asset, borrowing costs incurred directly related to the
construction are generally capitalized. If the asset is constructed for sale, the borrowing costs are classified
as inventory.

4. A is correct. Borrowing costs can be capitalized under IFRS until the tangible asset is ready for use. Also,
under IFRS, income earned on temporarily investing the borrowed monies decreases the amount of
borrowing costs eligible for capitalization. Therefore, Total capitalized interest = (500 million × 14% × 2
years)– 10 million = 130 million.

5. B is correct. A product patent with a defined expiration date is an intangible asset with a finite useful life. A
copyright with no expiration date is an intangible asset with an indefinite useful life. Goodwill is no longer
considered an intangible asset under IFRS and is considered to have an indefinite useful life.

6. C is correct. An intangible asset with a finite useful life is amortized, whereas an intangible asset with an
indefinite useful life is not.

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 Long Lived Assets

7. A is correct. The costs to internally develop intangible assets are generally expensed when incurred.

8. C is correct. Under both International Financial Reporting Standards (IFRS) and US GAAP, if an item is
acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible
asset, it is recognized as goodwill. Under US GAAP, assets arising from contractual or legal rights and assets
that can be separated from the acquired company are recognized separately from goodwill.

9. A is correct. In the fiscal year when long- lived equipment is purchased, the assets on the balance sheet
increase and depreciation expense on the income statement increases because of the new long- lived asset.

10. B is correct. Company Z’s return on equity based on year- end equity value will be 6.1%. Company Z will
have an additional £200,000 of expenses compared with Company X. Company Z expensed the printer for
£300,000 rather than capitalizing the printer and having a depreciation expense of £100,000 like Company
X. Company Z’s net income and shareholders’ equity will be £150,000 lower (= £200,000 × 0.75) than that
of Company X.

ROE =

11. A is correct. If the company uses the straight- line method, the depreciation expense will be one- fifth (20
percent) of the depreciable cost in Year 1. If it uses the units- of- production method, the depreciation
expense will be 19 percent (2,000/10,500) of the depreciable cost in Year 1. Therefore, if the company uses
the straight- line method, its depreciation expense will be higher and its net income will be lower.

12. C is correct. The operating income or earnings before interest and taxes will be lowest for the method that
results in the highest depreciation expense. The double- declining balance method results in the highest
depreciation expense in the first year of use.
Depreciation expense:
Straight line = €1,500/5 = €300.
Double- declining balance = €1,500 × 0.40 = €600.
Units of production = €1,500 × 0.15 = €225.

13. C is correct. If Martinez wants to minimize tax payments in the first year of the machine’s life, he should use
an accelerated method, such as the doubledeclining balance method.

14. A is correct. Using the straight- line method, depreciation expense amounts to
Depreciation expense = (1,200,000 – 200,000)/8 years = 125,000.

15. B is correct. Using the units- of- production method, depreciation expense amounts to
Depreciation expense = (1,200,000 – 200,000) × (135,000/800,000) = 168,750.

16. A is correct. The straight- line method is the method that evenly distributes the cost of an asset over its
useful life because amortization is the same amount every year.

17. A is correct. A higher residual value results in a lower total depreciable cost and, therefore, a lower amount
of amortization in the first year after acquisition (and every year after that).

18. C is correct. Shifting at the end of Year 2 from double- declining balance to straight- line depreciation
methodology results in depreciation expense being the same in each of Years 3, 4, and 5. Shifting to the
straight- line methodology at the beginning of Year 3 results in a greater depreciation expense in Year 4
than would have been calculated using the double- declining balance method.
Depreciation expense Year 4 (Using double- declining balance method all five years)
= 2 × Annual depreciation % using straight- line method × Carrying amount at end of Year 3

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 Long Lived Assets

= 40% × $43,200

Depreciation expense Year 4 with switch to straight- line method in Year 3

= ⅓ × Remaining depreciable cost at start of Year 3
= ⅓ × $72,000
= $24,000

19. B is correct. Using the straight- line method, accumulated amortization amounts to
Accumulated amortization = [(2,300,000 – 500,000)/3 years] × 2 years = 1,200,000

20. B is correct. Using the units- of- production method, depreciation expense amounts to
Depreciation expense = 5,800,000 × (20,000/175,000) = 662,857

21. B is correct. As shown in the following calculations, under the double- declining balance method, the annual
amortization expense in Year 4 is closest to ¥9.9 million.
Annual amortization expense = 2 × Straight- line amortization rate × Net book value.
Amortization expense Year 4 = 33.3% × ¥29.6 million = ¥9.9 million.

22. A is correct. As shown in the following calculations, at the end of Year 4, the difference between the net
book values calculated using straight- line versus double- declining balance is closest to €81,400.
Net book value end of Year 4 using straight- line method = €600,000 – [4 × (€600,000/6)] = €200,000.
Net book value end of Year 4 using double- declining balance method = €600,000 (1 – 33.33%)4 ≈ €118,600.

23. B is correct. In this case, the value increase brought about by the revaluation should be recorded directly
in equity. The reason is that under IFRS, an increase in value brought about by a revaluation can only be
recognized as a profit to the extent that it reverses a revaluation decrease of the same asset previously
recognized in the income statement.

24. B is correct. The impairment loss equals £3,100,000.

Impairment = max(Fair value less costs to sell; Value in use) – Net carrying amount
= max(16,800,000 – 800,000; 14,500,000) – 19,100,000 = –3,100,000.

25. B is correct. Under IFRS, an impairment loss is measured as the excess of the carrying amount over the
asset’s recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell
and its value in use. Value in use is a discounted measure of expected future cash flows. Under US GAAP,
assessing recoverability is separate from measuring the impairment loss. If the asset’s carrying amount
exceeds its undiscounted expected future cash flows, the asset’s carrying amount is considered
unrecoverable and the impairment loss is measured as the excess of the carrying amount over the asset’s
fair value.

26. B is correct. The result on the sale of the vehicle equals Gain or loss on the sale = Sale proceeds – Carrying
amount
= Sale proceeds – (Acquisition cost – Accumulated depreciation)
= 85,000 – {100,000 – [((100,000 – 10,000)/9 years) × 3 years]}
= 15,000.

27. A is correct. Gain or loss on the sale = Sale proceeds – Carrying amount. Rearranging this equation, Sale
proceeds = Carrying amount + Gain or loss on sale. Thus, Sale price = (12 million – 2 million) + (–3.2 million)
= 6.8 million.

28. C is correct. The carrying amount of the asset on the balance sheet is reduced by the amount of the
impairment loss, and the impairment loss is reported on the income statement.

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 Long Lived Assets

29. A is correct. The gain or loss on the sale of long- lived assets is computed as the sales proceeds minus the
carrying amount of the asset at the time of sale. This is true under the cost and revaluation models of
reporting long- lived assets. In the absence of impairment losses, under the cost model, the carrying amount
will equal historical cost net of accumulated depreciation.

30. B is correct. IFRS do not require acquisition dates to be disclosed.

31. A is correct. IFRS do not require fair value of intangible assets to be disclosed.

32. C is correct. Under US GAAP, companies are required to disclose the estimated amortization expense for
the next five fiscal years. Under US GAAP, there is no reversal of impairment losses. Disclosure of the useful
lives—finite or indefinite and additional related details—is required under IFRS.

33. B is correct. Investment property earns rent. Investment property and property, plant, and equipment are
tangible and long- lived.

34. C is correct. When a company uses the fair value model to value investment property, changes in the fair
value of the property are reported in the income statement—not in other comprehensive income.

35. A is correct. Investment property earns rent. Inventory is held for resale, and property, plant, and equipment
are used in the production of goods and services.

36. C is correct. A company will change from the fair value model to either the cost model or revaluation model
when the company transfers investment property to property, plant, and equipment.

37. A is correct. Under both the revaluation model for property, plant, and equipment and the fair model for
investment property, the asset’s fair value must be able to be measured reliably. Under the fair value model,
net income is affected by all changes in the asset’s fair value. Under the revaluation model, any increase in
an asset’s value to the extent that it reverses a previous revaluation decrease will be recognized on the
income statement and increase net income.

38. A is correct. Under IFRS, when using the cost model for its investment properties, a company must disclose
useful lives. The method for determining fair value, as well as reconciliation between beginning and ending
carrying amounts of investment property, is a required disclosure when the fair value model is used.

39. B is correct. The impairment loss is a non-cash charge and will not affect cash flow from operations.

A is incorrect because the statement is correct: the carrying amount of assets has been reduced, so the
debt-to-asset ratio will increase.

C is incorrect because the statement is correct: the carrying amount of assets has been reduced, so the fixed
asset turnover will increase.

40. B is correct. Intangible assets assumed to have indefinite useful lives (i.e., no foreseeable limit to the period
over which the asset is expected to generate net cash inflows for the company) are capitalized and not
amortized.

A is incorrect because acceptable amortization methods for intangible assets are the same as those for
depreciation, but given that the intangible has an indefinite life, expensing it is not an option.

C is incorrect because acceptable amortization methods for intangible assets are the same as those for
depreciation, but given that the intangible has an indefinite life, the straight-line method is not an option.

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 Long Lived Assets

41. B is correct. The FCFF [Cash flow from operations (CFO) + Interest × (1 − t) − Capital expenditures] would be
the same. CFO and capital expenditures would both increase by the same amount (ignoring taxes).
Therefore, the net effect on FCFF would be zero.

Example Capitalizing delivery cost as opposed to expensing it

Ignoring taxes
FCFF CFO + Interest * (1-t)
– Capital expenditure
Capital expenditure If capitalized, the amount capitalized increases capital expenditures
and is recorded as a cash outflow from investing activities
CFO The CFO will be higher by amount capitalized (i.e., the amount
not expensed)
Because capital expenditures and CFO increase by the same amount, ignoring taxes, FCFF is unchanged.

A is incorrect because as indicated, CFO increases in the period of capitalization. Cash flow per share is based
on CFO, so it would increase.

C is incorrect because future EPS will be lower due to the higher future depreciation expense arising from
the current capitalization.

42. A is correct. Based on the annual increase in accumulated depreciation, annual depreciation expense is $125
and the asset was acquired in 2012.

Total useful life of the capital asset = 2,500/125 = 20 years

Remaining useful life three years later = 20 years−3 years = 17 years

Alternative calculation based on straight-line depreciation with no salvage value:

NBV/Depreciation expense = 2,125/125 = 17 years

B is incorrect. It is the total expected life (2,500/125 = 20 years).

C is incorrect. It incorrectly divides gross PPE by accumulated depreciation: 2,125/375 = 5.7, rounded to 6
years.

43. A is correct. The fixed asset turnover ratio for the company is calculated as
Net sales/Average net PP&E = 21,670/12,200 =1.78

B is incorrect because it mistakenly uses net income instead of the net sales: 21,670/2,705 = 8.01.

C is incorrect because it mistakenly uses net PP&E year-end instead of the average: 21,670/14,350 = 1.51.

44. C is correct. The interest costs can be capitalized during the construction phase; however, under IFRS any
amounts earned by temporarily investing the funds are deducted from the capitalized amount. The costs
related to the preferred shares cannot be capitalized.
Capitalized Costs NZ$
Interest costs 0.08 * 5,000,000 400,000
Minus interest income 0.07 * 2,000,000 * 0.5 year -70,000
Total Capitalized Costs 330,000

A is incorrect because it fails to deduct the temporary interest earned (US GAAP): 400,000.

B is incorrect because it does deduct the temporary interest earned, but also capitalized the dividends.

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 Long Lived Assets

330,000 + 0.06 × 5,000,000 = 330,000 + 300,000 = 630,000

45. A is correct. When a long-lived asset is sold, only the net gain or loss is reported on the income statement.
The gain or loss on a sale = Sales proceeds − Carrying amount = $80,000 − $70,000 = $10,000 gain.

B is incorrect because it incorrectly subtracts original cost from sales proceeds: $80,000 − $120,000 = a loss
of $40,000.

C is incorrect because for the sale of capital assets only the net gain or loss is reported not the gross
proceeds.

46. A is correct. IFRS allows development costs to be capitalized if certain criteria are met. Unlike US GAAP,
under IFRS capitalization is not restricted to software development.

B is incorrect because under US GAAP, capitalization of development costs is restricted to software

development only. Development costs related to tangible assets other than software must be expensed
regardless.

C is incorrect because both IFRS and US GAAP allow certain development costs to be capitalized if certain
criteria are met.

47. A is correct. Using the double declining balance method will result in the highest asset turnover ratio (Total
asset turnover = Total revenue/Average total assets) for the company. This is because its higher
amortization expense in earlier periods ($3,333 in Year 1, compared with $1,667 and $1,875 for straight line
and units of production, respectively) decreases the company’s average total assets (the denominator),
causing its asset turnover ratio to be higher than under the other two methods. The following are the
amortization expense calculations under each method for Year 1:
Method Calculation ($ thousands) Amortization Expense in Year 1
($ thousands)
Double declining balance Rate is twice the straight-line
rate.
1/3 x 2 = 66.7%
66.7% x 5,000 = $3,335
Straight line (Cost – Residual value)/ Useful
life
($5,000 x $0)/3 $1,667
Units of production Cost per unit = Cost/Production
capacity
($5,000/800 units) = $6.25
Year 1 = 6.25 x 300 units $1,875

48. C is correct. IFRS does not require disclosure of the original date of acquisition.

A is incorrect because under the cost model, the carrying amount must be disclosed by companies using the
revaluation model.

B is incorrect because the details of how fair value was obtained must be disclosed by companies using the
revaluation model.

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 Long Lived Assets

49. A is correct. The revaluation model per IFRS allows the asset to be carried at fair value. If the revaluation
decreases the value, as it does here from 2011 to 2012, then later increases in value to the extent that they
reverse the losses are recognized in net income: from $800 to $1,000 = $200.
Any increase in excess of the reversal will be recorded directly in equity in a revaluation surplus account and
not on the income statement: here, 1,300 − 1,000 = 300.

B is incorrect because not the entire gain (1,300 − 800) should be booked to the income statement. Only
the portion previously booked to the income statement should be booked to the income statement.

C is incorrect because this is the amount above the original purchase price, and it is the portion that would
go to revaluation surplus, not NI: 300,000 = 1,300,000 − 1,000,000.

50. B is correct. Under the declining balance approach, depreciation is calculated as a fixed percentage of the
asset’s carrying amount, year after year. As the undepreciated value decreases, so does the reported
depreciation expense. The effect is most pronounced in the later years of the asset’s life when the
undepreciated cost is much lower and hence the expense is lower (and operating margins higher).

A is incorrect because under the straight-line approach, the annual depreciation expense is constant.

C is incorrect because although the units of production method could show the described expense
recognition pattern (if the asset was used more heavily in the later years of its life compared to the early
years), but other patterns are also possible. This response is not as strong as that of declining balance.

51. A is correct. Under the units-of-production depreciation approach, the amount of depreciation expense for
a period is based on the proportion of the asset’s production during the period compared with the total
estimated productive capacity of the asset over its useful life.

Depreciation Expense Year 4 = Depreciable cost×(Production Year 4/Total production

over useful life)
= $100,000×(300/1,000)
= $30,000
B is incorrect because $12,500 is the depreciation expense in Year 4 calculated using double-declining-
balance methodology as shown here:
Beginning Net Book Depreciation Expenses Ending Net Book Value
Value
Year 1 $100,000 $50,000 $50,000
Year 2 $50,000 $25,000 $25,000
Year 3 $25,000 $12,500 $12,500
Year 4 $12,500 $12,500 $0

C is incorrect because $25,000 is the depreciation expense in Year 4 calculated using straight-line
depreciation methodology as shown here:
Beginning Net Book Depreciation Expenses Ending Net Book Value
Value
Year 1 $100,000 $25,000 $75,000
Year 2 $75,000 $25,000 $50,000
Year 3 $50,000 $25,000 $25,000
Year 4 $25,000 $25,000 $0

52. C is correct. The temporary difference is the difference between the net book value (NBV) of the asset for
accounting purposes and the NBV for taxes

NBV accounting [500,000 − (500,000/10)] $450,000

Page 27 of 37
 Long Lived Assets

NBV taxes [500,000 − 0.15 × (500,000)] $425,000

Temporary difference $25,000

A is incorrect because the tax base of the asset is the amount that will be deductible for tax purposes in
future periods. At the end of the year that amount is $425,000: 500,000 − 0.15(500,000).

B is incorrect because the difference will create a deferred tax liability of $10,000 (25,000 × 40%), not a
deferred tax asset.

53. B is correct. Under the double declining balance approach, the depreciation rate applied to the carrying
amount is double the depreciation rate for the straight-line method. Because the rate for the straight-line
method is 10% (1/10), the double declining rate is 20%. The residual value is considered only when
calculating the expense, in that the company ceases to claim expenses once the net book value (NBV)
reaches the residual value.
Year 1 Year 2 Year 3
Opening NBV $1,500,000 $1,200,000 $960,000
Depreciation $300,000 $240,000 $192,000
expense (20% of
opening NBV)
Ending NBV $1,200,000 $960,000 $768,000
Alternatively, $1,500,000 × (1 − 0.20)2 × 0.20 = $192,000.

A is incorrect because this is the depreciation expense using declining balance (10%) rather than double
declining balance (20%):
Year 1 Year 2 Year 3
Opening NBV $1,500,000 $1,350,000 $1,215,000
Depreciation expense $150,000 $135,000 $121,500
(10%* of opening NBV)

Ending NBV $1,350,000 $1,215,000 $1,093,500

*incorrectly used 10%

C is incorrect because this is the double declining approach, but with the residual value incorrectly deducted
from the depreciation base:
Year 1 Year 2 Year 3
Opening carrying $1,000,000* $800,000 $640,000
value
Depreciation $200,000 $160,000 $128,000
expense (20% of
opening NBV)
Ending carrying $800,000 $640,000 $512,000
value
*incorrectly calculated net of the residual value

54. A is correct. Analyze and interpret financial statement disclosures regarding property, plant, and equipment
and intangible assets.
($ millions) Group 2 Group 3
Cost (opening amounts) 320 118
Less: Accumulated amortization and impairment -45 -16
(opening amounts)
Carrying value 275 102
Total carrying value 377

B is incorrect because this is the ending balance of definite life intangibles: 260 + 101 = 361.

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 Long Lived Assets

C is incorrect because this is the opening balance of Groups 2, 3, and 4. Although Group 4 assets have
incurred impairment, they have not incurred amortization and thus are incorrectly included in the total. Per
A, the opening value of Group 2 and 3 assets is $377. Group 4’s opening value is $96. Thus the opening value
for Groups 2, 3, and 4 is $473.

55. B is correct. The capitalized cost of the building would include the other costs that are directly attributable
to the building and are involved in extending its life or getting it ready to use:
€ millions
Initial cost 35.00
Upgrades to roof and windows 2.00
Modifications to interiors 0.50
Total cost 37.5

A is incorrect because it includes the staff training: 37.5 + 0.1 = 37.6.

C is incorrect because it does not include the modifications to the interior: 35 + 2.0 = 37.0.

56. A is correct. Costs associated with internally developing intangible assets are usually expensed; thus, a
company that has internally developed intangible assets through expenditures on R&D will recognize a
lower amount of assets than a company that has obtained intangible assets through external purchase.

B is incorrect because costs of acquiring intangible assets are classified as investing cash outflows. Thus if
the company is developing assets internally, it will report lower investing cash outflows than a company
that obtains intangibles through external purchase.

C is incorrect because costs associated with internally developing intangible assets are classified as
operating cash outflows. Thus, if the company is developing the intangible assets internally, it will report
higher operating cash outflows than a company that obtains the intangibles through external purchase.

57. C is correct. Under the double declining balance approach, the depreciation rate applied to the carrying
amount is double the depreciation rate for the straight-line method. Because the rate for the straight-line
method is 20% (1/5), the double declining rate is 40%. Depreciation expense is recorded until the net book
value (NBV) reaches the residual value.
Year 1 Year 2 Year 3
Opening NBV $1,800,000 $1,080,000 $648,000
Depreciation expense (40% 720,000 432,000 148,000
of opening NBV)
Ending NBV 1,080,000 648,000 500,000*

A is incorrect because this is the double declining approach, but with the residual value incorrectly deducted
from the depreciation base:
Year 1 Year 2 Year 3
Opening carrying value $1,300,000* $780,000 $468,000
Depreciation expense (40% 520,000 312,000 187,200
of opening NBV)
Ending carrying value 780,000 468,000 512,000
*incorrectly calculated net of the residual value

B is incorrect because this is the full double declining depreciation expense that would have been recorded
if the residual value had been below $388,800:
Year 1 Year 2 Year 3

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 Long Lived Assets

Opening net book value $1,800,000 $1,080,000 $648,000

(NBV)
Depreciation expense (40% 720,000 432,000 259,200
of opening NBV)
Ending net book value 1,080,000 648,000 388,800

58. B is correct. Using the units-of-production method, the amortization expense is closest to £397,500 and is
calculated as follows: First, determine the amortization rate per unit, and then determine the cost for 2014
based on the number of units produced that period.
Calculation Amount
Step 1 Cost per unit = Acquisition cost/Production capacity = 13.25 per unit
£2,650,000/200,000 units =
Step 2 Number of units produced x Cost per unit = 30,000 units x £13.25 = £397,500

A is incorrect because it mistakenly uses the annual plant capacity units instead of the actual production of
the patented product for 2014: £2,650,000 × (50,000/200,000) = £662,500.

C is incorrect because it incorrectly uses production per year/plant capacity per year when attempting to
calculate the expense: £2,650,000 × (30,000/50,000) = £1,590,000.

59. B is correct. Because the asset is self-constructed, the costs of specifically identifiable interest during the
construction period can be capitalized and included in the cost of the showroom.
€ millions
Construction cost 38.5
Interest expense in 2012 and 2013: 0.08 x €30 x 2 years 4.8
Total Capitalized cost 43.3
Straight line depreciation expense: (Capitalized cost – Residual 0.9575
value)/Useful life = (43.3-5.0)/40

A is incorrect because it continues to capitalize the interest in 2014: (43.3 + 2.4 − 5.0)/40 = 1.0175.

C is incorrect because it does not include the capitalized interest: (38.5 − 5)/40 = 0.8375.

60. B is correct. With accelerated amortization, first year amortization expense is the highest.

A is incorrect because with accelerated amortization, year 5 amortization expense should be the lowest.

C is incorrect because with accelerated amortization, amortization expense declines over the years.

61. C is correct. The broadcast licenses were written down in 2012, but the write-down was reversed in 2014.
Therefore, during 2013 the intangible assets were understated, which would have understated amortization
expense for the year and increased profit. Thus, in 2013 net profit margin was overstated.

A is incorrect because in 2013 the intangible assets were understated, and net profit was overstated (due
to the lower amortization expense); therefore, ROA would have been overstated in 2013, not understated.

B is incorrect because in 2013 the intangible assets were understated, which would have increased asset
turnover (Sales/Average total assets), so it would have been overstated during the year.

62. A is correct. The company will report an impairment loss of $13.8 million on its income statement. Under
US GAAP, the facilities fail the recoverability test: the net book value cannot be recovered from
undiscounted cash flows (7 years × $3 = $21 < $28.4). Therefore, the asset is impaired and should be written
down to its fair value.

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 Long Lived Assets

Fair Value is the present value (PV) of future benefits: (N = 7; i = 10; PMT = 3); PV = 14.6

Impairment Loss is Carrying value − Fair value = 28.4 − 14.6 = 13.8 to be reported on the income statement.

B is incorrect because it was determined with no discounting of future benefits, resulting in an incorrect
impairment charge: 28.4 − 3 × 7 = 7.4.

C is incorrect because this is a non-cash item and does not affect cash from operations.

63. A is correct. An acquired customer list that has an expected useful life of two years is an example of an
intangible asset with a finite useful life, even if the company plans to continue selling products or services
to customers on the list into the foreseeable future. Assets with finite useful lives are amortized. Although
the other two assets appear to have finite lives, they can be renewed at little or no cost and, therefore,
would be considered to have indefinite lives.

B is incorrect because an acquired trademark that expires in two years but can be renewed and relates to a
product the company plans to sell for the foreseeable future is an example of an intangible asset with
indefinite useful life. Intangible assets assumed to have an indefinite useful life are not amortized.

C is incorrect because an acquired license that expires in two years but can be renewed at little or no cost
and relates to a service the company plans to market for the foreseeable future is an example of an
intangible asset with indefinite useful life. Intangible assets assumed to have an indefinite useful life are not
amortized.

64. B is correct. The upward revaluation increases the carrying amount of the assets but bypasses net income.
The revaluation is reported as other comprehensive income and will be accumulated in equity under the
heading of revaluation surplus, increasing equity. This increase will cause the return on equity to decline.

A is incorrect because the upward revaluation causes an increase in the carrying amount of the assets but
bypasses net income and is reported as other comprehensive income (under the heading of revaluation
surplus), increasing equity. This will cause the return on assets to decline (same income, higher assets).

C is incorrect because the upward revaluation causes an increase in the carrying amount of the assets but
bypasses net income and is reported as other comprehensive income (under the heading of revaluation
surplus), increasing equity. This will cause Net Income/Sales to be unaffected.

65. B is correct. Licenses will have the largest dollar impairment charge on the income statement due to the
size of the implied impairment charge, which is calculated as: Accumulated impairment losses and
amortization as of 31 December 2019 − (Accumulated impairment losses and amortization as of 31
December 2019 + Exchange movements + Amortization charge for year + Net Additions (Disposals)). In this
case the largest impairment loss that will be reported is due to licenses. Impairment charge due to licenses
= 10,856 − (8,243 + 821 + 1,244 − 25) = 573.

A is incorrect because the amount of the impairment charge due to computer software is less than that of
licenses. The computer software impairment charge for 20X2 in dollars = 8,214 − (5,257 + 334 + 2,102) =
521.

C is incorrect because the amount of the impairment charge due to goodwill is less than that of licenses.
The goodwill impairment charge for 20X2 in dollars = 73,194 − (65,321 + 7,324) = 549.

66. C is correct. At the end of 2014, a test of impairment is required because “events or changes in
circumstances indicate that its carrying amount may not be recoverable” (all amounts $ thousands).

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 Long Lived Assets

US GAAP Impairment Test:

Step 1: Assess recoverability: Compare carrying amount with undiscounted future net cash flows.

Carrying amount = 1,604 > 1,350 (expected future net cash flows)

The recoverability test is not satisfied, so an impairment loss is required.

Step 2: Determine impairment loss:

Carrying amount − Fair value = 1,604 − 1,225 = 379

New carrying value: 1,225

Estimated depreciation in 2015

𝑁𝑒𝑤 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 − 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
$1,225 − $200
4 𝑦𝑒𝑎𝑟𝑠

A is incorrect because it writes the asset down to the PV of future benefits (which is < FV) and depreciates
this amount correctly: ($1,050 − $200)/4 years = $213.

B is incorrect because it acknowledges the impairment but ignores the residual value: $1,225/4 years = $306

67. A is correct. When an asset is acquired through an exchange, the cost of the asset acquired is the fair value
given up unless the fair value of the asset acquired is more clearly evident. Because the fair value of the
land is unknown, the cost is the fair value of the asset acquired, which is $20,000.

B is incorrect because it is the difference between the original land value and the fair value of the truck:
$60,000 − $20,000 = $40,000.

C is incorrect because this is the carrying cost of the truck using the declining balance method: $48,000 ×(1
− 0.20)3 = $24,576.

68. B is correct. The expensing of the previously capitalized interest is a non-cash amount and does not affect
cash flow from operations. Under US GAAP, cash flow from operations is higher as a result of the initial
capitalizing of interest but not its subsequent expensing. If the interest had not been capitalized, interest
expense would have been greater and net income and cash from operations lower.

69. A is correct. US GAAP requires that both research and development costs be expensed as incurred. Cash
flow from operations would be lower by the amount spent on development: €290 million − €25 million =
€265 million. The amortization of previous development costs is a non-cash expense, so it does not affect
cash flow.

B is incorrect because it assumes cash flow is not affected by accounting policies and hence would stay the
same.

C is incorrect because it adds back the amortization: 290 − 25 + 10 = 275 million

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 Long Lived Assets

70. B is correct. The increase in the value of the land bypasses the income statement and goes directly to a
revaluation surplus account in equity, assuming no previous decreases in value in the asset class for
revaluation purposes. Equity increases, thereby decreasing the debt-to-equity ratio.

A is incorrect because the increase in the value of the land bypasses the income statement and goes directly
to a revaluation surplus account in equity. Therefore net income and hence the return on sales are not
affected.

C is incorrect because the increase in the value of the land bypasses the income statement and goes directly
to a revaluation surplus account in equity. Therefore net income stays the same while assets increase, and
therefore ROA decreases.

71. A is correct.
($ thousands)
EBIT = Net sales – COGS – S&A = 11,159-9,898-872 389
Add back depreciation related to capitalized interest 34
Adjusted EBIT 423
Interest Expense: Income statement 122
Add capitalized interest: Notes to financial statement 66
Total interest paid 188
The interest coverage ratio requirement has been exactly achieved.

Because the bonds were issued at par, no amortization of premiums or discounts is included in interest paid.

B is incorrect because it does not adjust EBIT for depreciation related to interest = 389/188 = 2.07: violates
threshold. This is (2.07/2.25 − 1) = 8.8% below the threshold (more than 5% below).

C is incorrect because it is the unadjusted TIE = 389/122 = 3.19: exceeds threshold. This is (3.19/2.25 − 1) =
41.7% above the threshold (more than 5%).

72. C is correct. The units-of-production method is independent of the useful life estimate.

A is incorrect because the double declining balance method is linked to useful life estimate because the
“double” refers to doubling the rate determined under the straight-line method which depends on the
useful life.

B is incorrect because the straight-line method is linked to useful life estimate.

73. A is correct. The fair value model would be used for the investment property, and the €100 thousand gain
should be recognized on the company’s income statement. The revaluation model would be used for the
plant, and the €200 thousand gain should be recognized in the revaluation surplus account on the balance
sheet with no impact on net income. Therefore, only the €100 thousand will affect net income.

B is incorrect because the revaluation model would be used for the plant, and the gain should be recognized
in the revaluation surplus account on the balance sheet. This is a new purchase and therefore no gains need
to be recognized on the income statement to reverse previously recognized losses. Therefore, a maximum
of $100,000 would be recognized on the income statement.

C is incorrect because the revaluation model would be used for the plant, and the gain should be recognized
in the revaluation surplus account on the balance sheet. This is a new purchase and therefore no gains need
to be recognized on the income statement to reverse previously recognized losses.

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 Long Lived Assets

74. C is correct. Under IFRS, the carrying amount (132) is compared to the higher of fair value minus costs to
sell (104 =105 − 1) and present value of expected future cash flows (100). The higher of the two amounts,
the recoverable amount is 104; therefore, the asset is impaired and written down to that amount. The
impairment loss = 132 − 104 = 28.

A is incorrect because 27,000 is the impairment under US GAAP (carrying value less fair value).

B is incorrect because 32,000 = 132,000 − 100,000 carrying value less PV CF.

75. C is correct. Under IFRS, an asset is considered to be impaired when its carrying amount exceeds its
recoverable amount (the higher of fair value less cost to sell or value in use).

Fair value less costs to sell: 480,000 − 50,000 = 430,000

Value in use = 440,000

Recoverable amount (higher value of the above two amounts) = 440,000

Impairment loss under IFRS = Carrying value (net book value) − recoverable amount

Impairment loss = 500,000 − 440,000 = C$60,000

A is incorrect because it used the US GAAP approach to assess impairment, comparing the NBV to the
undiscounted cash flows, which are higher, so the asset is not impaired.

B is incorrect because it used the lower of the fair value less costs to sell and value in use, instead of the
higher amount for the recoverable amount: 500,000 − (430,000) = 70,000.

76. C is correct. For investment properties, when using the fair value model of valuing assets (as opposed to the
revaluation model, which is not allowed by IFRS for investment properties), all increases and decreases
affect net income.

A is incorrect because under the fair value model of valuing assets, all increases and decreases go through
net income. Had it been a regular type of PP&E, the increases above cost would have gone to revaluation
surplus and hence the reversal of those amounts would have been from revaluation surplus; decreases
below original cost go to net income.

B is incorrect because under the fair value model of valuing assets, all increases and decreases go through
net income.

77. C is correct. The shorter assumed useful life for this long-lived asset causes the annual depreciation expense
to be higher and, accordingly, the average value of total assets to be lower. Because asset turnover is
calculated as total revenue divided by average total assets, the new asset turnover ratio is higher than with
a longer assumed useful life. The higher depreciation expense would decrease operating margin. The effect
on operating return on assets is not clear because both operating income and total assets are effected.
Beginning Depreciation Ending Revenue EBIT Average Operating
Net Book Expense Net Book Total Return on
Value Value Assets Assets

Year 1 with $1,000,000 $250,000 $750,000 $15,000,000 $1,350,000 $875,000 154.29%

4- year life

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 Long Lived Assets

Year 1 with $1,000,000 $166,667 $833,333 $15,000,000 $1,433,333 $916,667 156.36%

6- year life

Asset Turnover Ratio Year One with a Four-Year Useful Life:

Beginning Depreciation Ending Revenue Average Asset
Net Book Expense Net Book Total Assets Turnover
Value Value Ratio

Year 1 $1,000,000 $250,000 $750,000 $15,000,000 $875,000 17.14

Asset Turnover Ratio Year One with a Six-Year Useful Life:

Beginning Depreciation Ending Revenue Average Asset
Net Book Expense Net Book Total Assets Turnover
Value Value Ratio

Year 1 $1,000,000 $166,667 $833,333 $15,000,000 $916,667 16.36

Asset turnover = (Total revenue/Average total assets)

A is incorrect because with a four-year, rather than a six-year, assumed useful life, the annual depreciation
expense would be higher causing the annual earnings before interest and taxes to be lower. The resulting
operating profit margin (earnings before interest and taxes divided by total revenue) would be lower, not
higher, than with a six-year assumed useful life.

Operating profit margin = (EBIT/Total revenue)

Operating Profit Margin Year One with a Four-Year Useful Life:

Beginning Depreciation Ending Revenue EBIT Operating
Net Book Expense Net Book Profit
Value Value Margin

Year 1 $1,000,000 $250,000 $750,000 $15,000,000 $1,350,000 9.00%

Operating Profit Margin Year One with a Six-Year Useful Life:

Beginning Depreciation Ending Revenue EBIT Operating
Net Book Expense Net Book Profit
Value Value Margin

Year 1 $1,000,000 $166,667 $833,333 $15,000,000 $1,433,333 9.56%

B is incorrect because with a four-year assumed useful life, the annual earnings before interest and taxes
and the average value of total assets would be lower. In this instance, the resulting return on assets
(earnings before interest and taxes divided by average total assets) also would be lower, not higher, than
with a six-year assumed useful life.

Operating return on assets = (EBIT/Average total assets)

Return on Assets Year One with a Four-Year Useful Life:

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 Long Lived Assets

Beginning Depreciation Ending Revenue EBIT Average Operating

Net Book Expense Net Book Total Return on
Value Value Assets Assets

Year 1 $1,000,000 $250,000 $750,000 $15,000,000 $1,350,000 $875,000 154.29%

Return on Assets Year One with a Six-Year Useful Life:

Beginning Depreciation Ending Revenue EBIT Average Operating
Net Book Expense Net Book Total Return on
Value Value Assets Assets

Year 1 $1,000,000 $166,667 $833,333 $15,000,000 $1,433,333 $916,667 156.36%

78. A is correct. IFRS only permits the reversal of previously recognized impairment losses and does not permit
the revaluation to the recoverable amount if the recoverable amount exceeds the previous carrying
amount.

B is incorrect because IFRS do not permit the revaluation to the recoverable amount if the recoverable
amount exceeds the previous carrying amount.

C is incorrect because IFRS allows for reversal of impairment losses regardless of whether the assets is
classified as held for use or held for sale.

79. B is correct. When an asset is exchanged, accounting for the exchange typically involves removing the
carrying amount of the asset given up, adding a fair value for the asset acquired, and reporting any
difference between the carrying amount and the fair value as a gain or loss.

A is incorrect because when a spin-off occurs, typically, an entire cash-generating unit of a company with all
its assets is spun off.

C is incorrect because when an asset is retired or abandoned, the company does not record cash proceeds.
Assets are reduced by the carrying amount of the asset at the time of retirement or abandonment, and a
loss equal to the asset’s carrying amount is recorded.

80. B is correct. First calculate the total amount of accumulated impairment losses and amortization based on
the data provided as follows: (Accumulated impairment losses and amortization as of 31 December 20X2 +
Exchange movements + Amortization charge for the year + Impairment losses + Disposals + Transfers to
investments in associated undertakings) or (2,142 + 212 + 752 + 52 − 7) = 3,151. That amount is used to
calculate the carrying value as of 31 December 20X3 as follows: (Cost of licenses as of 31 December 20X3 −
Accumulated impairment losses and amortization) = Net book value as of 31 December 20X3 or (16,435 −
3,151) = 13,284.

A is incorrect because the accumulated impairment losses and amortization must be subtracted from the
cost of the licenses as of 31 December 20X3, not from the net book value as of 31 December 20X2 as in this
case: (12,118 − 3,151) = 8,967.

C is incorrect because the exchange movements must be subtracted from the cost of licenses, not excluded
from the calculation, as in this case: (Accumulated impairment losses and amortization as of 31 December

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 Long Lived Assets

20X2 + Amortization charge for the year + Impairment losses + Disposals + Transfers to investments in
associated undertakings) or (2,142 + 752 + 52 − 7) = 2,939. In this case, subtrac ng the incorrect figure of
2,939 from the cost of licenses as of 31 December 20X3 produces the wrong net book value as of 31
December 20X3: (16,435 − 2,939) = 13,496.

81. B is correct. The cost of acquiring intangible assets (including patents) is classified as investing cash outflows,
whereas the costs of developing them internally is classified as operating cash outflows. If a company
obtains intangibles through external purchase, it will report higher investing cash outflows than a company
that develops intangible assets internally.

A is incorrect because costs associated with internally developing intangible assets are usually expensed,
while external purchases are capitalized. A company that purchases intangible assets through external
purchase will recognize a higher amount of assets than a company that develops intangible assets internally.

C is incorrect because the cost of acquiring intangible assets is classified as investing cash outflows, while
the cost of developing them internally is classified as operating cash outflows. Thus, if the company obtains
intangible assets through external purchase, it will report lower operating cash outflows than a company
that develops the intangibles internally.

82. B is correct. Under IFRS a building owned for the purpose of earning rentals or capital appreciation—in this
case the one owned by the company and leased out to tenants—is an investment property and can be
reported under either the cost model or fair value model.

A is incorrect because the building would be classified as PP&E, and only the cost model or revaluation
model would be allowed.

C is incorrect because houses constructed for sale to customers would be inventory. Under IFRS,
“inventories shall be measured at the lower of cost and net realizable value.” The fair value model is not
allowed.

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