Property, Plant, Equipment, and Intangible Assets

Analysts can use disclosures to better their understanding of a company’s investments in tangible and intangible assets. To begin with, disclosures can enable analysts to tell how a company’s investments changed during a reporting period. In addition, disclosures reveal how the changes affected the current financial performance of a company, and the implications of those changes on its future performance.

Disclosures Relating to Property, Plant, Equipment, and Intangible Assets

Property, Plant, and Equipment

IFRS Disclosures

For each class of property, plant, and equipment, a company must disclose the measurement bases, the depreciation method, and the useful lives (or, equivalently, the depreciation rate) used. Similarly, the company must reveal the gross carrying amount and the accumulated depreciation at the beginning and end of the period. Finally, the company must declare the reconciliation of the carrying amount at the beginning and end of the period.

Restrictions on title and pledges as security of property, plant, equipment, and contractual agreements to acquire property, plant, and equipment must be disclosed.

If the revaluation model is used, the date of revaluation, details of how the fair value was obtained, the carrying amount under the cost model, and the revaluation surplus must be disclosed.

US GAAP Disclosures

A company must disclose the depreciation expense for the period under review, the balances of major classes of depreciable assets, and the accumulated depreciation by major classes. In addition, it must give a general description of the depreciation method(s) used in computing depreciation expenses for the major classes of depreciable assets.

Intangible Assets

IFRS Disclosures

For each class of intangible assets, a company must disclose whether the useful lives are indefinite or finite.

In the case of finite useful lives, a number of disclosures must be made for each class of intangible assets. Specifically, the following pieces of information must be shared: the useful lives (or equivalently amortization rate) used, the amortization methods used, the gross carrying amount, and the accumulated amortization at the beginning and end of the period. It is noteworthy that amortization is included on the income statement and a reconciliation of the carrying amount at the beginning and end of the period.

If an asset has an indefinite life, a company must disclose its carrying amount and why it is considered to have an indefinite life.

Restrictions on title and pledges as security for intangible assets and contractual agreements to acquire intangible assets are required.

If the revaluation model is used, the date of revaluation, details of how the fair value was obtained, the carrying amount under the cost model, and the revaluation surplus must be disclosed.

US GAAP Disclosures

The gross carrying amounts and accumulated amortization in total and by major class of intangible assets, the aggregate amortization expense for the period, and the estimated amortization expense for the next five fiscal years must be disclosed.

Presentation

The balance sheet reports the carrying value of a long-lived asset.

In the income statement, depreciation expense may appear as a separate line item. Under IFRS, disclosure of depreciation expenses separately in the income statement is dependent on whether a company is using a ‘nature of expense’ method or a ‘function of expense’ method.

Like in the expense method, a company aggregates expenses “according to their nature,” and does not redistribute them among functions within the entity. In the function of the expense method, a company classifies expenses according to the function. When using the function of expense method, a company must, at a minimum, disclose the cost of sales, while the other line items may vary.

The cash flow statement reflects acquisitions and disposals of fixed assets in the cash flow from investing activities section. Additionally, when prepared using the indirect method, the cash flow statement displays depreciation expense as a line item in the adjustment of net income to cash flow from operations. The notes to the financial statements describe a company’s accounting method(s), the range of estimated useful lives, historical cost by the main category of fixed asset, accumulated depreciation, and annual depreciation expense.

Question 1

Under IFRS, a company must disclose the following pieces of information relating to intangible assets in its financial statements and footnotes, except:

1. Amortization rate.
2. Depreciation methods.
3. Whether the useful lives are indefinite or finite.

Solution

The correct answer is B.

Depreciation does not apply to intangible assets. If the intangible asset is finite, a disclosure must include the amortization method used.

Question 2

Each of the following should be disclosed if a company reports an impairment loss, except:

1. The reason for impairment occurrence.
2. The likelihood of further future impairment.
3. The main classes of assets affected by the impairment loss.

Solution

The correct answer is B.

An impairment is an unexpected decrease in the value of an asset. As such, the likelihood of future asset impairment can’t be calculated.