财务报表分析英文课件：ch8 Analysis of Long-lived Assets

1、8CHAPTERAnalysis of Long-lived Assets: Part - Analysis of Depreciation and ImpairmentIntroduction vStrictly speaking:Depreciation Tangible fixed assetsAmortization Intangible assetsDepletion Natural resourcesvThis chapter continues the analysis of long-lived assets begun in the previous chapter wher

2、e we examined financial reporting and analysis issues arising at acquisition. We now consider the reporting and analysis of long-lived assets:1. Over their useful lives, with emphasis onDepreciation methodsDepreciable lives and salvage valuesImpact of choices on financial statements2. When they are

3、disposed of, or written off when impaired, or at the end of their useful lives, with particular attention to the effects of impairment write downs on financial statements and ratios.(2)Straight-line depreciationvStraight-line depreciation is the dominant method in the United Stated and most countrie

4、s worldwide.vNote that the use of this method results in an increasing rate of return rather than the actual rate of return earned over the life of the asset.Example:Original cost=18000Salvage value=3000Depreciation life=4Straight-Line DepreciationYear (1)(2)(3)(4)=(2)-(3)(5)=(4)/(1)Opening balance

5、assetCash flowDepreciation expensesNet incomeRate of return124010080208.3%2160100802012.5%380100802025.0%total30024060Increasing rate of returnvArguments:Benefits (revenue) from an asset may be higher in early years, declining in later years as efficiency falls (the assets wears out).Even if revenue

6、s are constant over time, an asset requires maintenance and repairs over time, costs tend to increase as the asset ages.Accelerated depreciation methods have historically been used for tax reporting, where they are justified by the desire to promote capital investment, rather than accounting theory.

7、vSum of years digits (SYD) methodvDecline-balance methodvExample:Original cost=18000Salvage value=3000Depreciation life=5yearrateOriginal cost-salvage valueDepreciation expenseAccumulated depreciationNet book value01800015/1515000500050001300024/151500040009000900033/1515000300012000600042/151500020

8、0014000400051/15150001000150003000total15000yearrateNet book valueDepreciation expenseAccumulated depreciationNet book value01800012/518000720072001080022/510800432011520648032/5648025921411238884NANA8881500030005NANA0150003000total15000vThe carrying costs of natural resources are allocated to accou

9、nting periods using the units-of-production method. vThis method requires an initial estimate of the units in the resource base to compute a unit cost, which is then applied to the actual units produced, extracted, or harvested.AmortizationvAmortization of intangible assets may be based on useful li

10、ves as defined by law or regulation, or such assets may be depreciated over the period during which the firm expects to receive benefits from them. vCompanies use either straight-line or units-of-production methods. vDisclosure of the depreciation method used is required and can usually be found in

11、the footnote listing accounting policies.vEven when the same depreciation method is used, comparability for a firm over time and among companies at a given point in time may be lacking. The useful life and salvage values Depreciation lives and salvage values impact both depreciation expenses and sta

12、ted asset valuesFor example:Shorter Depreciation lives and lower Salvage valuesHigher depreciation expensesImpact of depreciation methods on financial statementsvAccelerated depreciation methods, with higher depreciation expense in the early years of asset life, tend to depress both net income and s

13、tockholders equity when compared with the straight-line method.Accelerated depreciation and taxesvNotwithstanding the theoretical arguments and the financial statement effects discussed, the primary reason for accelerated depreciation methods is their beneficial effect on the firms tax burden. vAt t

14、he onset of an assets life, the total amount of depreciable cost available is fixed. Depreciation acts as a tax shield by reducing the amount of taxes paid in any given year. vGiven a positive interest rate, firms are better off using accelerated depreciation methods to obtain the benefit of increas

15、ed cash flows in the earlier years. Estimating relative age and useful livesRelative age(%)= accumulated depreciation/ending gross investmentUseful measure of whether the firms fixed-asset is old or new. Depreciation lives; Salvage valuesAverage depreciation life= Ending gross investment/Depreciatio

16、n expenseAffected byPrerequisite:Straight line depreciation Estimating the age of assetsAverage age = Accumulated Depreciation/Depreciation ExpenseMay be distorted by changes in asset mix and by acquisitions.Useful for two reasons: First, older assets tend to be less efficient; inefficient or obsole

17、te fixed assets may make the firm uncompetitive. Second, knowing past patterns of capital replacement helps the analysts estimate when major capital expenditures will be required.vQUESTION:vA company owns various equipment costing $1,500,000 with related accumulated deprecation of $562,500. assuming

18、 the straight-line method of deprecation and annual depreciation expense of $187,500, the average age of its equipment is closet to? Example: 1999AssidomanHolmen SCAStora EnsoBuildingsAverage age%41.649.129.435.1Average depreciation life years27.321.024.427.6Average age years11.310.37.29.7Machinery and EquipmentAverage age%55.750.042.748.3Average depreciation l