OCW041: Introduction to Long-Lived Assets

Defining Long-Lived Assets

Long-lived assets are those that provide a company with a future economic benefit beyond the current year or operating period.

Learning Objectives

Differentiate between an asset and a long-lived asset

Key Takeaways

Key Points

  • Long term assets are used over multiple operating cycles.
  • Assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.
  • Since non- current, or long-lived, assets are expected to last for longer than one year, accounting treats long-lived assets differently according to their useful life.

Key Terms

  • Assets: A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.
  • economic entity assumption: the business is a separate and distinct from its owner(s)

Assets

Assets are economic resources. It is anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash.

Asset Characteristics

  • Assets represent probable present benefit, involving a capacity, solely, or in combination with other assets, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
  • The entity can control access to the benefit;
  • The transaction or event giving rise to the entity’s right to, or control of, the benefit has already occurred.

Interestingly enough, employees are not considered to be assets, like machinery is, even though they are capable of generating future economic benefits. This is because an entity does not have sufficient control over its employees to satisfy the definition of an asset.

Long-Lived Assets

Long-lived assets provide a company with a future economic benefit beyond the current year or operating period. It may be helpful to remember that most, but not all, long-lived assets start as some sort of purchase by the company. Since non-current, or long-lived, assets are expected to last for longer than one year, accounting treats long-lived assets differently according to their useful life.

All assets are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. When assets are expected to contribute to earnings for multiple years, such assets are referred to as long-lived, non-current or long-term assets. In general terms, it is “long-lived” because it is going to be around for some time and not quickly consumed.

Types of Long-Lived Assets

The two major asset classes are tangible assets (e.g., buildings and equipment) and intangible assets (e.g. copy rights).

Learning Objectives

Differentiate between intangible and tangible assets

Key Takeaways

Key Points

  • Accounting principles determine which assets can be recognized and which cannot; regulation is most restrictive on capitalizing intangible assets that are self-developed (such as brand names).
  • Capital expenditures are incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
  • If an asset can be recognized, the items that are spent to get the asset “up and running” are allowed to be capitalized..

Key Terms

  • Capital Expenditures: A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.

Asset Classes

There are two major types of long-term assets: tangible and non-tangible. Tangible assets include fixed assets, such as buildings and equipment. Intangible assets includes non-physical resources and rights that a firm deems useful in securing an advantage in the marketplace. Examples of intangible assets are copyrights, trademarks, patents and computer programs, financial assets– including such items as accounts receivable, bonds and stocks– and goodwill.

Long-term Investments

Long-term investments are often referred to simply as “investments. ” Long-term investments are meant to be held for many years and are not intended to be disposed of in the near future. They usually consist of three possible types of investments: investments in securities (such as bonds), common stock, or long-term notes. Other types of investments include investments in special funds– e.g. sinking funds or pension funds– and different forms of insurance.

Fixed Assets

Fixed assets– also referred to as property, plant, and equipment– are purchased for continued and long-term use in generating profit for a business. Fixed assets include asset land, buildings, machinery, furniture, tools, IT equipment– e.g. laptops– and certain limited resources– e.g. timberland and minerals. Most of these, with the exception of land assets, are written off against profits over their anticipated life by accumulating depreciation expenses.

Property, Plant and Equipment

Property, plant, and equipment are tangible, long-lived assets used in the operations of the business. Land, natural resources, buildings, furniture, equipment, and machinery are included in this category. They are listed under the asset portion of the balance sheet.

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Asset Classes: Capital expenditures are incurred to get the asset “up and running”.

Accounting Perspectives on Long-Lived Assets

All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.

Learning Objectives

Distinguish between the capitalized and expensed costs of an asset

Key Takeaways

Key Points

  • Figuring the cost of an item takes into consideration more than just the purchase price.
  • Examples that are excluded from the asset are expense, rather than capital costs.
  • If accounting principles allow recognition of an asset, the next issue is which items can be included, and which items need to be expensed.

Key Terms

  • Capital Costs: Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. Put simply, it is the total cost needed to bring a project to a commercially operable status.

Asset Recognition

If accounting principles allow recognition of an asset, the next issue concerns which items can be included and which items need to be expensed. The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.

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Asset Recognition: Items spent to get the asset up and running is capitalized as part as the cost of the asset.

Capital Costs

Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike. If the firm’s own personnel are involved with installing the machine, their wage expenses can be allocated to the machine as well.

Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine’s successful launch.

Figuring the cost of an item takes into consideration more than just the purchase price. Added to that would be any taxes paid, less any discounts received, cost of transportation that a company pays to bring the item to where it needs to go, and the cost of getting it ready for use.

So, for example, the cost of land would include any attorney fees, real estate fees, title fees, back taxes that need to be paid, and the cost of preparation for the lands intended use.

Buildings also have additional costs such as legal fees and remodeling fees to prepare it for use. The same goes for natural resources. Basically any costs that are necessary to get an item or land ready to use for business is included in the cost of the item.


Source: Accounting