Describe several issues in the accounting for long-lived assets

Answer 1

Long-lived assets include both tangible assets, such as land, buildings, and equipment, and intangible assets, such as patents, brand names, trademarks, customer lists, airport landing rights, and franchise rights. Long-lived financial assets also include investments in securities. Both U.S. GAAP and IFRS provide guidance in the following areas of the accounting for long-lived tangible and intangible assets:

1 . Deciding which expenditures with potential long-term benefits firms should recognize as assets on the balance sheet and which they should recognize as expenses on the income statement in the year of the expenditure.

2 . Deciding which expenditures recognized as assets firms should depreciate or amortize as expenses each period.

3 . For assets that firms depreciate or amortize, determining the length of time and pattern of charges to measure depreciation or amortization.

4 . The accounting treatment of changes in expected useful lives and salvage values.

5 . The accounting treatment of changes in fair values of long-lived assets.

6 . The accounting for disposals of long-lived assets.

Long-lived assets can have useful lives extending for decades and provide uncertain benefits because of technological change, introduction of new products, changing consumer tastes, changing government regulations, and similar factors. In addition, intangible long-lived assets have no physical substance. These characteristics of long-lived assets create special accounting challenges, including the need to estimate long useful lives and how, if at all, to recognize changes in fair value. For many firms, investments in long-lived assets represent the single largest balance sheet item as well as a significant use of cash. Management's ability to use these assets is a key determinant of financial success or failure. In order to analyze this aspect of performance, users of financial statements need to understand both the financial reporting standards applicable to long-lived assets and the judgments and estimates that firms make to apply those standards.