How is the acquisition cost treated over the life of tangible and intangible assets?
TREATMENT OF ACQUISITION COST OVER LIFE OF ASSET
The cost of long-lived assets with a finite life, that is, ones for which a firm consumes the asset's services over time in generating revenues, is recognized as an expense each period. The balance sheet carrying value decreases over time as the firm recognizes the cost of the asset as an expense. Management must estimate the asset's finite life, that is, its service life or useful life. Examples include buildings, equipment, patents, copyrights, landing rights, and customer lists.
The cost of long-lived assets with an indefinite life, that is, ones for which a firm does not consume the asset's services as time passes or cannot estimate the length of the benefit period, is not recognized as an expense each period. Instead, the asset remains on the balance sheet at acquisition cost (unless an asset impairment occurs). Examples include trade names, trademarks, certain renewable licenses, and goodwill arising from a business combination. Long-lived assets with extremely long useful lives, such as land and works of art, are treated as having an indefinite life.
Depreciation is the accounting term used to refer to the periodic write-off of the acquisition cost of a tangible long-lived asset with a finite service life, such as buildings and equipment. Amortization is the periodic write-off of intangible assets.
Salvage value is the estimated value of a tangible asset at the end of its useful life. Firms do not depreciate salvage values. Instead, firms compare the proceeds of selling the building at the end of its useful life with its carrying value (that is, its salvage value) to compute a gain or loss on the sale.
Goodwill reflects the value of knowledgeable employees, a reputation for quality products, and other items not separately recognized. Under both U.S. GAAP and IFRS, goodwill has an indefinite life, and firms do not amortize the amount recognized as goodwill.Firms must test goodwill annually for a loss in value.
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