Long-lived assets give the company a potential economic gain beyond the present year or period of operation. It might be beneficial to note that most, but not all, long-lived assets begin as some kind of company purchases. As non-current, or long-lived, assets are expected to last for more than a year, accounting handles long-lived assets differently based on their practical life.
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All assets are resources that the organization manages as a result of historical activities, and from which potential economic profits are projected to contribute to the company. If assets are expected to contribute to multiple-year earnings, such assets are considered long-lived, non-current, or long-term assets. Generally speaking, it is “long-lived,” since it will be around for some time and not consumed immediately.
- Long-term assets are deployed over many cycles of operation.
- Every tangible or intangible object that is capable of being owned or managing to generate value and that is perceived to have significant economic worth, is called an asset.
- As non-current, or long-lived, assets are assumed to last more than a year, accounting handles long-lived assets differently based on their useful life.
Long-lived properties typically fall into two sub-categories:
Tangible long-lived assets.
Tangible Long-lived assets are assets that have physical substance and reflect such assets that the firm will gain from for more than a year. Examples of long-lived tangible assets in business include computer equipment, furniture, machinery, buildings, and land.
The cost of a tangible long-lived asset is measured as the cost of purchasing the product plus any expenses involved in making it ready for its intended use. Let’s assume that owner paid $120,000 to purchase a piece of equipment for her factory and paid $5,000 in installation costs. The owner would record a cost of $125,000 for her equipment on the financial statements.
Long-lived tangible assets lose their worth when they are used over time and this is known as depreciation. A business will record depreciation or cost of using the asset per year in the same time span that the asset’s income helped the company gain. This means that the owner would record depreciation for each of her tangible long-lived assets separately. The amount of depreciation reported over the life of the asset is known as accumulated depreciation, and that value is excluded from the asset’s cost of reporting on the financial statements.
Intangible long-lived assets.
These are intangibles that hold great value to the business. Intangible assets could be created internally or purchased readily. One of the internally created cardinal important intangibles is Goodwill, it is the brand name and goodwill created by the business over the years in the market. Other intangibles include copyrights, patents, trademarks, brand names, etc. Some intangible assets have finite lives, and others have infinite lives, such as goodwill. Finite-lived intangible assets are amortized over their entire lifetime, and an amortization expense is recorded on the statement of income. In comparison, indefinite-lived intangible assets are checked for damage at least annually, and a cost of loss, if any, is recorded in the income statement over the impairment period.
Often, intangible assets are deemed identifiable or unidentifiable. An identifiable asset under IFRS is that which is;
- Separable from the firm or arises from a legal or contractual right
- Controlled by the firm
On the other hand, one unidentifiable asset is one that cannot be separated from the company. It may have an indefinite life too.
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De-recognition of long-lived assets
Long-lived assets are de-recognized until lost, exchanged, or abandoned.
If an asset is sold, it is taken off the balance sheet. In the income statement, a profit or loss is recorded to the degree of the difference between the selling proceeds and the asset’s carrying value.
If an asset is exchanged for another asset, gain or loss is measured by comparing the old asset’s carrying value to the old asset’s fair value (or the new asset’s fair value, if it is easier to determine). The old asset’s carrying value is excluded from the balance sheet and the new asset is recorded at its fair value.
When an asset is abandoned, it is excluded from the balance sheet and a loss to that extent is recognized on the income statement.
Author: Varsha Bhambhani
About Author: About Author: I’m an FRM professional and CFAL-2 candidate with 3 yrs of work ex in the risk domain. My interest includes mathematics and finance. From a personal life perspective, I love health and fitness, in not studying one can find me inside the gym aka nerd gym rat.