|What are long-lived assets?||4|
|(Valuation of long-lived assets)||4|
|The importance of classifying expenditures correctly||5|
|General approach to acquisition costs||5|
|Depreciation of long-lived assets||7|
|Factors that affect the computation of depreciation||8|
|Methods of computing depreciation||9|
|Depreciation of long-lived assets closely related to natural resources||12|
|Testing long-lived assets for recoverability||13|
|Estimating fair value||14|
|Disclosing impairment losses||14|
|Disposal of depreciable assets||15|
|Discarded long-lived assets||15|
|Long-lived assets sold for cash||15|
|Exchanges of long-lived assets||15|
Depending on the industry and activity of the company, long-lived assets can represent a substantial part of all assets of the company; long-lived assets serve as an instrument for building relationships with the company’s partners, banks and governmental institutions; they reflect the state of the company. Thus, a precise treatment of long-lived assets is a crucial part of the company’s financial system.
The aim of this paper is to provide explicit information on long-lived assets. First of all, the definition of long-lived assets will be given and then every phase of the assets’ life will be looked at and described in a clear and detailed way. Therefore, such phases as acquisition, use and disposal as well as problems related to them will be clarified to the readers. Practical examples will be presented in order to facilitate comprehension. This paper is of special attention to several groups of people: it carries value for students who deal with corporate finance and accounting, financial managers and accountants of major corporations, owners of small companies who make acquisition decisions, etc. At the end of the paper, practical recommendations will be drawn, which is highly useful to those who deal with long-lived assets or will do so in the future. This work can be viewed as synthesis of textbooks on corporate finance, current internet sources and interviews with some financial officers working in Latvian companies.
Long-lived assets have the following characteristics. They (1) have a useful life of more than one year, (2) are acquired for use in the operation of a business and (3) are not intended for resale to customers. Major classes of long-lived assets are land, land improvements, buildings and equipment.
Assets not used in the normal course of business should not be included in this category. Thus, land held for speculative reasons or buildings no longer used in ordinary business operations should not be included in the long-lived assets’ category. Instead, they should be classified as long-term investments. To give an example, a computer used in the office would be considered plant and equipment, whereas an identical computer held for sale to customers would be considered inventory.
Long-lived assets are reported at carrying value. Carrying value is the unexpired part of the cost of an asset, not its market value; it is also called book value. …
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