Long Lived assets

Mc Donalds reported in 2009, 33 Billion in

Propert plant (cost Gross value) and total
assets were 30 Billion
Refer pg.276 chapter 10, young
 Repair v/s improvement

USGAAP and IFRS guideline

Increase in assets life

Increase in quality of output
Increase in quantity of output
Reduction in cost
 Methods for depreciation

McDonald- pg 279 young

Double declining method- SLM rate*2
Change in depreciation estimates or methods
is adjusted going forward
 Long Lived Assets

Expensing V/s Capitalization

 NI Impact

Capitalizing results into higher net Income

in the period of the expenditure as
compared to expensing.

For companies which are expanding,

capitalizing expenditure leads to higher
earnings over many years as the
depreciation on previously capitalized
expenditure is less than the amount of
additional cost that are newly capitalized.
 Shareholder impact

Because capitalization results in higher net

income in the period of expenditure as
compared to expensing , it leads to higher
shareholder equity.
 CF

Capitalizing leads to higher OCF and lower

Investing CF, total cash flow statement
Is not impact, just the classification is
different.
 Ratios

Capitalizing leads to higher ROA, higher ROE,

as there is higher income in the first year, in
subsequent years the ROA and ROE will be
lower.

Expensing firms takes the hit in the first year

but the ROA and ROE are higher in
subsequent years, we should be careful not to
see this as a better performing company in
later years.
 Problem

When a firm constructs an assets, it

capitalizes all interest as asset cost. It is
correct as per USGAAP and IFRS. When
construction is completed the interest cost is
allocated to the income statement as
depreciation.
ICR=EBIT/I higher ICR when interest is
capitalized
 Problem

Bond rating agencies make the adjustment by

including total interest expense.
Debt covenants also gets triggered due to
minimum ICR requirement.
During 20X6, the company capitalized $20 of construction interest. The
capitalized interest increased depreciation expense $5 for the year. For analytical
purposes, you have decided to treat the capitalized interest as an immediate
expense.
 Old Revised

Assets 2060 2045

ICR 7 5.1

NP margin 5% 4.60%

CFO $220 200

CFI -100 -80

Debt/Equity 59.80% 60.70%

 Research and development

IFRS allows research cost to be expensed and

development cost is capitalized.

Development is defined as translation of

research finding into a product or process.

USGAAP research and development are both

expensed. Once the technological feasibility is
established all subsequent cost is capitalized.
Capitalizing results into higher net income, in
the first year and lower net income in
subsequent years.
Adjustments are similar to the capitalized
interest issue.
Solve ques-10.1 pg.288 David Young
 Ind AS

http://www.icai.org/post.html?post_id=7543

Ind AS -23, pg -4