Learning Module 7
Analysis of Long-Term Assets
Key Outcomes Summary & Practice Problems
What you must be able to do
Curriculum Year: 2026
Compare the financial reporting of intangible assets that are purchased, internally developed, and acquired in a business combination.
Explain and evaluate how impairment and derecognition of property, plant, and equipment and intangible assets affect the financial statements and ratios.
Analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets.
1 · Acquisition of Intangible Assets
Intangible assets are non-monetary assets lacking physical substance — patents, copyrights, trademarks, franchises. Under IFRS, an identifiable intangible asset must meet three definitional criteria — identifiable, controlled by the company, expected to generate future economic benefits — plus two recognition criteria: probable future benefits and reliable cost measurement. Goodwill is not an identifiable intangible asset; it arises only when the purchase price of an acquisition exceeds the fair value of net identifiable assets acquired.
Recorded at Fair Value
Treated like tangible assets — recorded at fair value when acquired, assumed equivalent to purchase price. If several assets are bought as a group, the price is allocated by relative fair value. Analysts focus on the type of asset acquired rather than the precise allocated value, since fair value relies on management judgment.
Generally Expensed
Costs to internally develop intangibles (patents, brands via R&D/advertising) are generally expensed as incurred — unlike purchased intangibles. This means internal developers report lower assets than companies that buy intangibles externally. Cash flow impact: internal development = operating outflow; external purchase = investing outflow.
Acquisition Method — Fair Value Allocation
Acquirer allocates purchase price to each asset/liability at fair value. Excess of price over net identifiable assets = goodwill. IFRS: recognize if it meets definitional/recognition criteria, else goodwill. US GAAP: separate from goodwill only if it arises from contractual/legal rights OR can be separated from the company.
IFRS vs US GAAP on research & development: IFRS requires expensing research-phase costs but allows capitalizing development-phase costs once technical feasibility and intent to complete/use/sell are demonstrated. US GAAP generally requires expensing both research and development — except certain software development costs, which are expensed until technological feasibility (software for sale) or probable completion (software for internal use) is established, then capitalized.
EUR1,000/month spent developing internal-use software, FY ended 31 Dec 2019
If recognition criteria met 1 February: Jan EUR1,000 expensed; remaining EUR11,000 capitalized as intangible asset
If recognition criteria met 1 December: Jan–Nov EUR11,000 expensed; only EUR1,000 capitalized
Under US GAAP (if completion was probable in 2018): the entire EUR12,000 would be capitalized — earlier-demonstrated "probable completion" vs IFRS's stricter "technical feasibility" test.
AB InBev / SABMiller acquisition (2016), USD103.1 billion purchase price: intangible assets recognized at USD20.0 billion (mostly indefinite-life brands like Castle, Carling, Aguila, Cristal — USD19.9bn), PP&E USD9.1bn, assets held for sale USD24.8bn. Goodwill of USD74.1 billion was recognized — driven by an assembled workforce, expected cost synergies, and deferred tax liabilities on the fair-value step-up of acquired intangibles (whose amortization isn't tax-deductible). None of this goodwill is tax-deductible.
Strategic signal in the type of asset, not its value: analysts gain more insight from understanding what a company acquired (e.g., franchise rights, brand names) than from the precise dollar figure management allocated to it — fair value requires heavy estimation.
Comparability distortion: a company that develops brands/patents internally (expensed) will show lower intangible assets than an otherwise-identical company that purchased similar intangibles externally (capitalized) — even though the underlying economic value may be similar.
2 · Impairment and Derecognition of Assets
Impairment charges reflect an unanticipated decline in asset value — distinct from depreciation/amortization, which systematically allocates cost over useful life. An asset is impaired when its carrying amount exceeds its recoverable amount. The impairment loss is non-cash and does not affect cash from operations.
Impairment = Carrying amount − Recoverable amount, where Recoverable amount = higher of (fair value less costs to sell) and (value in use, i.e. PV of future cash flows). One-step test. Reversals of impairment are permitted (reported in profit) if recoverable amount later increases — but never above original carrying amount.
Step 1 (recoverability): carrying amount vs undiscounted expected future cash flows. If carrying > undiscounted CF → not recoverable. Step 2 (measurement): impairment = Carrying amount − Fair value. Reversals of impairment losses on assets held for use are NOT permitted once recognized.
Carrying amount GBP18,000 in both cases
Sussex (Ex. 2): Value in use GBP16,000 > FV−costs GBP15,000 → IFRS recoverable amt = GBP16,000 → loss GBP2,000
Undiscounted CF GBP19,000 > carrying GBP18,000 → US GAAP: recoverable, NO loss
Essex (Ex. 3): Value in use GBP14,000 > FV−costs GBP8,000 → IFRS recoverable amt = GBP14,000 → loss GBP4,000
Undiscounted CF GBP16,000 < carrying GBP18,000 → not recoverable → US GAAP loss = 18,000 − FV(10,000) = GBP8,000
Key takeaway: IFRS write-down to value in use can be smaller than the US GAAP write-down to fair value.
Asset Category | Testing Frequency | Treatment |
|---|---|---|
PP&E & finite-life intangibles | Only when impairment indicators exist (obsolescence, demand decline, tech change) | Carrying amount reduced; loss hits income statement |
Indefinite-life intangibles (incl. goodwill) | At least annually, regardless of indicators | Not amortized; impaired when carrying amount > fair value |
Long-lived assets held for sale | Tested at reclassification from held-for-use | Written down to FV less costs to sell if carrying amount exceeds it; depreciation/amortization stops |
Reversal asymmetry — held for use vs held for sale (US GAAP): once impaired, an asset held for use can never be written back up under US GAAP. But for assets held for sale, if fair value subsequently increases, the previously recognized loss can be reversed. IFRS permits reversal in both cases (never above the original, pre-impairment carrying amount).
Gain or loss = Sale proceeds − Carrying amount at time of sale
Moussilauke Diners example: 450 pizza ovens sold for $3.1M
Carrying amount = Cost $5.1M − Accum. depreciation $3.2M = $1.9M
Gain = $3.1M − $1.9M = $1.2M gain (reported on income statement; $3.1M is the investing cash inflow)
Retirement/abandonment: treated like a sale but with zero cash proceeds — assets are reduced by carrying amount and a loss equal to the full carrying amount is recorded.
Exchanges: remove carrying amount of asset given up, add fair value of asset received; difference is gain/loss. If no reliable fair value exists, the new asset is recorded at the carrying amount given up (no gain/loss recognized).
Spin-offs (e.g., Fiat Chrysler's 2016 distribution of Ferrari shares to FCA shareholders): no gain or loss is recognized when the entire business unit is distributed pro-rata to existing shareholders — contrast with FCA's prior partial IPO sale of Ferrari shares, which generated an EUR873 million equity increase.
Indirect cash flow statement: gains/losses on sale are removed from operating cash flow (non-operating item) and the full sale proceeds are shown as an investing inflow.
3 · Presentation and Disclosure
Disclosures about long-lived assets appear across the balance sheet, income statement, cash flow statement, and notes. Required note disclosures differ meaningfully between IFRS and US GAAP.
Disclosure Item | IFRS | US GAAP |
|---|---|---|
PP&E: measurement basis, useful life, depreciation method | Required, by class | Required, by major class |
Gross carrying amount & accumulated depreciation/amortization | Required, beginning & end of period | Required, in total and by major class |
Intangibles: indefinite vs finite life | Required disclosure for each class | Less granular life disclosure requirement |
Estimated amortization expense, next 5 fiscal years | Not required | Required |
Reversals of impairment losses | Required disclosure (reversals permitted) | N/A — reversals not permitted for assets held for use |
Revaluation details (date, method, surplus) | Required if revaluation model used | N/A — revaluation model not permitted |
Nature-of-expense vs function-of-expense (IFRS income statement presentation): under the nature of expense method, a company discloses depreciation as its own line item alongside materials, transport, employee benefits, etc. Under the function of expense method, depreciation is buried inside functional categories like cost of sales or SG&A — at minimum, cost of sales must be disclosed separately. This choice affects whether an analyst can see depreciation expense directly on the income statement.
EXHIBIT — ORANGE SA (2017 ANNUAL REPORT, EUR MILLIONS)
Balance Sheet Item | 31 Dec 2017 | 31 Dec 2016 | 31 Dec 2015 |
|---|---|---|---|
Goodwill | €27,095M | €27,156M | €27,071M |
Other intangible assets | €14,339M | €14,602M | €14,327M |
Property, plant & equipment | €26,665M | €25,912M | €25,123M |
Total assets | €94,714M | €94,668M | €91,430M |
Orange's 2016 operating income fell 14.0% (€4,742M → €4,077M) largely due to €772M goodwill impairment + €207M fixed-asset impairment, concentrated in Poland (€507M — ADSL competitiveness decline, higher discount rate from sovereign downgrade), Egypt (€232M — 4G license terms, currency depreciation), DRC (€109M), Cameroon (€90M), and Niger (€26M), plus a €263M rise in depreciation & amortization.
Goodwill as % of total assets (2017) = 27,095 ÷ 94,714 = 28.6%
Other intangibles as % of total assets = 14,339 ÷ 94,714 = 15.1%
Recoverable-amount sensitivity (France, Spain, Poland, Belgium, Romania combined):
−1% perpetuity growth rate → recoverable value falls EUR13.2 billion (10.4+1.6+0.6+0.3+0.3)
+1% post-tax discount rate → recoverable value falls EUR14.6 billion (11.4+2.0+0.6+0.3+0.3)
Largest PP&E component for Orange: "Network and terminals" at €22,880M of €26,665M total — telecom infrastructure dominates. Largest intangible components: telecommunications licenses (€6,233M), software (€3,946M), Orange brand (€3,133M).
Goodwill is tested, not amortized: Orange tests goodwill for impairment at least annually (more often if indicators arise) at the Cash Generating Unit (CGU) level, comparing carrying value to recoverable amount (value in use = PV of expected future cash flows based on management's economic, regulatory, and license-renewal assumptions).
4 · Using Disclosures in Analysis
Two families of ratios help analysts assess a company's reinvestment needs and efficiency: the fixed asset turnover ratio and a set of asset age ratios derived from the relationship between historical cost, accumulated depreciation, and depreciation expense. These age ratios apply primarily to assets measured under the cost model (the revaluation model breaks the historical-cost relationship).
Fixed asset turnover = Total revenue / Average net PP&E — higher = more sales per $ of fixed-asset investment
Estimated total useful life = Historical cost / Annual depreciation expense
Estimated age = Accumulated depreciation / Annual depreciation expense
Estimated remaining life = Net PP&E / Annual depreciation expense
Identity: Total useful life = Estimated age + Estimated remaining life
(because Historical cost = Accumulated depreciation + Net PP&E)
EXHIBIT — ORANGE VS BCE VS VERIZON (2017, MILLIONS OF LOCAL CURRENCY)
Metric | Orange (EUR) | BCE Inc (CAD) | Verizon (USD) |
|---|---|---|---|
Historical cost, total PP&E | 97,092 | 69,230 | 246,498 |
Accumulated depreciation | 70,427 | 45,197 | 157,930 |
Net PP&E, end of year | 26,665 | 24,033 | 88,568 |
Annual depreciation expense | 4,708 | 3,037 | 14,741 |
Capital expenditure | 5,677 | 4,149 | 17,247 |
Accounting standard | IFRS | IFRS | US GAAP |
Estimated total useful life = 246,498 / 14,741 = 16.7 years
Estimated age = 157,930 / 14,741 = 10.7 years
Estimated remaining life = 88,568 / 14,741 = 6.0 years
Cross-company comparison: Orange & BCE depreciate over much longer assumed lives (20.6 / 22.8 yrs) than Verizon (16.7 yrs)
% of useful life elapsed: Orange 73%, BCE 65%, Verizon 64%
CapEx / Depreciation: Orange ~120%, BCE ~140%, Verizon ~120% — all three reinvesting faster than they depreciate
Fixed asset turnover: Orange 1.6, BCE 1.0, Verizon 1.5 — Orange & Verizon generate more sales per dollar of fixed assets than BCE
Caveat on precision: these are estimates only. Companies mix depreciation methods, hold assets with varying useful lives and salvage values (including fully depreciated assets), and disclosures are often presented at a general level. Use these ratios to flag areas for further investigation, not as precise figures — and exclude non-depreciable land where it is separately disclosed (Verizon discloses land separately; Orange and BCE do not).
Higher CapEx/Depreciation ratio signals a company is expanding or renewing productive capacity faster than its existing base is wearing out — consistent with all three telecoms in the exhibit having a somewhat older asset base they are actively replacing.
Cross-company differences in these ratios can reflect genuine business differences (asset mix, acquisition/divestiture activity) rather than purely differences in accounting choice — always pair ratio analysis with footnote detail on asset categories.