---
title: "ACCT 101, Session 6: PP&E and Intangibles"
author: 
  - name: Dr. Richard M. Crowley
    email: rcrowley@smu.edu.sg
    affiliation: https://rmc.link/
title-slide-attributes:
  data-background-video: "../Backgrounds/title.mp4"
  data-background-video-loop: "true"
  data-background-size: stretch
format:
  revealjs:
    theme: default
    css: quarto_white.css
    navigation-mode: vertical
    controls: true
    transition: slide
    background-transition: fade
    transition-speed: default
    width: 1536
    height: 864
    logo: ../Logos/logo2.png
    code-link: true
    code-line-numbers: false
    chalkboard:
      theme: whiteboard
    auto-stretch: false
revealjs-plugins:
  - attribution
execute:
  echo: true
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  message: false
editor: source
---

# Front matter {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}


<!--# Note that the downlit and xml2 pacakges are required to compile -->
<!--# Installed extensions include `attribution`, `qrcode`, and `material-icons` -->

```{r helpers, echo=FALSE, warning=FALSE, message=F}
library(knitr)
library(kableExtra)

#' Pretty formatted HTML tables
#' 
#' @param df The dataframe to format as a table
#' @param names Names to use for columns if not using the df column names. Vector
#' @param highlight_cols Columns to highlight. Default is c(1) for highlighting the first row. Use c() to remove.
#' @param highlight_rows Rows to highlight. Default is c() to not highlight any rows.
#' @param color_rows Rows to highlight in color. Default is c() to not highlight any rows.
#' @param highlight_end_rows Rows to highlight. Uses a reverse indexing where 1 is the last row, 2 is second to last, etc.
#' @param full Use to span the full width of a slide. FALSE by default.
#' @param fixed_header Whether the first row should be treated as a header row. TRUE by default.
html_df <- function(df, names=NULL, highlight_cols=c(1), highlight_rows=c(), color_rows=c(), highlight_end_rows=c(), full=F, fixed_header=T) {
  if(!length(names)) {
    names=colnames(df)
  }
  kbl(df,"html", col.names = names, align = c("l",rep('c',length(cols)-1))) %>%
    kable_paper(c("striped","hover"), full_width=full, fixed_thead=F, html_font = "\"Source Sans Pro\", Helvetica, sans-serif") %>%
    {if(length(highlight_cols)) column_spec(., highlight_cols,bold=T, background = "#ffffff99") else .} %>%
    {if(length(highlight_rows)) row_spec(., highlight_rows,bold=T, background = "#ffffff99") else .} %>%
    {if(length(color_rows)) row_spec(., color_rows,bold=T, background = "#aaaaff99") else .} %>%
    {if(length(highlight_end_rows)) row_spec(., nrow(df) + 1 - highlight_end_rows,bold=T, background = "#ffffff99") else .}
}

library(tidyverse)
```

<!--# List packages here that are not being correctly highlighted -->
<!--# The usual cause is calling the library from a echo=FALSE cell -->

```{r}
#| include: false
options(downlit.attached = c("knitr", "kableExtra", "tidyverse"))
```

<!-- "reveal_plugins:..." and "chalkboard:" are handled by prep.py -->
```{r setup, include=FALSE}
library(reticulate)  # To use python in R Markdown
# Python to use is specified in the .Renviron file
```

## Quiz update {data-background="../Backgrounds/default.jpg" class="present-only" visibility="hidden"}

- All graded
- We will go over the questions in class today
- Average score: 66/80



## Learning objectives {data-background="../Backgrounds/default.jpg"}

:::: {.columns}

::: {.column width="50%"}
![](../Course_Diagrams/ACCT_101_course_map_6.png){width="450px" fig-align="center"}
:::

::: {.column width="50%"}

PP\&E, Intangibles (Chapter 7)

1. Understand which assets qualify as PP&E and Intangibles
2. Account for acquisition and depreciation of PP\&E
3. Understand additional issues related to PP&E
4. Account for intangibles


:::

::::




# What are Non-current Assets? {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## Non-Current Assets {data-background="../Backgrounds/default.jpg"}

:::: {.columns}

::: {.column width="50%"}

- Long term investments
- Construction in Progress
    + Incomplete skyscrapers
    + Incomplete manufacturing plants
    + Incomplete complicated machinery
        * Tungsten cathode, LPP Fusion, 1.25 years

:::

::: {.column width="50%"}

![](../Figures/WIP2.png){width="200px" fig-align="center"}

![](../Figures/lpp_tungsten.jpg){width="200px" fig-align="center"}

:::

::::


## Non-Current Assets {data-background="../Backgrounds/default.jpg"}

:::: {.columns}

::: {.column width="50%"}

- *Property, Plant, and Equipment*, PP\&E
    - Leasehold Land
        - 99 year ownership
        - [Central Boulevard white site](http://www.businesstimes.com.sg/real-estate/ioi-places-top-bid-of-s257-billion-or-s1689-psf-ppr-for-central-boulevard-white-site)
            - S$2.57B
    - Freehold land
        - Permanent ownership
        - The Peak @ Cairnhill II
    - Natural Resources
        - [San Ardo Oil Field](https://www.flickr.com/photos/locosteve/6132400059)

:::

::: {.column width="50%"}

![](../Figures/Leasehold.jpg){width="200px" fig-align="center" style="margin:0px" .lightbox}

![](../Figures/Freehold.png){width="200px" fig-align="center" style="margin:0px" .lightbox}

![](../Figures/Oil_Field.jpg){width="200px" fig-align="center" style="margin:0px" .lightbox}

:::

::::


## Non-Current Assets {data-background="../Backgrounds/default.jpg"}

:::: {.columns}

::: {.column width="50%"}

- *Property, Plant, and Equipment*, PP\&E
    - Buildings
    - Land improvements
    - Furniture and Fixtures
    - Equipment
    - Machinery
    - Vehicles

:::

::: {.column width="50%"}

![](../Figures/factory.png){width="150px" fig-align="center" style="margin:0px"}

![](../Figures/pc.png){width="150px" fig-align="center" style="margin:0px"}

![](../Figures/machine.png){width="150px" fig-align="center" style="margin:0px"}
:::

::::


## Non-Current Assets {data-background="../Backgrounds/default.jpg"}

:::: {.columns}

::: {.column width="50%"}

- *Intangibles*
    + Patents
    + Internally developed software
    + Trademarks and names
    + M\&A value (goodwill)
- Not accounted for intangibles
    - Reputation
    - Own brand name
    - Management quality

:::

::: {.column width="50%"}

![](../Figures/IPOS.png){width="400px" fig-align="center"}

:::

::::


## What will we need to do? {data-background="../Backgrounds/reference.jpg"}

```{r , echo=FALSE, warning=FALSE}
options(knitr.table.format = "html") 
text <- data.frame(
  y0 = c("Land (freehold)","Land (leasehold)","Buildings","Furniture & fixtures", "Machinery", "Vehicles", "Land improvements", "Natural resources", "Intangibles (with finite useful lives)", "Intangibles (with indefinite useful lives)"),
  x0 = c("None","Depreciation","Depreciation","Depreciation","Depreciation","Depreciation","Depreciation","Depletion","Amortization","None")
)
html_df(text, highlight_cols = c(1), names=c("Asset","Related expense account"))
```

# PP&E Acquisition {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## What do we include? {data-background="../Backgrounds/default.jpg"}

> PP&E has useful life or extends useful life, whereas expenses do not extend useful life but merely maintain or restore working order. [IAS 16]

- Include as an asset:
    - Anything with useful life
    - Anything *extending* useful life
- Expense:
    - Maintenance
        - Maintenance doesn't extend useful life, it just keeps useful life where it should be

## Purchasing (IAS 16) {data-background="../Backgrounds/reference.jpg"}

- Include:
    - Purchase price at historical cost
        - Net of discounts
    - Duties and *non-refundable* taxes
    - Employee benefits
        - For setting up the PP\&E, such as insurance
        - Purchase commissions
    - Site preparation
    - Delivery and handling
    - Installation and/or assembly
    - Testing expenses
        - Net of test good proceeds
    - Fees incurred

## Purchasing (IAS 16) {data-background="../Backgrounds/reference.jpg"}

- What don't we include?
    - Opening ceremonies
        - No useful life after
    - Advertising a new product
        - A direct expense for operations, not the PP\&E
    - Business costs due to dealing with customers
        - Operating costs
    - Admin/overhead costs
        - Operating costs

## Examples of PP\&E Value {data-background="../Backgrounds/bricks.jpg"}

```{r , echo=FALSE, warning=FALSE}
options(knitr.table.format = "html") 
text <- data.frame(
  y0 = c("Land","Land improvements","Buildings (constructed)","Buildings (purchased)", "Equipment"),
  x0 = c("Purchase price, commission (to agents), taxes paid, fees (legal, surveying), grading (changing elevation), removing unwanted structures","Fencing, paving, lighting, security systems, landscaping", "Architect's fees, contractors' fees, materials, labor and overhead, interest on funds borrowed for construction","Purchase price, commission (to agents), taxes paid, repair and renovation costs","Purchase price, transport, insurance during transit, sales tax, installation, testing (net of useful products)")
)
html_df(text, highlight_cols = c(1), names=c("PP&E","Typical costs included in asset's value"))
```

## Check {data-background="../Backgrounds/question1.jpg"}

What is the asset value of the following:

<ol>
<li style="margin-bottom:3em"> \$10,000 of land with a \$1,000 stamp duty (tax) and a \$300 opening party
<li style="margin-bottom:3em"> A $5,000 machine, where testing cost \$1,000 but created \$500 of useful inventory.
</ol>

## Solution {data-background="../Backgrounds/answer.jpg" class="default exclude"}

1. \$10,000 of land with a \$1,000 stamp duty (tax) and a \$300 opening party
    - Answer: \$11,000
    - Purchase cost is included
    - Taxes are including (unless refundable)
    - Opening ceremonies are excluded
2. A $5,000 machine, where testing cost \$1,000 but created \$500 of useful inventory.
    - \$5,500
    - Purchase cost is included
    - Testing costs are included
    - Inventory created during testing is subtracted

## Basket purchasing {data-background="../Backgrounds/reference.jpg"}

:::: {.columns}

::: {.column width="30%"}

- Often, companies purchasing groups of assets
    - Firesales or deals with other companies
- We call this basket purchasing
    1. Determine the market value of each asset
    2. Allocate a percent of market value to each asset
    3. Allocate basket price by percentages to assets
- Record journal entries as usual

:::

::: {.column width="70%"}

![](../Diagrams/Basket_purchase.png){width="800px" fig-align="center" .lightbox}

:::

::::





## Basket purchasing example {data-background="../Backgrounds/default.jpg"}

> Situation: Bought Machinery (MV: $8,000), Land (MV: $10,000), and Equipment (MV: $2,000) for $10,000 in one cash purchase

![](../Diagrams/Basket_example.png){width="800px" fig-align="center"}

## Check {data-background="../Backgrounds/question1.jpg"}

Determine the value of each item in the following basket purchase for $90,000 cash:

1. A service van worth $30,000
2. A small tract of land worth $50,000
3. A large amount of inventory worth $20,000

## Solution {data-background="../Backgrounds/answer.jpg" class="default exclude"}

![](../Diagrams/Basket_example2.png){width="1000px" fig-align="center"}

## Repairs {data-background="../Backgrounds/default.jpg"}


- Standard repairs are an expense
    - They don't increase useful life
        - They maintain it
- Repairs that increase useful life should be capitalized
    - Add the repair cost to asset value

> Capitalize repairs *only* when useful life changes 

:::: {.columns}

::: {.column width="50%"}

![](../Diagrams/JE_6-1.png){width="600px" fig-align="center" .lightbox}
:::

::: {.column width="50%"}

![](../Diagrams/JE_6-2.png){width="600px" fig-align="center" .lightbox}

:::

::::



# Depreciation, Revisited {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## Why we depreciate {data-background="../Backgrounds/default.jpg"}

- Recognize usage of assets over time
    - Even though we still have the asset, it's lost value
        - Not as new
    - Charge to income statement as *depreciation expense*
    - Recognize on balance sheet as *accumulated depreciation* on a specific asset account
        - Contra asset
- Matching principal
    + We used the asset to generate revenue, so we need to match asset usage (expense) to this revenue

![](../Diagrams/JE_6-3.png){width="800px" fig-align="center" .lightbox}

## Depreciation in every day life {data-background="../Backgrounds/question1.jpg"}

How much does 1 year affect the value of the following?

1. Smart phone
2. Car
3. Textbook
4. Fiction book

## Depreciation methods {data-background="../Backgrounds/reference.jpg"}

1. Straight line
    + We've seen this one already!
    + $Depr = \frac{Cost-Salvage}{\#Periods}$
2. Units of production (a.k.a. units of activity)
    + $Depr = (Cost-Salvage) \frac{Units~Used}{Total~Units}$
3. Double declining balance
    + $P = 2/\#Periods$
    + $Depr = (Cost - Accum~Depr) \cdot P$

::: {.callout-important}
## Salvage value (a.k.a., residual value)

*Never go below salvage value*.  Stop depreciating when you hit salvage value

:::



## Picking a depreciation method {data-background="../Backgrounds/books.jpg"}

> The depreciation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by an entity. [FRS 16:60]

- Expect variation in methods used, as different firms may argue different usage patterns for the same assets

> The method must be used consistently from period to period. [FRS 16:61, 62]

- You generally can't change methods during the life of an asset

## Straight-line depreciation {data-background="../Backgrounds/default.jpg"}

$$
Depr = \frac{Cost-Salvage}{\#Periods}
$$

- Constant over time
    - Same amount per year
- Partial years: multiply by the $Months\ used/12$
- Will end up at salvage value after $\#Periods$ periods

```{r , echo=FALSE, warning=FALSE}
#| fig-align: center


suppressPackageStartupMessages(library(plotly))

m <- list(
  l = 60,
  r = 50,
  b = 60,
  t = 40,
  pad = 4
)

df = data.frame(
  year=c(1,2,3,4,5),
  sl=c(20000,20000,20000,20000,20000),
  unit=c(10000,30000,40000,10000,10000),
  ddb=c(40000,24000,14400,8640,12960),
  sls=c(15000,15000,15000,15000,15000),
  units=c(7500,22500,30000,7500,7500),
  ddbs=c(40000,24000,11000,0,0)
  
)
dfv = data.frame(
  year=c(0,1,2,3,4,5),
  v_sl=c(100000,80000,60000,40000,20000,0),
  v_unit=c(100000,90000,60000,20000,10000,0),
  v_ddb=c(100000,60000,36000,21600,12960,0),
  v_sls=c(100000,85000,70000,55000,40000,25000),
  v_units=c(100000,92500,70000,40000,32500,25000),
  v_ddbs=c(100000,60000,36000,25000,25000,25000)
)
```



```{r , echo=FALSE, warning=FALSE}
#| fig-align: center

p1 <- plot_ly(df, x=~year, y=~sl, type="scatter", mode="lines", name="Depr: SL" , line=list(color="#1f77b4", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", range=c(0,25000)))
p2 <- plot_ly(dfv, x=~year, y=~v_sl, type="scatter", mode="lines", name="NAV: SL", line=list(color="#1f77b4", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Check: Straight-line {data-background="../Backgrounds/question1.jpg"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is straight-line depreciation in years 1 and 2?</span>

<p style="margin-bottom:15em"></p>

## Check: Straight-line {data-background="../Backgrounds/answer.jpg" class="default exclude"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is straight-line depreciation in years 1 and 2?</span>

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~sls, type="scatter", mode="lines", name="Depr: SL" , line=list(color="#1f77b4", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", range=c(0,25000)))
p2 <- plot_ly(dfv, x=~year, y=~v_sls, type="scatter", mode="lines", name="NAV: SL", line=list(color="#1f77b4", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Units of production depreciation {data-background="../Backgrounds/default.jpg"}

$$
Depr = (Cost-Salvage) \times \frac{Units\ Used}{Total\ Units}
$$

- Constant per unit produced
    - Same amount per unit, but units vary by year
- Partial years: no change
- Will end up at salvage value after the total number of units are produced

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~unit, type="scatter", mode="lines", name="Depr: unit" , line=list(color="#ff7f0e", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_unit, type="scatter", mode="lines", name="NAV: unit", line=list(color="#ff7f0e", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Check: Units of production {data-background="../Backgrounds/question1.jpg"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is units of production depreciation in years 1 and 2?  Usage will be 10%, 30%, 40%, 10%, and 10% for each year.</span>

<p style="margin-bottom:15em"></p>

## Check: Units of production {data-background="../Backgrounds/answer.jpg" class="default exclude"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is units of production depreciation in years 1 and 2?  Usage will be 10%, 30%, 40%, 10%, and 10% for each year.</span>

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~units, type="scatter", mode="lines", name="Depr: unit" , line=list(color="#ff7f0e", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_units, type="scatter", mode="lines", name="NAV: unit", line=list(color="#ff7f0e", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Double declining balance depreciation {data-background="../Backgrounds/default.jpg"}

$$
Depr = (Cost - Acc\ Depr)\times P,\quad P=\frac{2}{\#Periods}
$$

- More depreciation early, less later
- Partial years: multiply by the $Months\ used/12$
- Can hit salvage value early -- stop depreciating at this point


```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~ddb, type="scatter", mode="lines", name="Depr: DDB" , line=list(color="#2ca02c", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_ddb, type="scatter", mode="lines", name="NAV: DDB", line=list(color="#2ca02c", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Double declining balance depreciation {data-background="../Backgrounds/default.jpg"}

$$
Depr = (Cost - Acc\ Depr)\times P,\quad P=\frac{2}{\#Periods}
$$

Steps for calculation:

1. Determine the percentage to deduct each period, $P=\frac{2}{\#Periods}$
2. Determine net asset value, $NAV = Historical~Cost-Accum~Depr$
3. Determine the maximum depreciation, $max=NAV \cdot P$
4. If not the last period:
    - Check if $NAV-max \ge salvage$
    - If it is, depreciation is $max$
    - If it is not, depreciation is $NAV - salvage$
5. If the last period:
    - Take $NAV - salvage$ as your depreciation

## Check: DDB {data-background="../Backgrounds/question1.jpg"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is double declining balance depreciation in years 1 and 2?</span>

<p style="margin-bottom:15em"></p>

## Check: DDB {data-background="../Backgrounds/answer.jpg" class="default exclude"}

> <span style="font-size:0.8em">You have a $100k asset which you will use for 5 years, with $25,000 salvage value.  What is double declining balance depreciation in years 1 and 2?</span>

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~ddbs, type="scatter", mode="lines", name="Depr: DDB" , line=list(color="#2ca02c", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_ddbs, type="scatter", mode="lines", name="NAV: DDB", line=list(color="#2ca02c", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Depreciation comparison: no salvage value {data-background="../Backgrounds/default.jpg"}

> <span style="font-size:0.8em">Situation: You have a $100k asset which you will use for 5 years, with \$0 salvage value. Determine depreciation using the 3 methods.  Usage will be 10%, 30%, 40%, 10%, and 10% for each year.</span>

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~sl, type="scatter", mode="lines", name="Depr: SL" , line=list(color="#1f77b4", width=4)) %>%
  add_trace(y=~unit, type="scatter", mode="lines", name="Depr: unit" , line=list(color="#ff7f0e", width=4)) %>%
  add_trace(y=~ddb, type="scatter", mode="lines", name="Depr: DDB" , line=list(color="#2ca02c", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_sl, type="scatter", mode="lines", name="NAV: SL", line=list(color="#1f77b4", width=4, dash="dash")) %>%
  add_trace(y=~v_unit, type="scatter", mode="lines", name="NAV: unit", line=list(color="#ff7f0e", width=4, dash="dash")) %>%
  add_trace(y=~v_ddb, type="scatter", mode="lines", name="NAV: DDB", line=list(color="#2ca02c", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Depreciation comparison: salvage value {data-background="../Backgrounds/default.jpg"}

> <span style="font-size:0.8em">Situation: You have a $100k asset which you will use for 5 years, with *\$25,000* salvage value. Determine depreciation using the 3 methods.  Usage will be 10%, 30%, 40%, 10%, and 10% for each year.</span>

```{r , echo=FALSE, warning=FALSE}
p1 <- plot_ly(df, x=~year, y=~sls, type="scatter", mode="lines", name="Depr: SL" , line=list(color="#1f77b4", width=4)) %>%
  add_trace(y=~units, type="scatter", mode="lines", name="Depr: unit" , line=list(color="#ff7f0e", width=4)) %>%
  add_trace(y=~ddbs, type="scatter", mode="lines", name="Depr: DDB" , line=list(color="#2ca02c", width=4)) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, title = "Depreciation expense and net asset value", xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
p2 <- plot_ly(dfv, x=~year, y=~v_sls, type="scatter", mode="lines", name="NAV: SL", line=list(color="#1f77b4", width=4, dash="dash")) %>%
  add_trace(y=~v_units, type="scatter", mode="lines", name="NAV: unit", line=list(color="#ff7f0e", width=4, dash="dash")) %>%
  add_trace(y=~v_ddbs, type="scatter", mode="lines", name="NAV: DDB", line=list(color="#2ca02c", width=4, dash="dash")) %>%
  layout(autosize = F, width = 900, height = 350, margin = m, xaxis=list(title="Year",rangemode="tozero"), yaxis=list(title="Depreciation expense", rangemode="tozero"))
subplot(p1, p2)
```

## Natural resources {data-background="../Backgrounds/default.jpg"}

- Depletion
    + Just like *units of production* depreciation
    + Different name as resources are *depleted* when mined
        + Meaning the amount of resources left has decreased

![](../Diagrams/JE_6-4.png){width="800px" fig-align="center" .lightbox}

## Notes on depreciation {data-background="../Backgrounds/reference.jpg"}

- Useful life is an *estimate*
- Salvage value is an *estimate*
- Depreciation method is a *choice*
- 0 net asset value (NAV) $\ne$ unusable
    + NAV $=$ *asset value* minus its *accumulated depreciation*
    + You won't record any more depreciation after hitting 0
    
# Other issues in PP&E {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## Income taxes {data-background="../Backgrounds/default.jpg"}

- Depreciation method affects your taxes!
    - This makes double-declining balance look more enticing

![](../Diagrams/PPE_Cycle.png){width="800px" fig-align="center"}

## Long lives {data-background="../Backgrounds/default.jpg"}

- Partial years
    + Straight-line and DDB: Multiply yearly depreciation by $Months\ used/12$
    + Units of production: No change needed, as fewer units produced controls for this
- Many things change over time
    + This includes the accuracy of your depreciation assumptions
        + Length of time, salvage value
    + Increased life from maintenance is an example
- Use new assumptions going forward
    - Essentially treat as a new asset with a historical cost equal to the current NAV, for the purpose of depreciation calculations

## Example of partial years {data-background="../Backgrounds/bricks.jpg"}

> <span style="font-size:0.8em">Situation: Bought an asset on September 30th for \$10,000, with useful life of 7 years and \$3,000 of salvage value.  What is depreciation under straight line and DDB for the asset as of December 31st of the same year?</span>

- Months passed: 3 months
    - Oct, Nov, Dec
- Straight-line
    - Full year is: $\frac{10,000-3,000}{7}=1,000$
    - Partial year is: $1,000 \times \frac{3}{12} = 250$
- DDB
    - Full year is: $(10,000 - 0)\times \frac{2}{7} = 2,857.14$
    - Partial year is: $2,857.14\times \frac{3}{12} = 714.29$

## Example of changing assumptions {data-background="../Backgrounds/bricks.jpg"}

> <span style="font-size:0.8em">Situation: Bought an asset on January 1st 20X0 for \$10,000, with useful life of 7 years and \$3,000 of salvage value, to be accounted for using straight line depreciation.  In year 20X2 it was determined that the asset would only last 6 years in total, with 0 salvage value, and should be accounted for using DDB.  What is the depreciation expense in years 20X0 through and 20X2?</span>

- Years 20X0 and 20X1
    - Normal straight line problem:
        - $Expense = (10,000 - 3,000) / 7 = 1,000$
- Year 20X2
    - Determine NAV (new cost): $10,000 - 1,000 - 1,000 = 8,000$
    - Years left: $6 - 2 = 4$
    - New Acc. Depr.: $0$
    - $DDB = (8,000 - 0) \times \frac{2}{4} = 4,000$

## Retirement {data-background="../Backgrounds/default.jpg"}

- *Retirement* $=$ throwing the asset out
- Adjust the PP&E value to include partial depreciation (if any)
    - Same as usual depreciation methods
- Record retirement:

:::: {.columns}

::: {.column width="50%"}

Asset at 0 net asset value (NAV)

- No gain or loss here

![](../Diagrams/JE_6-5.png){width="600px" fig-align="center" .lightbox}
:::

::: {.column width="50%"}

Asset at $>0$ net asset value

- Debit *loss on asset retirement*

![](../Diagrams/JE_6-6.png){width="600px" fig-align="center" .lightbox}
:::

::::



## Sale {data-background="../Backgrounds/default.jpg"}

- Sale is like retirement, but you are receiving some cash instead of nothing.
- Adjust the PP&E value to include partial depreciation (if any)
    - Same as usual depreciation methods
- Record a sale:

:::: {.columns}

::: {.column width="50%"}

Loss (NAV $>$ Cash)

- Debit *loss on asset sale*

![](../Diagrams/JE_6-7.png){width="600px" fig-align="center" .lightbox}

:::

::: {.column width="50%"}

Gain (NAV $<$ Cash)

- Credit *gain on asset sale*

![](../Diagrams/JE_6-8.png){width="600px" fig-align="center" .lightbox}

:::

::::

## Exchange {data-background="../Backgrounds/default.jpg"}

- Exchange is the same as a sale, but with non-cash settlement
    - Ex.: Exchange machinery for a car
- Adjust the PP&E value to include partial depreciation (if any)
    - Same as usual depreciation methods
- Record an exchange:


:::: {.columns}

::: {.column width="50%"}

Loss (NAV $>$ Asset received)

- Debit *loss on asset sale*

![](../Diagrams/JE_6-9.png){width="600px" fig-align="center" .lightbox}

:::

::: {.column width="50%"}

Gain (NAV $<$ Asset received)

- Credit *gain on asset sale*

![](../Diagrams/JE_6-10.png){width="600px" fig-align="center" .lightbox}

:::

::::


## Example of disposal {data-background="../Backgrounds/bricks.jpg"}

> <span style="font-size:0.8em">Situation: A machine bought for \$10,000 has \$4,000 of accumulated depreciation, but the firm no longer needs the asset.  Record the following possible outcomes: 1) Disposal of the machinery; 2) Sale for \$4,000 cash; 3) Exchange for an \$8,000 Warehouse</span>

![](../Diagrams/JE_6-11.png){width="750px" fig-align="center" .lightbox}

## Practice {data-background="../Backgrounds/group.jpg"}

1. Get the in class activity spreadsheet on eLearn
    Session_6_Activity_Depr.xlsx
2. Calculate depreciation for the assets listed in the file using each method

# Intangibles {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## What are intangibles? {data-background="../Backgrounds/default.jpg"}

- Literally "not perceptible by touch"
    + Things you can't hold, but still have value
- Patents
- Copyrights
- Franchise rights
- Licenses
- Trademarks
- Goodwill (i.e. excess acquisition price)

## Patents {data-background="../Backgrounds/default.jpg"}

- Most cited: [US4683202A](https://patents.google.com/patent/US4683202A/en)
    + Filed 25/10/1985
    + $>$ 8,000 citations

> The present invention is directed to a process for amplifying any desired specific nucleic acid sequence contained in a nucleic acid or mixture thereof. The process comprises treating separate complementary strands of the nucleic acid with a molar excess of two oligonucleotide primers, and extending the primers to form complementary primer extension products which act as templates for synthesizing the desired nucleic acid sequence. The steps of the reaction may be carried out stepwise or simultaneously and can be repeated as often as desired.

## Patents {data-background="../Backgrounds/default.jpg"}

- [Nortel patent sale](https://www.theguardian.com/technology/2011/jul/01/nortel-patents-sold-apple-sony-microsoft)
    + Over 6,000 patents
    + Consortium of Microsoft, Apple, Sony, RIM (Blackberry), EMC, Ericsson
    + **\$4.5B**
- [Merck Lawsuit against Gilead](https://www.reuters.com/article/us-gilead-sciences-merck-co-verdict/merck-wins-2-54-billion-in-hepatitis-c-drug-trial-against-gilead-idUSKBN1442U9)
    + Over patent infringement
        + Hepatitis C drug
    + **\$2.54B** jury verdict
        + 10% of all revenue

## Copyrights {data-background="../Backgrounds/default.jpg"}

- © or "rights reserved"

<center>![](../Figures/Alice1.png){width="300px" fig-align="center"} $\quad$ ![](../Figures/Alice2.png){width="300px" fig-align="center"}</center>


## Franchise Rights {data-background="../Backgrounds/default.jpg"}

- [text](http://www.reuters.com/article/mcdonalds-singapore-idUSL4N1DX3RU)<a href="">McDonalds franchise in Singapore is owned by Lionhorn Pte Ltd</a>
    - Housed under Hanbaoabo Pte. Ltd.; which is owned by Lion Arches, which is owned by Lionhorn

<center>![](../Figures/Mcdonalds.svg){width="300px" fig-align="center"} $\quad$ ![](../Figures/Lionhorn.png){width="400px" fig-align="center"}</center>

## Licenses {data-background="../Backgrounds/default.jpg"}

- Software licenses
- Can be for a period or infinite
    - Periodic licenses treated as a prepaid expense
    - Infinite licenses treated as an asset
        - Unless the license usefulness is clearly limited

<center>![](../Figures/office365.jpg){height="200px" fig-align="center"} $\quad$ ![](../Figures/windows.svg){height="200px" fig-align="center"}</center>

## Trademarks {data-background="../Backgrounds/default.jpg"}

- ™ or ®

<center>![](../Figures/Mcdonalds.svg){width="300px" fig-align="center"} $\quad$ ![](../Figures/ups.png){width="300px" fig-align="center"}</center>

## Goodwill {data-background="../Backgrounds/default.jpg"}

- The amount paid for a company in an acquisition above its **updated** book value
    - If price < **updated** book value, negative goodwill
- <a href="http://time.com/4376607/microsoft-linkedin-goodwill/">Microsoft bought LinkedIn</a>
    - $25B price
    - LinkedIn had about $4B book value
        - Note: LinkedIn's assets were worth more than their book value
    - *As much as \$17B was goodwill*

<center>![](../Figures/Microsoft.png){height="100px" fig-align="center"} $\quad$ ![](../Figures/linkedin.jpg){height="100px" fig-align="center"}</center>

## Valuing intangibles {data-background="../Backgrounds/default.jpg"}

- If internally generated
    - Legal costs for titles can be capitalized (registration costs)
        - Added to asset account
    - Generation costs are expensed
        - Exception: Development after Research can be capitalized under IFRS (IAS 38)
- If purchased
    - Record at cost

> Why do we have this difference?  It's because purchases have more *reliable* values.

## What about depreciation? {data-background="../Backgrounds/default.jpg"}

- Intangibles are not physical items, so they doesn't depreciate
- They *can* lose value over time

- Solution for infinitely lived items:
    - Revalue when doing financial statements
    - Involves decreasing book value to match the current (lower) value, if lower, by a process called impairment
    - We generally never increase book value
- Solution for finitely lived items:
    - Amortize their value
    - Works like straight line depreciation with 0 salvage value
    - Can also be impaired

> Impairment is not covered on the exam

## Amortization {data-background="../Backgrounds/default.jpg"}

- Amortization is like depreciation for intangibles
- Debit Amortization expense
- Credit accumulated amortization
- Always use straight-line with 0 salvage value
- Example:

:::: {.columns}

::: {.column width="50%"}

1. Bought a patent for $100 cash.  It has 5 years of life.
2. Recorded amortization after 1 year.
3. Recorded amortization after another year.

:::

::: {.column width="50%"}
![](../Diagrams/JE_6-13.png){width="600px" fig-align="center" .lightbox}
:::

::::



## Notes on Intangibles {data-background="../Backgrounds/default.jpg"}

- Determining the life of intangibles:
    - Often, this is based on a country's laws
        - Copyright duration is set by each country
        - Trademark law determines trademark life
    - Mergers will be infinitely lived, but are often impaired



# End matter {data-background-video="../Backgrounds/section.mp4" data-background-video-loop="true"}

## Wrap up {data-background="../Backgrounds/ending.jpg"}

- For next week
    1) Recap the reading for this week
    2) Read the pages for next week
        - Chapter 8 (Liabilities)
        - Tricky subject, reading highly recommended
        - We'll spend 2 weeks on liabilities
    3) Homework 3 to *turn in next week*
        - Available on eLearn
        - Submit on eLearn
    4) Practice on eLearn
        - Practice on Journal entries (\#2)
        - Automatic feedback provided
- Survey on the class session at [rmc.link/101survey6](https://docs.google.com/forms/d/e/1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6-lMMNT9z2Q/viewform?usp=sf_link)

## Packages used for these slides {data-background="../Backgrounds/code.jpg"}

- `{kableExtra}`
- `{knitr}`
- `{plotly}`
- `{revealjs}`




## References {data-background="../Backgrounds/books.jpg" .never .small visibility="hidden"}

## Custom code {data-background="../Backgrounds/code.jpg" .never .small visibility="hidden"}


## NOTES {class="never" visibility="hidden"}


## Impairment {data-background="../Backgrounds/default.jpg" .never visibility="hidden"}

- Debit *Impairment expense*
- Directly record decrease to the asset (Credit)
- We can impair PP&E as well

:::: {.columns}

::: {.column width="50%"}

1. We bought a competitor for \$800: \$400 of machinery and \$400 of goodwill (for their R&D).
2. We realized that the R&D we paid extra for had no value.
3. We realized we overpaid for the machinery by \$200.

:::

::: {.column width="50%"}

![](../Diagrams/JE_6-12.png){width="600px" fig-align="center"}

:::

::::


## Valuing goodwill {data-background="../Backgrounds/default.jpg" .small .never visibility="hidden"}

- Goodwill comes from acquiring other firms
- We record new book values for each asset acquired
    - We use the *net asset value* of each asset for this
- To calculate goodwill:
    1. Start with the purchase price of the firm
    2. Subtract the *net asset values* of all assets
    3. Add back all liabilities
    4. What's left is goodwill

> <span style="font-size:0.8em">Situation: Coffee Corp bought a rival coffeeshop for \$100,000.  The coffee shop has book values of assets and liabilities of \$80,000 and \$40,000, respectively.  We estimate NAV to be $90,000.  What is goodwill?</span>

- Goodwill is \$100,000 - \$90,000 + \$40,000 = \$50,000
    - We ignore the old book value of assets

## Common terminology confusion for goodwill {data-background="../Backgrounds/reference.jpg" .never visibility="hidden"}

- Often we will collapse steps 2 and 3 together into a quantity called *Net assets*
    - $Net~assets = Total~assets - Total~liabilities$

> *Net assets* and *Net asset value* are not the same!

- $Net~asset~value = Historical~Cost - Accumulated~Depreciation$

<br>

> Reworking the prior example: Net assets is $90k - 40k = 50k$

- To calculate goodwill:
    1. Start with the purchase price of the firm
    2. Subtract *net assets*
    3. What's left is goodwill
- Goodwill is \$100,000 - \$50,000 = \$50,000


