Includes cash and other assets that will likely be converted into cash or used up within 1 year or one operating cycle, whichever is greater
-> reported in order of their liquidity

Operating cycle: the time it takes to produce or purchase inventory, sell the product, collect the cash

Provide information about investing activities, which form the foundation upon which the firm operates

Financial assets, short-term, highly liquid investment, interest rate risk is insignificant

Ex: T-bills, commercial paper, money market funds

Financial assets, traded in public market, value can be readily determined, disclose details in footnotes

Financial assets, customers own firm for goods sold on credit -> reveal collection problems

Reported at net realizable value, which based on estimated bad debt expense (which increase allowance for doubtful account -> contra account, should be considered relative to the growth rate of sales)
-> Accounts receivable at net realizable value = Gross receivables - Allowance for doubtful account

Manu firm: report separately inventories of raw materials, WiP, finished goods

Standard costing: often used by manu firm, assign pre-determined amount of materials, labor, overhead to good produced

Retail method: measure inventory at retail P -> cost = retail P - gross profit

Note:

1. GAAP -> use LIFO or retail method report to increase inventory cost (have advantage in inflation: LIFO COGS > FIFO COGS -> lower earnings -> lower tax)
   -> Use market value = replacement cost
2. IFRS: prohibit LIFO, lower inventory cost (compared to GAAP)
   -> Use net realizable value = Selling P - Completion cost - Selling / Disposal cost

not material if shown separately -> combine to single acc

land and buildings, machinery equipment, furniture, natural resource

reported at amortized cost = historical cost - accumulated depreciation, amortization, depletion, impairment losses

Historical cost = Purchases P + Other cost (to get the asset ready for use)

Affected by depreciation method and related estimate (salvage value, useful life)

Must be test for impairment: if Carrying value > Recoverable amount -> Impaired -> written down to its recoverable amount, recognize loss

IFRS: Recoverable value (Giá trị có thể thu hồi) = Fair value - Selling costs / Asset's value in use
-> Loss recoveries are allowed under IFRS, not GAAP

Changes in fair value are reflected in shareholder's equity: Increase in asset's carrying value is recognized as revaluation surplus in owner's equity (unless it reverses a previously recognized loss)

IFRS: assets that generate rental income / capital appreciation
GAAP: not have specific definition

IFRS: reported at amortized cost / fair value -> cost model / fair value model BUT a firm must use the same valuation model (cost/ fair value) for all of its investment properties

Fair value model: any change in fair value is recognized in income statement -> Increase in fair value above historical cost -> recognized as gains on IS

result of temporary differences between financial reporting income and tax reporting income

Identifiable intangible assets: (Tài sản cố định vô hình) can be acquired separately / are result of rights or privileges convey to their owners
Ex: patents, trademarks, copyrights

Under IFRS: if purchase -> report on balance sheet by (1) cost model, (2) revaluation model - only used if an active market for intangible asset exists
Under GAAP: only cost model is allowed

created when the amount of taxes payable > income tax expenses
created by unusual tax losses from prior period

when expenses / losses are recognized in income statement before they are tax deductible
when revenues / gains are taxable before they are recognized in income statement

will reverse when the expense is deducted for tax purpose / revenue is recognized in income statement

Unidentifiable intangible assets: can not be acquired separately / have unlimited life

Ex: Goodwill: excess of purchase P over fair value of identifiable net assets acquired in a business acquisition -> acquirers are often willing to pay more than the fair value because the target may have assets that are not reported on its balance sheet (reputation, loyalty, research and development assets)
-> Part of acquisition price may reflect perceived synergies from business combination (nhận thức được sức mạnh tổng hợp từ việc hợp nhất kinh doanh)
(1) only created in purchase acquisition, internally generated goodwill -> expense
(2) not amortized but must be test for impairment at least annually (if impaired -> goodwill is reduced and loss is recognized, impairment loss does not affect CF > < if not impaired -> remain on balance sheet indefinitely)

Accounting goodwill: result of past acquisition > < Economic goodwill: derives from expected future performance of firm

research stage -> expense
More: start-up & training costs, administrative overhead, advertising & promotion costs, relocation & reorganization costs, termination costs

Finite-lived intangible assets: amortized over useful lives and test for impairment (check suy giảm tài sản), review amortization method and useful life estimates at least annually

Infinite-lived intangible assets: not amortized, tested for impairment at least annually

COGS + Ending inventory = Purchase + Beginning inventory

Conversion (manufacturing) costs including labor and overhead

Other costs necessary to bring the inventory to its present location and condition

4 methods: Specific identification, FIFO, LIFO (prohibited under IFRS, Weighted-average cost

All of these costs are capitalized and included in balance sheet -> expense recognition is delayed until the inventory is sold and revenue is recognized

Period cost -> not capitalized -> record in the period incurred: abnormal waste of materials, labor or overhead; storage costs (unless required as part of production), administrative overhead, selling cost, freight-out to customers

LIFO and FIFO when prices have been rising and inventory quantities are stable or increasing
LIFO - compared to FIFO: Higher COGS, Lower gross profit, Lower inventory balances, Higher inventory turnover, Lower tax

LIFO and FIFO when prices have been decreasing and inventory quantities are stable or increasing
LIFO - compared to FIFO: Lower COGS, Higher gross profit, Higher inventory balances, Lower inventory turnover

Periodic inventory system:
(1) Inventory values and COGS are determined at the end of the accounting period
(2) No detailed records of inventory are maintained -> Inventory acquired during the period is reported in Purchases account
(3) End of period: purchases are added to beginning inventory to arrives Cost of Goods Available for Sales
-> COGS = Goods available for sale - Ending inventory

Perpetual inventory system:
(1) Inventory values and COGS are updated continuously
(2) Inventory purchased and sold is recorded directly in Inventory when the transactions occur (Purchase account is not necessary)

Two systems give the same results for the FIFO and specific identification method but produce different values for inventory and COGS under LIFO & weighted average cost method

Capitalization (Vốn hoá): if that expenditure provides a future economic benefit over multiple accounting periods / make assets ready for use or increase future benefits

Expensing(Chi phí hoá): if that expenditure provides an uncertain future economic benefit and it is expensed in period incurred

Expenditure capitalized -> recorded as assets -> allocate to income statement as Depreciation exp or Amortization exp (except for land and goodwill) -> higher NI in first year, lower NI in subsequent years

Construct an assets for its own use (except for resale): interest accruing during the construction period is capitalized as part of asset's cost

Identifiable intangible asset: (1) Capable of being separated from the firm or arise from a contractual or legal right (2) Controlled by the firm (3) Expected to provide future economic benefits. Ex: patents

Unidentifiable intangible asset: (1) cannot be purchased separately and (2) may have an indefinite life. Ex: Goodwill

The asset was created internally: Cost to create intangible assets are expensed as incurred, with some exceptions:
(1) Under IFRS, research costs are expensed as incurred / Development costs may be capitalized
(2) Under GAAP, research costs and development costs are expensed as incurred
(3) Under IFRS, Software development costs are expensed as incurred until the product’s technological feasibility has been established, it will be capitalized

Purchased intangible assets: Initially recorded on the balance sheet at cost, typically its fair value at acquisition

Intangible Assets obtained in a Business combination: Goodwill created in a business combination is capitalized on the balance sheet, cost of any internally generated "goodwill" are expensed

Financial statements: Capitalizing will:
(1) Higher: total assets, equity, NI (1st year), Operating CF and (2) Lower: NI (subsequent years), Investing CF

Ratios: Capitalizing will higher: Debt to Assets ratio, Debt to Equity ratio, Initial ROA, Initial ROE, Interest coverage ratio

No difference in Total Net income and Cash flow over the life of an asset

Depreciation: The systematic allocation of an asset’s cost over time

Historical cost: The original purchase price of the asset including installation and transportation costs

Carrying (book) value: The net value of an asset or liability on the balance sheet (= Historical cost – Accumulated depreciation - Impairment charges)

Straight line depreciation: Depreciation is the same amount each year over the asset’s estimated life

Accelerated depreciation: More depreciation expense is recognized in early years of an asset’s life and less in the later years - > Double-declining balance

Units-of-production method: Depreciation is based on usage rather than time -> applied to natural resource: referred to as depletion

Units-of-production depreciation = (Cost - Salvage) / Useful life * Output units in period

Component depreciation: IFRS: depreciate components of an assets separately -> require useful life estimate for each component -> useful life of each component is estimated and depreciation expense is computed separately for each
(Seldom used under GAAP)

Straight-line: higher NI, higher total A, higher E, higher ROA, higher ROE

Accelerated: higher depreciation expense, higher assets turnover ratios

Salvage value: Also known as residual value or disposal value, is the estimated monetary value of an asset at the end of its useful life when it is expected to be sold, disposed of or retired

Firms can manipulate depreciation expense by increasing or decreasing these estimates as longer useful lives / higher salvage value -> decrease annual depreciation, increase reported NI

Change in depreciation estimate is applied to the asset's carrying value and depreciation is calculated going forward using new estimate with no effect in previous periods

Intangible assets with definite lives are amortized over their useful life

The same method: straight line, accelerated, and units of production are permitted

Choice of method: same effects as depreciation

(1) Average age = Acc depre / Annual depre exp

(2) Total useful life = Historical cost / Annual depre exp

(3) Remaining useful life = Ending net PPE / Annual depre exp

Cost model: GAAP & IFRS: most long-lived assets are reported depreciated cost, no fair value alternative for asset reporting
-> Carrying (book) value = Historical cost - Acc. depre/amor - impairment charges

IFRS: Revaluation model: an asset is carried at its depreciated cost, but at each revaluation date, the balance sheet value is adjusted to fair value. Between revaluation dates, depreciation is recorded for asset
-> Carrying value = its value as of the last revaluation date - subsequent depre / amor

First Revaluation Date:
Fair value < Carrying value → recording Loss in Income Statement
Fair value > Carrying value → recording Revaluation surplus in Equity

Subsequent Revaluation Dates
Fair value < Carrying value → the difference reduces revaluation surplus and then the excess is recorded as Loss in Income statement
Fair value > Carrying value → the gain reverses any previously loss from valuation and then the excess is recorded in revaluation surplus

When there are events (such as significant decline in market value) or change in the asset’s physical condition) → The asset value must be tested for impairment

An asset is impaired when the carrying value > the recoverable amount

Recoverable amount is the greater of: Fair value less any selling costs & The value in use

If impaired, the asset’s value must be written down to the recoverable amount on the BS, impairment loss is recognized in the IS.

Intangible assets with indefinite lives are not amortized, they are tested for impairment at least annually.

Impairment loss ( = Carrying value - Recoverable amount) is recognized when Carrying amount > Fair value
-> indication that firm has not recognized sufficient depreciation or amortization expense -> overstated earnings

Indicators: significant adverse change in market conditions, technological advancements, legal or regulatory changes

When there is events and circumstances indicate the firm may not be able to recover the carrying value through future use

Step 1: apply Recoverability test -> Step 2: Measure loss

Recoverability: An asset is consider impaired if carrying value > asset's future undiscounted CF stream (involve considerable management discretion)

Loss measurement: If impaired, asset’s value must be written down to fair value on the BS, impairment loss is recognized in the IS
(Impairment loss = Carrying value - Fair value of A / Discounted value of its future CF)

Asset is available for immediate sale -> tested for impairment -> no longer depreciated or amortized

Impaired if: Carrying value > (Fair value - Selling cost)
-> asset is written down to net realizable value in BS, loss is recognized in IS

Derecognition occurs when assets are sold, exchanged or abandoned

Sold: asset is removed from BS, the Gain / Loss = Sale - Carrying value in IS or reported separately if material

Abandoned: no proceeds, carrying value of asset is removed from BS and a Loss = Carrying value is recognized in the IS

Exchanged: carrying value of old assets is removed from BS, new asset is recorded at fair value, Gain / Loss = Carrying value of old asset - Fair value of old / new asset is reported on IS

In the year of impairment: decrease asset's carrying value, asset and equity (RE), ROA, ROE
Reason: impairment charge -> loss in NI

In the subsequent periods: higher NI as lower depreciation expense (as assets has lower depreciable value), higher ROA & ROE, higher asset turnover

No impact on CF (as impairment does not reduce taxable income and it is an unrealized loss until the asset is disposed of)

Lower: debt ratio and debt-to-equity ratio, ROA & ROE, profitability in period after revaluation

If increase in A is the result of higher operating capacity -> higher revenue, higher NI

Analyst should check the source of appraisal (sự đánh giá, thẩm định) that supports the revaluation (prefer appraisals from independent sources)

Differences in disclosure requirements for tangible and intangible assets under IFRS and GAAP

For impaired assets, the loss amount and reasons under the loss

For revalued assets (IFRS only), the revaluation date, fair value and carrying value was determined and the carrying value using historical cost model