Please respond to one of the following topics. TOPIC 1: On page 381 of our textb

Question

Please respond to one of the following topics.

TOPIC 1: On page 381 of our textbook there is an article about Nike. In particular, Intangible Assets are discussed in the second paragraph of the article. The textbook discusses Intangible Assets in detail on pages 395-400. Think of a company such as Nike that might have Intangible Assets listed on its Balance Sheet. What is the name of the company and what do you think are the intangible assets that are owned by the company? Why are they considered to be intangible assets? Over what period of time do you think the intangible assets are being amortized and why?

TOPIC 2: What factors may contribute to the decline in usefulness of operating assets? Should the choice of depreciation method be related to these factors? Must a company choose just one method of depreciation for all assets? Explain

Explanation / Answer

TOPIC 1

Intangible assets cannot be felt physically but its existence can be felt all-round ,in the firms' profitability and customer patronisation,etc.Their benefit normally extends beyond an accounting year.Goodwill, patents,copyrights,trademarks are some examples of intagible assets - which add value to the tangible assets.Trademarks have unlimited life whereas the rest mentioned above,have limited existence- always constantly to be renewed.

Coca-cola is a company that has listed intangible assets in its balance sheet.The intangible assets owned by the company are its brand -name recognition- thanks to which the company established high values, far greater than its tangible assets on the balance sheet.Brand -name recognition by the general public cannot be physically felt/touched--but can be definitely inferred from higher sales, positive rise in profits, growing asset values and market values and market share, that too for a firm which has global presence.

Companies like Chevrolet,McDonald,IBM are all rich in intangible assets far outweighing their tangible assets.

Amortisation of Intangible assets

If the useful life of the assets can be estimated or finite, they are amortised ,over that period , for a value-cost less any residual value.If there is no residual value, then the cost is amortised on a straight line method- ie equally over that period.

If the life is indefinite as for goodwill, it is not amortised at all. Instead,it is tested for any impairment/decrease in value- reflected by way of decrease in fair market value of assets and stock-

and the asset is carried at a value -cost less impairment loss. This evaluation is undertaken periodically ,in case of intangible assets with indefinite life.

TOPIC 2

Factors contributing to the decline in usefulness of operating assets :

Except land all other operating assets decline in value due to the following

1. Wear and tear due to usage.

2.Technical obsolescence - rendered obsolete by comparative technical improvisations

3.Commercial obsolescence - rendered obsolete by demand falling for the products produced by that particular asset.

Depreciation is allocation of cost for using the asset which is going to give benefits over a number of years.The amount of depreciation charged against the revenues of the year depends entirely on the acquisition cost of the asset,its residual value and its estimated useful life.

As different assets are affected by the above said factors differently,the choice of depreciation method adopted to write-off the asset annually, should be able to cover the cost during its life-time.

Assets giving constant benefits all through its useful life may be depreciated on straight-line basis-ie. equal charge throughout, whereas, certain assets are more useful in the initial years and may become technically obsolete-for such an asset -it is prudent to depreciate in reducing balance method- a method by which initial years carry more depreciation charges that reduce gradually over the years.

Hence the choice of depreciation method be certainly related to the above factors.

Must a company choose just one method of depreciation for all assets -- Not necessarily.

Many comes use straight line method for their internal statements and use any accelerated method for taxation purposes.

No.of useful life assumed for calculations may also vary- 10 yrs. for a particular asset for internal documents and 7 years for taxation purposes.

Thus, use of two or more methods of depreciation can be chosen and different assets may be depreciated differently .

But for income tax assessment purposes the rates are as specified in the relevant schedules.Allowances are only to that extent.

An asset with normal wear and tear , can be depreciated straight-line-ie.equally over the years.

An asset which is likely to be outdated fast enough ,needs even more accelerated depreciation charges.

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