Wednesday, 28 December 2011

Apple Inc.'s Long Lived Assets - Form 10K FY 2011

Below is the snapshot taken from Form 10K submitted by Apple Inc. for the year ended on 24th September, 2011.

Following is the extract from Reading 21 Long-lived Assets: Implications for Financial Statements & Ratios.

"Impairment of Long-lived Tangible Assets held for use 
• Impairment losses are recognized when:
Carrying amount of the asset > recoverable amount of the asset where,

Recoverable amount is higher of (Fair value - cost to sell) and value in use.
Value in use = discounted expected future cash flows
• Companies are required to assess at least annually whether there are any indications of impairment of an asset.
• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

• Under U.S. GAAP, there is a two step test which is used to determine whether the asset is impaired.
1) Recoverability test:  Asset’s carrying amount is not recoverable when:

Carrying amount of the asset > Undiscounted expected future cash flows
2) Impairment loss measurement: When asset’s carrying amount is not recoverable, then Impairment loss = carrying amount of an asset –  Fair value of an asset (or discounted value of expected future cash flows)
• Companies must undertake an impairment test only when “events or circumstances indicate that carrying value of an asset is not recoverable on permanent basis”.
• Goodwill and identifiable intangible assets that are not amortized must be tested for impairment at least annually.

Examples of indicators of impairment test include:
• Significant adverse change in asset’s physical condition,
• Significant adverse change in legal or economic factors, or
• Significant decrease in the market price among others.
Effects of Impairment loss: 
• It reduces the carrying  amount of the asset on balance sheet.
• It reduces net income on the income statement.
• Impairment loss is a non-cash item and thus, it does not affect operating cash flows.
• Debt-to-total assets and fixed asset turnover ratios increase due to impairment loss because it reduces the carrying amount of fixed assets and thus total assets."

In previous posts I have been mentioning the practical application of the knowledge learned and the skills developed through the CFA curriculum. It is worthwhile to note that financial statements are key sources of information which help in inspecting the position and performance of any business. Understanding financial statements and the financial lingo used in them critical in analyzing them. For me figuring out that what I am studying is adding value to me is for sure a strong motivating factor.

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