Long-lived Assets Research Articles

Determinants of Tangible Long-Lived Asset Impairments under US GAAP and IFRS

This paper explores determinants of tangible long-lived asset impairments under US GAAP and IFRS. Using a sample covering 26 countries, we document that US GAAP impairments are more related to macroeconomic factors consistent with the built-in delay in reporting impairments under two-step impairment testing and measuring the impairment loss at fair value. IFRS impairments are more associated with firm-specific factors consistent with measuring the impairment at value-in-use and a one-step impairment test. Results also indicate US GAAP impairments are more associated with reporting incentives, except for having private debt. Further, when enforcement is low, impairments are less (more) associated with economic factors (reporting incentives) for IFRS reporters.

Fair Value Measurement for Long-Lived Operating Assets: Research Evidence

This paper reviews research evidence on the usefulness of fair value measurement of long-lived operating assets for financial reporting. Although economically material, these assets have been sidelined in the current fair value debate that largely centers on financial assets, from which operating assets differ in important respects. Our review provides several insights. First, fair value measurement is pervasive for investment property, while nearly non-existent for PP&E and intangible assets. Second, external fair value appraisers help enhance the decision usefulness of fair values. Third, the determinants of fair-value-related reporting choices vary by context and are not yet well-understood. Fourth, fair value measurement is largely useful when it comes to the valuation role of financial reporting, but this usefulness varies across recognized and disclosed fair values. Fifth, the contracting implications of fair value measurement for long-lived operating assets are severely under-researched. Overall, whereas extant research provides relevant insights, it is derived from diverse settings employing different measures and research designs, and does not yet provide an accumulation of evidence sufficient for final clarity about the determinants and consequences of fair value measurement for long-lived operating assets. Based on this conclusion, we develop several suggestions for future research in this area.

Auditor Industry Specialization and Accounting Estimates: Evidence from Asset Impairments

SUMMARYThis study examines whether auditor competencies developed through industry specialization play a role in monitoring client firms' accounting estimates. Specifically, I focus on asset impairment decisions as a key accounting estimate given managers incentives to hide these losses and the PCAOB's criticisms of auditors' testing in this area. Impairments examined in this study relate to goodwill and intangibles, other long-lived assets, and investment securities. Using the portfolio share approach to measure office level specialization, I find that client firms engaging industry specialist auditors exhibit a greater propensity to record, and record larger, impairments relative to client firms engaging auditors with less specialization. The results also demonstrate that impairments recognized by clients of specialist auditors are more positively associated with concurrent bad news signals, suggesting that these losses are recognized on a more timely basis. This evidence enhances our understanding of the factors affecting auditors' ability to evaluate complex accounting estimates.Data Availability: Data are available from the public sources cited in the text.

Cybersecurity for Upstream Operations

This article, written by Special Publications Editor Adam Wilson, contains highlights of paper OTC 28121, “Cybersecurity for Upstream Operations,” by Mohammed A. AlGhazal, SPE, and Mohammad J. AlJubran, SPE, Saudi Aramco. The paper was prepared, but not presented at the 2017 Offshore Technology Conference Brasil, Rio de Janeiro, 24–26 October. The paper has not been peer reviewed. Copyright 2017 Offshore Technology Conference. Reproduced by permission. During well drilling and completion, cybersecurity is critical for securing data to prevent hacking or the loss of software programs. Paying attention to data flow, with the goal of protecting the data as well as the facility, while developing capabilities to deal with intrusions is important. This is the essence of cybersecurity and operational leadership. This paper emphasizes the value gained by investing in cybersecurity for drilling, workover, and completion operations. Introduction Countless engineering and research projects have addressed cybersecurity for downstream operations. Other works have discussed remote upstream operation models along with data flow and information management that have been implemented to digitize the upstream industry, moving it to a new level of automation, efficiency, and improved overall performance. The benefits of the transforming digitization include assurance, cross-organizational collaboration, leveraging of knowledge, and safer operations with minimal human presence on the well site because of remote control. On the other hand, sensors, controls, and networks are added when intelligence is added. This digital expansion creates vulnerability and more entry points—back doors—to exploit defects and weaknesses. One of the reasons for this proliferation of weaknesses is that no logical system can describe a physical system perfectly because too many pieces are involved. The Pressing Threat Upstream oil and gas represents the world’s largest supply chain, involving numerous subcontractors who supply equipment, fluid, and other services to the operating company. The life of upstream assets and resources lasts for decades with multiple time scales for different facilities. Threats and security defenses continuously evolve and change, but much of a facility does not. This makes cybersecurity of long-lived assets very complex, especially because decisions taken will last a long time and be costly. Additionally, the extended reach of oil and gas infrastructures into remote operational areas creates vulnerability and security exposures alongside environmental risk. Accidents in such extended facilities result in liability increases, revenue losses, and the loss of safety standing with society and authorities. While substantial emphasis has been placed on physical security for decades, cybersecurity is still evolving and is building an experience curve as threats keep moving.

The Distribution of Residual Controls and Risk Sharing: A Case Study of Farmland Transfer in China

Structuring contracts to share interest and risk is the central premise of farmland transfer, yet the contract framework and its determinants have rarely been empirically tested based on micro-level data. In this study, we aim to examine factors underlying the balanced distribution of residual controls and risk sharing on contract framework by using field surveyed data of 353 individual farmland transfer contracts. Our evidence shows that the policy of farmland property rights registration has a significant effect on the contract framework and supports the implication of enforcement costs exerted by the effects of the scale ratio and the contract form, contract duration, conversion way, and long-lived assets input. Although our findings fail to support the typical implication of risk sharing as an explanation of contract framework of farmland transfer, given the symmetric positions of two contracted parties of rural farmer households, it is proved that right confirmation and contract duration are two important factors underlying contract options.

A note on the linear and annuity class of depreciation methods

Depreciation methods are used for allocating acquisition costs of long-lived assets to individual years that benefit from those assets, e. g., in connection with product pricing and regulation of public utilities. The following depreciation methods are sometimes mentioned together in the literature: Nominal linear, real linear, nominal annuity, and real annuity. All are shown to be special cases of one generic formula. For that reason, they are referred to collectively as the linear and annuity class of depreciation methods. The members of this class are ranked (to the extent possible) by their book values. Such a ranking indicates the relative depreciation rates of the class members, and also relative savings due to tax-deductible depreciation. Two applications of members of the linear and annuity class are discussed, to product pricing in classical equilibrium theory, and to incentives for undertaking an investment project. The essential insight from this note is that it is meaningful to group the members of the linear and annuity class into one well-defined class of depreciation methods.

A study of long-lived asset impairment under U.S. GAAP and IFRS within the U.S. institutional environment

This paper explores whether differences in accounting standards influence reporting behavior within the U.S. institutional environment where both IFRS and U.S. GAAP are used for reporting purposes. We focus on the accounting for impairment of long-lived assets, an area where significant differences exist between U.S. GAAP and IFRS. We identify all U.S.-listed firms who have recognized long-lived asset impairment losses during the 2004–2012 period. From these firms, we identify firms following IFRS, then develop a matched sample of U.S. GAAP firms, using a propensity score matching procedure. We examine the relation between impairment loss and unexpectedly high or low earnings in the year of impairment using a two-stage Heckman regression model, controlling for industry, country, year of write-down, and firm-level economic factors. We find that the association between impairment losses and unexpectedly high and low earnings is significantly greater for U.S. GAAP firms as compared to IFRS reporting firms, implying differences in accounting standards influence firm financial reporting. Our findings are robust to alternative measures of country level institutional factors and macro-economic variables, as well as inclusion of asset impairment reversals.

Non-implementability of Arrow–Debreu equilibria by continuous trading under volatility uncertainty

In diffusion models, a few suitably chosen financial securities allow to complete the market. As a consequence, the efficient allocations of static Arrow–Debreu equilibria can be attained in Radner equilibria by dynamic trading. We show that this celebrated result generically fails if there is Knightian uncertainty about volatility. A Radner equilibrium with the same efficient allocation as in an Arrow–Debreu equilibrium exists if and only if the discounted net trades of the equilibrium allocation display no ambiguity in the mean. This property is violated generically in endowments, and thus Arrow–Debreu equilibrium allocations are generically unattainable by dynamically trading a few long-lived assets.

Momentum and Reversal in Financial Markets with Persistent Heterogeneity

This paper investigates whether short-term momentum and long-term reversal may emerge from the wealth reallocation process taking place in speculative markets. We assume that there are two classes of investors who trade long-lived assets by holding constantly rebalanced portfolios based on their beliefs. Provided beliefs, and thus portfolios, are sufficiently diversified, all investors survive in the long-run and, due to waves of mispricing, the resulting equilibrium returns exhibit long-term reversal. If, moreover, asset dividends are positively correlated, investors’ profitable trades become positively correlated too, thus generating short-term momentum in equilibrium returns. We use the model to replicate the performance of the Winners and Losers portfolios highlighted by the empirical literature and to provide insights on how to improve upon them. Finally, we show that dividend positive autocorrelation is positively related to momentum and negatively related to reversal while diversity of beliefs is positively related to both momentum and reversal.

Nordgold: All-In Sustaining Costs

Understanding the economics of gold mining had always been a challenge. Gold mines were long-lived assets that required substantial capital investments both to identify and gain access to mineral ore for future processing and to sustain output over the life of a mine. A typical investor might have looked at annual operating margins alone, ignoring these capital outlays, and set unrealistic return expectations. When firms fell short of these expectations, investors were perplexed and took a negative stance regarding the industry. Excerpt UVA-C-2412 Aug. 15, 2018 Nordgold: All-In Sustaining Costs In the summer of 2017, Nordgold was a major global player in the manufacture of gold and was steadily improving its economic position though continued enhancements in efficiency and careful positioning of its portfolio of mines. The company was clearly poised for success. However, the market seemed to not fully appreciate the favorable long-term outlook for the company. In fact, in March 2017, the company delisted from the London Stock Exchange and planned to return to the market when public trading of its shares would better impact shareholders. Understanding the economics of gold mining had always been a challenge. Gold mines were long-lived assets that required substantial capital investments both to identify and gain access to mineral ore for future processing and to sustain output over the life of a mine. A typical investor might have looked at annual operating margins alone, ignoring these capital outlays, and set unrealistic return expectations. When firms fell short of these expectations, as happened when cash flows did not rise when gold prices reached a high of $ 1,900 an ounce in 2011, investors were perplexed and took a negative stance regarding the industry. The central point of confusion was the lack of clear understanding about what it took to sustainably develop mining resources. To provide some clarity on these issues, the World Gold Council had adopted a framework for reporting costs, the all-in sustaining costs (AISC), which would supplement traditional accounting information generated under International Financial Reporting Standards (IFRS). Nordgold was a thoughtful adopter of this reporting standard. There was no doubt that AISC-based costs would exceed IFRS-based costs. Furthermore, there were certainly still judgment calls to be made under this standard. However, the hope was that enhanced understanding of mine economics would build confidence with investors over the long run. . . .

Patience is a Virtue - In Value Investing

This note illustrates a simple but important insight for financial investment. In a heterogeneous agent-based evolutionary finance market model with long-lived assets, markets are stable if clients of fundamental ('value') investment funds are more patient than clients of other funds.

A New Characterization of Equilibrium in a Multi-period Finance Economy: A Computational Viewpoint

Computing equilibrium in incomplete-markets with long-lived assets is a challenging task especially because equilibrium may not exist due to the ‘bad-price’ problem. When algorithms fail to produce equilibrium outcomes, it is hard to differentiate between the existential failure and the algorithmic failure. Moreover, algorithmic success can be misleading when algorithms work out a quasi-solution for the system of equations which may fail to have equilibrium. To address the computational dilemma, the paper provides a new approach to computing equilibrium in a multi-period, single-good general equilibrium model with incomplete asset markets (single-good GEI model or stochastic finance model). The new approach is built on a notion of ‘pre-GEI equilibrium’ which always exists in the economy. When the payoff matrix has full rank, equilibrium of the stochastic finance economy (GEI equilibrium) coincides with pre-GEI equilibrium in real terms. This implies full-rank GEI equilibrium can be computed as pre-GEI equilibrium. It is shown that pre-GEI equilibrium is determined in a system of equations which can be encoded into diverse algorithms such as homotopy path-following methods. Since pre-GEI equilibrium always exists, the existential failure cannot occur and thus, computational failures imply algorithmic failures in the current computational framework.

Risk premia and ambiguity in an experimental market featuring a long-lived asset

This study reports consistent pricing below expected value in a laboratory market featuring a long-lived asset. I posit that this result reflects risk premia. The emergence of statistically significant risk premia appears to stem from the austerity and simplicity of the experimental design, the starkness and centrality of the risk/return relationship within the market environment, attempts to focus subjects’ attention on the risk/reward relationship, and the experience level of the subjects. The proposition that the addition of ambiguity increases expected returns is tested, and no evidence of such a relationship is found.

Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under U.S. GAAP and IFRS

ABSTRACTThis paper investigates the predictive value of tangible long-lived asset impairments for changes in future operating cash flows under U.S. GAAP and IFRS. We find that impairments reported under IFRS are negatively associated with changes in future operating cash flows, whereas those under U.S. GAAP, on average, are not. We investigate whether differences in the predictive value are attributable to differences in recognition or measurement, providing evidence suggesting that impairment recognition under U.S. GAAP is delayed. Evidence also suggests that the value-in-use measurement attribute, allowed under IFRS, does not induce under-impairing as IFRS and U.S. GAAP impairments are similarly related to future impairments. The main result of a negative association under IFRS, but not U.S. GAAP, holds after considering future impairments to control for measurement differences, macro-economic factors, and firm reporting incentives. Further, impairment losses under IFRS are more predictive in high-enforcement countries.JEL Classifications: D78; F02; M16; M41; G38.Data Availability: Data used are available from sources identified in the paper.

Lifecycle Based User Value Analysis of Rail - Road Level Crossings: Probabilistic Approach Using Monte Carlo Simulation

Railway operators are in continuous pressure to minimize maintenance and rehabilitation costs of infrastructures; at the same time they are expected to provide a reliable service by optimum allocation of natural and economical resources. Railway tracks and level crossings are long-lived assets where their service life stretch 30 to 100 years. This paper aims to show an approach that serve as a decision support whereby expert's knowledge can directly be integrated by using a delphiround. A proposed methodology is illustrated by application examples using level crossings commonly used in Austria by Wiener Lokalbahnen. Lifecycle based user – product performance – expectations and economic imperatives could be incorporated through the development of key performance metrics. Assessment criteria are set by allocation percentages for value criteria under these criteria are the sub value – contingencies where Monte Carlo simulation is used for probabilistic scenario analysis. The approach facilitates the first step for a detailed lifecycle cost analysis of infrastructures by supporting experts and non-expert decision makers to get a quicker overview on system benefits as well as serve as a bridge to the practical application of more robust data-driven lifecycle cost analysis.

Long-Lived Asset Impairments and Future Performance Under US GAAP and IFRS

This paper investigates the ability of long-lived asset impairments to predict future operating cash flows under US GAAP and IFRS. We provide evidence that total impairments reported under IFRS are negatively and persistently associated with future operating cash flows whereas those under US GAAP generally are not. Under IFRS, impairments of tangible long-lived assets are more informative than those of intangible assets and goodwill. We further explore the predictive content of reported write-offs under IFRS in different institutional settings, including legal origins and enforcement, and find that impairment losses under IFRS are more informative in common law and high enforcement countries. In general, the findings suggest greater informativeness of long-lived asset impairments under IFRS than US GAAP. The informativeness, however, depends on the type of assets impaired and the institutional characteristics.

Debt and welfare in economies with land

In a stochastic economy of overlapping generations subject to uninsurable risks, debt can implement Pareto improvements in welfare. This is the case even in the presence of long-lived assets and no short sales.

FASB and IASB diverging perspectives on the new lessee accounting

Purpose – The purpose of this paper is to demonstrate the expected effect of diverging accounting requirements and practices on firms in two industries – construction and retailing – which typically undertake different types of leases, namely, equipment and real estate, respectively. The paper also discusses how the new standards will provide expanded disclosures to aid this financial statement analysis. Design/methodology/approach – The research demonstrates how to estimate information comparable to that produced under IFRS from US GAAP financial statements and estimates the significance of the impact on key financial statement ratios. Findings – Key profitability ratios – return on assets and return on equity – generally improve over the time period 2007-2013 while interest coverage drastically deteriorates particularly for retailing firms. This finding contrasts with what some view as the Financial Accounting Standards Board’s reason for its choice of income statement presentation – to avoid the front-end loading of costs that ensues from accounting for leases as one would any other long-lived asset acquired through long-term financing. Practical implications – Current IFRS and US GAAP requirements do not provide sufficient information to estimate lease accounting changes for those firms which have no long-term debt other than long-term leases. Therefore, the estimates presented in this analysis are limited below what will be possible to do under new accounting requirements. Originality/value – The research covers a current topic of new divergence between US GAAP and IFRS requirements for leases. In addition, improvements over analysis techniques currently required that will be possible with new financial statement disclosures also are discussed.

The impact of long-lived non-financial assets depreciation/amortization method on financial statements

Non-financial long-lived assets are ones ensuring company’s basic business operations, with expected useful time more than one accounting period, and generating profit. Assets often requiring significant investments constitute also considerable part of companies’ total assets in its statements of financial position. In average this proportion in balance sheets of Latvian companies listed in Baltic stock exchange is 48%. In most of these companies this percentage is higher and even up to 97%. Due to nowadays global economic situation the management of non-financial long- -lived assets also plays significant role in both – shareholders’ (actual/ potential) and management’s – decision-making processes concerning investing, financing, controlling, other activities. In order to ensure financial statements reflects real situation of the particular company, company’s management is responsible to ensure that accounting process of depreciation/ amortization these assets is: – Correct, transparent and in line with specifics of company’s business; – In accordance with respective accounting and reporting regulations. This article reveals theoretical and practical view exploring how information relating depreciation/ amortization of long-lived non-financial assets influences results in financial statements of Latvian companies listed in Baltic stock exchange.

Building Better Budgets: Canada's Cities Should Clean Up Their Financial Reporting

In nearly all Canada’s major cities, what should be a simple exercise – comparing the spending voted by city council in its annual budget with the actual spending reported at year-end – will baffle any but the most expert reader. While most of Canada’s federal and provincial governments now present their budgets on the same basis as their financial reports, municipal governments typically do not. As a result, judging whether a city over- or under-shot its budget targets, and by how much – which should be a simple matter of comparing headline numbers – is not possible for a typical councillor, taxpayer or citizen. The critical common element is that most cities use an antiquated form of budgeting. Most of Canada’s senior governments, when preparing budgets and end-of-year reports, use modern accounting methods that record the cost of long-lived assets such as buildings and infrastructure as those assets deliver their services. Municipal budgets, by contrast, budget capital on a cash basis, exaggerating projects’ up-front costs and understating them later on expenses. Largely for this reason, no major city in Canada offers a clear budget presentation, and none earns an “A” in our report card on budgeting practices. Among the cities that earn the worst grades for baffling budget presentations are Edmonton, Winnipeg, Windsor, Toronto, Vaughan and Ontario’s Durham Region. This study also shows how a reasonably intelligent but time-constrained non-expert user – a councillor or taxpayer – might understand the differences between budgeted and actual spending in Canada’s major cities. The gaps are enormous – and indicate that opaque budgeting is a major obstacle to fiscal accountability at the municipal level. Importantly, these cities’ end-of-year financial reports, which use accounting similar to that used by senior governments, show a cumulative surplus of $41 billion since 2008. Their total surplus was $6 billion in 2014 alone. This record suggests that cash budgeting has led cities to over-charge today’s taxpayers for long-lived capital projects. In Ontario, Vaughan, Halton Region, and Markham stand out in this respect; among major Western Canadian cities, Calgary, Saskatoon and Surrey, B.C. also appear not to be spreading the costs of capital over time as fairly as they could. Changes in provincial legislation could foster better municipal budgeting, but cities also have the capacity to present more meaningful numbers on their own. Having comparable accounting standards among all levels of government is critical to understanding the relative fiscal health of each level – especially important if provinces look to give cities new tax powers or direct financial supports. Both provinces and municipalities should take steps to improve the fiscal accountability of municipalities and the stewardship of municipal funds.