7.3 Property, Equipment, and Intangibles

Property, Equipment, and Intangibles

The 2026 FAR Blueprint places property, plant and equipment (PP&E) and intangible assets in Area II. Representative tasks are direct: calculate gross and net balances, prepare journal entries, compute gains and losses on disposal, calculate impairment losses, determine held-for-sale treatment, prepare rollforwards, and reconcile subledger differences. For intangibles, the Blueprint highlights recognition, finite-lived versus indefinite-lived classification, finite-lived carrying amounts, purchased software, and cloud computing arrangements.

Capitalize or Expense

The first decision is whether a cost creates or improves an asset. Capitalize the purchase price plus all costs necessary to bring the asset to the location and condition required for intended use, including freight, installation, testing, sales tax, legal title fees, and asset retirement obligation costs. Expense routine repairs and maintenance that merely keep the asset operating as expected.

Depreciation and Rollforwards

A PP&E rollforward separates cost from accumulated depreciation:

1. Beginning gross PP&E + additions and capitalized improvements.
2. Subtract disposals at original cost.
3. = Ending gross PP&E.
4. Beginning accumulated depreciation + current depreciation.
5. Subtract accumulated depreciation on disposed assets.
6. = Ending accumulated depreciation.
7. Net PP&E = ending cost - ending accumulated depreciation.

Depreciation methods:

• Straight-line: (cost - salvage) / useful life, spread evenly.
• Double-declining balance (DDB): 2 x straight-line rate applied to beginning book value; ignore salvage until book value would drop below it. Example: $100,000 asset, 5-year life, $10,000 salvage. SL rate = 20%; DDB rate = 40%. Year 1 = $40,000; Year 2 = ($100,000 - $40,000) x 40% = $24,000.
• Units-of-production: (cost - salvage) / total estimated units x units produced.
• Sum-of-the-years'-digits (SYD): accelerated; multiply depreciable base by a declining fraction (for a 5-year life the denominator is 5+4+3+2+1 = 15, so Year 1 = 5/15).

Watch the partial-year convention: an asset placed in service mid-year is depreciated only for the months held, and a change in estimated useful life or salvage is a change in accounting estimate applied prospectively over the remaining life, never restated retroactively. Land is never depreciated; land improvements (paving, fencing) are depreciated separately. When equipment is acquired by issuing a note, record the asset at the cash-equivalent price (present value of the note), not the face of the note.

Disposals, Impairment, and Held for Sale

On disposal, remove the asset's cost and accumulated depreciation, record consideration received, and recognize the difference as gain or loss. Example: equipment cost $80,000, accumulated depreciation $55,000 (carrying amount $25,000), sold for $30,000 -> gain of $5,000.

For held-and-used long-lived assets, impairment is a two-step test under ASC 360. Step 1 (recoverability): compare carrying amount with undiscounted expected future cash flows. If carrying amount exceeds them, the asset is not recoverable. Step 2 (measurement): impairment loss = carrying amount minus fair value. Impairments of held-and-used assets are not reversed.

Held-for-sale classification requires management commitment, immediate availability for sale, active marketing at a reasonable price, and a probable sale within one year. Once classified, stop depreciation and measure at the lower of carrying amount or fair value less cost to sell.

Intangible Assets

An intangible asset is recognized when it is identifiable, controlled by the entity, and expected to provide future benefits. Purchased patents, customer lists, licenses, and trademarks may qualify; internally generated goodwill is never recognized. Finite-lived intangibles are amortized over useful life (often straight-line) and tested for impairment only when indicators exist. Indefinite-lived intangibles are not amortized but are tested for impairment at least annually (one-step: carrying amount vs. fair value).

Purchased software and cloud computing arrangements (CCAs) require close reading. A license that transfers control of software to the customer creates an intangible asset. A hosting arrangement that does not convey a software license is a service (executory) contract; under ASU 2018-15, qualifying implementation costs are capitalized and amortized over the term of the hosting arrangement, while ongoing hosting and maintenance fees are expensed.

Exam Workflow

• Identify the asset unit and acquisition date.
• Separate capital expenditures from period expenses.
• Compute depreciation or amortization through the relevant date.
• Remove both cost and accumulated depreciation on disposal.
• Apply the recoverability screen before measuring any impairment.
• Reconcile the fixed asset register to the general ledger before recording plug entries.

The FAR answer usually follows the rollforward. When the cost layer, the accumulated depreciation layer, and net carrying amount all agree, the journal entry becomes straightforward.

Goodwill Impairment

Goodwill arises only in a business combination, recorded as the excess of consideration transferred over the fair value of identifiable net assets acquired. It is not amortized (for public companies) but is tested for impairment at the reporting-unit level at least annually. Under ASU 2017-04, the FASB eliminated the old Step 2: impairment is now the amount by which a reporting unit's carrying amount exceeds its fair value, limited to the goodwill balance. Private companies may elect the accounting alternative to amortize goodwill over up to 10 years and test only on a triggering event, a distinction FAR likes to contrast.

IFRS Contrasts

FAR tests several U.S. GAAP versus IFRS differences here. IFRS permits the revaluation model, carrying PP&E at fair value with revaluation surplus in other comprehensive income; U.S. GAAP uses only the cost model. IFRS impairment is a one-step test (carrying amount vs. recoverable amount, the higher of value in use and fair value less costs to sell) and permits reversal of prior impairments (except goodwill); U.S. GAAP prohibits reversal of held-and-used impairments. Knowing which framework a question uses prevents reflexively applying the recoverability screen.