1. Briefly discuss the impact of any recent accounting pronouncements on long-lived assets. You can find this information in the footnotes (e.g., Recent Accounting Pronouncements).
The chosen company is Apple. In June 2019, the testing of hedging instrument impairment changed by eliminating separate measurement and presentation. The rules are not yet effective until the first quarter of 2020 (FASB ASU 2017-12).
2. Note if the company changed the way it accounts for depreciation and/or amortization. You can find this information in a footnote on significant accounting policies, one of the first few footnotes in most companies’ 10-Ks.
No it is in line with previous policy of straight line depreciation.
3. Review the Management Discussion and Analysis (MD&A) section and briefly note any discussion related to long-lived assets.
Yes, it had segment reporting (performance based), accounting pronouncements,
and specific business risk (such as currency).
4. List the amounts of the company’s fixed assets and intangible assets for the last three years. Note that many firms report an asset called right-of-use assets, which are related to capitalized operating leases and are technically intangible assets. Given their nature, you can ignore them for this mini case.
a. What is the percentage of fixed assets and intangible assets to total assets? Briefly comment on the importance of these accounts to the company’s total assets.
Fixed – 7.44%
Intangible – 2.56%
The trend shows that there was a considerable investment in tangible assets, other than intangible one’s, in three fiscal years’ time.
b. What do the results from (a) suggest about the company’s strategy for generating revenues?
This means that new assets acquired for the production of Apple so the revenue could be increased.
5. What depreciation/amortization method(s) does your company use for its long-lived assets? This information is usually available in the discussion of significant accounting policies and/or the footnotes.
The software (internal-use) is amortized on a straight-line basis over the useful life of average 3-5 years.
6. Does your company report any asset impairments for long-lived assets over the past three years? You can usually find information about long-lived asset impairments in the footnotes.
a. If so, note the amount of the impairment and the percentage of operating earnings before the impairment and comment on its impact on future operating income.
$63930/260200 = 24.56%
Impairment usually reduces profitability of the Apple firm with no direct impact
on the cash balance.
7. If the company provided a reason for the impairment, note that reason (this should be disclosed!).
The technological and obsolescence reasons are major for impairment. Secondly financial instruments disclosure regarding impairments were mandatory.
8. Calculate asset turnover ratios for the past three years and explain why they changed.
2017 – 7.5x, 2018 – 7.1x, 2019 – 6.6 x the pattern indicates that Apple is ineffective at using capex for revenue generation.
a. Verify the calculation of Total Asset Turnover (compare to D&B Business Browser)
340,618/260,174 = 1.31 x 2019, 2018 1.3 x, 2017 1.38 x
i. Compare the ratio to its industry benchmark and comment on differences.
ROA is 15.87%, 2019 average is 16.2%. 2018 -14.27% , 2017 14%- It is above industrial benchmark.
b. Calculate Fixed Asset Turnover (benchmark data not available on D&B Business Browser)
2017 – 7.5x or 13.5% decline,
2018 – 7.1 x, 6.2% decline,
2019 6.6 x or 6.5% decline
c. Calculate Intangible Asset Turnover (benchmark data not available on D&B Business Browser)
0% for three years
d. Comment on the trend in fixed asset turnover and intangible asset turnover and the differences between them.
There was no investment in fixed assets performance that decline due to depreciation when compared to revenue.
9. What is the percentage of years remaining and the number of years remaining for fixed assets and intangible assets for the last three years? Firms should disclose depreciation and amortization expense in the footnotes. If your company doesn’t do so, then you can obtain this data from the Statement of Cash Flows.
It is 20%, 21%, and 23% for 2019, 2018, 2017 respectively.
Some companies do not have amortizable intangibles. If this is the case with your company, then you will not be able to do this analysis for intangibles. Please note this in your write-up.
10. Comment on the sufficiency of fixed assets (PP&E) and intangible assets to sustain sales growth. Integrate your analyses from above, as appropriate, into your answer.
PP&E is the largest component of long-lived asset for any company. Then comes the intangible asset or the capitalized software development costs. The capex to sales ratio grew for Apple, but the decline in asset turnover means they are not sufficiently used to generate sales. The goodwill has also declined.
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