📖 长期资产：折旧方法

Financial Statement Analysis

I. Lesson Focus

This lesson examines the accounting decision to capitalize versus expense long-lived asset expenditures and the subsequent choice of depreciation methods. Candidates must master the impact of these choices on the income statement, balance sheet, cash flow statement, and key financial ratios. The focus is on calculating depreciation under straight-line, accelerated (double-declining balance), and units-of-production methods, performing analytical adjustments for comparability, and understanding tax timing differences.

II. The Problem

A manufacturing firm purchases production equipment for CNY 1,000,000 with a five-year useful life and CNY 100,000 residual value. The firm can either expense the entire amount in the current period or capitalize it as a long-lived asset and allocate the cost through depreciation over future periods. These treatments produce dramatically different current-period net income, total assets, ROA, asset turnover, and future profitability. CFA exams frequently require candidates to determine which treatment is appropriate, adjust reported statements for comparability across firms using different policies, and analyze how depreciation methods affect cash flows, tax payments, and valuation metrics. This lesson solves these core analytical problems.

III. Capitalization versus Expensing: Accounting Treatment and Economic Substance

When a firm incurs expenditures related to long-lived assets, it must determine whether the outlay increases future economic benefits (capitalization) or benefits only the current period (expensing).

• Capitalization: The expenditure is recorded as an asset on the balance sheet and subsequently allocated through depreciation, amortization, or impairment charges over multiple periods. Examples include acquisition of PPE, qualifying development costs under IAS 38, and major improvements.
• Expensing: The expenditure is recognized immediately on the income statement, reducing current net income. Examples include routine repairs and maintenance, research-stage R&D, and training costs.

Financial Statement Impact Comparison:

• Current-period effects:
• Expensing: Higher expenses → lower net income → lower taxes (cash tax savings) → higher operating cash flow (under the indirect method).

• Capitalization: Higher assets → little or no immediate expense (only depreciation) → higher current net income → lower asset turnover ratios.

• Future-period effects: Capitalization creates higher depreciation expense in later years, lowering future profits and producing a “profit-smoothing” pattern.

• Statement of Cash Flows: Actual cash outflow is identical under both treatments. However, capitalized expenditures are classified as investing cash outflows, while expensed amounts are operating cash outflows. This distinction is critical when analyzing free cash flow.

Decision Criteria (IAS 16 and ASC 360): 1. It is probable that future economic benefits will flow to the entity. 2. The cost can be measured reliably. 3. The expenditure is necessary to bring the asset to the condition and location for its intended use.

IV. Depreciation Methods for Long-Lived Assets

Depreciation systematically allocates the depreciable amount (cost minus residual value) of tangible assets over their useful lives. CFA Level I emphasizes three methods:

1. Straight-Line Method
   Allocates expense evenly each period.
   Formula:
   Annual depreciation = (Cost − Residual value) / Useful life (years)

2. Accelerated Depreciation (Double-Declining Balance)
   Front-loads expense to reflect higher productivity in early years.
   Formula:
   Depreciation rate = 2 / Useful life (years)
   Annual depreciation = Beginning net book value × Depreciation rate
   (Switch to straight-line in later years to avoid book value falling below residual value.)

3. Units-of-Production Method
   Allocates based on actual usage or output, best matching economic consumption.
   Formula:
   Depreciation per unit = (Cost − Residual value) / Total estimated units
   Periodic depreciation = Depreciation per unit × Actual units produced in period

Tax versus Financial Reporting Differences: Many jurisdictions permit accelerated depreciation for tax purposes, creating temporary differences between book and taxable income and resulting in deferred tax liabilities.

V. Impact of Depreciation Methods on Financial Ratios

• Profitability: Accelerated methods produce lower net income, ROA, and ROE in early years; the pattern reverses later.
• Solvency: Lower early EBIT under accelerated depreciation reduces interest coverage ratios.
• Efficiency: Capitalization increases total assets, lowering asset turnover.
• Cash Flow: Depreciation is non-cash; accelerated methods reduce early taxable income, producing higher operating cash flow in initial years.

Analysts adjust for non-comparable depreciation policies by converting accelerated results to straight-line or by reversing engineering implied assumptions.

Worked Cases

Case 1: Comparison of Three Depreciation Methods

A company acquires equipment at the beginning of 2024 for CNY 1,000,000. Useful life is 5 years, residual value CNY 100,000, and total estimated output 500,000 units. Actual output in 2024 is 80,000 units.

Straight-line:
Annual depreciation = (1,000,000 − 100,000) / 5 = CNY 180,000
2024 depreciation expense = CNY 180,000
Ending net book value = 1,000,000 − 180,000 = CNY 820,000

Double-Declining Balance:
Rate = 2/5 = 40%
2024 depreciation = 1,000,000 × 40% = CNY 400,000
Ending net book value = 1,000,000 − 400,000 = CNY 600,000

Units-of-Production:
Depreciation per unit = (1,000,000 − 100,000) / 500,000 = CNY 1.80
2024 depreciation = 1.80 × 80,000 = CNY 144,000
Ending net book value = 1,000,000 − 144,000 = CNY 856,000

Accelerated depreciation produces the highest early expense, straight-line is moderate, and units-of-production depends on actual utilization.

Case 2: Capitalization versus Expensing — Multi-Year Profit Impact

A firm incurs CNY 300,000 in expenditure. If expensed immediately, the full amount reduces current pre-tax income. If capitalized and depreciated straight-line over 5 years with zero residual value, annual depreciation is CNY 60,000. Tax rate is 25%.

• Expensing: Year 1 after-tax net income lower by CNY 225,000; no effect in Years 2–3.
• Capitalization: Year 1 after-tax net income lower by only CNY 45,000; Years 2–5 each lower by CNY 45,000.

Capitalization increases Year-1 profit but produces identical cumulative after-tax profit reduction (CNY 135,000) over the asset’s life, illustrating the smoothing effect.

Case 3: Analytical Adjustment — Converting Accelerated to Straight-Line Depreciation

Company A uses DDB and records CNY 400,000 depreciation in 2024 on an asset for which Company B, using straight-line, records CNY 180,000. To compare profitability, an analyst adjusts Company A:

Approximate adjusting entry:
Debit: Accumulated depreciation CNY 220,000 (difference)
Credit: Depreciation expense CNY 220,000 → increases pre-tax income by CNY 220,000 (after-tax +CNY 165,000 at 25% tax).
Net asset value also increases by CNY 220,000, requiring simultaneous adjustment to ROA and turnover ratios.

Traps

Key Formulas

• Straight-line depreciation: $ \text{Annual depreciation} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life (years)}} $
• Double-declining balance rate: $ \text{Rate} = \frac{2}{\text{Useful life}} $
• Annual DDB depreciation: $ \text{Depreciation} = \text{Beginning book value} \times \text{Rate} $
• Units-of-production unit rate: $ \text{Rate per unit} = \frac{\text{Cost} - \text{Residual value}}{\text{Total estimated units}} $
• Capitalization vs. expensing Year-1 net income difference: (Expenditure − Current depreciation) × (1 − tax rate)
• Net book value = Cost − Accumulated depreciation
• Analytical adjustment (accelerating to straight-line): Add back excess depreciation to income and to net assets

Practice Questions

Q1. Equipment costs $500,000, useful life 5 years, no residual value. Using double-declining balance, Year-2 depreciation is closest to:
A. $80,000
B. $120,000
C. $200,000
D. $72,000

Q2. Which expenditure is most likely to be capitalized?
A. Employee training costs
B. Routine machine lubrication
C. Major overhaul that extends machine life
D. Laboratory costs for researching a new product

Q3. Relative to expensing, capitalizing a long-lived expenditure will most likely result in:
A. Higher current operating cash flow
B. Higher current investing cash flow
C. Higher future asset turnover
D. Lower current net income

Q4. The primary advantage of the units-of-production method is that it:
A. Smooths reported profit
B. Best matches the pattern of economic benefit consumption
C. Provides the greatest tax benefit
D. Is the simplest to calculate

Q5. Firm A uses accelerated depreciation while Firm B uses straight-line on identical assets. In early years, Firm A will most likely report:
A. Higher ROA
B. Lower operating cash flow
C. Lower net book value
D. Higher net income

Q6. A machine costs $1,200,000 with $200,000 residual value and 10,000 estimated working hours. It operated 2,400 hours this year. Units-of-production depreciation for the year is:
A. $240,000
B. $288,000
C. $200,000
D. $144,000

Q7. When adjusting a firm using accelerated depreciation to a straight-line basis, an analyst would most likely:
A. Reduce current profit and reduce assets
B. Increase current profit and increase net asset value
C. Adjust only the cash flow statement
D. Reduce deferred tax liabilities

Q8. Regarding the long-term effect of capitalization versus expensing on free cash flow to the firm (FCFF), which statement is correct?
A. Capitalization permanently increases FCFF
B. Cumulative FCFF is the same under both methods
C. Expensing produces higher early-period FCFF
D. Capitalization has no effect on FCFF classification

Answers

Takeaways

• Capitalization increases current profit, assets, and operating cash flow but creates higher future depreciation and smoother earnings.
• Accelerated depreciation produces the highest early expense, lowest early profit, and (via tax deferral) highest early operating cash flow.
• Units-of-production best reflects economic reality when reliable output estimates exist.
• Analytical adjustments for differing depreciation policies must modify both income and balance-sheet carrying values to produce comparable ROA.
• Tax laws frequently allow accelerated depreciation, generating deferred tax liabilities that require careful analyst attention.
• The fundamental decision between capitalization and expensing rests on whether future economic benefits are probable and costs can be measured reliably.