ACCTG 371 (1) Interpreting and Applying Disclosures on Property and Equipment (L03) Following are selected disclosures from the Rohm and Haas Company (a specialty chemical com- pany) 2007 10-K. Land, Building and Equipment, Net (in millions) 2007 2006 $ 146 1,855 6,155 352 Land ........ Buildings and improvements ..... Machinery and equipment.... Capitalized interest. Construction in progress... Land, buildings, and equipment, gross Less: Accumulated depreciation ...... Total .. 271 $ 142 1,729 5,721 340 218 8,150 5,481 $2,669 8.779 5,908 $2,871 The principal lives in years) used in determining depreciation rates of various assets are: buildings and improvement (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized software (5-7). The principal life used in determining the depreciation rate for leasehold improvements is the years remaining in the lease term or the useful life (in years) of the asset, whichever is shorter. Impairment of Long-lived Assets Long-lived assets, other than investments, goodwill and indefinite- lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impair- ment whenever changes in circumstances indicate the carrying value of the asset may not be recover able. Such circumstances would include items such as a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset... When such events or changes occur, we assess the recoverability of the asset by compar- ing the carrying value of the asset to the expected future cash flows associated with the asset's planned future use and eventual disposition of the asset, if applicable ... We utilize marketplace assumptions to calculate the discounted cash flows used in determining the asset's fair value... For the year ended December 31, 2007, we recognized approximately $24 million of fixed asset impairment charges. Required a. Compute the PPE turnover for 2007 (Sales in 2007 are $8,897 million). Does the level of its PPE turnover suggest that Rohm and Haas is capital intensive? Explain. (Hint: The median PPE turn- over for all publicly traded companies is approximately 5.03 in 2007.) b. Rohm and Haas reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets. C. By what percentage are Rohm and Haas' assets used up" at year-end 2007? What implication does the assets used up computation have for forecasting cash flows? d. Rohm and Haas reports an asset impairment charge in 2007. How do companies determine if assets are impaired? How do asset impairment charges affect Rohm and Haas' cash flows for 2007? How would we treat these charges for analysis purposes? Part (a) is worth 4 marks. Part (b) is worth 1 mark. Part (c) is worth 5 marks Part (d) is worth 7 marks. Please note: impairment requirements are slightly different under IFRS and U.S. GAAP. Either method is an acceptable answer, but please specify which GAAP you are applying (IFRS or U.S.). (Total for question: 17 marks)
