Question 9.16: Using Fixed Asset Disclosure to Compare Companies’ Fixed Ass......

to 1: The following table presents the estimated total useful life, estimated age, and estimated remaining useful life of PPE for each of the companies. (Table 1)

The computations are explained using UPM’s data. The estimated total useful life of PPE is total historical cost of PPE of €16,382 divided by annual depreciation expense of €745, giving 22.0 years. Estimated age and estimated remaining life are obtained by dividing accumulated depreciation of €10,694 and net PPE of €5,688 by the annual depreciation expense of €745, giving 14.4 years and 7.6 years, respectively.

Ideally, the estimates of asset lives illustrated in this example should exclude land, which is not depreciable, when the information is available; however, IP does not separately disclose land. We will use UPM, for which land appeared to be disclosed separately in the previous table, to illustrate the estimates with adjusting for land. As an illustration of the calculations to exclude land, excluding UPM’s land would give an estimated total useful life for the nonland PPE of 21.5 years [(total cost €16,382 minus land cost of €347) divided by annual depreciation expense of €745 million].

to 2: The estimated total useful life suggests that IP and UPM depreciate PPE over a much longer period than ABY: 22.1 and 22.0 years for IP and UPM, respectively, versus 12.4 years for ABY. This result can be compared, to an extent, to the useful life of assets noted by the companies, and the composition of fixed assets. For instance, ABY and UPM depreciate their buildings over similar periods and their equipment over the same period (5 to 20 years). That the estimated useful life of PPE overall differs so much between the companies suggests that equipment reflects a higher proportion of ABY’s assets. An inspection of the companies’ footnoted information (not shown) on asset composition confirms that equipment accounts for a larger portion of ABY gross fixed assets (86%) compared to UPM (76%).

The estimated age of the equipment suggests that ABY has the newest PPE with an estimated age of 6.3 years. Additionally, the estimates suggest that around 50 percent of ABY’s assets’ useful lives have passed (6.3 years ÷ 12.4 years, or equivalently, C$4,553 million ÷ C$9,013 million). In comparison, around 67 percent of the useful lives of the PPE of UPM have passed. Items that can affect comparisons across the companies include business differences, such as differences in composition of the companies’ operations and differences in acquisition and divestiture activity. In addition, the companies all report under different accounting standards, and IP discloses that it uses the units-of-production method for the largest component of its PPE. Differences in disclosures, for example, in the categories of assets disclosed, also can affect comparisons.

to 3: Capital expenditure as a percentage of depreciation is 26 percent for ABY, 74 percent for IP, and 75 percent for UPM. Based on this measure, IP and UPM are replacing their PPE at rates closer to the rate PPE are being depreciated. ABY’s measure suggests the company is replacing its PPE at a slower rate than the PPE is being depreciated, consistent with the company’s apparently newer asset base.

to 4: Fixed asset turnover for each company is presented here, calculated as total revenues divided by average net PPE. Net sales is used as an approximation for total revenues, because differences like sales returns are not consistently disclosed by companies. We can see that IP’s fixed asset turnover is highest, implying it is able to generate more sales from each unit of investment in fixed assets. (Table 2)