College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 13

Big Picture in Focus: ULOm. Explain the nature of depreciation; n.

Apply the proper accounting treatment of recognizing depreciation.

Metalanguage and Essential Knowledge

In this section, the most essential terms relevant to the study of Depreciation are
discussed and to demonstrate ULOm will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through the study of depreciation. Please
refer to these definitions in case you will encounter difficulty in the in understanding
accounting concepts.

To perform the aforesaid big picture (unit learning outcomes) for these weeks of the
course, you need to fully understand the following essential knowledge that will be laid
down in the succeeding pages. Please note that you are not limited to exclusively refer
to these resources. Thus, you are expected to utilize other books, research articles
and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

1. Depreciation: Depreciation is used to account for ordinary, typical wear and tear of fixed
assets over time.

Depreciation has been defined as the systematic process of allocating the depreciable
amount over the useful life of the asset.

The amount periodically allocated is reported as expenses presented in the income

statement whether as general and administrative or part of selling expenses or
manufacturing overhead in case of manufacturing equipment.

The accumulated depreciation is a contra-asset account of the appropriate property, plant

and equipment.

In the definition of account titles, a contra asset is a deduction from the related account
title to arrive at its carrying amount.

The entry to recognize depreciation as part of year-end adjusting entry is:

Year Account Titles F Debit Credit

Depreciation Expense XX
Accum. Depreciation – Asset XX

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IAS 16.50 indicates depreciable amount of an asset to be allocated on a systematic

basis over its useful life.

2. Depreciation Methods used:

A. Straight Line
B. Sum of the years digit
C. Double declining balance method
D. Output method

Straight line method:

a. Annual Depreciation = Depreciable Cost/Economic or useful life.
b. Depreciable cost = Cost - Residual value
c. Carrying amount = Historical cost less accumulated depreciation
d. Accumulated depreciation = The sum of depreciation expense over the period.
Example (Adapted) A machine is purchased on Jan. 1, 2017 costing 1,000,000 with
useful life of 5 years and a residual value of 100,000. The Depreciation table will
appear as follows:

Year Annual Depreciation Carrying Amount

1/1/2017 1,000,000
12/31/2017 180,000 820,000
12/31/2918 180,000 640,000
12/31/2019 180,000 460,000
12/31/20 180,000 280,000
12/31/20 180,000 100,000 Residual value

The entry to recognize depreciation expense for the year is to debit depreciation
expense with a corresponding credit to accumulated depreciation of 180,000.

At end of year 1, the Statement of Financial Position shall report accumulated

depreciation of 180,000 and a carrying amount of 820,000. In the Income statement,
depreciation expense reported is 180,000.

Sum of the years digit method:

SYD = ( life in years +1)*life in years

2 which is constant

Year 1 depreciation is computed as Depreciable amount * remaining life in year

1/SYD, in year 2 is Depreciable amount * remaining life in year 2/SYD and so on.

Example (Adapted) : On January 1, 2017, a machine costing 6,000,000 was

purchased and the SYD method is used. The useful life of the machine was 10 years
with a residual value of 500,000.

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Thus: The SYD = 55

The table of depreciation is presented below:

Date Annual Depreciation Accumulated Carrying

Depreciation Amount
1/1/2017 6,000,000
12/31/2017 10/55*5,500,000=1,000,000 1,000,000
5,000,000
12/31/2018 9/55*5,500,000=900,0000 1,900,000
4,100,000
12/31/2019 8/55*5,500,000= 800,000 2,700,000 3,300,000
12/31/2020 7/55*5,500,000=700,000 3,400,000
2,600,000
12/31/2021 6/55*5,500,000=600,000 4,000,000
2,000,000
12/31/2022 = 500,000 4,500,000 1,500,000
12/31/2023 = 400,000 4,900,000
1,100,000
12/31/2024 = 300,000 5,200,000
800,000
12/31/2025 = 200,000 5,400,000
600,000
12/31/2026 = 100,000 5,500,000 500,000

The year 2 Income statement shall report depreciation expense amounting to 900,000, accumulated
depreciation of 1,900,000 (year 1 plus year 2 depreciation expense) and a carrying amount at the end
of year 2 of 4,100,000.
3. Double declining Balance Method.
Annual depreciation = Carrying amount * double declining rate
Double declining rate = Straight line rate*2
Straight line rate = 100%/life in years

Illustration: (Adapted from Intermediate Accounting by Glenn Arnold & Suzanne

Kyle)

On January 1, 2017, Loverei company purchased for a packaging machine for

4,800,000 used in a factory with a useful life of 10 years and a residual value of
200,000. The machine was depreciated by the double declining balance method..

Thus: The double declining rate is 1/10=10%*2 = 20% or 100%/10*2= 20%

The depreciation table follows:

Year Annual Depreciation Accumulated Carrying Amount

Dep.

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1/1/2017 4,800,000
12/31/2017 4800,000 *20%=960,000 960,000
3,840,000
12/31/2018 3840,000*20%=768,000 1,728,000 3,072,000
12/31/2019 3072,000*20%=614,400 2,342,400 2,457,600
12/31/2020 2,457,600*20%=491,520 2,833,920 1,966,080
12/31/2021 1,966,080*20%=393,216 3,227,136 1,572,864
12/31/2022 1,572,864*20%=314,573 3,541,709 1,258,291
12/31/2023 1,258,291*20%=291,658 3,833,367 966,633
12/31/2024 966,633*.20 =193,327 4,026,694 773,306
12/31/2025 773,306*20% =154,661 4,181,355 618,645

12/31/2026 618,645-200,000=418,645 4,600,000 200,000

The Income statement of year 3 (2019) shall report depreciation expense amounting
to 614,400, accumulated depreciation of 2,342,400 (the sum of depreciation for year
1, 2 and 3) and presents the carrying amount at 2,457,600.

The final year’s depreciation is just getting the difference between the previous year’s
carrying amount and the residual value at the end of the life of the asset.

4. Output Method and production method.

Depreciation rate = Depreciable cost/total number of units
Or = Depreciable cost/total number of hours
Annual Depreciation = Depreciation rate * number of units produced during the year
Or= Depreciation rate * number of hours used during the year

Illustration (Adapted) : Assume that a machine purchased for P8,000,000 has a

production capacity over its economic life of 4,000,000 in terms of units of products and
3,040,000 in terms of service hours available for production. The residual value amounted
to 400,000. Units produced per year in terms of units and service hours worked are shown
below: Units produced Service
Hours worked
Year 1 900,000 750,000
Year 2 800,000 640,000
Year 3 700,000 620,000
Year 4 750,000 635,000
Year 5 650,000 345,000
Year 6 200,000 50,000

The depreciation table will be: Units of production method

Year Annual depreciation Accumulated Carrying Amount

Depreciation
7,600,000/4,000,000=1.9 8,000,000

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1 1.9 * 900,000=1,710,000 1,710,000 6,290,000

2 1.9 * 800,000= 1,520,000 3,230,000 4,770,000
3 1.9* 700,000=1,330,000 4,560,000 3,440,000
4 1.9* 750,000=1,425,000 5,985,000
2,015,000
5 1.9*650,000=1,235,000 7,220,000
780,000
6 1.9*200,000=380,000 7,600,000 400,000 RV

The amount of depreciation expense to be reported in the Income statement of year 2

is 1,710,000 while the statement of financial position shall present accumulated
depreciation at the end of year 2 for 3,230,000 and a carrying amount of the asset at
4,770,000.

The depreciation table under Working Hours method will be:

Year Annual depreciation Accumulated Carrying Amount

dep.
7,600,000/3,040,000=2.5 8,000,000
1 2.5 * 750,000 = 1,875,000 1,875,000 6,125,000
2 2.5 * 640,000 = 1,600,000 3,475,000 4,525,000
3 2.5 * 620,000 = 1,550,000 5,025,000 2,975,000
4 2.5 * 635,000 = 1,587,500 6,612,500 1,387,500
5 2.5 * 345,000 = 862,500 7,475,000 525,000
6 2.5 * 50,000 = 125,000 7,600,000 400,000

To check if you can prepare a depreciation table under each of the 5 methods using
the guide above, please refer to problem 1 in Let’s check portion.

Composite and group method. Is used by large entities as it is not so practical to

depreciate each asset individually.

Composite method is used for dissimilar assets to be grouped together and

depreciated as a single unit.

Dissimilar assets refers to assets having different characteristics and even vary in their
useful life.

In group method, similar assets are taken and depreciated as one unit. The purpose
of which is to simplify accounting for depreciating individually low value assets.

Illustration (Adapted) : Composite Method

MieLove Company had the following items in its property, plant and equipment:
Cost Residual Depreciable Cost Life Depreciation

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Building 1,170,000 90,000 1,080,000 15 72,000

Machinery 396,000 36,000 360,000 8 45,000
Equipment 234,000 54,000 180,000 4 45,000
1,800,000 180,000 1,620,000 162,000

At the end of 4th year, the equipment is retired for a consideration of 36,000.

It uses the composite method of depreciation.

To compute depreciation, the composite life and composite rate are computed using the
formula.
Composite life = Total Depreciable amount/ Total depreciation
=1,620,000/162,000
= 10 years
Composite rate = Total depreciation/ Total Cost
= 162,000/1,800,000
= 9%

Hence, the entry to recognize depreciation is

Year Account Titles F Debit Credit

Depreciation expense 162,000
Accumulated Depreciation 162,000
To record annual dep.

Upon the retirement of the equipment after 4 years for a proceeds of 36,000, simply eliminate
the cost of the equipment, receive the cash and the excess is charged or debited against
accumulated depreciation as follows:

Year Account Titles F Debit Credit

Cash 36,000
Accumulated Depreciation 198,000
Equipment 234,000

If on the other hand there were no proceeds received from the equipment, the entry will
involve the elimination of the cost of the equipment and the same amount is charged or
debited against accumulated depreciation as shown below:

Year Account Titles F Debit Credit

Accumulated Depreciation 234,000
Equipment 234,000
To record
Retirement.

On the fifth year, the annual depreciation will be computed as 9% (1,566,000) resulting to
140,940. The 1,566,000 is the balance of 1,800,000 less the equipment retired of 234,000.

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Phone No.: (082)300-5456 Local 13

Had the asset retired been replaced by another asset costing 288,000, then the annual
depreciation would be computed as 9% (1,854,000) which is 166,860. The 1,854,000 is
computed as follows:
Total assets 1,800,000
Equipment retired (234,000)
Add: newly purchased 288,000
Balance 1,854,000 * 9% = 166,860

Illustration (Adapted) : Group method

William Company purchased 100 similar machines on January 1, year 1 at a total cost of
1,500,000 or at an average cost of 15,000 per machine.
The machines have an average useful life of 5 years or an annual depreciation rate of 20%.
The machine are retired as follows:
Date Number of Machines Salvage proceeds
Dec. 31, year 4 30 None
Dec. 31, year 5 40 15,000
Dec. 31, year 6 30 30,000

The annual depreciation is simply computed as 20% multiplied by the total cost of 1,500,000.
The journal entry to record the annual depreciation from year 1 to year 6 is the same as follows:

Year Account Titles F Debit Credit

12/31/1 Depreciation expense 300,000
Accumulated 300,000
Depreciation

12/31/2 Depreciation expense 300,000

Accumulated 300,000
Depreciation

12/31/3 Depreciation expense 300,000

Accumulated 300,000
Depreciation

12/31/4 Depreciation expense 300,000

Accumulated 300,000
Depreciation

Accumulated depreciation
450,000
Machinery
450,000

Cost of machines retired is computed as: 30 machines (15,000) = 450,000

There is no cash receive therefore no cash is debited and the full cost of the machines
retired is then charged to the accumulated depreciation.

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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 13

To get the following year’s amount of depreciation, simply get the balance of total cost and
multiply to 20%. Thus, 1,500,000 less 450,000 equals 1,050,000 balance in total cost then
multiplied to 20% is 210,000, the amount of depreciation for the next period.

Year Account Titles F Debit Credit

12/31/18 Depreciation expense 210,000
Accumulated Depreciation 210,000

Cash 15,000
Accumulated Depreciation
585,000
Machinery 600,000

Upon the retirement of the 40 machines, the accumulated depreciation is charged for the
excess of cost over the cash received since there is a cash proceeds.

The determination of the next period’s depreciation expense requires the following
computation:

a. carrying amount per book

b. Difference between carrying amount and salvage proceeds

Cost as of Dec. 31, 2017 1,050,000

Retired 40 (15,000) 2018 600,000
Cost balance 450,000
Accumulated dep. (375,000) (300,000 * 4) + 210,000 - 450,000- 585,000
Carrying amount per book 75,000
Less Salvage proceeds 30,000
Depreciation expense 45,000

Year Account Titles F Debit Credit

12/31/19 Depreciation expense 45,000
Accumulated Depreciation 45,000

Cash 30,000
Accumulated Depreciation
420,000
Machinery 450,000
To record the retirement of the 30
machines.

The retirement of the machines eliminates the cost of the machines and the accumulated
depreciation is debited for an amount in excess of the cost over the cash proceeds.

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We just had the end of this chapter, please answer the Let’s analyze and Nutshell portion as
part of your accumulated graded assignment which is 5% of your final grade. You may submit
your work through LMS and may raise your questions and clarifications via LMS, group chat
and text message.

KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
Cost Residual Value Cost model
Accumulated Carrying Amount Composite rate
Depreciation
Depreciation Dissimilar Assets Depreciable amount

Self-Help: You can also refer to the sources below to help you
further understand the lesson:
*VALIX (2017). Financial Accounting: Volume 2. Manila, Philippines: GIC Enterprises
& Co

Intermediate Financial Accounting Volume 1, Glenn Arnold & Suzanne

Kylehttps://lifa1.lyryx.com/textbooks/ARNOLD_2/marketing/ArnoldKyle-IntermFinAcct-
Vol1-2020A.pdf

https://www.profitbooks.net/what-is-depreciation/retrieved May 27, 2020

https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-depreciation-
methods/retrieved May 27, 2020
http://investment_terms.enacademic.com/11948/Retirement_Method_of_Depreciationretrieve
d May 27, 2020
http://www.accioneduca.org/admin/archivos/clases/material/depreciation_1564412042.pdfret
rieved May 27, 2020

https://www.playaccounting.com/explanation/exp-oa/composite-depreciation/retrieved May
27, 2020

Weydgant, J., kimmel P., Kieso D.- Fianncial Accounting IFRS.pdf

file:///C:/Users/canque%20evelyn/Downloads/Weygandt%20J.,%20Kimmel%20P.,%20Kies
o%20D.%20-%20Financial%20Accounting%20IFRS.pdf retrieved June 1, 2020
J. David Spiceland, Mark W. Nelson, Wayne B. Thomas Intermediate Accounting 10 th
edition, McGrawhill higher education 2019.pdf
https://drive.google.com/file/d/1bZ4wSMaqrIG8OTSwkAplJ2ehwk40MtBB/view retrieved
June 1, 2020

Q&A LIST
Do you have any questions for clarification?

Questions/Issues Answers
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Big Picture
Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to

a. Discuss the nature of wasting assets, its classifications, recognition

and measurement;
b. Apply proper accounting treatment of wasting asset and depletion;
c. Discuss the measurement of property, plant and equipment using
the revaluation model;
d. Apply proper accounting treatment of revaluation;
e. Discuss the basic principle for the recognition of impairment;
f. Apply proper accounting treatment of impairment of asset.

Big Picture in Focus:

ULOa. Discuss the nature of wasting assets, its classification,
recognition and measurement;
b. Apply proper accounting treatment of wasting asset and depletion;

Metalanguage
In this section, the most essential terms relevant to the study of wasting assets is
discussed and to demonstrate ULOa to b will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through the study of wasting assets. Please
refer to these definitions in case you will encounter difficulty in the in understanding of
wasting assets.
1. Exploration for and Evaluation of mineral resources – searching for mineral resources
after the entity has obtain the legal right to explore in specific area, the determination of of
technical feasibility of extracting the mineral resource.

2. Exploration and evaluation expenditures - incurred by an entity in connection with

exploration and evaluation of mineral resources before the commercial viability of
extracting the resource.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for these weeks of the
course, you need to fully understand the following essential knowledge that will be laid

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down in the succeeding pages. Please note that you are not limited to exclusively refer
to these resources. Thus, you are expected to utilize other books, research articles
and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

1. Wasting Assets. Wasting assets are natural resources of economic value and utility.
These are physically consumed, and which can only be replaced by the process of nature.
2. Elements of cost of exploration and evaluation assets. IFRS standard 6 provides for
the initial measurement of exploration and evaluation assets at cost.

Elements of cost are as follows as enumerated in paragraph 9 of IFRS:

a. Acquisition of rights to explore

b. Topographical, geological, geochemical and geophysical studies;
c. Exploratory drilling;
d. Trenching;
e. Sampling; and
f. Activities in relation to evaluating technical feasibility commercial viability of extracting
a mineral resource.

As a consequence for exploration and evaluation of mineral resources, the entity will
recognize any obligations for removal and restoration in accord with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

Acquisition Cost.It is the price paid for in obtaining the asset.

The value of the land after the extraction activity is deducted from the cost of the
wasting asset in getting the depletable amount.

Exploration cost. It is the cost of locating the natural resource that can be extracted
from nature such as acquiring right to explore, exploratory drilling, trenching and
sampling etc.

Successful effort method capitalizes cost of successful effort of locating the natural
resource while the cost of unsuccessful locating is expensed immediately.

In Full cost method, all whether successful or not form part of the exploration cost of
the successful resource discovery.

Development Cost. After the successful discovery of natural resource, development

cost follows. These are the costs to exploit or extract the natural resource.

IFRS par 15 provides that the company shall classify exploration and evaluation assets
whether tangible or intangible.

Tangible equipments are depreciable development cost depreciated over whichever

is shorter between its useful life or the useful life of the wasting asset such as vehicles.

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The intangible development cost from part of the cost of the natural resource (IFRS 6
par. 16). Such costs include drilling and construction of wells.

Restoration Cost. In IAS 37 on Provisions and contingencies, after the exploration

and extraction activities, if it is a legal/lawful requirement for the companies to bring
back the property to its original condition, restoration cost is added as cost of the
depletable property. The amount is discounted for the effect of time value of money
is to be considered in the standard for provision.

3. Subsequent Measurement. IFRS 6 par. 12provides that after the initial

recognition, an entity shall apply either the cost model or revaluation model.

4. Depletion. It is the systematic allocation of the depletable cost of wasting asset

over the period for which the natural resource is expected to be extracted.

The output or production method is the method often used.

When there is a change in the estimate of total recoverable mineral deposits, it is to

be handled currently and prospectively as it is treated as change in accounting
estimate.

- During shutdown operation, the output method may not be used. The straight line
method at applies during shutdown.

- The remaining carrying amount of the equipment is divided by the remaining life of
the equipment to arrive at the depreciation in the year of shutdown.

5. Impairment. IFRS 6 paragraph 18 provides that when circumstances suggest that

carrying amount of exploration and evaluation assets exceeds its recoverable amount, the
same should be tested for impairment.

The IFRS standard 6 par. 18 provides that the measurement, presentation and
disclosure of the resulting impairment loss be in accordance with IAS 36, except as
provided for in par. 21 of IFRS.

6. Trustfund Doctrine. In this doctrine, the corporation can pay dividends to shareholders
limited only to the balance of the retained earnings in protection of creditors. Under the
wasting asset doctrine, a wasting asset corporation can pay dividends more than their
retained earnings. It can distribute an amount equal to the balance of retained earnings
and accumulated depletion.

7. Maximum Dividend. The formula to compute the amount of maximum dividend that can
be declared is as follows:
Retained earnings xx
Add: Accumulated depletion xx
Total xx
Less: Capital liquidated in prior years xx
Unrealized depletion in ending inventory xx_________xx__

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In a Nutshell (Adapted)
Your boyfriend seeks for your expertise regarding a work related matter. He works forLove
company engaged in a business on exploration of natural resource property. He provided you
with the following balances at the end of the current year:
Wasting asset, at cost 16,000,000
Accumulated depletion 2,000,000
Share capital 40,000,000
Capital liquidated 1,440,000
Retained earnings 1,200,000
Depletion based on 50,000 units at 16 per unit 800,000
Inventory of resource deposit (5000 units) 320,000

He is confused on the company’s declaration of dividends of 1,600,000 which is more than

its retained earnings balance.

Give him an advice with research/legal/lawful support on the appropriateness of the matter.
Also give him an idea of the maximum dividend that their company may declare and pay for
the current year.

Answer in minimum of 50 words and in English only.

Big Picture in Focus:

ULOc. Discuss the measurement of property, plant and equipment
using the revaluation model;
d. Apply proper accounting treatment revaluation

Metalanguage
In this section, the most essential terms relevant to the study of property, plant and
equipment using revaluation model is discussed and to demonstrate ULOc to d will
be operationally defined to establish a common frame of reference as to how the texts
work in your chosen field or career. You will encounter these terms as we go through
the study of property, plant and equipment using revaluation model. Please refer to
these definitions in case you will encounter difficulty in the in understanding of this
topic.

Revalued Amount. It refers to the depreciated replacement cost of the item of

property, plant and equipment and often described as the fair value of the property on
the date of the revaluation less subsequent accumulated depreciation and impairment
losses.

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Depreciated replacement cost. It is equal to the replacement cost of the property,

plant and equipment minus the accumulated depreciation. It is referred to also as
sound value.
Replacement cost. The current purchase price of the property, plant and equipment.
Carrying amount. Historical cost minus accumulated depreciation based on historical
cost.
Revaluation Surplus. Also known as revaluation increment in property or the net
appreciation.
Appreciation or revaluation increase. The excess of the revalued amount over the
historical cost.
Essential knowledge
To perform the aforesaid big picture (unit learning outcomes) for these weeks of the
course, you need to fully understand the following essential knowledge that will be laid
down in the succeeding pages. Please note that you are not limited to exclusively refer
to these resources. Thus, you are expected to utilize other books, research articles
and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

1. Measurement of property, plant and equipment. Initial measurement of

property, plant and equipment is at cost. IAS 16 par. 29 provides that subsequently
the entity can choose either the cost model or revaluation model applied to an entire
class of property, plant and equipment.

2. Cost model. Property, plant and equipment are carried at cost less accumulated
depreciation and accumulated impairment losses (IAS 16 par 30).

3. Revaluation model. The subsequent measurement of PPE at revalued amount

less subsequent accumulated depreciation and impairment losses (IAS 16 par. 31).

4. Frequency of revaluation. Review on the assets fair value, residual value and
useful life is done at least annually. Although, it can be done every three to five years
for some properties.

IAS 16. 51 provides that any changes are handled currently and prospectively as a
change in estimate in IAS 8.

Basis for revaluation. Appraisal of fair value made by a qualified professional

valuers.

If fair value is not available, it is equal to depreciated replacement cost.

Accounting for revaluation:

The proportional approach is used in this illustration whereby the appreciation is

recorded on the date of revaluation.

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The amount is credited through OCI under revaluation surplus as provided for in IAS
16 par. 39.

Further, it provides that if the increase was a reversal of a revaluation decrease of the
same asset previously recognized through profit or loss, such shall be in profit or loss.

In paragraph 40 of IAS 16, the standard provides that the decrease in an asset’s
carrying amount as a result of revaluation shall be made through profit or loss.

The decrease shall be recognized in OCI in respect to the extent of any credit balance
in the revaluation surplus of the asset.

The revaluation surplusis to be realized annually through retained earnings over the
remaining useful life.

Depreciation shall also continually be recognized but the amount has also considered
the effect of the revaluation. Thus, an increased amount of depreciation expense is
reported.

IAS 16.41 provides that in the event of disposal of a revalued asset, the balance of
revaluation surplus shall be transferred to retained earnings.

Illustration 1 (Adapted) : There is revision in the useful life. A building was

subjected to revaluation and the company seeks the expertise of a professional
qualified valuer. The following details were provided:
Cost Replacement Cost
Building 7,200,000 12,000,000
Accumulated 2,160,000
depreciation

The original life useful life of the building is 10 years but according the expert, a
revised useful life of 15 years is appropriate from the date of acquisition.
The analysis:
a. 2,160,000/7,200,000 = 30%; therefore the asset is 30% depreciated and so must
be the Replacement cost, it must also be 30% depreciated. Additionally it means that
10*30%=3 years depreciated.

b. Prepare the table:

Cost Replacement Cost Appreciation

Building 7,200,000 12,000,000 4,800,000
Accumulated 2,160,000 3,600,000=.30*12M 1,440,000
depreciation
CA/SV/RS 5,040,000 8,400,000 3,360,000

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c. The entry:

Year Account Titles F Debit Credit

Building 4,800,000
Accumulated 1,440,000
depreciation
Revaluation surplus 3,360,000

Depreciation expense
700,000
Accumulated 700,000
depreciation
8,400,000/15-3=12 yrs
remaining

Revaluation surplus
280,000
Retained earnings 280,000

Illustration 2 (Adapted) : With residual value

Cost Replacement Cost
Machinery 5,100,000 7,440,000
Residual Value 300,000 240,000
Accumulated 1,920,000
depreciation

The original useful life is 10 years and the revaluation shows a revised useful life of
12 years from the date of acquisition.

The analysis: a. Solve for the age of machinery on date of revaluation.

= 5,100,000-300,000 = 4,800,000 depreciable cost
Divided by 10 years useful life
= 480,000
1,920,000/480,000= 4 years age of the asset; 4/10 therefore 40%
depreciated

b. Prepare the table:

Cost Replacement Appreciation
cost
Machinery 5,100,000 7,440,000 2,340,000
Residual value 240,000 240,000 -
Depreciable amount 4,860,000 7,200,000 2,340,000
Accumulated 1,920,000 2,880,000 960,000
depreciation -40%

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Remaining depreciable 2,940,000 4,320,000 1,380,000

amount

The entries:
Year Account Titles F Debit Credit
Machinery 2,340,000
Accumulated 960,000
depreciation
Revaluation surplus 1,380,000

Depreciation expense
540,000
Accumulated 540,000
depreciation
4,320,000/8 12-4=8
remaining life

Revaluation surplus
172,500
Retained earnings 172,500

To evaluate your understanding of the different revaluation situation/cases, please

refer to problem 1, 2 and 3 and answer.

7. Reversal of a revaluation increase. IAS 16 par 40 provides that a revaluation

decrease shall first be charged as deduction from revaluation surplus to the extent it
increased previously and the balance shall be recorded as an expense “revaluation
loss or impairment loss”.

For example a land with original cost of 2,000,000 was revalued upward to 2,400,000
three years ago with the following entry:

Year Account Titles F Debit Credit

Land 400,000
Revaluation surplus 400,000

In the current year, the fair value has fallen to 1,400,000. The entry to record the
revaluation decrease would then be:

Year Account Titles F Debit Credit

Revaluation surplus 400,000

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Impairment Loss
600,000
Land
1,000,000

8. Reversal of a revaluation decrease. IAS 16 par 39 provides that a revaluation

decrease should be charged first to reverse the effect of recorded revaluation loss
previously recorded as “revaluation gain” and the excess shall be deemed revaluation
surplus.

For example, a land costing 2,000,000 was revalued downward to 1,600,000 with this
entry:

Year Account Titles F Debit Credit

Revaluation Loss 400,000
Land 400,000

In the current year, the land fair value is now 2,200,000. The entry then to recognize
the reversal of the revaluation decrease will be:

Year Account Titles F Debit Credit

Land 600,000
Revaluation gain 400,000
Revaluation surplus
200,000

9. Additional Disclosures for revalued property:

a. Effective date of revaluation
b. Whether there is an independent valuer
c. the carrying amount had the cost model been used
d. the revaluation surplus

KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
Revaluation model Revaluation surplus Cost model
Accumulated Sound value Replacement Cost
Depreciation
Depreciated replacement Revaluation Impairment loss
cost

Self-Help: You can also refer to the sources below to help you
further understand the lesson:

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Phone No.: (082)300-5456 Local 13

The selling price of the equipment yesterday (one year after revaluation) which your
conflict has arisen is 8,000,000.
Answer in minimum of 50 words.

Big Picture in Focus:

ULOe. Discuss the basic principle for the recognition of impairment;
f. Apply proper accounting treatment of impairment of asset.

Metalanguage
In this section, the most essential terms relevant to the study of impairment is
discussed and to demonstrate ULOe to f will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through the study of impairment. Please refer
to these definitions in case you will encounter difficulty in the in understanding of this
topic.
The following terms are defined in IAS 36 paragraph 6:

1. Impairment Loss – The excess of carrying amount over the recoverable amount of an
asset.

2. Carrying Amount – The amount initially recorded in the statement of financial position less
accumulated depreciation and accumulated impairment losses.

3. Recoverable amount – It is the amount whichever is higher between value in use and fair
value less cost of disposal.

4. Fair value – is the price that would be received to sell an asset , or paid to transfer a
liabilityin an orderly transaction between market participants at the measurement date.
(CPA Canada, 2019, 4.26)

5. Value in use – the present value of the future cash flows to be derived from an asset.

To perform the aforesaid big picture (unit learning outcomes) for these weeks of the
course, you need to fully understand the following essential knowledge that will be laid
down in the succeeding pages. Please note that you are not limited to exclusively refer
to these resources. Thus, you are expected to utilize other books, research articles
and other resources that are available in the university’s library e.g. ebrary,
search.proquest.com etc.

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Impairment. The IAS 36.12 discusses the following situations indicating impairment
of assets:
a. Decline in market value
b. Technological, market, economic or legal conditions that negatively affect the
asset or entity;
c. Increases in interest rates
d. Entity’s net assets is greater than its market capitalization.
e. Obsolescence or physical damage
f. Significant changes in how the asset is used, such as excess capacity
g. Economic performance of asset is worse than expected.

IAS 36. 59 describes an asset as impaired when the recoverable amount is lower than
its carrying amount.

Impairment loss is recognized as an expense as provided for in IAS 36.60 unless it is

related to a revalued asset where it is treated as a revaluation decrease.

IAS 36.60 provides for the adjusted depreciation expense for future periods.

Since impairment may be impossible to determine on an asset by asset basis, it is

recognized for a cash generating unit.

IAS 36. 104 provides that the amount of impairment loss is allocated first to goodwill
and the remaining amount to all other noncash assets of the generating unit
proportionate to their carrying amount.

In the allocation of the impairment among the non cash assets, it is to be observed
that carrying amount of an individual asset shall not be below the highest of fair value
less cost of disposal, value in use and zero as provided for in IAS 36. 105.

Thus, the excess amount that has been allocated to the asset must be allocated again
in addition to amount of loss already allocated to the other remaining assets of the
cash generating unit.

Cash Generating Unit. IAS 36 describe it referring to the smallest identifiable group
of assets that generate cash inflows from continuing use that are largely independent
of the cash inflows from other assets or group of assets.(International Accounting
Standards,n.d.,36.68)

Illustration (Adapted) : The assets of a certain cash generating at their carrying

amount: Bulding, 7,500,000; Equipment, 4,500,000; Inventory, 3,000,000. The value
in use of the division is 12,000,000 and the buidling’s fair value less cost of disposal
is 6,750,000.

Step 1. Determine the amount of Impairment loss

Impairment loss = Carrying amount of CGU 15,000,000
Less: Value in use 12,000,000

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Impairment loss 3,000,000

Step 2. Allocate impairment loss on noncash assets on the basis of their carrying
amount.
Building 7,500,000 7.5/15*3,000,000 1,500,000
Equipment 4,500,000 4.5/15*3,000,000 900,000
Inventory 3,000,000 3/15*3,000,000 600,000
Total 15,000,000 3,000,000

The allocated impairment loss to the building should only be 750,000 which is
computed as follows as the standard so stated.
7,500,000 - 750,000 = 6,750,000 the fair value of building
1,500,000 - 750,000 = 750,000

The 750,000is the amount of impairment loss that is to be reallocated prorate to the
remaining non cash assets as an addition to the amount of impairment loss computed
in the table in step 2.
Equipment 4.5/7.5*750,000 = 450,000
Inventory 3/7.5 * 750,000 = 300,000

Therefore total allocated impairment loss to these assets were:

Cost Allocated Carrying amount

impairment loss
Building 7,500,000 750,000 6,750,000
Equipment 4,500,000 900,000+450,000 3,150,000
Inventory 3,000,000 600,000+300,000 2,100,000

Step 3. The entry:

Year Account Titles F Debit Credit

Impairment loss 3,000,000
A/D - Building 750,000
A/D - Equipment
1,350,000
Inventory
900,000

Illustration 2 (Adapted) . Cash generating unit with goodwill.

The cash generating unit is composed of the following assets in their respective
carrying amounts:
Property, plant and equipment 9,000,000
Patent 6,000,000

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Goodwill 3,000,000
Carrying amount of Cash generating 18,000,000
unit

The cash generating unit is tested at least annually because it has goodwill. Recent
assessment reveals value in use of the cash generating unit equal to 13,500,000.
Step 1. Compute impairment loss:
Carrying amount of CGU 18,000,000
Less: Value in Use 13,500,000
Impairment loss 4,500,000
Step 2. Allocate impairment loss.
Impairment loss 4,500,000
Less: Amount applicable to goodwill 3,000,000
Excess impairment loss 1,500,000

The excess is allocated to other non cash assets proportionate to their carrying
amount.
Property, plant and equipment 9,000,000/15,000,000 * 1,500,000= 900,000
Patent 6,000,000/15,000,000 * 1,500,000=600,000

Step 3. The entry:

Year Account Titles F Debit Credit

Impairment loss 4,500,000
Goodwill 3,000,000
A/D - Equipment 900,000
Patent
600,000

Reversal of impairment loss on goodwill. PAS 36 provides that impairment loss

recognized for goodwill shall not be reversed subsequently.

KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
Impairment Fair Value Cash generating unit
Accumulated Carrying Amount Value in use
Depreciation
Depreciation Impairment loss Recoverable Amount

Self-Help: You can also refer to the sources below to help you
further understand the lesson:

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