Fixed assets - Property,

1 Plant, and Equipment

(IAS16,

CONTENTS
1. Property, plant, and equipment and initial recognition. (IAS 16)
2. Interest capitalization AND governments grants (IAS 20 and IAS 23)
3. Accounting for depreciation (IAS 16)
4. Cost subsequent to the acquisition and the disposal of property, plant,
and equipment. (IAS 16)
5. Cost model and revaluation model (IAS 16)
6. Impairment of assets (IAS 36)

10-1

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are assets of a durable

nature. Other terms commonly used are plant assets and
fixed assets.
Includes:
► “Used in operations” and not
 Land,
for resale.
 Building structures
► Long-term in nature and (offices, factories,
warehouses), and
usually depreciated.
 Equipment
► Possess physical substance. (machinery, furniture,
tools).

10-2 LO 1
PROPERTY, PLANT, AND EQUIPMENT –
Initial recognition
 IAS 16 - an asset should initially be measured at its cost –
purchase price and any directly attributable costs of bringing
the asset to working condition for its intended use.
 Purchase price: Cost of purchase, Import duties and non-
refundable purchase taxes
 Directly attributable: could be avoided if the expenditure on
the qualifying asset had not been made. Including:
 Cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Professional fees: architects and engineers
 The provisions of dismantling and removing the asset and
restoring the site
10-3 LO 1

PROPERTY, PLANT, AND EQUIPMENT -

examples

• Costs before ready for use as intended:

• Purchase price = 600 (incl 50 refundable purchase tax)
• Costs 120 to get equipment to site and to install
• In 10 yrs must restore land (PV to restore = 100)
• Costs 135 to modify equip to operate as intended
• Costs 10 to train staff to operate equip.
• Costs 37 for testing and final modifications
• Operating loss after ready for use: 23
• What is the cost of the asset?

10-4 LO 1
 ACQUISITION OF PP&E

Self-Constructed Assets
Costs include:
 Materials and direct labor

 Overhead can be handled in two ways:

1. Assign no fixed overhead.

2. Assign a portion of all overhead to the construction

process.

Companies use the second method extensively.

10-5 LO 3

BORROWING COST (IAS 23)

10-6
 BORROWING COST

Interest Costs During Construction

Three approaches have been suggested to account for the
interest incurred in financing the construction.

$0
Increase to Cost of Asset $?

Capitalize no Capitalize
interest during Capitalize actual all costs of
construction costs incurred during funds
construction

IFRS

10-7 LO 4

BORROWING COST

Interest Costs During Construction

 IFRS requires — capitalizing actual interest (with
modification).

 Consistent with historical cost.

 Capitalization considers three items:

1. Qualifying assets.

2. Capitalization period.

3. Amount to capitalize.

10-8 LO 4
 Interest Costs During Construction

Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.
Two types of assets:
 Assets under construction for a company’s own use.
 Assets intended for sale or lease that are constructed or
produced as discrete projects.

10-9 LO 4

Interest Costs During Construction

Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.
2. Activities for readying the asset for use or sale are in
progress.
3. Interest costs are being incurred.
Ends when:
The asset is substantially complete and ready for
use.
10-10 LO 4
 Interest Costs During Construction

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.
2. Directly attributable to the construction or
production
Avoidable interest US GAAP - the amount of
interest cost during the period that a company
could theoretically avoid if it had not made
expenditures for the asset.
10-11 LO 4

Interest Costs During Construction

Illustration: Assume a company borrowed $200,000 at
12% interest from State Bank on Jan. 1, 2015, for specific
purposes of constructing special-purpose equipment to be
used in its operations. Construction on the equipment
began on Jan. 1, 2015, and the following expenditures
were made prior to the project’s completion on Dec. 31,
2015: Other general debt existing on
Actual Expenditures during 2015: Jan. 1, 2015:
January 1 $ 100,000 $500,000, 14%, 10-year
April 30 150,000 bonds payable
November 1 300,000
December 31 100,000 $300,000, 10%, 5-year
note payable
10-12 Total expenditures $ 650,000 LO 4
 Interest Costs During Construction

Step 1 - Determine which assets qualify for

capitalization of interest.
Special purpose equipment qualifies because it requires a
period of time to get ready and it will be used in the
company’s operations.
Step 2 - Determine the capitalization period.
The capitalization period is from Jan. 1, 2015 through
Dec. 31, 2015, because expenditures are being made
and interest costs are being incurred during this period
while construction is taking place.
10-13 LO 4

Interest Costs During Construction

Step 3 - Compute weighted-average

accumulated expenditures. Weighted
Average
Actual Capitalization Accumulated
Date Expenditures Period Expenditures
Jan. 1 $ 100,000 12/12 $ 100,000
Apr. 30 150,000 8/12 100,000
Nov. 1 300,000 2/12 50,000
Dec. 31 100,000 0/12 -
$ 650,000 $ 250,000

A company weights the construction expenditures by the

amount of time (fraction of a year or accounting period)
10-14
that it can incur interest cost on the expenditure. LO 4
 Interest Costs During Construction
Step 4 - Compute the Actual and Avoidable Interest.

Selecting Appropriate Interest Rate:

1. For the portion of weighted-average accumulated expenditures that is
less than or equal to any amounts borrowed specifically to finance
construction of the assets, use the interest rate incurred on the
specific borrowings.
2. For the portion of weighted-average accumulated expenditures that is
greater than any debt incurred specifically to finance construction of
the assets, use a weighted average of interest rates incurred on
all other outstanding debt during the period.

10-15 LO 4

Interest Costs During Construction

Step 4 - Compute the Actual and Avoidable Interest.
Actual Interest
Interest Actual
Debt Rate Interest
Specific Debt $ 200,000 12% $ 24,000 Weighted-average
interest rate on
General Debt 500,000 14% 70,000 general debt
$100,000
= 12.5%
300,000 10% 30,000 $800,000
$ 1,000,000 $ 124,000

Accumulated Interest Avoidable

Avoidable Interest Expenditures Rate Interest
$ 200,000 12% $ 24,000
50,000 12.5% 6,250
$ 250,000 $ 30,250
10-16 LO 4
 Interest Costs During Construction

Step 5 – Capitalize the lesser of Avoidable interest or Actual

interest.

Avoidable interest $ 30,250

Actual interest 124,000

Journal entry to Capitalize Interest:

Equipment 30,250
Interest Expense 30,250

10-17 LO 4

Interest Costs During Construction

Comprehensive Illustration: On November 1,

2014, Shalla Company contracted Pfeifer
Construction Co. to construct a building for
$1,400,000 on land costing $100,000 (purchased
from the contractor and included in the first
payment). Shalla made the following payments to
the construction company during 2015.

10-18 LO 4
 Interest Costs During Construction

Pfeifer Construction completed the building, ready for

occupancy, on December 31, 2015. Shalla had the
following debt outstanding at December 31, 2015.
Specific Construction Debt
1. 15%, 3-year note to finance purchase of land and
$750,00
construction of the building, dated December 31, 2014,
with interest payable annually on December 31 0
Other Debt
$550,00
2. 10%, 5-year note payable, dated December 31, 2011,
with interest payable annually on December 31 0
3. 12%, 10-year bonds issued December 31, 2010, with $600,0
interest payable annually on December 31 00
Compute weighted-average accumulated
10-19 expenditures for 2015. LO 4

Interest Costs During Construction

Compute weighted-average accumulated expenditures for 2015.

ILLUSTRATION 10-4
Computation of Weighted-Average
Accumulated Expenditures

10-20 LO 4
 Interest Costs During Construction
ILLUSTRATION 10-5
Compute the avoidable interest. Computation of
Avoidable Interest

10-21 LO 4

Interest Costs During Construction

Compute the actual interest cost, which represents the maximum

amount of interest that it may capitalize during 2015.

ILLUSTRATION 10-6
Computation of Actual
Interest Cost
The interest cost that Shalla capitalizes is the
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.

10-22 LO 4
 Interest Costs During Construction

Shalla records the following journal entries during 2015:

January 1 Land 100,000

Buildings (or CIP) 110,000
Cash 210,000
March 1 Buildings 300,000
Cash 300,000
May 1 Buildings 540,000
Cash 540,000
December 31 Buildings 450,000
Cash 450,000
Buildings (Capitalized Interest) 120,228
Interest Expense 119,272
Cash 239,500

10-23 LO 4

Interest Costs During Construction

At December 31, 2015, Shalla discloses the amount of interest

capitalized either as part of the income statement or in the notes
accompanying the financial statements.

ILLUSTRATION 10-7
Capitalized Interest
Reported in the Income
Statement

ILLUSTRATION 10-8
Capitalized Interest
Disclosed in a Note

10-24 LO 4
 Interest Costs During Construction
Special Issues Related to Interest Capitalization
1. Expenditures for Land

 If land is purchased as a site for a structure, interest costs

capitalized during the period of construction are part of the cost
of the plant, not the land.

 Conversely, if the company develops land for lot sales, it includes

any capitalized interest cost as part of the acquisition cost of the
developed land.

2. Interest Revenue:

 In general, companies should not offset interest revenue

against interest cost unless earned on specific
borrowings.
10-25 LO 4

WHAT’S YOUR
WHAT ‘S IN YOUR PRINCIPLE
INTEREST?

How do statement users determine the impact of interest capitalization

on a company’s bottom line? They examine the notes to the financial
statements. Companies with material interest capitalization must
disclose the amounts of capitalized interest relative to total interest
costs. For example, Royal Dutch Shell (GBR and NLD) capitalized
nearly 42 percent of its total interest costs in a recent year and provided
the following footnote related to capitalized interest.

10-26 LO 4
 Discussion

 A substantial period of time to get ready

 The borrowing costs which are 'directly

attributable' to work on the qualifying asset

 ‘Activities for readying the asset for use or

sale are in progress’ which is to identify the
commencement of capitalization period

 ‘The asset is substantially complete and

ready for use’
10-27

GOVERNMENT GRANTS (IAS 20)

Government Grants are assistance received

from a government in the form of transfers of
resources to a company in return for past or
future compliance with certain conditions relating
to the operating activities of the company.
IFRS requires grants to be recognized in income
(income approach) on a systematic basis that
matches them with the related costs that they are
intended to compensate.
10-28 LO 5
 GOVERNMENT GRANTS (IAS 20)

A grant relating to assets may be presented in

one of two ways: [IAS 20.24]

•as deferred income, or

• by deducting the grant from the asset's carrying

amount.

10-29 LO 5

Government Grants

Example 1: Grant for Lab Equipment. AG Company received a

€500,000 subsidy from the government to purchase lab equipment on
January 2, 2015. The lab equipment cost is €2,000,000, has a useful
life of five years, and is depreciated on the straight-line basis.

IFRS allows AG to record this grant in one of two ways:

1. Credit Deferred Grant Revenue for the subsidy and amortize

the deferred grant revenue over the five-year period.

2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.

10-30 LO 5
 Government Grants

Example 1: Grant for Lab Equipment. If AG chooses to record

deferred revenue of €500,000, it amortizes this amount over the
five-year period to income (€100,000 per year). The effects on the
financial statements at December 31, 2015, are:

ILLUSTRATION 10-17
Government Grant
Recorded as Deferred
Revenue

10-31 LO 5

Government Grants

Example 1: Grant for Lab Equipment. If AG chooses to reduce

the cost of the lab equipment, AG reports the equipment at
€1,500,000 (€2,000,000 - €500,000) and depreciates this amount
over the five-year period. The effects on the financial statements
at December 31, 2015, are: ILLUSTRATION 10-18
Government Grant Adjusted to Asset

10-32 LO 5
 Repayment of Government Grants
 Repayment of grant related to income: apply
first against any unamortised deferred income,
any excess should be recognised as an
expense.
 Repayment of grant related to an asset:
increase the carrying amount of the asset or
reduce the deferred income balance. The
cumulative additional depreciation that would
have been recognised to date in the absence of
the grant should be immediately recognised as
an expense

10-33

Chapter 1

DEPRECIATION

10-34
 DEPRECIATION—METHOD OF COST
ALLOCATION

Depreciation is the accounting process of allocating the cost

of tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use of
the asset.

Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense

 Intangibles = Amortization expense

 Mineral resources = Depletion expense

10-35 LO 1

DEPRECIATION—COST ALLOCATION

Factors Involved in the Depreciation Process

Three basic questions:
1. What depreciable base is to be used?
2. What is the asset’s useful life?
3. What method of cost apportionment is best?

10-36 LO 2
 Factors Involved in Depreciation Process

Depreciable Base for the Asset

ILLUSTRATION 11-1
Computation of
Depreciation Base

10-37 LO 2

Factors Involved in Depreciation Process

Estimation of Service Lives

 Service life often differs from physical life.
 Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of
physical life).
2. Economic factors (inadequacy, supersession,
and obsolescence).

10-38 LO 2
 DEPRECIATION—COST ALLOCATION

Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:

1. Activity method (units of use or production).

2. Straight-line method.

3. Diminishing (accelerated)-charge methods:

a) Sum-of-the-years’-digits.

b) Declining-balance method.

10-39 LO 3

Methods of Depreciation

Activity Method ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:

ILLUSTRATION 11-3
Depreciation Calculation,
Activity Method—Crane
Example

10-40 LO 3
 Methods of Depreciation

Straight-Line Method ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11-4
Depreciation Calculation,
Straight-Line Method—
Crane Example

10-41 LO 3

Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Sum-of-the-Years’-Digits. Each fraction uses the sum of the

years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator
is the number of years of estimated life remaining as of the
beginning of the year.

Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
10-42 LO 3
 Methods of Depreciation

Sum-of-the-Years’-Digits

ILLUSTRATION 11-6
Sum-of-the-Years’-Digits
Depreciation Schedule—
Crane Example

10-43 LO 3

Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Declining-Balance Method.
 Utilizes a depreciation rate (percentage) that is some multiple
of the straight-line method.

 Does not deduct the salvage value in computing the

depreciation base.

10-44 LO 3
 Methods of Depreciation

Declining-Balance Method

ILLUSTRATION 11-7
Double-Declining
Depreciation Schedule—
Crane Example

10-45 LO 3

 Can the company change depreciation rate

and depreciation method?

10-46
 Chapter 1

COST SUBSEQUENT TO ACQUISITION

AND DISPOSAL OF PPE

10-47

COSTS SUBSEQUENT TO ACQUISITION

Recognize costs subsequent to acquisition as an asset

when the costs can be measured reliably and it is probable that
the company will obtain future economic benefits.
Evidence of future economic benefit would include increases in
1. useful life,

2. quantity of product produced, and

3. quality of product produced.

10-48 LO 6
 COSTS SUBSEQUENT TO ACQUISITION

10-49 ILLUSTRATION 10-21 Summary of Costs Subsequent to Acquisition LO 6

DISPOSITION OF PROPERTY, PLANT,

AND EQUIPMENT

A company may retire plant assets voluntarily or dispose of

them by
 Sale,

 Exchange,
 Involuntary conversion, or
 Abandonment.

Depreciation must be taken up to the date of disposition.

10-50 LO 7
 DISPOSITION OF PP&E

Sale of Plant Assets

Illustration: Barret Company recorded depreciation on a machine
costing €18,000 for nine years at the rate of €1,200 per year. If it
sells the machine in the middle of the tenth year for €7,000, Barret
records depreciation to the date of sale as:

Depreciation Expense (€1,200 x ½) 600

Accumulated Depreciation—Machinery 600

10-51 LO 7

DISPOSITION OF PP&E

Illustration: Barret Company recorded depreciation on a machine

costing $18,000 for 9 years at the rate of $1,200 per year. If it sells
the machine in the middle of the tenth year for $7,000, Barret
records depreciation to the date of sale. Record the entry to record
the sale of the asset:

Cash 7,000
Accumulated Depreciation—Machinery 11,400
Machinery 18,000
Gain on Disposal of Machinery 400

10-52 LO 7
 DISPOSITION OF PP&E

Involuntary Conversion
Sometimes an asset’s service is terminated through some type of
involuntary conversion such as fire, flood, theft, or
condemnation.
Companies report the difference between the amount recovered
(e.g., from a condemnation award or insurance recovery), if any,
and the asset’s book value as a gain or loss.

They treat these gains or losses like any other type of disposition.

10-53 LO 7

DISPOSITION OF PP&E

Illustration: Camel Transport Corp. had to sell a plant located on

company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded the
book value of the land of $150,000 and the book value of the building
of $100,000 (cost of $300,000 less accumulated depreciation of
$200,000). Camel made the following entry.

Cash 500,000
Accumulated Depreciation—Buildings 200,000
Buildings 300,000
Land 150,000
Gain on Disposal of Plant Assets 250,000

10-54 LO 7
 Chapter 1 (cont.)

COST MODEL AND

REVALUATION MODEL

10-55

COST MODEL AND REVALUATION

MODEL
 For subsequent measurement, IAS 16 allow two
alternative approaches:
 Cost model: the recognized initial cost less any
accumulated depreciation and any accumulated
impairment losses
 The revaluation model: the fair value at the
date of revaluation (revalued amount) less any
subsequent accumulated depreciation and
subsequent accumulated impairment losses

10-56 LO 7
 REVALUATION MODEL
 The revaluation model: the fair value at the date of
revaluation (revalued amount) less any subsequent
accumulated depreciation and subsequent accumulated
impairment losses
 Fair value
 The price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between
market participants at the measurement date

10-57

REVALUATION MODEL

 Revaluation
 When an item of PPE is revalued, the entire class of
PPE should be revalued.
 Revaluations shall be made with sufficient regularity
to ensure that the carrying amount does not differ
materially from that which would be determined using
fair value at the end of the reporting period.
 The carrying values of assets will be changed:
gearing ratios
 Potentially and eventually, retained earnings will be
affected

10-58 LO 7
 Accounting for the revaluation – main
principles
 Revaluation gains are recognised in
______________________________ and form part of
equity as a ________________________unless they
relate to an earlier revaluation ___________.
 Revaluation losses are recognised as an
________________ in profit or loss unless they relate
to an earlier ________________________.
 After revaluation, depreciation is based on the revalued
amount.
 An annual reserves transfer is allowed amounting to
the excess of actual depreciation over the historical
cost depreciation.

10-59

Accounting for the revaluation – main

principles
 Revaluation gains are recognized in other
comprehensive income and form part of equity as a
revaluation surplus unless they relate to an earlier
revaluation loss.
 Revaluation losses are recognized as an expense in
profit or loss unless they relate to an earlier revaluation
surplus.
 After revaluation, depreciation is based on the revalued
amount.
 An annual reserves transfer is allowed amounting to
the excess of actual depreciation over the historical
cost depreciation.

10-60
 Accounting for revaluation - non depreciable
assets

 Increase in the value?

DR: Assets - Cost
CR: Revaluation surplus (OCI)
And/Or: CR: P/L (if a decrease in the value of the same assets
has been recognized before)
 Decrease in the value?
DR: P/L
DR: Revaluation surplus (if an increase in the value of the same
assets has been recognized before)
CR: Assets - Cost

10-61

REVALUATION MODEL – Non depreciable

assets
 Example 1: An entity buys freehold land for
£100,000 in year 1. The land is revalued to
£150,000 in year 3 and £90,000 in year 5. The
land is not depreciated.
 How should the entity account for the land under
revaluation model?

10-62 LO 7
 REVALUATION MODEL – Non depreciable
assets
 Example 2: An entity buys freehold land for
£100,000 in year 1. The land is revalued to
£75,000 in year 3 and £110,000 in year 5. The
land is not depreciated.
 How should the entity account for the land under
revaluation model?

10-63 LO 7

Accounting for revaluation - depreciable

assets
The carrying amount is adjusted to the revalued amount in one of the following ways:
 The 1st alternative: The gross carrying amount is adjusted in a manner that is consistent
with the revaluation of the carrying amount of the asset.
 The gross carrying amount: Restated by reference to observable market data or be
restated proportionately to the change in the carrying amount.
 The accumulated depreciation: be adjusted to equal the difference between the gross
carrying amount and the carrying amount of the asset.
 If decrease: Both cost and depreciation decrease.
DR: P/L account
DR Accumulated depreciation;
CR Asset
 If increase:
DR: Asset
CR Accumulated depreciation;
CR Revaluation Surplus

10-64
 Accounting for revaluation - depreciable
assets
The carrying amount is adjusted to the revalued amount in one
of the following ways:
 The 2nd alternative (method)
 The accumulated depreciation is eliminated against the gross
carrying amount of the asset.
 Step 1: eliminate depreciation:
DR – Accumulated Depreciation/CR Asset
 Step 2: adjust the value of the asset
(2.1) If increase:
DR – Assets
CR Revaluation Surplus
(2.2) If decrease:
DR: P/L account
CR: Assets

10-65

REVALUATION MODEL – Depreciable assets

 Example 2:
 AB Ltd. purchased an item of plant for £12,000 on 1
January 20X1. The plant was depreciated on a straight-
line basis over its useful economic life, which was
estimated at six years.
 On 1 January 20X3 the entity decided to revalue its
plant. No fair value was available for the item of plant
that had been purchased for £12,000 on 1 January 20X1
but the replacement cost of the plant on 1 January 20X3
was £21,000.
 The plant was sold on 1 January 20X5 for £5,000.
 Discuss how AB should account for the above
transactions.
10-66 LO 7
 REVALUATION MODEL – Depreciable assets
 Example 3. With the same scenario of Ex2, except for the transaction of selling the
plant in 20X5. On 1 January 20X4, The fair value of the plant is 3,000.
 How much is the carrying amount of plant after the valuation on 01 January 20X4?

 How the revaluation taken on 01January 20X4 affects the elements of FS?.

10-67 LO 7

Depreciation of revalued assets and reserve

transferred
 Where an asset has been revalued, the depreciation
charge is based on the revalued amount, less residual
value, from the date of revaluation. The asset's residual
value should also be re-estimated on revaluation
 Example:
 Vann Ltd commenced trading on 1 January 20X1. On that date
the company purchased a building for £120,000 to be
depreciated over 30 years with no residual value. Vann Ltd uses
a revaluation model for buildings.
 After five years of trading on 1 January 20X6, the building has a
fair value of £175,000. It still has a further 25 years of useful life
remaining.
 Calculate the annual depreciation charge to profit or loss in each
year of the asset's life, and the revaluation surplus as at 1
January 20X6.

10-68
10-69

Depreciation of revalued assets and

reserve transferred
 Excess depreciation: Difference between the new
depreciation charge based on the revalued carrying amount and
the old depreciation charge based on the original cost of the asset
 IAS 16 allows entities to transfer an amount equal to the excess
depreciation from the revaluation surplus to retained earnings, if
the entity wish to do so.
 Amount of transfer = actual depreciation charged less
equivalent charge based on original historical cost of
asset
 Entry to record transfer:
DR: Revaluation surplus X
CR: Retained earnings X
 Example: determine the excess depreciation in Vann Lld,
prepare the entries to transfer the reserve.

10-70
 Revaluate depreciable assets which were
revaluated before?
The carrying amount is adjusted to the revalued amount in one of the following ways:
 The 1st alternative: The gross carrying amount is adjusted in a manner that is
consistent with the revaluation of the carrying amount of the asset.
 The gross carrying amount: Restated by reference to observable market data or
be restated proportionately to the change in the carrying amount.
 The accumulated depreciation: be adjusted to equal the difference between the
gross carrying amount and the carrying amount of the asset.
 If decrease: Both cost and depreciation reduce.
DR: P/L account (and/or Revaluation surplus-if an increase recognized before)
DR Accumulated depreciation;
CR Asset
 If increase:
DR: Asset
CR Accumulated depreciation;
CR Revaluation Surplus (and/or P/L account - if a decrease recognized before)

10-71

Revaluate depreciable assets which were

revaluated before?
The carrying amount is adjusted to the revalued amount in one of the
following ways:
 The 2nd alternative (method)
 The accumulated depreciation is eliminated against the gross carrying
amount of the asset.
 Step 1: eliminate depreciation:
DR – Accumulated Depreciation/CR Asset
 Step 2: adjust the value of the asset:
(2.1) If increase:
DR – Assets
CR Revaluation Surplus (and/or CR P/L account - if a decrease recognized
before)
(2.2) If decrease:
DR: P/L account (and/or DR Revaluation Surplus - if an increase recognized before)
CR: Assets

10-72
 Revaluate depreciable assets which were
revaluated before?
A non-current asset has Cost: 100, useful life: 5 years. Revaluation model is
applied.
End of year 1: asset has FV of 60, End of year 2: FV of 80.

End of year 1:

End of year 2:

10-73

Revaluate depreciable assets which were

revaluated before?
A non-current asset has Cost: 150, useful life: 6 years. Revaluation model is
applied.
End of year 1: asset has FV of 80, End of year 2: FV of 120.

End of year 1:

End of year 2:

10-74
 INVESTMENT PROPERTY

10-75

INVESTMENT PROPERTY

10-76
 ACCOUNTING FOR
INVESTMENT PROPERTY
 Initial measurement:
 measured at cost
 Subsequent measurement:

10-77

ACCOUNTING FOR
INVESTMENT PROPERTY

10-78
 Transfers following a change in use

A change in use may lead to

recognition or de-recognition of an
investment property. A change in use
occurs when:
• The property meets, or ceases to meet,
the definition of an investment property;
and
 • There is evidence of the change in use.

10-79

Transfers following a change in use –

Accounting Treatment
Evidence of changes in use Accounting treatment
Commencement of owner occupation or - If IAS 40 fair value model was used, treat fair
development with a view to owner occupation value as deemed cost of PPE or inventory.
(Investment Property to PPE) OR Gain/loss on IP’s FV change is recognized in
commencement of development with a view to P/L.
sale (Investment Property to Inventory) - If cost model was used for Investment
property: transfer to PPE/inventory at current
carrying amount of IP.
- Then account for PPE under IAS16 and
Inventory under IAS02
End of owner occupation and inception of - If fair value model to be used, revalue at date
operating lease to another party (PPE to of change and recognize the difference as
Investment Property) revaluation under IAS 16
- If cost model to be used: investment property
is recognized at current carrying amount of
PPE.
Property held as inventory now let to a third If fair value model to be used, revalue at date of
party under operating lease (Inventory to change and recognise difference in profit or
Investment property) loss.
If cost model to be used: investment property is
recognized at current carrying amount of
10-80 inventory
 Chapter 1 (cont.)

IMPAIRMENT OF ASSETS

10-81

Impairment of assets

 Objective and Scope

 Determination time and indications
 Measurement and Recognition
 Cash Generating Units and Accounting for Impairment
 Reversal of impairment losses

10-82
 Objective and Scope
 Objective: to ensure that entity’s assets are carried at no more than their recoverable
amount
 Scope: IAS 36 shall be applied in accounting for the impairment of all assets, other than: :
 inventories (see IAS 2 Inventories);
 contract assets and assets arising from costs to obtain or fulfill a contract that are
recognized in accordance with IFRS 15 Revenue from Contracts with Customers;
 deferred tax assets (see IAS 12 Income Taxes);
 assets arising from employee benefits (see IAS 19 Employee Benefits);
 financial assets that are within the scope of IFRS 9 Financial Instruments;
 investment property that is measured at fair value (see IAS 40 Investment Property);
 biological assets related to agricultural activity within the scope of IAS 41
Agriculture that are measured at fair value less costs to sell;
 contracts within the scope of IFRS 17 Insurance Contracts that are assets; and
 non-current assets (or disposal groups) classified as held for sale in accordance with
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

10-83

Determination time
 An entity shall assess at the end of each
reporting period whether there is any indication
that an asset may be impaired

 If any such indication exists, the entity shall

estimate the recoverable amount of the asset

10-84
 Indications
 External factors:
 asset’s value has declined during the period significantly
more than would be expected

 significant changes with an adverse effect on the entity have

taken place in the technological, market, economic or legal
environment

 market interest rates or other market rates of return on

investments have increased during the period

 the carrying amount of the net assets of the entity is more

than its market capitalization

10-85

Indications
 Internal factors:
 evidence is available of obsolescence or physical damage
of an asset

 significant changes with an adverse effect on the entity have

taken place in the extent to which, or manner in which, an
asset is used or is expected to be used

 evidence is available from internal reporting that indicates

that the economic performance of an asset is, or will be,
worse than expected

10-86
 Determination time – Attention!

- Irrespective of whether there is any indication of

impairment, Impairment test (recoverable amount)
should be done annually for:
- intangible assets with an indefinite useful life
- intangible assets not yet available for use
- goodwill acquired in a business combination

10-87

IMPAIRMENT OF ASSETS – IAS 36

If impairment indicators are present, then an impairment test

must be conducted.

ILLUSTRATION 11-15
Impairment Test

10-88 LO 5
 Value in Use
Value in Use
the present value of the future cash flows expected
to be derived from an asset or cash-generating unit

Discount rate
a pre-tax rate (rates) that reflect(s) current market
assessments of the time value of money and the
risks specific to the asset
1. Market Rate weighted average cost of capital

2. Market rate not available incremental borrowing rate

other market borrowing rates
10-89

 Measurement and Recognition

 An impairment loss: recognised immediately as an
expense in the income statement
 If the asset has any revaluation surplus, the
impairment loss can be offset against the surplus
(see revaluation model)
 Depreciation: adjusted for future periods to allocate
the asset’s revised carrying amount, less its
residual value (if any), on a systematic basis over
its remaining useful life.
 Goodwill impairment: chapter 4 – intangible assets

10-90 LO 7
 Impairment Illustrations
Case 1
At December 31, 2016, Hanoi Company has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2016, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2016
and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2016, is VND11,000,000.
4. The remaining useful life of the equipment after December 31,
2016, is two years.
10-91 LO 5

Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2016, as follows.

VND3,000,000 Impairment Loss

ILLUSTRATION 11-15
VND14,000,000 VND11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000

10-92 LO 5
 Impairment Illustrations

Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2016) VND 11,000,000

Hanoi Company determines that the equipment’s total useful life

has not changed (remaining useful life is still two years). However,
the estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2017.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000

10-93 LO 5

Impairment Illustrations
Case 2
At the end of 2015, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated
remaining useful life of five years. Because there is little market-related
information on which to base a recoverable amount based on fair value,
Verma determines the machine’s recoverable amount should be based on
value-in-use. Verma uses a discount rate of 8 percent. Verma’s analysis
indicates that its future cash flows will be $40,000 each year for five
years, and it will receive a residual value of $10,000 at the end of the five
years. It is assumed that all cash flows occur at the end of the year.

ILLUSTRATION 11-16
Value-in-Use Computation
10-94 LO 5
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss
ILLUSTRATION 11-15

$200,000 $166,514

Unknown $166,514

10-95 LO 5

Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514

10-96 LO 5
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514

10-97 LO 5

Impairment of assets – CGU

 How to determine impairment if:

 Fair value can not be reliably determined?
 the asset does not generate cash inflows that are
largely independent of those from other assets or
groups of assets.
=> recoverable amount is determined for the cash-
generating unit to which the asset belongs (IAS 36.22).

10-98
 Impairment of assets - CGU
A cash-generating unit is the smallest identifiable group of
assets that generates cash inflows that are largely independent
of the cash inflows from other assets or groups of assets.

CGU
- Plant
- Machinery
- Building
- Inventory
- Account
Receivable
- …….

Carrying Recoverable
amount amount
10-99

CGU’s impairment loss allocation

 The impairment loss is allocated to reduce the
carrying amount of the assets of the unit (group of
units).
 Discuss:
 Whether to allocate impairment loss to CGU’s
current assets?
 Any limit in allocation of impairment loss to
CGU’s non-current assets?
 What is goodwill? How to determine GW? How
to determine impairment of GW?
 If GW is allocated to CGU, how to allocate
impairment loss to GW?
10-100
 Goodwill
 Goodwill: An asset representing the future economic
benefits arising from other assets acquired in a
business combination that are not individually identified
and separately recognised.
 At acquisition date, acquirer shall:
 Recognize Goodwill at cost as asset
 Subsequent recognition – VAS
 Systematically allocated over its useful life
 Useful life can not exceed 10 years.
 Allocation method should reflect the economic benefit
arised from GW.
 Subsequent recognition – IFRS: no depreciation,
periodic impairment test
10-101 101

Goodwill and Impairment

Allocating Goodwill to CGU
Goodwill does not generate cash flows independently of
other assets or groups of assets, and often contributes to
the cash flows of multiple cash-generating units, so need
to be allocated to Acquirer’s CGUs.

10-102
 Order of CGU’s impairment loss allocation
Impairment loss of CGU containing Goodwill

first, to reduce the carrying amount of any

goodwill allocated to CGU

then, to the other assets of the unit (group of

units) pro rata on the basis of the carrying
amount of each asset in the unit
HOWEVER
The carrying amount of an asset should not be
reduced below the highest of :

10-103 FVLCS VIU 0 (Nil)

Goodwill and Impairment

A CGU includes assets with opening balances as follows:

Building 30 bil
Machinery 06 bil
Goodwill 10 bil
Current assets 20 bil
66 bil
Due to economic crisis, recoverable amount of this CGU is estimated
at 50 bil. What is the balance of assets in CGU after impaiment
allocation?

10-104
 Reversal of impairment loss
Reversal of impairment loss (cost model)

reversed if, and only if, there has been a change in the estimates used to determine
the asset’s recoverable amount since the last impairment loss was recognised

Individual assets CGU Goodwil

l
Increase Assets – Allocate on pro rata basis
Not
Decrease expense to assets in CGU, Note: reversed
Note: Any limit? - Limit of each asset
- Goodwill

10-105

IMPAIRMENT OF ASSETS – IAS 36

 Reversal of impairment loss:The increased
carrying amount of an asset (other than goodwill)
 Be recognised immediately in profit or loss (except
for goodwill).
 Not exceed the carrying amount that would have
been determined (net of amortisation or
depreciation) had no impairment loss been
recognised for the asset in prior years.
 Notes: Revaluation model

10-106 LO 7
 Reversal of Impairment Loss

Illustration: Tan Company purchases equipment on January 1,

2015, for HK$300,000, useful life of three years, and no residual
value.

At December 31, 2015, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
10-107 LO 5

Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2016, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.

Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000

10-108 LO 5
 IMPAIRMENT OF ASSETS – IAS 36 -
discussion
Mavis Ltd hires out motorbikes to tourists. The draft accounts for
the year ended 31 December 2003 included the following
motorbike:
£ £
Cost 12,000
Depreciation: Opening 4,800
Charge for 2003 2,400 (7,200)
Net book value 4,800
The motorbike is being written off over five years’ life remaining.
However, the tourist market has slumped, and as a result it will
only be able to generate £2,500 cash per annum in 2004 and
2005 each. It will then be scrapped in December 2005.
Alternatively, the bike could be sold immediately for £3,000 (less
£200 selling costs). Market interest rates are 12% per annum.
10-109

IMPAIRMENT OF ASSETS – IAS 36 -

discussion

Required
a) Calculate the impairment loss at 31 December
2003.
b) Redraft the plant and equipment note to reflect
the impairment.
c) Draft the plant and equipment note for 2004.
d) In December 2004 the market for motorbike tours
picked up, and the bike now has a recoverable
amount of £3,900. You are required to redraft
2004’s plant and equipment note to reflect this.

10-110 LO 7
 Solution
(a) Calculating the impairment loss:

£ £
Draft carrying amount 4,800
Recoverable amount
The higher of: Net selling price (£3,000 -£200) 2,800
Value in use (2,500 X 0.893) 2,233
(2,500 X 0.797) 1,993 4,226
Recoverable amount 4,226
Impairment loss 574

Note that: Value in use is calculated as follows:

10-111

1st year 2500 X 1 = 2,500 X 0.893 = 2,233

(1 + 0.12)1

2nd year 2,500 X 1 = 2,500 X 0.797 = 1,993

(1 + 0.12)2

10-112
 (b) The revised plant and equipment note for 2003
£ £
Cost 12,000
Acc. Dep. (4,800 + 2,400) 7,200
Impairment 574
(7,774)
Net book value 4,226

10-113

(c) The draft plant and equipment note for 2004

£ £
Cost 12,000
Depreciation Opening 7,774
Charge for 2004
(4,226/2 years) 2,113
(9,887)
Net book value 2,113

10-114
 (d) The revised plant and equipment note for 2004
£ £
Cost 12,000
Depreciation Opening 7,774
Charge for 20X4
(4,226/2 years) 2,113
Reversal of impairment ( 287)
(bal. fig.) (9,600)
Net book value 2,400

10-115

Note that:
Although the recoverable amount is now
£3,900, the asset can only be restated to
the depreciated historic cost that it would
have had on 31 December 2004. That is
£12,000 less four years’ depreciation at
£2,400 per annum.

10-116