Intermediate Financial Accounting 1 (01)

Chapter 11
Depreciation, Impairments, and Depletion
Property, Plant & Equipment
1. Acquisition of PP&E (Ch.10)
Historical cost, interest capitalization

2-1. Cost allocation – Depreciation

2-2. Valuation in a subsequent period, by choosing either (Ch.11)
• Cost method
• Fair value (revaluation) method

3. Disposal of PP&E (Ch.10)

- Remove all accounts related to the retired asset
- Recognize gain or loss from disposal of the asset
2
Learning Objectives

After studying this chapter, you should be able to:

LO 1 Describe depreciation concepts and methods of depreciation.
LO 2 Identify other depreciation issues.
LO 3 Explain the accounting issues related to asset impairment.
LO 4 Apply the accounting for revaluations.

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PREVIEW OF CHAPTER 11

4
 Learning Objective 1
Describe depreciation concepts and
methods of depreciation.

5
Depreciation—A 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

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Depreciation—A Method of Cost
Allocation
Depreciation
(Dr) Depreciation expense XX (Cr) Accumulated Depreciation XX
SFP, contra asset account

Book value
Carrying value

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Depreciation—A Method of 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?

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Factors Involved in the Depreciation Process
Depreciable Base for the Asset

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).
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Depreciation—A Method of Cost Allocation
Method 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.

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Method of Depreciation
1. Activity Method
ILLUSTRATION 11.2

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
11
Method of Depreciation
2. Straight-Line Method
ILLUSTRATION 11.2

Data for Stanley

Coal Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11.4
12
Method of Depreciation
3. Diminishing-Charge Methods
ILLUSTRATION 11.2

Data for Stanley

Coal Mines

a. 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

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Method of Depreciation
Sum-of-the-Years’ Digits Depreciation Schedule

ILLUSTRATION 11.6

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Method of Depreciation
3. Diminishing-Charge Methods
ILLUSTRATION 11.2

Data for Stanley

Coal Mines

b. 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.

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Method of Depreciation
Declining-Balance Method
ILLUSTRATION 11.7

Plug in

64,800 x 0.4 = 25,920

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 Comparison of Methods
Diminishing-Charge Methods
Year Straight-line Sum-of-the-Years’-Digits Declining-Balance Method
depreciation book-value depreciation book-value depreciation book-value
1 90,000 410,000 150,000 350,000 200,000 300,000
2 90,000 320,000 120,000 230,000 120,000 180,000
3 90,000 230,000 90,000 140,000 72,000 108,000
4 90,000 140,000 60,000 80,000 43,200 64,800
5 90,000 50,000 30,000 50,000 14,800 50,000
450,000 450,000 450,000

Annual depreciation varies considerably among the methods, but total

depreciation expense is the same ($450,000) for the five-year period.

Q. Effects on net income & tax? (in earlier years)

Expenses : Straight line < Diminishing-charge methods
 Net income and tax : Straight line > Diminishing-charge methods
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 Learning Objective 2
Identify other depreciation issues.

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Other Depreciation Issues
1) Component Depreciation

IFRS requires that each part of an item of property, plant, and

equipment that is significant to the total cost of the asset
must be depreciated separately.

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Other Depreciation Issues
1) Component Depreciation
Illustration: EuroAsia Airlines purchases an airplane for €100,000,000 on
January 1, 2023. The airplane has a useful life of 20 years and a residual
value of €0. EuroAsia uses the straight-line method of depreciation for all
its airplanes. EuroAsia identifies the following components, amounts, and
useful lives.

ILLUSTRATION 11.8

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Other Depreciation Issues
1) Component Depreciation
Computation of depreciation expense for EuroAsia for 2023.

ILLUSTRATION 11.9

Depreciation journal entry for 2023.

Depreciation Expense 8,600,000
Accumulated Depreciation — Equipment 8,600,000

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Other Depreciation Issues
2) Depreciation and Partial Periods

How should companies compute depreciation for partial periods?

• Companies determine the depreciation expense for the full
year and then
• prorate this depreciation expense between the two periods
involved.
This process should continue throughout the useful life of the
asset.

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Depreciation and Partial Periods
Illustration (E11.5)—(Four Methods): Maserati SpA purchased a new
machine for its assembly process on August 1, 2022. The cost of this
machine was €150,000. The company estimated that the machine would
have a residual value of €24,000 at the end of its service life. Its life is
estimated at 5 years and its working hours are estimated at 21,000 hours.
Year-end is December 31.

Instructions: Compute the depreciation expense under the

following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-
digits.
(b) Activity method (d) Double-declining balance.

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Depreciation and Partial Periods
Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2022 € 126,000 / 5 = $ 25,200 x 5/12 = € 10,500 $ 10,500
2023 126,000 / 5 = 25,200 Aug-Dec, 25,200 35,700
2022
2024 126,000 / 5 = 25,200 25,200 60,900
2025 126,000 / 5 = 25,200 25,200 86,100
2026 126,000 / 5 = 25,200 25,200 111,300
2027 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
Jan-July, 2027 € 126,000
Journal entry:

2022 Depreciation expense 10,500

Accumulated depreciation 10,500

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Depreciation and Partial Periods
Activity Method (Assume 800 hours used in 2022)
(€126,000 / 21,000 hours = €6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2022 800 x $6 = € 4,800 € 4,800 € 4,800
2023 x =
2024 x =
2025 x =
2026 x =
800 € 4,800

Journal entry:
2022 Depreciation expense 4,800
Accumulated depreciation 4,800

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Depreciation and Partial Periods
5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.

2022 € 126,000 x 5/15 = 42,000 x 5/12 € 17,500 € 17,500

2023 126,000 x 4.58/15 = 38,500 38,500 56,000

2024 126,000 x 3.58/15 = 30,100 30,100 86,100

2025 126,000 x 2.58/15 = 21,700 21,700 107,800

2026 126,000 x 1.58/15 = 13,300 13,300 121,100

2027 126,000 x .58/15 = 4,900 4,900 126,000

# of years of estimated life remaining € 126,000
Journal entry: as of the beginning of the year

2022 Depreciation expense 17,500

Accumulated depreciation 17,500

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Depreciation and Partial Periods
Double-Declining Balance Method
Current
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense

2022 € 150,000 x 40% = € 60,000 x 5/12 = € 25,000

2023 125,000 x 40% = 50,000 50,000

2024 75,000 x 40% = 30,000 30,000

2025 45,000 x 40% = 18,000 18,000

2026 27,000 x 40% = 10,800 Plug in 3,000

→ Residual value € 126,000
= 24,000
Journal entry:
2022 Depreciation expense 25,000
Accumulated depreciation 25,000
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Other Depreciation Issues
3) Depreciation and Replacement of PP&E

Does depreciation provide funds for the replacement of assets?

• Depreciation expense reduces net income, but it does not
involve a current cash outflow.
• Although depreciation does not involve cash outflows, it does
not provide the funds for replacement because it does not
involve cash inflows.
• Funds for the replacement of the assets come from the
revenues (generated through use of the asset).
• Depreciation is no way provides funds for replacement of assets.

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Other Depreciation Issues
4) Revision of Depreciation Rates
How should companies handle revisions in depreciation rates?
changes in accounting estimates
• Accounted for in the current and prospective periods
• Not handled retrospectively
• Not considered errors or extraordinary items
• Changes in the estimates of useful lives, residual value, and
depreciation methods are treated as changes in accounting
estimates.

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Revision of Depreciation Rates
Change in Estimate: Arcadia HS, purchased equipment for $510,000
which was estimated to have a useful life of 10 years with a residual value
of $10,000 at the end of that time. Depreciation has been recorded for 7
years on a straight-line basis. In 2022 (year 8), it is determined that the
total estimated life should be 15 years with a residual value of $5,000 at
the end of that time.

Questions:
 What is the journal entry to correct
No Entry
the prior years’ depreciation? Required
 Calculate the depreciation expense
for 2022.

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Revision of Depreciation Rates After 7
years

Equipment cost $510,000 First, establish NBV at

Salvage value - 10,000 date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2021)

Equipment $510,000  Original price
Accumulated depreciation 350,000
Net book value (NBV) $160,000

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Revision of Depreciation Rates After 7
years
Net book value $160,000 Depreciation Expense
Salvage value (new) 5,000 calculation for 2022.
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2022

Depreciation Expense 19,375

Accumulated Depreciation 19,375

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Revision of Depreciation Rates
SFP (Dec. 31, 2022)
Fixed Assets:
Equipment $ 510,000  Original price
Accumulated depreciation 369,375  350,000 +19,375
Net book value (NBV) $ 140,625

SFP (Dec. 31, 2029 - after 8 years)

Fixed Assets:
Equipment $ 510,000
Accumulated depreciation 505,000
Net book value (NBV) $ 5,000
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Samsung Electronics F/S

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 Learning Objective 3
Explain the accounting issues related to
asset impairment.

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Recognizing Impairments
Recognizing Impairments ( 손상차손 )
A long-lived tangible asset is impaired when a company is not
able to recover the asset’s carrying amount either through
using it or by selling it.
On an annual basis, companies review the asset for
indicators of impairments—that is, a decline in the asset’s
cash-generating ability through use or sale.

e.g., physical damage of the asset

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Impairment Test
If impairment indicators are present, then an impairment test must
be conducted.

Sale Use*

* PV (expected CFs from the

future use + residual value at
Carrying value < Recoverable amount  no problem! the end of its useful life)
Carrying value > Recoverable amount  impairment!
Impairment losses may be reversed, but limited to the carrying amount
that would result if the impairment had not occurred.
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Impairment Test
Example: Assume that Cruz SA performs an impairment test for its
equipment. The carrying amount of Cruz’s equipment is €200,000, its fair
value less costs to sell is €180,000, and its value-in-use is €205,000. In this
case, the value-in-use of Cruz’s equipment is higher than its carrying
amount of $200,000. As a result, there is no impairment.
€205,000

No
Impairment

ILLUSTRATION 11.15 38
Impairment Test
Example: Assume the same information for Cruz Company except that
the value-in-use of Cruz’s equipment is €175,000 rather than €205,000.

€20,000 Impairment Loss

€180,000

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000
Other income and expense
Accumulated Impairment loss—Equipment 20,000
**Instead of “accumulated depreciation” that is used in the textbook

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Impairment Illustrations – Case 1
At December 31, 2023, Hanoi Ltd. 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, 2023, 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 2023 and
is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2023, is VND11,000,000.
4. The remaining useful life of the equipment after December 31, 2023,
is two years.
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Impairment Illustrations – Case 1
Case 1: Hanoi records the impairment on its equipment at December 31,
2023, as follows.

Loss on Impairment 3,000,000

Accumulated Impairment loss—Equipment
3,000,000
**Instead of “accumulated depreciation” that is used in the textbook

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Impairment Illustrations – Case 1
Equipment VND 26,000,000
Less: Accumulated Depreciation-Equipment (12,000,000)
Less: Accumulated Impairment loss (3,000,000)
Carrying value (Dec. 31, 2023) VND 11,000,000

Hanoi Ltd. 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 2024.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000

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Reversal of Impairment Loss ( 손상차손의 환입 )

Illustration: Tan Group purchases equipment on January 1, 2022, for

HK$300,000, useful life of three years, and no residual value. Its
depreciation and related carrying amount over the three years is as follows.

Depreciation (2022.12.31)
Depreciation expense 100,000
Accumulated Depreciation—Equipment 100,000
 Carrying value = 300,000 – 100,000 = HK$200,000

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Reversal of Impairment Loss
Illustration: Tan Group purchases equipment on January 1, 2022, for
HK$300,000, useful life of three years, and no residual value. Its
depreciation and related carrying amount over the three years is as follows.

At December 31, 2022, Tan determines it has an impairment loss of

HK$20,000 and makes the following entry.
Loss on Impairment 20,000
Accumulated Impairment Loss — Equipment 20,000

 Carrying value = 200,000 – 20,000 = HK$180,000

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Reversal of Impairment Loss
Depreciation expense and related carrying amount after the impairment.

Depreciation (2023.12.31).
Depreciation expense 90,000
Accumulated Depreciation—Equipment 90,000

 Carrying value = 180,000 – 90,000 = HK$90,000

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Reversal of Impairment Loss
Depreciation expense and related carrying amount after the impairment.

At the end of 2023, Tan determines that the recoverable amount of the
equipment is HK$96,000. Tan reverses the impairment loss.
Accumulated Impairment Loss—Equipment 6,000
Recovery of Impairment Loss 6,000
other income and expense
 Carrying value = HK$96,000
Because HK$96,000 < HK$100,000 (original carrying value)
The amount of the recovery of the loss is limited to the carrying
amount that would result if the impairment had not occurred.
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Cash-Generating Units ( 현금창출단위 )

When it is not possible to assess a single asset for impairment

because the single asset generates cash flows only in
combination with other assets, companies identify the
smallest group of assets that can be identified that generate
cash flows independently of the cash flows from other assets.

Such a group is called a cash-generating unit (CGU).

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Impairment of Assets to Be Disposed of
• What happens if a company intends to dispose of impaired
asset, instead of holding it for use?
• Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).
• No depreciation or amortization is taken on assets held for
disposal during the period they are held.
• Can write up or down an asset held for disposal in future
periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before the
impairment.

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ILLUSTRATION 11.18 49
 Learning Objective 5
Apply the accounting for revaluations.

50
PP&E
1. Acquisition of PP&E

2. Valuation in a subsequent period, by choosing either

① Historical cost model : depreciation, impairment & reversal
② Revaluation model

3. Disposal of PP&E

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Revaluation Model ( 재평가모형 )

• Under IFRS, companies can use either the historical cost model
(at cost) or the revaluation model (fair value).

• U.S. GAAP does NOT permit revaluations of PP&E.

• Company can select to value only one class of assets, say

buildings, and not revalue other assets such as land or equipment.

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Revaluation Model
Cf. Impairment: Recoverable amount
• The measurement basis is fair value (=Max(FV - Cost to Sell, Value in use))
– FV: 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 (IFRS 13)

• Revaluation model is applied to a class of assets rather than

individual assets:
– Limits ability of management to ‘cherry pick’ which assets to revalue

• Fair value UP↑: Gain (revaluation surplus) as reflected in other

comprehensive income (OCI)
• Fair value DOWN↓: Loss as reflected in net income (i.e. profit or loss)

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Comprehensive Income From Ch.4 (I/S)

Net Income
Income Statement (in thousands)
Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000
Operating expenses:
 Unrealized gains and
Selling expenses 10,000
losses on non-trading
Administrative expenses 43,000 equity securities.
Total operating expense 53,000  Translation gains and
Income from operations 83,000 losses on foreign currency.
Other revenue (expense):
 Plus others
Interest revenue 17,000
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in Equity
Net income $ 55,000

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Cf. Accounting Conservatism
Conservatism

 “Anticipate no profit, but anticipate all losses”

 Profits should be verifiable
 Higher degree of verification is required to recognize good
news as gains than to recognize bad news as losses

Watts, R. L. 2003. Conservatism in accounting part I: Explanations and implications. Ac-

counting Horizons 17 (3): 207–221.

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Revaluation Model
Recognizing Revaluations
1. If fair value > net carrying value  Gain (revaluation surplus)

- Other comprehensive income (OCI)

- OCI goes to equity directly, bypassing I/S  no effect on current NI

2. If fair value < net carrying value  Loss (impairment loss)

- Other income and expense

- Impairment loss reduces net income.

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Upward Revaluations (Increments)
• Where asset’s carrying amount is increased as the result of a revaluation:
– The increase is credited directly to equity under the heading
revaluation surplus
– Increase is NOT taken through income

Income statement (IS)

Sales XXXX
Revaluation loss (affecting
PPE write-down loss net income)
Net income XXX (write down expense)

Other comprehensive income (OCI) XXX

Total comprehensive income XXX Revaluation surplus
(not affecting net income)

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Upward Revaluations (Increments)
Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for €1,000,000 on
January 5, 2019. The company elects to use revaluation accounting for
the land in subsequent periods. At December 31, 2019, the land’s fair
value is €1,200,000. The entry to record the land at fair value is as
follows. Corresponding increase
Increase in carrying value of land in SFP
in equity (reserves)
Land 200,000
Unrealized Gain on Revaluation - Land OCI 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

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Upward Revaluations (Increments)
Revaluation—Equipment (depreciable asset)
Illustration: Prince Ltd. applies revaluation to equipment purchased on January
1, 2017, for HK$1,000,000. The equipment has a useful life of 5 years, and no
residual value. Prince makes the following entry to record depreciation for 2017,
assuming straight-line depreciation.

Depreciation Expense I/S 200,000

Accumulated Depreciation—Equipment SFP 200,000

Statement of Financial Position (Dec. 31, 2017)

Property, Plant, and Equipment
Equipment HK$ 1,000,000
Less: Accumulated depreciation 200,000
Net book value (NBV) HK$ 800,000 59
Upward Revaluations (Increments)
Revaluation—Equipment (depreciable asset)

At the end of 2017, independent appraisers determine that the asset has a fair
value of HK$850,000. The entry to record the revaluation is as follows.

 The revaluation gain = 850,000 – 800,000 = HK $ 50,000

 Eliminate the Accumulated Depreciation 200,000
 Original basis 1,000,000  new basis 850,000
 reduce the Equipment account by 150,000
Step 1: Eliminate accumulated depreciation

Accumulated Depreciation—Equipment 200,000

Equipment Step 2: Adjust original asset cost
150,000
to equal the revalued amount
Unrealized Gain on Revaluation_Equipment 50,000OCI
Step 3: Take difference between steps 1 60
and 2 to reserves
Downward Revaluations (Decrements)
• Accounting for a revaluation decrement involves an immediate
recognition of an expense in the period of the revaluation

Illustration: Assume again that Prince’s equipment has a carrying amount of

HK$800,000 (HK$1,000,000 − HK$200,000). However, at the end of 2017,
independent appraisers determine that the asset has a fair value of
HK$775,000.

 The revaluation loss = 800,000 – 775,000 = HK$ 25,000

 Eliminate Accumulated Depreciation 200,000
 Original basis 1,000,000  new basis 775,000
 reduce Equipment by 225,000 Step 1: Eliminate accumulated depreciation

Accumulated Depreciation—Equipment 200,000 Step 2: Adjust gross BV

downwards to equal
Loss on impairment I/S 25,000 new fair value
Step 3: Charge difference between carrying
Equipment value and new225,000
fair value to income
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 The impairment loss of HK$25,000 reduces net income.
 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

LEARNING OBJECTIVE 7
Illustrate revaluation accounting procedures.

The general rules for revaluation accounting are as follows.

1. When a company revalues its long-lived tangible assets above
historical cost, it reports an unrealized gain that increases other
comprehensive income.
2. If a company experiences a loss on impairment (decrease of value
below historical cost), the loss reduces income and retained
earnings. Thus, gains on revaluation increase equity but not net
income.

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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment
For an identical asset,
3. If a revaluation increase reverses a decrease that was previously reported
as an impairment loss, a company credits the revaluation increase to
income using the account Recovery of Impairment Loss up to the amount
of the prior loss. Any additional valuation increase above historical cost
increases other comprehensive income and is credited to Unrealized Gain
on Revaluation.

(Dr) Loss on impairment (Cr) Equipment

(Dr) Equipment (Cr) Recovery of Impairment Loss

(Cr) Unrealized Gain on Revaluation-Equipment
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 Revaluation Increment Reversing Prior
Decrement
• If the revaluation increment reverses a previous revaluation
decrement:
• Increase is realized in income statement  because the previous
downward revaluation would also have been recognised in income

Revaluation surplus (t+1)

Case 2 (OCI)

Revaluation Reversal of previously

loss (period t) Case 1 recognised loss
 Income (t+1)

t t+1 time
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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment
For an identical asset,
4. If a revaluation decrease reverses an increase that was reported as an
unrealized gain, a company first reduces other comprehensive income by
eliminating the unrealized gain. Any additional valuation decrease reduces
net income and is reported as a loss on impairment.

(Dr) Equipment (Cr) Unrealized Gain on Revaluation-Equipment

(Dr) Unrealized Gain on Revaluation-Equipment (Cr) Equipment

(Dr) loss on impairment

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 Revaluation Decrement Reversing Prior
Increment
• If revaluation decrement reverses a previous revaluation
increment:
• The revaluation surplus must be eliminated before any expense is
recognized

Revaluation Case 1
surplus Reversal of revaluation
(period t) surplus (negative OCI)

Case 2 Revaluation loss

t t+1 time
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Revaluation of Land
Revaluation—2022: Valuation Increase
Assume that Unilever Group (GBR and NLD) purchased land on January 1,
2022, that cost €400,000. Unilever decides to report the land at fair value
in subsequent periods. At December 31, 2022, an appraisal of the land
indicates that its fair value is €520,000. Unilever makes the following
entry to record the increase in fair value.

Land 120,000
Unrealized Gain on Revaluation—Land 120,000 (€520,000 −
€400,000)

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Revaluation—2022: Valuation Increase

• Land is now reported at its fair value of €520,000.

• The increase in the fair value of €120,000 is reported on the
statement of comprehensive income.
• The ending balance in Unrealized Gain on Revaluation—Land is
reported as accumulated other comprehensive income in the
statement of financial position in the equity section.

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Revaluation—2023: Decrease below
Historical Cost
What happens if the land’s fair value at December 31, 2023, is €380,000,
a decrease of €140,000 (€520,000 − €380,000)? In this case, the land’s
fair value is below its historical cost. Unilever makes the following entry
on December 31, 2023 to record the decrease in fair value of the land.

① Unrealized Gain on Revaluation — Land 120,000

② Land on Impairment 20,000

Land (€520,000 − €380,000) 140,000

69
Revaluation—2023: Decrease below
Historical Cost
ILLUSTRATION 11A.2

• The decrease to Unrealized Gain on Revaluation—Land of €120,000

reduces other comprehensive income, which reduces accumulated
other comprehensive income.
• The debit to Loss on Impairment of €20,000 reduces net income and
retained earnings.
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Revaluation—2024: Recovery of
Impairment Loss
At December 31, 2024, Unilever’s land value increases to €415,000,
an increase of €35,000 (€415,000 − €380,000). In this case, the Loss
on Impairment of €20,000 is reversed and the remaining increase
of €15,000 is reported in other comprehensive income. Unilever
makes the following entry to record this transaction.

Land 35,000
Unrealized Gain on Revaluation — Land 15,000 ②
Recovery of Impairment 20,000
①

71
Summary of Revaluation—2024

ILLUSTRATION 11A.3

72
2025 Journal Entries for Sale of Land
On January 2, 2025, Unilever sells the land for €415,000. Unilever makes
the following entry to record this transaction.
January 2,2025
Cash 415,000
Land 415,000
(To record sale of land)

Since the land is sold, Unilever has option to transfer Accumulated Other
Comprehensive Income (AOCI) to Retained Earnings.
January 2,2025
Accumulated Other Comprehensive Income 15,000
Retained Earnings 15,000
(To eliminate the remaining balance in AOCI)

73
2025 Journal Entries

• The purpose of this transfer is to eliminate the unrealized gain

on the land that was sold.
• Transfers from Accumulated Other Comprehensive Income
cannot increase net income.
• Even though the land has appreciated in value by €15,000,
Unilever is not able to recognize this gain in net income over
the periods that it held the land.

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Revaluation of Depreciable Assets
Revaluation—2022: Valuation Increase
Assume that Nokia (FIN) purchases equipment for €1,000,000 on January
2, 2022. The equipment has a useful life of five years, is depreciated using
the straight-line method of depreciation, and its residual value is zero.
Nokia chooses to revalue its equipment to fair value over the life of
equipment. On December 31, 2022, Nokia records depreciation expense of
€200,000 (€1,000,000 ÷ 5) as follows.

Depreciation Expense 200,000

Accumulated Depreciation — Equipment 200,000

Carrying value = 1,000,000 – 200,000 = 800,000

75
Revaluation—2022: Valuation Increase
After this entry, Nokia’s equipment has a carrying amount of €800,000
(€1,000,000 − €200,000). Nokia employs an independent appraiser, who
determines that the fair value of equipment at December 31, 2022, is
€950,000. To report the equipment at fair value, Nokia does the following.

1. Reduces the Accumulated Depreciation—Equipment , €200,000

2. Reduces the Equipment account by €50,000
€1,000,000  €950,000
3. Records an Unrealized Gain on Revaluation—Equipment, €150,000
€ 950,000- € 800,000

Accumulated Depreciation—Equipment 200,000

Equipment 50,000
Unrealized Gain on Revaluation—Equipment 150,000
76
Revaluation Summary—2022

ILLUSTRATION 11A.4

• The carrying amount of the asset is now €950,000.

• Nokia reports depreciation expense of €200,000 in the income
statement and Unrealized Gain on Revaluation—Equipment of
€150,000 in other comprehensive income.

77
Revaluation—2023: Decrease below
Historical Cost
Assuming no change in the useful life of the equipment, depreciation
expense for Nokia in 2023 is €237,500 (€950,000 ÷ 4), and the entry to
record depreciation expense on December 31, 2023 as follows.

Depreciation Expense 237,500

Accumulated Depreciation — Equipment 237,500

Under IFRS, Nokia may transfer from AOCI the difference between
depreciation based on the revalued carrying amount of the equipment
and depreciation based on the asset’s original cost to retained earnings.

78
Revaluation—2023: Decrease below
Historical Cost
Depreciation based on the original cost was €200,000 (€1,000,000 ÷ 5)
and on fair value is €237,500, or a difference of €37,500 (€237,500 −
€200,000). The entry to record this transfer at December 31, 2023 is as
follows.
Accumulated Other Comprehensive Income 37,500
Retained Earnings 37,500

Before revaluation in 2023, Nokia has the following amounts related to

its equipment.

79
Revaluation—2023: Decrease below
Historical Cost
Nokia determines through appraisal that the equipment now has a fair
value of €570,000. To report the equipment at fair value, Nokia does the
following.
1. Reduces the Accumulated Depreciation—Equipment account of
€237,500 to zero.
2. Reduces the Equipment account by €380,000 (€950,000 − €570,000)
3. Impairment loss = 570,000 – 712,500 = € 142,500
① first, reduce AOCI by € 112,500
② then, recognize impairment loss € 30,000

80
Revaluation—2023: Decrease below
Historical Cost
① Reduces Unrealized Gain on Revaluation—Equipment by €112,500,
to offset the balance in the unrealized gain account (related to the
revaluation in 2022).
② Records a loss on impairment of €30,000.

Accumulated Depreciation—Equipment 237,500

Loss on Impairment 30,000
Unrealized Gain on Revaluation—Equipment 112,500
Equipment 380,000

81
Revaluation Summary—2023

ILLUSTRATION 11A.5
The carrying amount of the equipment is now €570,000.
Nokia reports depreciation expense of €237,500 and an impairment loss of
€30,000 in the income statement.
Nokia reports the reversal of the previously recorded unrealized gain by
recording the transfer to retained earnings of €37,500 and the entry to
Unrealized Gain on Revaluation—Equipment of €112,500.
82
Revaluation—2024: Recovery of
Impairment Loss
Assuming no change in the useful life of the equipment, depreciation
expense for Nokia in 2024 is €190,000 (€570,000 ÷ 3), and the entry to
record depreciation expense on December 31, 2024 as follows.

Depreciation Expense 190,000

Accumulated Depreciation—Equipment 190,000

83
Revaluation—2024: Recovery of
Impairment Loss
Nokia transfers the difference between depreciation based on the revalued
carrying amount of the equipment and depreciation based on the asset’s
original cost from AOCI to retained earnings. Depreciation based on the
original cost was €200,000 (€1,000,000 ÷ 5) and on fair value is €190,000.
(190,000 – 200,000 = -10,000)
Retained Earnings 10,000
Accumulated Other Comprehensive Income 10,000

Before revaluation in 2024, Nokia has the following amounts related to its
equipment.

84
Revaluation—2024: Recovery of
Impairment Loss
Nokia determines through appraisal that the equipment now has a fair
value of €450,000. To report the equipment at fair value, Nokia does the
following.

1. Reduces the Accumulated Depreciation—Equipment account of

€190,000 to zero.
2. Reduces the Equipment account by €120,000 (€570,000 −
€450,000)—it then is reported at its fair value of €450,000.
3. Gain = 450,000 – 380,000 = € 70,000
① Records a Recovery of Loss on Impairment for €30,000
② Records an Unrealized Gain on Revaluation—Equipment for
€40,000.
85
Revaluation—2024: Recovery of
Impairment Loss
Nokia determines through appraisal that the equipment now has a
fair value of €450,000. To report the equipment at fair value, Nokia
does the following. The entry to record this transaction is as follows.

Accumulated Depreciation—Equipment 190,000

Unrealized Gain on Revaluation—Equipment 40,000
Equipment 120,000
Recovery of Loss on Impairment 30,000

86
Revaluation Summary—2024

ILLUSTRATION 11A.6

On January 2, 2025, Nokia sells the equipment for €450,000. Nokia

makes the following entry to record this transaction.

Cash 450,000
Equipment 450,000

87
Revaluation Summary—2024

ILLUSTRATION 11A.6

Nokia transfers the remaining balance in Accumulated Other

Comprehensive Income to Retained Earnings.

On January 2, 2025
Accumulated Other Comprehensive Income 50,000
Retained Earnings 50,000

88
End of Document

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