Lecture Intermediate accounting (IFRS 2nd edition): Chapter 11 - Kieso, Weygandt, Warfield

Chapter 11 - Depreciation, impairments, and depletion. After completing this chapter you should be able to: Explain the concept of depreciation, identify the factors involved in the depreciation process, compare activity, straight-line, and decreasing-charge methods of depreciation, explain special depreciation methods.

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Intermediate Accounting IFRS 2nd Edition

11

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6 Explain the accounting procedures for depletion of mineral resources.

7 Explain the accounting for revaluations.

8 Explain how to report and analyze property, plant, equipment, and mineral resources.

After studying this chapter, you should be able to:

Depreciation, Impairments, and Depletion

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Depreciation Calculation,

Activity Method—Crane

Example

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Methods of Depreciation

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Methods of Depreciation

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€100,000,000 on January 1, 2016. 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

Component Depreciation

ILLUSTRATION 118

Airplane Components

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Computation of Component Depreciation

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DEPRECIATION—COST ALLOCATION

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Depreciation and Partial Periods

Current Depreciable Annual Partial Year Accum Year Base Years Expense Year Expense Deprec.

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Activity Method (Assume 800 hours used in 2015)

(€126,000 / 21,000 hours = €6 per hour)

Hours Rate per Annual Partial Year Accum.

Year Used Hours Expense Year Expense Deprec.

2015 Depreciation expense 4,800

Accumultated depreciation 4,800

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SumoftheYears’Digits Method 5/12 = .416667 7/12 = .583333

Current Depreciable Annual Partial Year Accum Year Base Years Expense Year Expense Deprec.

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Current Depreciable Rate Annual Partial Year Year Base per Year Expense Year Expense

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

Balance Sheet (Dec. 31, 2014)

After 7 years

Revision of Depreciation Rates

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Depreciation Expense 19,375

Accumulated Depreciation Journal entry for 2015

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The amount of depreciation expense

For example, Veolia Environment

(FRA) provided information regarding

useful lives of its assets in the note to its

financial statements, as shown to the right.

With the information provided, an analyst

determines the impact of these

management choices and judgments on

the amount of depreciation expense for

Property, plant, and equipment are recorded by component, with each component depreciated over its useful life.

Useful lives are as follows:

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If impairment indicators are present, then an impairment test

must be conducted.

Recognizing Impairments

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Recognizing Impairments

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Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment

Equipment

VND 26,000,000Less: Accumulated DepreciationEquipment

15,000,000Carrying 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 straightline depreciation and makes the

following journal entry to record depreciation for 2017

Impairment Illustrations

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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.

Impairment Illustrations

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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

Reversal of Impairment Loss

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When it is not possible to assess a single asset for impairment because the single asset generates cash flows only in

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IMPAIRMENTS

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Graphic of Accounting for Impairments

IMPAIRMENTS

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6 Explain the accounting procedures for depletion of mineral resources.

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Disclosures related to E&E expenditures should include:

1. Accounting policies for exploration and evaluation

expenditures, including the recognition of E&E assets

2. Amounts of assets, liabilities, income and expense, and

operating cash flow arising from the exploration for and evaluation of mineral resources

DEPLETION

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7 Explain the accounting for revaluations.

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After this entry, Lenovo’s equipment has a carrying amount of

¥400,000 (¥500,000 ¥100,000). Lenovo receives an independent appraisal for the fair value of equipment at December 31, 2015,

which is ¥460,000

Accumulated Depreciation—Equipment 100,000

Equipment

40,000Unrealized Gain on Revaluation—Equipment

Recognizing Revaluation

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Revaluation—Depreciable Assets ILLUSTRATION 1122

Financial Statement Presentation—Revaluations

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

Recognizing Revaluation

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8 Explain how to report and analyze property, plant, equipment, and mineral resources.

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and Mineral Resources

Basis of valuation (usually cost)Pledges, liens, and other commitments

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Measures how efficiently a company uses its assets to generate sales.

Analysis of Property, Plant, and Equipment

Asset Turnover Ratio

PRESENTATION AND ANALYSIS

adidas AG

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to generate operating

income from a particular level of

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Measures a firm’s success in using assets to generate

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=

Net Sales

Asset Turnover

x

x Average Total Assets

PRESENTATION AND ANALYSIS

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=

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U.S. GAAP adheres to many of the same principles as IFRS in the accounting for property, plant, and equipment. Major differences relate to use of component depreciation, impairments, and revaluations.

GLOBAL ACCOUNTING INSIGHTS

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• The accounting for plant asset disposals is the same under U.S. GAAP and IFRS.

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• U.S. GAAP and IFRS both view depreciation as allocation of cost over an

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Differences

• Under U.S. GAAP, component depreciation is permitted but is rarely used. IFRS requires component depreciation.

• U.S. GAAP does not permit revaluations of property, plant, equipment, and mineral resources. Under IFRS, companies can use either the historical cost model or the revaluation model.

• In testing for impairments of longlived assets, U.S. GAAP uses a different model than IFRS. Under U.S. GAAP, as long as future undiscounted cash flows exceed the carrying amount of the asset, no impairment is recorded. The IFRS impairment test is stricter. However, unlike U.S. GAAP, reversals

of impairment losses are permitted under IFRS.

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As indicated, impairment testing under U.S. GAAP is a twostep process. The graphic on page 520 summarizes impairment measurement under U.S. GAAP. The key distinctions relative to IFRS relate to the use of a cash flow recovery test to determine if an impairment test should be performed. Also, U.S. GAAP does not permit reversal of impairment losses for assets held for use.

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With respect to revaluations, as part of the conceptual framework project, the Boards will examine the measurement bases used in accounting. It is too early

to say whether a converged conceptual framework will recommend fair value measurement (and revaluation accounting) for property, plant, and equipment. However, this is likely to be one of the more contentious issues, given the longstanding use of historical cost as a measurement basis in U.S. GAAP.

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1. When a company revalues its longlived tangible assets above

historical cost, it reports an unrealized gain that increases other comprehensive income. Thus, the unrealized gain bypasses net income, increases other comprehensive income, and increases accumulated 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, whereas losses decrease income

EQUIPMENT

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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

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

EQUIPMENT

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