Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 11
Depreciation, Impairments, and Depletion
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

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Copyright ©2020 John Wiley & Sons, Inc.
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 Discuss the accounting procedures for depletion of mineral
resources.
LO 5 Apply the accounting for revaluations.
LO 6 Demonstrate how to report and analyze property, plant,
equipment, and mineral resources.

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PREVIEW OF CHAPTER 11

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 Learning Objective 1
Describe depreciation concepts and
methods of depreciation.

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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
• Mineral resources = Depletion expense

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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 Depreciation Process
Computation of Depreciation Base

ILLUSTRATION 11.1

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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).

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Depreciation—Method of 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.

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Methods of Depreciation
Activity Method

Data for Stanley

Coal Mines

ILLUSTRATION 11.2
Illustration: If Stanley uses the crane for 4,000 hours the first year, the
depreciation charge is:

ILLUSTRATION 11.3
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Methods of Depreciation
Straight-Line Method

Data for Stanley

Coal Mines

ILLUSTRATION 11.2
Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11.4

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Methods of Depreciation
Diminishing-Charge Methods (1 of 2)

Data for Stanley

Coal Mines

ILLUSTRATION 11.2
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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Methods of Depreciation
Sum-of-the-Years’ Digits Depreciation Schedule

ILLUSTRATION 11.6

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Methods of Depreciation
Diminishing-Charge Methods (2 of 2)

Data for Stanley

Coal Mines

ILLUSTRATION 11.2
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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Methods of Depreciation
Double-Declining Depreciation Schedule

ILLUSTRATION 11.7

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 Learning Objective 2
Identify other depreciation issues.

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Other Depreciation Issues
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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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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Computation of 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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Presentation of Carrying Amount of
Airplane
On the statement of financial position at the end of 2023,
EuroAsia reports the airplane as a single amount.

ILLUSTRATION 11.10

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Other Depreciation Issues
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
Straight-Line Method
Illustration: Steeltex Ltd. purchases an automated drill
machine with a five-year life for £45,000 (no residual value)
on June 10, 2022. The company’s fiscal year ends December
31. Steeltex therefore charges depreciation for only six and
two-third months during that year. The total depreciation for
a full year (assuming straight-line depreciation) is £9,000
(£45,000 ÷ 5). The depreciation for the first partial year is
therefore:
6 23
 £9,000 = £5,000
12

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Depreciation and Partial Periods
Accelerated Methods of Depreciation
Illustration: Steeltex Ltd. purchases a machine for £10,000 on July 1, 2022, with
an estimated useful life of five years and no residual value. Illustration 11.11
shows the depreciation figures for 2022, 2023, and 2024.

ILLUSTRATION 11.11

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Depreciation and Partial Periods
Fractional-Year Depreciation Policies
Machine purchased on June 10, 2022, for $45,000, no residual
value, five-year estimated life.

ILLUSTRATION 11.12
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Other Depreciation Issues
Depreciation and Replacement of PP&E

Does depreciation provide for the replacement of assets?

• Does not involve a current cash outflow.
• Funds for the replacement of the assets come from the
revenues (generated through use of the asset).

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Other Depreciation Issues
Revision of Depreciation Rates

How should companies handle revisions in depreciation rates?

• Accounted for in the current and prospective periods
• Not handled retrospectively
• Not considered errors or extraordinary items

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Revision of Depreciation Rates
Illustration: Assume that Nestlè (CHE) purchased machinery with an
original cost of CHF90,000. It estimates a 20-year life with no residual
value. However, during year 11, Nestlè estimates that it will use the
machine for an additional 20 years. Depreciation has been recorded at
the rate of 1/20 of CHF90,000, or CHF4,500 per year by the straight-line
method. On the basis of a 30-year life, Nestlè should have recorded
depreciation of 1/30 of CHF90,000, or CHF3,000 per year. It has therefore
overstated depreciation, and understated net income, by CHF1,500 for
each of the past 10 years, or a total amount of CHF15,000.

ILLUSTRATION 11.13
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Revision of Depreciation Rates
Computing Depreciation After Revision of Estimated Life
Nestlè should report this change in estimate in the current and
prospective periods. It should not make any change in previously
reported results. It does not adjust opening balances nor attempt
to “catch-up” for prior periods. Changes in estimates are a
continual and inherent part of any estimation process. Charges for
depreciation in subsequent periods are determined by dividing the
remaining book value less any residual value by the remaining
estimated life.

ILLUSTRATION 11.14

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Revision of Depreciation Rates
Journal Entry for Revised Depreciation
Nestlè would prepare the following entry to record
depreciation for each of the remaining 20 years.

Depreciation Expense 2,250

Accumulated Depreciation—Machinery 2,250

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

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Recognizing Impairments
Recognizing Impairments
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.

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

ILLUSTRATION 11.15
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Impairment Test Example 1
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.

ILLUSTRATION 11.15
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Impairment Test Example 2
Assume the same information for Cruz Company except that the value-in-
use of Cruz’s equipment is €175,000 rather than €205,000. Cruz measures
the impairment loss as the difference between the carrying amount of
€200,000 and the higher of fair value less costs to sell (€180,000) or
value-in-use (€175,000).

ILLUSTRATION 11.15
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Impairment Test Example 2
Journal Entry to Record Impairment
Assume the same information for Cruz Company except that the value-
in-use of Cruz’s equipment is €175,000 rather than €205,000. Cruz
measures the impairment loss as the difference between the carrying
amount of €200,000 and the higher of fair value less costs to sell
(€180,000) or value-in-use (€175,000). Cruz therefore uses the fair
value less cost of disposal to record an impairment loss of €20,000
(€200,000 - €180,000).

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000

Accumulated Depreciation — Equipment 20,000

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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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Case 1 Loss on Impairment Journal Entry
Hanoi records the impairment on its equipment at December
31, 2023, as follows.

Loss on Impairment 3,000,000

Accumulated Depreciation — Equipment 3,000,000

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Case 1 Depreciation Journal Entry
Equipment VND 26,000,000
Less: Accumulated Depreciation – Equipment ____15,000,000
Carrying value (Dec. 31, 2023) VND 11,000,000

For 2024, 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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Impairment Illustrations
Case 2
At the end of 2022, 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.
Present value of 5 annual payments of $40,000 ($40,000 x 3.99271, Table 6.4) $159,708.40
Present value of residual value of $10,000 ($10,000 x .68058), Table 6.2) ____6,805.80
Value-in-use related to machine $166,514.20

ILLUSTRATION 11.16

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Case 2 Loss on Impairment Journal Entry
Computation of the impairment loss on the machine at the end of
2022.

Loss on Impairment 33,486

Accumulated Depreciation — Machinery 33,486

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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 Depreciation — Equipment 20,000

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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, which is greater than its carrying
value of $90,000. Tan reverses the impairment loss.
Accumulated Depreciation — Equipment 6,000
Recovery of Impairment Loss 6,000

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Cash-Generating Units
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.

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Impairment of Assets to be Disposed Of
• 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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Graphic of Accounting for Impairments

ILLUSTRATION 11.18
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 Learning Objective 4
Discuss the accounting procedures for
depletion of mineral resources.

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Depletion
Natural resources can be divided into two categories:
1. Biological assets (timberlands)
o Fair value approach (Chapter 9)
2. Mineral resources (oil, gas, and mineral mining).
o Complete removal (consumption) of the asset.
o Replacement of the asset only by an act of nature.
Depletion - process of allocating the cost of mineral resources.

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Establishing a Depletion Base
Computation of the depletion base involves:
1. Pre-exploratory costs.
2. Exploratory and evaluation costs.
3. Development costs.

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Write-off of Resource Cost
Normally, companies compute depletion on a units-of-
production method (activity approach). Depletion is a
function of the number of units extracted during the period.
In this approach, the total cost of the mineral resource less
residual value is divided by the number of units estimated to
be in the resource deposit, to obtain a cost per unit of product.
To compute depletion, the cost per unit is then multiplied by
the number of units extracted.

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Computation of Depletion Rate
Illustration: MaClede S A acquired the right to use 1,000 acres of
land in South Africa to mine for silver. The lease cost is €50,000,
and the related exploration costs on the property are €100,000.
Intangible development costs incurred in opening the mine are
€850,000. Total costs related to the mine before the first ounce of
silver is extracted are, therefore €1,000,000. MaClede estimates
that the mine will provide approximately 100,000 ounces of silver.
The computation of the depletion cost per unit (depletion rate) is:

ILLUSTRATION 11.19
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Statement of Financial Position
Presentation of Mineral Resource
If MaClede extracts 25,000 ounces in the first year, then the
depletion for the year is €250,000 (25,000 ounces x €10).
Inventory 250,000
Accumulated Depletion 250,000

MaClede’s statement of financial position:

ILLUSTRATION 11.20
Depletion cost related to inventory sold is part of cost of goods
sold.
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Estimating Recoverable Reserves

• Same as accounting for changes in estimates.

• Revise the depletion rate on a prospective basis.
• Divide the remaining cost by the new estimate of the
recoverable reserves.

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Liquidating Dividends
Dividends greater than the amount of accumulated net
income.
Illustration: Callahan Mining had a retained earnings balance
of £1,650,000, accumulated depletion on mineral properties
of £2,100,000, and share premium of £5,435,493. Callahan’s
board declared a dividend of £3 a share on the 1,000,000
shares outstanding. It records the £3,000,000 cash dividend as
follows.
Retained Earnings 1,650,000
Share Premium — Ordinary 1,350,000
Cash 3,000,000

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Presentation on the Financial Statements
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.

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 Learning Objective 5
Apply the accounting for revaluations.

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Recognizing Revaluations
Companies may value long-lived tangible asset subsequent to
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for
its railroad network.
• Increased long-lived tangible assets by £4,289 million.
• Change in the fair value accounted for by adjusting the
asset account and establishing an unrealized gain.
• Unrealized gain is often referred to as revaluation surplus.

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Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2022. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2022, the land’s fair value is €1,200,000. The
entry to record the land at fair value is as follows.
Land 200,000
Unrealized Gain on Revaluation 200,000

Unrealized Gain on Revaluation—Land increases other

comprehensive income in the statement of comprehensive
income.

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Revaluation—Depreciable Assets (1 of 2)
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 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.
Lenovo chooses to revalue its equipment to fair value over
the life of the equipment. Lenovo records depreciation
expense of ¥100,000 (¥500,000 ÷ 5) at December 31, 2022,
as follows.
Depreciation Expense 100,000
Accumulated Depreciation — Equipment 100,000

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Revaluation—Depreciable Assets (2 of 2)

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, 2022, which is ¥460,000. The entry to record this
revaluation at December 31, 2022, is as follows:

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation — Equipment 60,000

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Financial Statement Presentation—
Revaluations

ILLUSTRATION 11.22
Under no circumstances can the Accumulated Other
Comprehensive Income account related to revaluations have
a negative balance.
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Revaluation Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or
equipment.
If a company selects only buildings,
• revaluation applies to all assets in that class of assets.
• A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
• Companies must also make every effort to keep the assets’
values up to date.

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 Learning Objective 6
Demonstrate how to report and
analyze property, plant, equipment,
and mineral resources.

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Presentation of Property, Plant,
Equipment and Mineral Resources
Depreciating assets, use Accumulated Depreciation.
Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.
Disclosures
• Basis of valuation (usually cost)
• Pledges, liens, and other commitments

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Analysis of Property, Plant, and Equipment
Asset Turnover

Measures how efficiently

a company uses its assets
to generate sales.

ILLUSTRATION 11.24

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Analysis of Property, Plant, and Equipment
Profit Margin on Sales
Measure of the ability to
generate operating income
from a particular level of
sales.

ILLUSTRATION 11.25

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Analysis of Property, Plant, and Equipment
Return on Assets

Measures a firm’s success

in using assets to generate
earnings.

ILLUSTRATION 11.25

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Return on Assets

Rather than using the profit margin on sales, we can compute

return on assets directly by dividing net income by average
total assets. Using Siemens’ data, the calculation is as follows.

ILLUSTRATION 11.26

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 Learning Objective 7
Illustrate revaluation accounting
procedures.

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Revaluation of Property, Plant, and
Equipment (1 of 2)
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
Equipment (2 of 2)
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.
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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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Summary of Revaluation—2022

ILLUSTRATION 11A.1

• 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 (1 of 4)
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.

Unrealized Gain or Revaluation — Land 120,000

Land on Impairment 20,000
Land (€520,000 − €380,000) 140,000

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Summary of Revaluation—2023

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
Recovery of Impairment 20,000

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Summary of Revaluation—2024

ILLUSTRATION 11A.3

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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 415,00
Land 415,00
(To record sale of land)

Since the land is sold, Unilever will 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)
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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

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Revaluation—2022: Valuation Increase (1 of 2)
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
account to zero.
2. Reduces the Equipment account by €50,000—it then is
reported at its fair value of €950,000.

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Revaluation—2022: Valuation Increase (2 of 2)

3. Records an Unrealized Gain on Revaluation—Equipment for the

difference between the fair value and carrying amount of the
equipment, or €150,000 (€950,000 − €800,000). The entry to
record this revaluation at December 31, 2022, is:
Accumulated Depreciation — Equipment 200,000
Equipment 50,000
Unrealized Gain or Revaluation — Equipment 150,000

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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.

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Revaluation—2023: Decrease Below
Historical Cost (2 of 4)
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.
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Revaluation—2023: Decrease Below
Historical Cost (3 of 4)
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.

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Revaluation—2023: Decrease Below
Historical Cost (4 of 4)
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)—it then is reported at its fair value of €570,000.
3. Reduces Unrealized Gain on Revaluation—Equipment by
€112,500, to off set the balance in the unrealized gain account
(related to the revaluation in 2022).
4. Records a loss on impairment of €30,000.
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Revaluation—2023: Decrease Below
Historical Cost
Journal Entry to Record Impairment Loss

Accumulated Depreciation — Equipment 237,500

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

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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.
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Revaluation—2024: Recovery of
Impairment Loss (1 of 3)
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

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Revaluation—2024: Recovery of
Impairment Loss (2 of 3)
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.
Retained Earnings 10,000
Accumulated Other Comprehensive Income 10,000
Before revaluation in 2024, Nokia has the following amounts
related to its equipment.

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Revaluation—2024: Recovery of
Impairment Loss (3 of 3)
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. Records an Unrealized Gain on Revaluation—Equipment for
€40,000.
4. Records a Recovery of Loss on Impairment for €30,000.

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Revaluation—2024: Recovery of Impairment
Loss
Journal Entry to Record 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

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Revaluation Summary—2024

ILLUSTRATION 11A.6

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2025 Journal Entries for Sale of Equipment
On January 2, 2025, Nokia sells the equipment for €450,000. Nokia makes the following
entry to record this transaction.
January 2, 2025
Cash 450,000
Equipment 450,000
(To record sale of equipment)
Nokia does not record a gain or loss because the carrying amount of the equipment is the
same as its fair value.
Nokia transfers the remaining balance in Accumulated Other Comprehensive Income to
Retained Earnings.
January 2, 2025
Accumulated Other Comprehensive Income 50,000
Retained Earnings 50,000
(To eliminate the remaining balance in AOCI)
Even though the equipment has appreciated in value by €50,000, the company does not
recognize this gain in net income.
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 Learning Objective 8
Compare accounting procedures for
property, plant, and equipment under
IFRS and U.S. GAAP.

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 Global Accounting Insights

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.

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Global Accounting Insights
Similarities
• The definition of property, plant, and equipment is essentially
the same under U.S. GAAP and IFRS.
• Under both U.S. GAAP and IFRS, changes in depreciation
method and changes in useful life are treated in the current and
future periods. Prior periods are not affected.
• The accounting for plant asset disposals is the same under U.S.
GAAP and IFRS.
• The accounting for the initial costs to acquire natural resources
is similar under U.S. GAAP and IFRS.

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Global Accounting Insights
More Similarities
• Under both U.S. GAAP and IFRS, interest costs incurred during
construction must be capitalized. Recently, IFRS converged to
U.S. GAAP.
• The accounting for exchanges of non-monetary assets is
essentially the same between U.S. GAAP and IFRS. U.S. GAAP
requires that gains on exchanges of non-monetary assets be
recognized if the exchange has commercial substance. This is
the same framework used in IFRS.
• U.S. GAAP and IFRS both view depreciation as allocation of cost
over an asset’s life. U.S. GAAP and IFRS permit the same
depreciation methods (straight-line, diminishing-balance, units-
of-production).
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Global Accounting Insights
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 long-lived 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.
• Under U.S. GAAP, all losses on non-monetary asset exchanges are
recognized immediately.
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Global Accounting Insights
About the Numbers
As indicated, impairment testing under U.S. GAAP is a two-
step process. Illustration GAAP 11.1, in the text, 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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Global Accounting Issues
On the Horizon
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 long-standing use of historical
cost as a measurement basis in U.S. GAAP.

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Copyright
Copyright © 2020 John Wiley & Sons, Inc.
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of these programs or from the use of the information contained herein.

Copyright ©2020 John Wiley & Sons, Inc. 101