.

Chapter 5
Accounting for
Property, Plant and Equipment

IAS 16
 Definitions
Are used in the operations of a
business.
are held for use in the production or
PPE:- are supply of goods or services, for rental
to others, or for administrative
tangible purposes; and
. items that:
are expected to be used during
more than one period.

 PPE Includes: Land, Building structures (offices, factories, warehouses), and Equipment (machinery,
furniture, tools).

❑ PPE Are not intended for sale to customers.

❑ If building and land held for rental purpose or capital appreciation purpose they are not PPE.

❑ Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
 Spare Parts

PPE (if they are to be used for

more than 12 months)
Spare parts can
be categorized
as either : Inventories (if they are
used/consumed with in 12
month)
 Recognition of PPE

it is probable that future

economic Benefits associated
The cost of an item with the item will flow to the
of property, plant entity; and
and equipment shall
be recognized as an
asset if, and only if: the cost of the item can be
measured reliably.
 Initial Measurement of PPE
An item of property, plant and equipment that qualifies for recognition as an asset
shall initially be measured at its cost
✓ As per historical cost [cost principle] of PPE includes the cash or cash equivalent
price of obtaining the asset and bringing it to the location and condition necessary
for its intended use
✓ Cost consists of all expenditures necessary & reasonable to acquire an asset and
make it ready for its intended use.
✓ Its purchase price, including import duties and non refundable purchase taxes, after
deducting trade discounts and rebates.
✓ Any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
✓ The initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located and any obligation associated.
 1. Cost of Land

 All expenditures made to acquire land and ready it for use.

Land costs typically include;

1. The purchase price;
2. Closing costs, such as title to the land, attorney’s fees, real estate brokers’
commissions and recording fees;
3. Costs incurred in getting the land in condition for its intended use, such as
grading, filling, draining, clearing and demolishing of existing structures less
salvage value.;
4. Assumption of any liens, mortgages, or encumbrances on the property; and
5. Any additional land improvements that have an indefinite life.
 Illustration: Sunrise Company acquires real estate at a cash cost of Br.100,000. The property
contains an old warehouse that is razed at a net cost of Br.6,000 (Br.7,500 in costs less Br.1,500
proceeds from salvaged materials). Additional expenditures are the attorney’s fee, Br.1,000, and
the real estate broker’s commission, Br.8,000.

Required: Determine the amount to be reported as the cost of the land.

Land
Cash price of property (Br.100,000) Br.100,000
Net removal cost of warehouse (Br.7,500-Br.1,500) 6,000
Attorney's fees (Br.1,000) 1,000
Real estate broker’s commission (Br.8,000) 8,000
Cost of Land Br.115,000
 1.1. Cost of Land Improvements

Land Improvements Enhancements to property such as parking lots, driveways, private roads,
fences, landscaping, and sprinkler systems

Structural additions made to land. Cost includes all expenditures necessary to make the
improvements ready for their intended use.

◆ Examples: driveways, parking lots, fences, landscaping, and underground sprinklers, trees
and shrubs, outdoor lighting, concrete sewers and drainage.
◆ Limited useful lives.

◆ Expense (depreciate) the cost of land improvements over their useful lives.
 2. COST OF BUILDINGS

Includes all costs related directly to purchase or construction.

Purchase costs:
◆ Purchase price, closing costs (attorney’s fees, title insurance, etc.) and real estate broker’s
commission.
◆ Remodeling, and replacing or repairing the roof, floors, electrical wiring, and plumbing.
Reconditioning (purchase of an existing building)
Construction costs:
◆ materials, labor, and overhead costs incurred during construction and professional fees and
building permits.
◆ Contract price plus payments for architects’ fees, Engineers’ fees, building permits, and
excavation costs.
◆ Companies consider all costs incurred, from excavation to completion, as part of the
building costs.
◆ Insurance & interest costs incurred during construction
◆ Walkways to and around the building
 3. Cost of Equipment
Include all expenditures incurred in acquiring the equipment and
preparing it for use. Costs include:
◆ Cash purchase price,
◆ freight and handling charges,
◆ insurance on the equipment while in transit,
◆ cost of special foundations if required,
◆ assembling and installation costs, and
◆ costs of conducting trial runs.
◆ Sales taxes
◆ Repairs (purchase of used equipment)
◆ Reconditioning (purchase of used equipment)
◆ Modifying for use
 Illustration:
Huang Company purchases a delivery truck at a cash price of HK$420,000.
Related expenditures are sales taxes HK$13,200, painting and lettering
HK$5,000, motor vehicle license HK$800, and a three-year accident insurance
policy HK$16,000. Compute the cost of the delivery truck.
Cash price HK$420,000
Sales taxes 13,200
Painting and lettering 5,000
Cost of Delivery Truck HK$438,200

Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000
 Cost of Acquiring Fixed Assets Excludes:
(Unnecessary and Unreasonable Costs)

▪Vandalism (deliberate destruction of property)

▪Mistakes in installation
▪Uninsured theft
▪Damage during unpacking and installing
▪Fines for not obtaining proper permits from government agencies
▪Training fee
▪Costs of opening a new facility;
▪Costs of introducing a new product or service (including costs of advertising and
promotional activities);
▪Costs of conducting business in a new location or with a new class of customer
(including costs of staff training); and
▪Administration and other general overhead costs.
Summary of PPE
 2. Valuation of PPE

 As with other assets, companies should record PPE at the

fair value of what they give up or at the fair value of the
asset received, whichever is more clearly evident.
 However, the process of asset acquisition sometimes
obscures fair value.
 For example, if a company buys land and buildings
together for one price, how does it determine separate
values for the land and buildings?
Valuation of PPE

If asset Acquired;

1. With discount
2. Group purchase
3. Issuance of stock
4. By gift (donation)
5. Deferred payment
6. Exchanges of Nonmonetary Assets
 2.1. Cash Discounts
 When a company purchases plant assets subject to cash
discounts for prompt payment, how should it report the
discount?
 If it takes the discount, the company should consider the
discount as a reduction in the purchase price of the asset.
 But should the company reduce the asset cost even if it
does not take the discount? Two points of view exist on this
question.
 2.2. Deferred-Payment Contracts

 Companies frequently purchase plant assets on long-term

credit contracts, using notes, mortgages, bonds, or
equipment obligations.

 To properly reflect cost, companies account for assets

purchased on long-term credit contracts at the present
value of the consideration exchanged between the
contracting parties at the date of the transaction.
 Example
GT real estate Company purchases an asset today in exchange for a
$10,000 zero-interest bearing note payable four years from now. Assuming
an appropriate interest rate of 9% at which to discount this single payment
of $10,000 due four years from now.

Lum sum payment PV= FV

(1+i)n
= 10,000 = 7084
(1+0.09)4
Journal Entries
Equipment ------------------7,084
Discount on Equipment ----2916
Contract payable -----------------10,000
 2.3. Lump-sum (Basket) Purchases

Lump-Sum Purchases — Allocate the total cost among the various assets
on the basis of their relative fair market values.

Example: A company pays $120,000 for equipment and a building. The land and
building are appraised at $50,000 and $75,000, respectively.

Appraisal Relative Total Allocated

Assets Value Fair Value Cost Cost
Equipment 50,000 50,000/125,000 120,000 48,000
Building 75,000 75,000/125,000 120,000 72,000
Total 125,000 120,000

Equipment 48,000
Building 72,000
Cash 120,000
 2.4. Issuance of Shares
• Market price of the shares issued is a fair indication of the cost of the property
acquired.
• If the market price of the common stock exchanged is not determinable, establish the
fair value of the property and use it as the basis for recording the asset

Example: North Co. decides to purchase building located adjacent to it for expansion of
its operation. The building is owned by Sky Co. In lieu of paying cash for the building,
North issues to Sky Co. 5,000 shares of common stock (par value $10) that have a fair
value of $12 per share. Make the journal entry.

Building (5,000 x $12)…………………….. 60,000

Common Stock………………..………………….. 50,000
Paid-In Capital in Excess of Par—Common Stock.. 10,000
 2.5 Accounting for Contributions
Companies sometimes receive or make contributions (donations or gifts). Such
contribution asset transfer by one direction. To estimate the value of asset company
consider the market value of Asset.

Example : If The Regional state offer to Tiret PLC a land with current fair value of Br.
500,000 as an incentive to invest, in return Tiret Plc is going to create a job
opportunity for 50 individuals.

Land----------------------------500, 000
Donated Capital-----------------500, 000
 2.6 Exchanges of Nonmonetary Assets
 Some argue that companies should account for these types of
exchanges based on;
➢ fair value of the asset given up or
➢ fair value of the asset received, with a gain or loss recognized.
 Others believe that they should account for exchanges based on the
recorded amount (book value) of the asset given up, with no gain or
loss recognized.
 Still others favor an approach that recognizes losses in all cases but
defers gains in special situations.
 Ordinarily, companies account for the exchange of nonmonetary
assets on the basis of the fair value of the asset given up or the fair
value of the asset received, whichever is clearly more evident.
 The rationale for immediate recognition of loss/gain is that most
transactions have commercial substance.
 Meaning of Commercial Substance
 An exchange has commercial substance if the future cash flows
change as a result of the transaction.
 That is, if the two parties’ economic positions change, the transaction
has commercial substance.
 Gain and Loss Recognition on
Exchanges of Nonmonetary Assets
 A. Exchanges—Loss Situation
 When a company exchanges nonmonetary assets and a loss
results, the company recognizes the loss immediately. The
rationale: Companies should not value assets at more than
their cash equivalent price.

 For example, Information Processing, Inc. trades its used machine for a
new model at Jerrod Business Solutions Inc. The exchange has
commercial substance. The used machine has a BV of $8,000 (original cost
$12,000 less $4,000 accumulated depreciation) and a FV of $6,000. The new model
lists for $16,000. Jerrod gives Information Processing a trade-in allowance
of $9,000 for the used machinery deferred, assets would be overstated.
Gain (Loss) on exchange = FV-BV = 6000-8000=(2000)
 B. Exchanges—Gain Situation
1B. Has Commercial Substance.

 Nowlet’s consider the situation in which a nonmonetary exchange has

commercial substance and a gain is realized.

 Insuch a case, a company usually records the cost of a nonmonetary

asset acquired in exchange for another nonmonetary asset at the FV of
the asset given up and immediately recognizes a gain.

 The company should use the FV of the asset received only if it is more
clearly evident than the FV of the asset given up.
 Illustration
 To illustrate, Interstate Transportation Company exchanged a number of
used trucks plus cash for a semi-truck. The used trucks have a combined BV
of $42,000 (cost $64,000 less $22,000 accumulated depreciation).
Interstate’s purchasing agent, experienced in the secondhand market,
indicates that the used trucks have a FV of $49,000. In addition to the
trucks, Interstate must pay $11,000 cash for the semitruck.
 2B. Lacks Commercial Substance—No Cash Received.

 We now assume that the Interstate Transportation Company

exchange lacks commercial substance. That is, the economic position
of Interstate did not change significantly as a result of this exchange.
In this case, Interstate defers the gain of $7,000 and reduces the basis
of the semi-truck.
 3B. Lacks Commercial Substance—Some Cash Received.

 When a company receives cash (boot) in an exchange

that lacks commercial substance, it must immediately
recognize a portion of the gain.

 To illustrate, Queen Corporation traded in used machinery with a BV of $60,000 (cost

$110,000 less Depreciation $50,000) and a FV of $100,000. It receives in exchange a
machine with a FV of $90,000 plus cash of $10,000.
Because company recognizes only a gain of $4,000 on this transaction,
it defers the remaining $36,000 ($40,000 − $4,000) and reduces the
basis (recorded cost) of the new machine.
3. COSTS SUBSEQUENT TO ACQUISITION
❖ IAS 16 makes no distinction in principle between the initial costs of acquiring
an asset and any subsequent expenditure upon it. In both cases any and all
expenditure has to meet the recognition rules
❖ After installing plant assets and readying them for use, a company incurs
additional costs that range from ordinary repairs to significant additions.
❖ The major problem is allocating these costs to the proper time periods. In
general, costs incurred to achieve greater future benefits should be
capitalized, whereas expenditures that simply maintain a given level of
services should be expensed.

In order to capitalize costs, one of three conditions must be present:

1. The useful life of the asset must be increased.
2. The quantity of units produced from the asset must be increased.
3. The quality of the units produced must be enhanced.
MAJOR TYPES OF EXPENDITURES
Summary of Subsequent Costs
4. DISPOSITION OF PPE
A company may retire plant assets voluntarily or dispose of
them by sale, exchange, involuntary conversion, or
abandonment.

 Regardless of the type of disposal, depreciation must be

taken up to the date of disposition. Then, Co. should remove
all accounts related to the retired asset.

 Generally, the BV of the specific plant asset does not equal

its disposal value. As a result, a gain or loss develops.
 3.1. Sale of Plant Assets
 Companies record depreciation for the period of time between the
date of the last depreciation entry and the date of sale.
 To illustrate, assume that 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,
 3.2. 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 BV as a gain or loss.

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

 Thesegains or losses are reported as other revenues and gains or

other expenses and losses in the I/S
 Illustration,
 Camel Transport Corp. had to sell a plant located on company
property that stood directly in the path of an interstate highway.
 For a number of years, the state had sought to purchase the land on
which the plant stood, but the company resisted. The state ultimately
exercised its right of eminent domain, which the courts upheld.
 In settlement, Camel received $500,000, which substantially
exceeded the $200,000 BV of the plant and land (cost of $400,000
less depreciation of $200,000).
Depreciation of PPE

DEPRECIATION To accountants, however, depreciation is not a matter of valuation.

Rather Process of allocating to expense the cost of a plant asset over its useful
(service) life in a rational and systematic manner.

◆ Process of cost allocation, not asset valuation.

◆ Applies to land improvements, buildings, and equipment, not land.
◆ Depreciable, because the revenue-producing ability of asset will decline over the
asset’s useful life.
 FACTORS IN COMPUTING DEPRECIATION

HELPFUL HINT
Depreciation expense is reported on the income statement.
Accumulated depreciation is reported on the balance sheet as a deduction from plant assets.
 DEPRECIATION METHODS

Management selects the method it believes best measures an asset’s contribution to

revenue over its useful life.
The Standard requires the method employed be “systematic and rational.” Methods used include:

1. Straight-line method.

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

3. Diminishing (accelerated)-charge methods:

a) Sum-of-the-years’-digits.

b) Declining-balance method.

4. Special depreciation methods:

(a) Group and composite methods.

(b) Hybrid or combination methods.

 DEPRECIATION METHODS

Illustration: Bob’s Florist purchased a small delivery truck on January 1, 2017.

Cost €13,000
Expected residual value €1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining-Balance.
1. STRAIGHT-LINE METHOD

◆ Expense is same amount for each year.

◆ Depreciable cost = Cost less salvage value.
◆ Deprecation expense = (cost- SV)/EUL
 STRAIGHT-LINE METHOD

Depreciable Annual Accum. Book

Year Cost x Rate = Expense Deprec. Value

2017 € 12,000 20% € 2,400 € 2,400 € 10,600

2018 12,000 20 2,400 4,800 8,200
2019 12,000 20 2,400 7,200 5,800
2020 12,000 20 2,400 9,600 3,400
2021 12,000 20 2,400 12,000 1,000

2017 Depreciation Expense 2,400

Journal
Entry Accumulated Depreciation 2,400
 STRAIGHT-LINE METHOD Partial
Year
Assume the delivery truck was purchased on April 1, 2017.

Current
Depreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2017 € 12,000 x 20% = € 2,400 x 9/12 = € 1,800 € 1,800
2018 12,000 x 20% = 2,400 2,400 4,200
2019 12,000 x 20% = 2,400 2,400 6,600
2020 12,000 x 20% = 2,400 2,400 9,000
2021 12,000 x 20% = 2,400 2,400 11,400
2022 12,000 x 20% = 2,400 x 3/12 = 600 12,000
€ 12,000
Journal entry:
2017 Depreciation Expense 1,800
Accumulated Depreciation 1,800
 STRAIGHT-LINE METHOD

 The major objection to the straight-line method is that it rests on two tenuous
assumptions.
1. The asset’s economic usefulness is the same each year, and
2. the maintenance and repair expense is essentially the same each period.

One additional problem that occurs in using straight-line—as well as some

others—is that distortions in the rate of return analysis (income/assets) develop.
 2. UNITS-OF-ACTIVITY METHOD

◆ Companies estimate total units of activity to calculate depreciation cost per unit.
◆ Expense varies based on units of activity.
◆ Depreciable cost is cost less residual value.
 UNITS-OF-ACTIVITY METHOD

Units of Cost per Annual Accum. Book

Year Activity x Unit = Expense Deprec. Value

2017 15,000 € 0.12 € 1,800 € 1,800 € 11,200

2018 30,000 0.12 3,600 5,400 7,600
2019 20,000 0.12 2,400 7,800 5,200
2020 25,000 0.12 3,000 10,800 2,200
2021 10,000 0.12 1,200 12,000 1,000

2017 Depreciation Expense 1,800

Journal
Accumulated Depreciation 1,800
Entry
3. DECLINING-BALANCE METHOD

◆ Accelerated method.
◆ Decreasing annual depreciation expense over the asset’s useful life.
◆ Twice the straight-line rate with Double-Declining-Balance.

◆ Exact
◆ Rate applied to book value.
◆ The rationale is that companies should charge more depreciation in earlier years because
the asset is most productive in its earlier years
 DECLINING-BALANCE METHOD
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2017 € 13,000 40% € 5,200 € 5,200 € 7,800

2018 7,800 40 3,120 8,320 4,680
2019 4,680 40 1,872 10,192 2,808
2020 2,808 40 1,123 11,315 1,685
2021 1,685 40 685* 12,000 1,000

2017 Depreciation Expense 5,200

Journal
Entry Accumulated Depreciation 5,200

* Computation of €674 (€1,685 x 40%) is adjusted to €685.

 DECLINING-BALANCE METHOD Partial
Year
Illustration:
Declining Current
Beginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.
2017 € 13,000 x 40% = € 5,200 x 9/12 = € 3,900 € 3,900
2018 9,100 x 40% = 3,640 3,640 7,540
2019 5,460 x 40% = 2,184 2,184 9,724
2020 3,276 x 40% = 1,310 1,310 11,034
2021 1,966 x 40% = 786 786 11,820
2022 1,180 x 40% = 472 Plug 180 12,000
€ 12,000
Journal entry:

2017 Depreciation Expense 3,900

Accumulated Depreciation 3,900
 4.Sum Of Years Digit Methods
Also called Diminishing-Charge Methods

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.

n(n+1) 5(5+1)
Alternate sum-of-years’ calculation = = 15
2 2
Methods of Depreciation

Sum-of-the-Years’-Digits
 Special Depreciation Methods
 Sometimes companies adopt special depreciation methods.
 Reasons for doing so might be that a company’s assets have
unique characteristics, or the nature of the industry.

 Two of these special methods are:

1. Group and composite methods.
2. Hybrid or combination methods.
 5. Group and Composite Methods
 Companies often depreciate multiple-asset accounts using one rate.

Two methods of depreciating multiple-asset accounts exist:

 the group method and the composite method.

 The choice of method depends on the nature of the assets involved.

 Group Method when the assets are similar in nature and have
approximately the same useful lives.
 Composite Method when the assets are dissimilar and have different
lives.
Illustration
 6. Hybrid or Combination Method
 In addition to the depreciation methods already discussed,
companies are free to develop their own special or tailor-made
depreciation methods.

 GAAP requires only that the method result in the allocation of an

asset’s cost over the asset’s life in a systematic and rational manner.

 Forexample, the steel industry widely uses a hybrid depreciation

method, called the production variable method, that is a
combination straight-line/activity approach.
 7. 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.

Illustration: EuroAsia Airlines purchases an airplane for €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

Depreciation Expense 8,600,000

Accumulated Depreciation—Airplane 8,600,000
 COMPARISON OF METHODS

Each method is acceptable because each recognizes the decline in service potential of the
asset in a rational and systematic manner.
Annual depreciation varies considerably among the methods, but total depreciation expense
is the same (€12,000) for the five-year period.
 REVISING PERIODIC DEPRECIATION

◆ Accounted for in the period of change and future periods (change in estimate) -Prospective application

◆ No restatement of prior years’ depreciation expense (retrospective reinstatement is not allowed).

Illustration: 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 2020 (year 8), it is determined that the total useful of 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 prior years’ depreciation expense?
◆ Calculate the depreciation expense for 2020.
 REVISING PERIODIC DEPRECIATION

First, establish NBV at date of change in estimate.

Equipment cost €510,000
Residual value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation € 50,000 x 7 years = €350,000

Equipment €510,000
Accumulated depreciation 350,000
Balance Sheet (Dec. 31, 2019)
Net book value (NBV) €160,000
 REVISING PERIODIC DEPRECIATION

Depreciation Expense calculation for 2020.

Net book value €160,000

Residual value (new) 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation € 19,375

Journal entry for 2020 and future years.

Depreciation Expense 19,375

Accumulated Depreciation 19,375
 Impairments of PPE
The impairment loss is the amount by which the carrying amount (CA) of the
asset exceeds its fair value (FV).

Various events and changes in circumstances might lead to an impairment.

Examples are:
 A significant decrease in the fair value of an asset.
 A significant change in the extent in which an asset is used.
 A significant adverse change in legal factors or in the business climate that
affects the value of an asset.
 An accumulation of costs significantly in excess of the amount originally
expected to acquire or construct an asset.
 A projection or forecast that demonstrates continuing losses associated
with an asset.
 Measuring Impairments
1. Review events or changes in circumstances for possible impairment.

2. If the review indicates a possible impairment, apply the recoverability test.

If the sum of the expected future net cash flows from the long-lived asset is
less than the carrying amount of the asset, an impairment has occurred.

3. Assuming an impairment, the impairment loss is the amount by which the

CA of the asset exceeds the FV of the asset. The FV is the market price of
the asset or the present value of expected future net cash flows.
 Example 1
 The equipment’s carrying amount is $600,000 ($800,000 cost less
$200,000 accumulated depreciation).
 The expected future net cash flows (undiscounted) from the use of the
equipment and its eventual disposal to be $580,000.
 Assuming this asset has a fair value of $525,000.

Impairment loss reported as part of income from continuing operations, in the “Other
expenses and losses” section
 Restoration of Impairment Loss
 After recording an impairment loss, the reduced CA of an asset
held for use becomes its new cost basis.
 A company does not change the new cost basis except for
depreciation or amortization in future periods or for additional
impairments.
Example; Company at Dec 31, 2016, has equipment with a CA of $500,000. Damon
determines this asset is impaired and writes it down to its FV of $400,000. At the end of 2017,
Damon determines that the FV of the asset is $480,000. The CA of the equipment should not
change in 2017 except for the depreciation taken in 2017.

Company may not restore an impairment loss for an asset held for use. The
rationale for not writing the asset up in value is that the new cost basis puts the
impaired asset on an equal basis with other assets that are unimpaired.
 Impairment of Assets to Be Disposed
 What happens if a company intends to dispose of the impaired asset, instead of
holding it for use?

 Inthis case, we reports the impaired asset at the lower-of-cost-or-net realizable

value (FV less costs to sell).

 Because we intends to dispose of the assets in a short period of time, it uses

NRV in order to provide a better measure of the net cash flows that it will
receive from these assets.
MEASUREMENT AFTER RECOGNITION: REVALUATION

Recognizing Revaluations
If the revaluation model is adopted, PP&E is initially recognized at cost
and subsequently measured at FV less accumulated depreciation and
impairment losses.
Companies may value long-lived tangible asset subsequent to acquisition
at cost or fair value.
► 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.
 REVALUATIONS

► 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. 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 the loss reduces income
and retained earnings. Thus, gains on revaluation increase equity but
not net income, whereas losses decrease income and retained earnings
(and therefore equity).
 REVALUATIONS

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.
 Recognizing Revaluation

REVALUATION OF LAND
To illustrate Unilever Group purchased land on January 1, 2015, that cost €400,000. Unilever
decides to report the land at revalued amount in subsequent periods. At December 31, 2015,
an appraisal of the land indicates that its fair value is €520,000.
 Recognizing Revaluation

The land is now reported at its FV of €520,000. The increase in the FV of €120,000
is reported on the statement of comprehensive income as other comprehensive
income (OCI).
In addition, the ending balance in Unrealized Gain on Revaluation is reported as
accumulated other comprehensive income (AOCI) in the statement of financial
position in the equity section.
 Recognizing Revaluation

Revaluation–2016: Decrease below Historical Cost

What happens if the land’s FV at December 31, 2016, is €380,000, a decrease of €140,000
(€520,000 − €380,000)?
❖ In this case, the land’s FV is below its historical cost. Therefore, Unilever debits
Unrealized Gain on Revaluation—Land for €120,000 to eliminate its balance.
❖ In addition, Unilever reports a Loss on Impairment of €20,000 (€400,000 − €380,000),
reducing net income.
 Recognizing Revaluation

Summary of the revaluation adjustments for Unilever in 2016.

 Recognizing Revaluation

► The decrease to Unrealized Gain on Revaluation of €120,000 reduces

other comprehensive income, which then reduces the balance in
accumulated other comprehensive income.
► The Loss on Impairment of €20,000 reduces net income and retained
earnings. In this case, Unilever had a revaluation decrease which first
reverses any increases that Unilever reported in prior periods as an
unrealized gain.
► Any additional amount is reported as an impairment loss. Under no
circumstances can the revaluation decrease reduce accumulated other
comprehensive income below zero.
 Recognizing Revaluation

Revaluation–2017: Recovery of Impairment Loss

At December 31, 2017, 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.
Recognizing Revaluation

 The recovery of the impairment loss of €20,000 increases income (RE)

only to the extent that it reverses previously recorded impairment losses.
 Recognizing Revaluation

❖ On January 2, 2018, Unilever sells the land for €415,000. Unilever

makes the following entry to record this transaction.

❖ In this case, Unilever does not record a gain or loss because the carrying amount of the land
is the same as its fair value. At this time, since the land is sold, Unilever has the option to
transfer Accumulated Other Comprehensive Income (AOCI) to Retained Earnings.
Revaluation—Depreciable Assets

Illustration: Lenovo Group purchases equipment for ¥500,000 on January 2,

2015. The equipment has a useful life of 5 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, 2015.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000
 Recognizing Revaluation

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

Under no circumstances can the Accumulated Other Comprehensive Income account

related to revaluations have a negative balance.
 Derecognition of PPE
❑ Derecognition, i.e. removal of the carrying amount of the item from
the financial statements of the entity, occurs when an item of PP&E is
either;

A. Disposed of, or

B. When no further economic benefits are expected to flow from its use or
disposal.

❑ Thegain or loss arising from the derecognition of an item of PPE shall

be included in profit or loss.
Disclosure of PPE
❑ The financial statements shall disclose, for each class of property, plant
and equipment:

(a) The measurement bases used for determining the gross carrying amount;
(b) The depreciation methods used;
(c) The useful lives or the depreciation rates used;
(d) The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
Disclosure of PPE
❑ If items of property, plant and equipment are stated at revalued amounts, the following
shall be disclosed
a) The effective date of the revaluation;

b) Whether an independent valuer was involved;

c) For each revalued class of property, plant and equipment, the

d) Carrying amount that would have been recognised had the assets been carried under the cost mode.

e) The revaluation surplus, indicating the change for the period and any restrictions on the distribution
of the balance to shareholders.
Thank You