FINANCIAL

REPORTING
08
 ASSETS

Initial Subsequent
Recognition Measurement

Fair value
Purchase Exchange COST Revaluation
(N/A for PPE)

Govt.
Impairment
Grant

Borrowing
Cost
 Models used for recognition of Assets
Cost Revaluation Fair value
N/A for PPE
Historic cost
Increase in value is not Increase in value is Increase in value is
recorded recorded recorded

Impairment is recorded Impairment is recorded Impairment is recorded

Not required every year Required every year
Gains are recorded as
revaluation reserve through
other comprehensive Gains / losses are
income charged to P&L
Losses goes to P&L after
Impairment losses goes writing off existing
to P&L revaluation reserves
 SUBSEQUENT MEASUREMENT
1. Cost Model: historical cost less acc.
Depreciation. No upward adjustment to value
due to changing circumstances.
2. Revaluation Model: initially recorded at cost,
but increase when asset’s value appreciates.
Impairment: Both in Cost Model & Revaluation
Model. Asset value decreased to recoverable
amount i.e. higher of (a) fair value less cost of
disposal and (b) value in use.
 INTRODUCTION TO IMPAIRMENT
• Anybody remembered what happens to inventory
when its value is decreased below its cost
• The same principle could be applied to PPE as well.
So writing-down of PPE is known as Impairment
• An impairment loss is the amount by which the
carrying amount of an Asset exceeds its recoverable
amount
• So, what is the difference between Impairment &
revaluation?
 Impairment is determined using
TEST OF IMPAIRMENT

Recoverable amount is only

TEST OF IMPAIRMENT
calculated:
considers the following
• Incase of decrease in
factors;
• External information value
• It is mandatory to calculate
• Internal information
• Is it Material it for the following
• If above condition are INTANGIBLE ASSETS;
• Indefinite useful lives
fulfilled then RV,
• Not yet available for
depreciation &
sale
remaining life should
• Goodwill
be re-evaluated
 IMPAIRMENT INDICATORS

EXTERNAL INDICATORS; INTERNAL INDICATORS;

• Significant decrease in • Physical damage or
fair value of asset obsolescence
• Significant adverse • A significant change in
market changes affecting extent or manner in which
the value of asset asset is being used
• An accumulation of costs
significantly in excess of
the amount originally
expected to acquire or
construct the asset
• A projection or forecast
that demonstrates
continuing losses
associated with an asset
 IMPAIRMENT TEST
If impairment indicators are present then impairment test should
be conducted.
Carrying Compared Recoverable
amount to amount

Higher
of

Fair value less Value-in-use

cost to sell

• Where Carrying Amount > Recoverable amount= IMPAIRMENT LOSS

• Value-in-use= Present value of future cash flows expected from future use &
eventual sale of asset at the end of its useful life
Fair value less cost to sell includes:
Fair value less legal costs, cost of removal of assets,
costs incurred in bringing the asset to saleable
condition, related taxes etc.
Value in Use (Present value) includes:
(Management’s own estimate)
• Estimating the future cash flows relating to the
asset
• Multiplying cash flows by appropriate discount rate
Recoverable amount:
Higher of future economic benefits expected
• From use of asset (Value-in-use)
• From sale (FV less cost to sell)
 TEST YOURSELF (COST MODEL)
• Cruz Ltd. performs an impairment test for its
equipment
• The carrying amount of equipment is $200,000;
its fair value less cost to sell is $180,000 and
value-in-use is $205,000

Required;
Calculate impairment loss
 SOLUTION
In this question, Although fair value is less
than the carrying amount but value-in-use is
greater than the carrying amount of $200,000.
Hence, there is no impairment loss
• Impairment assessment = at the end of each reporting
period (presence of any indicators).
• The concept of materiality applies, and only material
impairment needs to be identified.
• If there are indications of possible impairment, the entity is
required to make a formal estimate of the recoverable
amount of the assets concerned.
• Even if there are no indications of impairment, the
following assets must always be tested for impairment
annually.
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
(c) An intangible asset not yet available for sale
 TEST YOURSELF (COST MODEL)
• Cruz Ltd. performs an impairment test for its
equipment
• The carrying amount of equipment is $200,000;
its fair value less cost to sell is $180,000 and
value-in-use is $175,000

Required;
Journal entry to record impairment loss
 SOLUTION
• Carrying amount will be compared with higher of Fair value
less cost to sell & value-in-use
• $200,000- $180,000= $20,000
• Entry;
Impairment loss 20,000
Accumulated depreciation &
impairment losses 20,000
Note; Accumulated impairment loss account can also be
credited separately
Impairment loss is presented in “other income / expense a/c” in
the income statement
 TEST YOURSELF (COST MODEL)
• At Dec 31, 2014 Hanoi company has an equipment costing $26,000 and
accumulated depreciation of $12,000
• The equipment has a total useful life of 4 years with $2,000 residual value &
further information relating to equipment is as follows;
• Equipment’s carrying amount on Dec31 ,2014= $14,000
• The amount of depreciation during 2014 was $6,000 (26,000- 2,000 / 4)
• Hanoi determined that recoverable amount for this asset on Dec31,2014 is
$11,000 with NIL residual value
• The remaining useful of equipment after Dec31, 2014 is 2 years with NIL RV
• On Dec 31, 2015, the useful life of asset is same but NIL residual value
• In Jan 1st,2016. the recoverable amount is $4,000
Record the necessary entries in 2014, 2015 & 2016
 SOLUTION
• Assuming deprecation for 2014 is already booked,
the entries can be started from impairment;
Dec31, 2014
Impairment loss 3,000
Accumulated dep.& impairment loss 3,000
(14,000-11,000= 3,000)
 SOLUTION
Dec31, 2015
Depreciation 5,500
Accumulated dep. 5,500
(11,000 / 2)
Jan1, 2016
Impairment loss 1,500
Accumulated dep. & impairment losses 1,500
(5,500- 4,000= 1,500)
 TEST YOURSELF (COST MODEL)- VALUE IN USE
• On Dec31, 2015, Verma Ltd. Tests a machine for impairment
• Carrying amount= $200,000 & remaining useful life is 5 years
• Due to specialized nature of machine, there is no fair value available
• Verma Ltd. Determines recoverable amount on the basis of value-in-use
• To calculate this value, the company uses its future cash flows based on
the company’s internal cash budget
• The pre-tax discount rate is 8%
• The company expects to have cash flows of $40,000 per annum over the
next 5 years and machine will have a salvage value of $10,000 at the end
of 5th year
• All cash flows occur at the end of year
Record the Journal entry for Dec31, 2015 along with the relevant calculations
 SOLUTION
• Calculation of value-in-use;
• 40,000 * 3.992 =159,708
• 10,000* 0.681 =6,806
Value-in-use =166,514

• Carrying amount = 200,000

• Impairment loss = 200,000 – 166,514

=$33,486
 SOLUTION
• Journal entry;

Impairment loss 33,486

Accumulated dep. & impairment losses 33,486
 REVERSAL OF IMPAIRMENT LOSS
• After recording the impairment loss, the
recoverable amount becomes the basis of
impaired asset
• In future, if the recoverable amount of the
same asset exceeds its carrying amount;
them impaired loss may be reversed
 Reversal of Impairment Loss

Cost Model Revaluation Model

Credited as
“Reversal of Any amount above
impairment loss” up Historical carrying
till Historical amount will be
carrying amount IGNORED

Credited as Any amount above

“Reversal of Historical carrying
impairment loss” up amount will be
till Historical credited as
carrying amount Revaluation surplus
 TEST YOURSELF (COST MODEL)- REVERSAL
• Tan company purchased equipment of Jan1,2015 for
$300,000
• It has a useful life of 3 years with NIL residual value
• Straight line depreciation method is used
• On Dec31,2015 the recoverable amount is $180,000
• On Dec31,2016 the recoverable amount is $96,000

Record the entries on Dec 31, 2015 & Dec 31,2016

 SOLUTION
Dec 31,2015;
Depreciation 100,000
Accumulated dep. 100,000
(Depreciation booked= 300,000 / 3)

Carrying amount= 300,000- 100,000= 200,000

Recoverable amount = 180,000
Impairment loss 20,000
Accumulated dep. & impairment losses 20,000
(Impairment loss booked)
 SOLUTION
Dec 31,2016;
Depreciation 90,000
Accumulated dep. 90,000
(Depreciation booked= 180,000 / 2)

Carrying amount= 180,000- 90,000= 90,000

Recoverable amount = 96,000
Accumulated dep. & impairment losses 6,000
Recovery of impairment loss 6,000
(Impairment loss recovered)
Recovery of impairment loss should be shown in “other income” in
income statement
 TEST YOURSELF (REVALUATION MODEL)
The following balances relate to a plant measured at
revaluation model at Dec31 2014;
• Carrying amount on Dec 31,2014= $100,000
• Recoverable amount on Dec 31,2014= $40,000
• Revaluation surplus on Dec 31,2014= $10,000

Journalize the entries on Dec 31, 2014

 SOLUTION
Journal entry
First step; If there is an existing revaluation surplus, its should
be written off first
Revaluation surplus 10,000
Plant 10,000

Second step; Now the balance is impairment loss (100,000-

40,000= 60,000- 10,000= $50,000)
Impairment loss 50,000
Accumulated dep, & impairment losses 50,000
TEST YOURSELF (REVALUATION MODEL)- REVERSAL
• Tan company purchased equipment of Jan1,2015 for
$300,000
• It has a useful life of 3 years with NIL residual value
• Straight line depreciation method is used
• On Dec31,2015 the recoverable amount is $180,000
• On Dec31,2016 the recoverable amount is $106,000

Record the entries on Dec 31, 2015 & Dec 31,2016

 SOLUTION
Dec 31,2015;
Depreciation 100,000
Accumulated dep. 100,000
(Depreciation booked= 300,000 / 3)

Carrying amount= 300,000- 100,000= 200,000

Recoverable amount = 180,000
Impairment loss 20,000
Accumulated dep. & impairment losses 20,000
(Impairment loss booked)
 SOLUTION
Dec 31,2016;
Depreciation 90,000
Accumulated dep. 90,000
(Depreciation booked= 180,000 / 2)

Carrying amount= 180,000- 90,000= 90,000

Recoverable amount = 106,000
Historic carrying amount= 300,000- 200,000 = 100,000
So any amount above Historic carrying amount will be revaluation surplus

Accumulated dep. & impairment losses / Equipment 16,000

Recovery of impairment loss 10,000
Revaluation surplus 6,000
(Impairment loss recovered plus additional amount is included in surplus)