CorporateFinancialReporting

Session16and17:
TangibleFixedAssets
Acquisition,Depreciation,Impairment,Sale

1
 LearningGoals TangibleFixedAssets

DeterminingCost
Depreciation
TheConcept,UsefulLife,SalvageValue,ChoiceofMethod SLM,WDV
ChangesinDepreciation
Impairment
Disposal
Analysis
ApplyingtheMatchingPrinciple

2
 PlantAssetsorTangibleFixedAssets

PlantassetsorTangibleFixedAssetsareresourcesthathave
physicalsubstance(adefinitesizeandshape),
areusedintheoperations ofabusiness,
arenotintendedforresale tocustomers,
areexpectedtoprovideservice tothecompanyforanumberofyears
Examples:Land,LandImprovement,Equipment,Building

Criticaltoacompanyssuccess.Soacompanyshould
Keepassetsingoodoperatingcondition
Replacewornoutoroutdatedassets
Expanditsproductiveassetsasneeded CapitalBudgetingdecision

Financing :CFO,Longtermdebt,stockissue(adequacyofFCF)
RecognitionCriteria FixedAssetisinitiallyrecognisedwhen:
itisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowto
theentity
thecostoftheitemcanbemeasuredreliably

3
DeterminingtheCostofPlantAssets

4
 DeterminingtheCostofPlantAssets
CostPrinciple requiresthatcompaniesrecordplantassetsatcost.
Cost consistsofallexpendituresnecessarytoacquireanassetandmakeitreadyforits
intendeduse.
PurchasePriceand
Costsdirectlyattributabletobringingtheassettothelocationandworking
conditionfor itsintendeduse.
Revenueexpenditure:Costswhichareexpensedimmediately
Capitalexpenditures:CostswhichareincludedinPlantAssetA/c

Cost cashpaidinacashtransactionorthecashequivalentpricepaid.
Cashequivalentprice isthefairvalueoftheassetgivenuporfairvalue oftheasset
received,whicheverismoreclearlydeterminable.Ifbothclearlyevident:useFVof
assetgivenup
Example:
XLtdacquiredanewequipmentinexchangeofanoldequipmentfromYltd.Fair
ValueofoldequipmentgivenupbyXLtd:Rs10lakhs.Carryingvalueofold
equipment:Rs8lakhs.FVofnewequipmentacquiredisnotveryclear.Whatisthe
cashequivalentprice? 5
 CostofPlantAssets
PurchasePrice
BasicPrice
Add:NonrefundablepurchaseTaxesandDuties(eg.ImportDuty)
Less:DiscountsandRebates
Less:TaxRefunds/TaxRebates/DutyDrawbacks
Freightchargesforbringingitfromsupplier,TransitInsurancepaidbybuyer
InitialdeliveryandHandlingcosts
Costofpreparingthesite,ProfessionalFeespaidtoengineers
Administrativeoverheads incurredsolelytowardssuchasset,beforeitisready
forcommercialuse,(Otherwise Expensed)
Installation,assembly,startupcosts
Ifnecessarytobringtheassettoworkingcondition
Costsincurredafterthecommercialproductionstarts:AreExpensed
Trialrun costsoftesting,Deduct:Incomefromsaleofoutput,ifany
Borrowingcoststillreadyforcommercialuse(coveredlater)
LoanProcessingcost
proportionatetotheextentloanisusedforfinancingtheasset 6
 CostofPlantAssets Land&Landimprovement
Allnecessarycosts incurredinmakingland readyforitsintendeduse:Willincrease
(Debit)LandAccount
Coststypicallyinclude:
1) cashpurchaseprice,
2) closingcostssuchastitleandlawyers(attorney)fees,
3) realestateagentscommissions,
4) accruedpropertytaxesandotherliensonthelandassumedbythepurchaser
5) Costofpreparingthelandreadyforitsintendeduse
Ifvacantland:clearing,draining,&fillingofland,grading;
iflandhasoldconstruction:Costofdemolitionofoldbuildingonit
Landisnotdepreciated UnlimitedUsefulLife
LandImprovements :Includesallexpendituresnecessarytomaketheimprovements
readyfortheirintendeduse.
Structuraladditionsmadetolandlikedriveways,parkinglots,fences,
landscaping,andundergroundsprinklers.
Limitedusefullives Depreciatethecostovertheirusefullives

E 93 (p418): Zobrist Company acquires real estate at a cash cost of $80,000. The
property contains an old warehouse that is demolished at a net cost of $6,500 ($8,200 in
costs less $1,700 proceeds from salvaged materials). Additional expenditures before
construction of a building began included: attorneys fee, $1,900; the real estate brokers
commission, $5,200; architects fee $9,100; $14,000 to put in driveways & parking lot.
Determine the amount to be reported as the cost of the land. Ans.$93,600
7
 Cost Buildings
Building: Includes all costs related directly to purchase or construction
Purchase costs:
Purchase price, closing costs (attorneys fee etc.) and real estate brokers
commission.
All costs to make it ready for use: Remodelling and replacing rooms; or
repairing the roof, floors, electrical wiring, and plumbing.
Construction costs:
Net Contract price plus other expenditures needed to put it in usable
condition (building permits, architects fees, borrowing costs etc.)
Construction costs like RM, labour, OHs, insurance during construction,
payments for architects fees, legal fees, building permits, and excavation
costs, Interest costs incurred to finance construction till the asset is
ready for use

Iflandandbuildingboughttogether:
Recognizethelandandbuildingseparately.
Totalcostneedstobeallocatedbetweenthetwo:Usingsomeequitablebasislike
relativeproportionofFVoflandandFVofbuilding 8
 GroupPurchase LandandBuilding
Iflandandbuildingboughttogether:
Recognizethelandandbuildingseparately.Totalcostneedstobeallocatedbetween
thetwo:usingsomeequitablebasislikerelativeproportionofFVoflandandFVof
building
Supposeacompanypurchasesabuildingandthelandonwhichthebuildingstandsfora
lumpsumof$170,000.Assumethatif purchasedseparatelyLandwouldhavecost
$20,000andforthebuilding$180,000.Theallocationwouldbeasfollows:

Cantherebeanincentivetoallocatemoreofthelumpsumtolandthanbuilding?
Assume :Usefullifeofthebuildingis10 yrs,RV=$13,000

Canthistypeofallocationaffectcashflows? 9
 Cost Equipment
Equipment:Includeallcostsincurredinacquiringtheequipmentandpreparingitfor
use.Coststypicallyinclude:
Cashpurchasepriceincludingnonrefundabletaxes
Freightchargesandotherincidentalchargestobringtheassettothelocation
ofuse
Insuranceduringtransitpaidbythepurchaser.
Expendituresrequiredinassembling,installing,andtestingtheunit
Examples:Furniture,FactoryMachinesetc
Twocriteriafordeterminingcost:Frequencyofthecost,Benefitperiod
Illustration:
Purchaseofadeliverytruckatacashpriceof$24,000.Relatedexpendituresaresales
taxes$1,080,paintingandlettering$1700,motorvehiclelicense$300,anda3year
accidentinsurancepolicy(duringuse)$2,000.Computethecostofthedeliverytruck
andshowtheaccountingforallthecostsincurred.
Cash price 24,000 Equipment Dr. 26,780
Sales taxes 1,080 License Expense Dr. 300
Painting and lettering 1700 Prepaid Insurance Dr. 2000
Cost of Delivery Truck 26,780 Cash Cr. 29,080
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 E91(page417)
1 Paid$7000accruedtaxesatthetimetheplantsitewas Land
acquired
2 Paid$200insurancetocoverapossibleaccidentlosson Equipment
newfactorymachinerywhilethemachinerywasintransit
3 Paid$850salestaxesonanewdeliverytruck Equipment
4 Paid $21,000forparkinglotsanddrivewaysonthenew LandImprovements
plantsite
5 Paid$250tohavethecompanyname&sloganpaintedon Equipment
thenewdeliverytruck
6 Paid$8,000forinstallationofnewfactorymachinery Equipment
7 Paid$900fora1yearaccidentinsurancepolicyonthenew PrepaidInsurance
deliverytruck
8 Paid$75motorvehiclelicensefeeonthenewtruck LicenseExpense

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 E91(page417)
1 Paid$7000accruedtaxesatthetimetheplantsitewas Land
acquired
2 Paid$200insurancetocoverapossibleaccidentlosson Equipment
newfactorymachinerywhilethemachinerywasintransit
3 Paid$850salestaxesonanewdeliverytruck Equipment
4 Paid $21,000forparkinglotsanddrivewaysonthenew LandImprovements
plantsite
5 Paid$250tohavethecompanyname&sloganpaintedon Equipment
thenewdeliverytruck
6 Paid$8,000forinstallationofnewfactorymachinery Equipment
7 Paid$900fora1yearaccidentinsurancepolicyonthenew PrepaidInsurance
deliverytruck
8 Paid$75motorvehiclelicensefeeonthenewtruck LicenseExpense

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 BorrowingCosts
BorrowingCosts:
Interestandothercoststhatanentityincursinconnectionwithborrowings
Costsdirectlyattributabletotheacquisition,constructionorproductionofqualifying
assets
Capitaliseaspartofthecostoftheasset(i.e.addedtoPlantAssetaccount)
Qualifyingasset:
Assetthattakesasubstantialperiodoftimetogetreadyforitsintendeduse
Timeperiodforcapitalization ofborrowingcostsincurred:
Starts whenallthefollowingconditionsaremet:
expendituresare beingincurred
borrowingcostsarebeingincurred
activities,necessarytomaketheassetreadyforitsintendeduse,areinprogress
Ceases whentheassetissubstantiallycompletei.e.readyforintendeduse
PeriodofSuspensioninactivedevelopmentofQualifyingassets
ifabnormal innatureisexcluded(Forexample:Heavyrainwouldnotbeexcluded,
ifitisnormalinnature duringtheperiod,intherelevantgeographicalarea)
Disclosure
AccountingPolicyadoptedforborrowingcosts,capitalizationrateusedtodetermineit
Amountofborrowingcostscapitalizedduringtheperiod Ratioeffect?
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 BorrowingCosts:Illustration
A Ltd started construction of a building on 1/1/2010.
It spent Rs 15 lakhs on the construction.
For funding the same it took a loan of Rs 10 lakhs from a bank on 1/1/2010 @ 10% p.a.
The construction was completed on 30/10/2010. Loan was repaid on 31/12/2010
The construction was suspended from 1/4/2010 to 30/4/2010 due to a directive from court.
Calculate the amount to be capitalised

TotalInterestCosts=Rs10lakhs*10%*1year=Rs100,000
Interestcoststobecapitalisedtocostofbuilding=Rs10lakhs*10%*(101)/12=Rs75,000
InterestcoststobeexpensedtoIncomeStatement=Rs25,000
[=(10lakhs*10%*1/12)+(10*10%*2/12)]
WhatiftheloantakenwasRs16lakhs:15lakhs forbuilding,1lakh forworkingcapital
Capitalize:15lakhs*10%*9/12=1.125lakhs,InterestExpense:0.475lakh(=1.61.125)
WhatiftherewasaloanprocessingfeesofRs32,000?
Capitalise:Proportionatetotheextenttheloanwasusedforfundingtheasset(Rs30,000)

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Depreciation

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 Depreciation Concept
Processofallocatingtoexpense
thecostofaplantassetoveritsuseful(service)lifeinarationalandsystematic
manner(DepletionforNaturalResources,AmortizationforIntangibleassets)
Purpose:Matchexpenseswithrevenue

AffectsIncomeStatement Depreciationexpense
AffectsBalancesheet Accumulateddepreciation(contraasset)

Processofcostallocation,notaprocessofassetvaluation.

NetBookValue=>GrossBV AccumulatedDepreciationitsFairValue
UnexpiredCost(CarryingValues)=Cost AccumulatedDepreciation

Doesntresultinaccumulationofcashfundforreplacementofasset
Revenueproducingabilityofassetwilldecline overtheassetsusefullifedueto
wearandtear,orobsolescencethroughtechnologyormarketchangesetc.
Appliestolandimprovements,buildings,andequipment,notland.
Depreciationis notasourceoffund
IsDepreciation aproductcostorperiodcost?
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 FactorsinComputingDepreciation
Threebasicelementsformeasuringdepreciation:
1. HistoricalCost:Allexpenditurenecessarytopurchaseorconstructtheassetandmakeit
readyforuse(Revaluationcanleadtoasubstitutedhistoricalcost)
2. EstimatedUsefulLife(UL): Periodoverwhichtheentityintendstousetheasset
Canbeexpressedintermsoftime,unitsofactivityoroutput
Estimatebasedon:Experience,CorporateStrategy UL:ShorterthanTechnicallife
Zero,ifcannotbeestimatedreliably orEconomiclife
ScheduleIIofCompaniesAct2013(PartC)providesUsefullives Managerialestimates
canbeused butnottobelongerthanprescribed Discloseimpactondepreciationexpense
3.EstimatedResidualValue/SalvageValue(SV): (CosAct RV:Max5%oforiginalcost)
Estimatedamountanentitywouldobtainfromdisposaloftheassetattheendofits
usefullife(Afterdeductingtheestimatedcostsofdisposal/removalcosts)
Depreciableamount:Costofdepreciableassetless itsResidualValue
DepreciationMethods:Managementselectsthemethoditbelievesbestmeasurespatternof
assetscontributiontorevenueoveritsusefullife(typeofasset,natureofuseetc)
Straightlinemethod,Decliningbalancemethod,Unitsofactivitymethod
Landhasunlimitedusefullife sonotdepreciated,butsubjecttoImpairmentTest
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 AccountingforPlantAssets
Illustration:BillsPizzaspurchasedasmalldeliverytruckonJanuary1,2012.

Required: Computedepreciationusingthefollowing.
(a) StraightLine:
(b) DecliningBalanceorAccelerateddeprecationmethod

Depreciationischargedfromthedatetheassetissuitableforuse
IfFAisboughtduringtheyear
Firstyearsdepreciationisproratedfortheperiodofuse
CanuseHalfyearconvention

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StraightLineMethod
Sameexpenseeachyear
AccDep increasesuniformly
CVdecreasesuniformlytillRV

Depreciable Annual Dep Accum. Book

Year Cost x Rate = Expense Deprec. Value (CV)
13,000
2012 $12,000 20% $2,400 $2,400 2,400 $10,600
2013 12,000 20 Rate= 2,400 4,800 8,200
2014 12,000 20 100/UL 2,400 7,200 5,800
2015 12,000 20 2,400 9,600 3,400
2016 12,000 20 2,400 12,000 1,000
Cost - Residual Value
Yearly Depreciation
Estimated Useful Life
2012 Depreciationexpense 2,400
JournalEntry
Accumulateddepreciation 2,400
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 AccountingforPlantAssets DecliningBalance
Decreasingannualdepreciationexpenseovertheassetsusefullife
Basedonpassageoftime
CalledDecliningbalancemethod because
Depreciationiscalculatedbyapplyingaconstantrateonbeginningbookvalue
(BegBV declineseveryyear Decliningbalance)
CalledAcceleratedmethod becauseresultsinmoredepreciationininitialyears
thanlateryearswhencomparedwithSLM
Suitedforassetswhichareexpectedtolosetheirusefulnessrapidlybecauseof
obsolescence
Assumesmanyplantassetsaremoreefficientwhennew Consistentwith
matchingrule
Acommonapproachis Doubledecliningbalancemethod WittenDownValue(WDV)
wheretherateisdoublethestraightlinerate method:Calculationof
DepreciationRate:

WDVMethod
r= 1 n S / C

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 CalculationofDepreciationUsingOtherMethods

Illustration:(DecliningBalanceMethod:doublethestraightlinerate)
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value

2012 13,000 40% $5,200 $5,200 $7,800

2013 7,800 40 3,120 8,320 4,680
2014 4,680 40 1,872 10,192 2,808
2015 2,808 40 1,123 11,315 1,685
2016 1,685 40 685* 12,000 1,000

2012 Depreciationexpense 5,200

JournalEntry
Accumulateddepreciation 5,200
*Computationof$674($1,685x40%)isadjustedto$685
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sothattheendingbookvaluewillequalthesalvagevalue.
AccountingforPlantAssets:ComparisonofDepreciationMethods

Declining balance /
Accelerated

Eachmethodis
acceptablebecauseeach
recognizes
thedeclineinservice
potential oftheasset
inarationaland
systematicmanner.
Whichmethodwillleadtohigherreportednetincomein2012,overULof5years?
22
 E94(page418)
1. False.Depreciationisaprocessofcostallocation,notassetvaluation
2. True.
3. False.Thebookvalueofaplantassetmaybequitedifferentfromitsmarket
value.
4. False.Depreciationappliestothreeclassesofplantassets:land
improvements,building,andequipment.
5. False.Depreciationdoesnotapplytolandbecauseitsusefulnessand
revenueproducingabilitygenerallyremainintactovertime.
6. True.
7. False.Recognizingdepreciationonanassetdoesnotresultinan
accumulationofcashforreplacementoftheasset.
8. True.
9. False.Depreciationexpenseisreportedontheincomestatement,and
accumulateddepreciationisreportedasadeductionfromplantassetsonthe
balancesheet.
10. False.Threefactorsaffectthecomputationofdepreciation:cost,usefullife,
andsalvagevalue(alsocalledresidualvalue).

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ChangesinDepreciation

24
ChangesinDepreciation ChangeinEstimate:Prospectiveaffect
DepreciationExpense Dr. 2,500
Changeinestimatedresidualvalue
AccumulatedDepreciation Cr. 2,500
Changeinestimatedusefullife
At the beginning of year 1: Revisions at the beginning of year 4
Bought on1st Jan, 2012 Revised on 1st Jan 2015
Original Cost 55,000 Residual Value 10,000
Residual Value 5,000 Total Estimated Useful Life 15
Estimated Useful Life 10
Method SLM Year 1
Original Cost 55,000
Dep =(55000-5000)/10 =5000 Less: Dep 5,000
NBV 50,000
Equipment 55,000 Year 2 Less: Dep 5,000
Less: Acc Depn 15,000 NBV 45,000
40,000 Year 3 Less: Dep 5,000
NBV 40,000
Revised Dep for each of the remaining 12 years = 40000-10000/ (15-3) = 2500

Changeindepreciationmethod
WitholdestimatesofULandRV WithnewestimatesofULandRV
DepreciationRate r=1 [(5,000/40,000)]^(1/(103)]=25.7% r=1 [(10,000/40,000)]^(1/(153)]=10.91%
DepreciationExpense 40,000*25.7%=Rs.10,280 40,000*10.91%=Rs.4,364

25
ChangesinDepreciation ChangeinEstimate:Prospectiveaffect
DepreciationExpense Dr. 2,500
Changeinestimatedresidualvalue
AccumulatedDepreciation Cr. 2,500
Changeinestimatedusefullife
At the beginning of year 1: Revisions at the beginning of year 4
Bought on1st Jan, 2012 Revised on 1st Jan 2015
Original Cost 55,000 Residual Value 10,000
Residual Value 5,000 Total Estimated Useful Life 15
Estimated Useful Life 10
Method SLM Year 1
Original Cost 55,000
Dep =(55000-5000)/10 =5000 Less: Dep 5,000
NBV 50,000
Equipment 55,000 Year 2 Less: Dep 5,000
Less: Acc Depn 15,000 NBV 45,000
40,000 Year 3 Less: Dep 5,000
NBV 40,000
Revised Dep for each of the remaining 12 years = 40000-10000/ (15-3) = 2500

Changeindepreciationmethod
WitholdestimatesofULandRV WithnewestimatesofULandRV
DepreciationRate r=1 [(5,000/40,000)]^(1/(103)]=25.7% r=1 [(10,000/40,000)]^(1/(153)]=10.91%
DepreciationExpense 40,000*25.7%=Rs.10,280 40,000*10.91%=Rs.4,364
DepreciationExpense Dr. 10,280 DepreciationExpense Dr. 4,364
AccumulatedDepreciation Cr. 10,280 AccumulatedDepreciation Cr. 4,364 26
 E96(page418)
ExpectedULandsalvagevalueswerereviewedatthebeginningof2014
Date acquired Useful Life SalvageValue
Lifeexpired(years) OLD Prop Old Prop.
Building Jan1,2006 8(2006 to2013) 40 48 50,000 35000
Warehouse Jan1,2009 5(2009to 2013) 25 20 5,000 3600

27
 E96(page418)
ExpectedULandsalvagevalueswerereviewedatthebeginningof2014
Date acquired Useful Life SalvageValue
Lifeexpired(years) OLD Prop Old Prop.
Building Jan1,2006 8(2006 to2013) 40 48 50,000 35000
Warehouse Jan1,2009 5(2009to 2013) 25 20 5,000 3600

IIMC2015 Prof.ArpitaGhosh 28
 SubsequentorOngoingExpenditureDuringUsefulLife
OrdinaryRepairs
Expenditurestomaintain theoperatingefficiencyandexpectedproductivelifeoftheasset
Generallysmallamounts,occurfrequently
Example:Paintingofbuildings,replacingwornoutgearsinfactorymachine.
RevenueExpenditure
Debitedto Repair& MaintenanceExpenseAccount(intheyearitisincurred).

Additions,BettermentsandExtraordinaryRepairs
Costsincurredtoincrease theoperatingefficiency,utility,productivecapacity,orusefullife
orresidualvalueofaplantasset beyondpreviouslyassessedstandardsofperformance
Usuallymaterialinamount,occurinfrequently
Example:InstallationofAirConditioningindeliveryvan
CapitalExpenditure(increasecompanysinvestmentinassets)
Debitedto PlantAssetAccount(alsocalledFixedAsset)
NewDepreciationbasedon:
[HistoricalCost/substitutedcost* AccumulatedDepreciation ImpairmentLosstilldate]
*Adjustedforrevaluationand/orcapitalexpenditureincurredbefore
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 PlantAssetDisposals SaleandRetirement
Original Cost of equipment 60000 Original Cost 60000
Accumulated Depreciation 49000
Accumulated Depreciation as on 31/12/2010 41000
NBV on date of disposal 11000
Sales Proceeds obtained on 1/7/2011 16000 No cash received on retireme 0
Depreciation for first 6 months 8000 Loss on sale 11000
Depreciationuptothedateofdisposal DISCARDED
Depreciation Expense Dr 8000
Accumulated Depreciation Cr 8000 Accumulated Depreciation Dr 49000
Loss on disposal Dr 11000
Equipment Cr 60000
Original Cost 60000
Accumulated Depreciation 49000 Original Cost 60000
NBV on date of disposal 11000 Accumulated Depreciation 49000
Proceeds from sale 16000 NBV on date of disposal 11000
Gain on sale 5000 Proceeds from sale 9000
SOLDforCASH,Proceeds>CV Loss on sale 2000
Cash Dr 16000 SOLDforCASH,Proceeds<CV
Accumulated Depreciation Dr 49000 Cash Dr 9000
Equipment Cr 60000 Accumulated Depreciation Dr 49000
Loss on disposal Dr 2000
Gain on sale Cr 5000
Equipment Cr 60000
FSEffects:
AssetiseliminatedfromBS,
CashReceivedfromDisposalnetofcostsassociatedwithdisposal shownascashinflowinCFI,
30
Gain/Lossonsale NonoperatingIteminIncomeStatement
 Impairments
Permanentdecline inthefairvalueofanasset (USGAAP)
Carryingvalue>Recoverableamountofanasset (IFRS,IndianGAAP)
Purpose:Nottooverstatetheassetonthebooks
BothunderIFRSandIndianGAAP:
Step1:OneachBalanceSheetdate,entityassessesifthereisanyevent
indicating/triggeringanimpairmentinassets:
ExternalFactors:significantdeclineinassetsmarketvalue,changein
technologicalenvironment,increase inmarketinterestrates
InternalFactors Evidenceofobsolescenceorphysicaldamageofanasset,
evidenceofpoorperformancereflectedbyoperatingprofitorcashgenerated
muchbelowexpectation,assetbecomingidle
Step2:ConductImpairmentTest OnlyifthereisindicationofImpairment
Step3:Recognizeimpairmentloss Ifanyeventidentifiedasaboveleadsto
ImpairmentLossbeingidentified.
TestunderUSGAAP:(DonotFollowthis,youcanignorethis)
IfCV>UndiscountedFutureCashflowsfromtheasset
CVtobewrittendowntonewfairvalue(discountedfuturecashflows)
duringtheyearinwhichthedeclineinvalueoccurs. 31
 ImpairmentofAssets:IFRSandIndianGAAP Cost- Beg Year 1= 50,000; UL=10Y
Y5-End:Carrying Value (CV) 25,000

Anassetissaidtohave impaired if: Net Selling Price 24,000

Value is Use 19,000
itscarrying value(CV) exceeds itsrecoverableamount(RA)
Recoverable Amount (RA) 24,000
Impairment Loss = CV - RA =1,000

Impairment Carrying Recoverable

Loss = ValueorNBV Minus Amount

ChargedtoIncomeStatement,
CVoftheassetbroughtdowntoitsRA

ImpairmentLoss(ChargedtoIncomeStatement) Dr. 1,000 Higherof

AccumulatedImpairment (ReducesCVofAsset) Cr. 1,000

NetSelling
ValueinUse
Price

NetSellingPrice=FairValue(MV) CostofDisposal(i.e.costtoselltheasset)
ValueinUse=PresentValueoffutureExpectedcashflowfromtheasset(from
continuinguseoftheassetandultimatedisposalattheendofUL)
32
ImpairmentlossischargedtoIS,alternativelytorevaluationsurplus(ifany,frombefore)
 ImpairmentofAssets:ReversalofImpairmentLoss
ReversalofimpairmentallowedunderIFRS(exceptforGoodwill)
IfRecoverableAmountexceeds Carrying ValueonaBSdate USGAAPprohibits
Toberecognizedasincome,CVincreasedtonewRA impairment
ButRecognitionrestrictedtillRevisedCVdoesntexceed reversal
CVhadnoImpairmentLossbeenrecognizedinthepast
Carrying Value (CV) = 50,000 - (5 years*5,000) = 25,000; UL=10Y
FV less cost of disposal = 24,000; Value in Use =19,000
Recoverable Amount (RA) 24,000
Impairment Loss = CV - RA = 1,000; New CV of the asset: 24,000
Due to improved market conditions 2 years later,
Recoverable Amount = 16,500
Revised SLM Dep : 24,000/5 = 4,800
CV at the end of year 2
24,000 - (2*4,800) 14,400
Excess of RA over CV 2,100
CEILING for Reversal - CV had there been no impairment:
25,000 - (2* 5,000) 15,000
Reversal of Impairment loss restricted till CV increases to 15,000
Max Reversal allowed = 15,000 - 14,400 = 600
Reversal of Impairment loss = Min (600, 2,100) = 600
NewDepreciationnextyear
New CV after reversal = 14,400+600 =15,000 =15,000/(52)=5,000

AccumulatedImpairment(IncreasesCVofAsset)Dr
ReversalofImpairmentLoss(IncomeinIS)Cr. 600
Revaluationsurplus,ifanycanbecredited
600
Depreciation Prospectivelybasedon
revisedCarryingAmountlessRVoverRUL
33
 Revaluation
USGAAPdoesntallowrevaluationoffixedassets
IFRS&IndAS 16 Choicebetweenrevaluationandcostmodel

Revaluationoption :IfFVcanbeestimatedreliably

Mustbeappliedtoallassetsinaclassofassets,Systematicbasis

Frequency:AssetsexperiencingvolatileFV changes:Revaluedannually
Otherwise,lessfrequentrevaluationacceptable(35years)
(CommonMethods:AppraisalbyCompetentValuers,Indexation,CurrentMarketprices)
IfanassetsFV(120)isaboveitscurrentCV(100),itswouldbeupwardrevaluation:
FixedAsset(Dr)&RevaluationSurplus(OCI Equity)(Cr) 20

IfanassetsFV(90)islessthanitscurrentCV(100),itswouldbedownwardrevaluation:
RevaluationLoss(OtherIncomeorloss IncomeStatementorP/L)&FixedAsset(Cr) 10

Sum:IncreaseinCV creditRevaluationSurplus,DecreaseinCV ChargetoProfit&Loss

Depreciationischargedprospectivelybasedonrevaluedfigure.

Reversals:
IfdecreaseinCV(reversespreviousupwardrevaluation)
firstuse theexistingrevaluationsurplus(Dr)andthenremainingdecreaseischargedtoP/L

IfincreaseinCV (reversespreviousdownwardrevaluation),
firstreverse thepreviousdecreasein PL(Cr.)&thenremaining increaseistakentorevaluation
34
surplus(equity)
 SomeDisclosureRequirements
ImpairmentofAssets
1. Eventsandcircumstancesthatledtotherecognitionofimpairmentloss(orreversal)
2. ImpairmentLossandReversalofImpairmentLossrecognizedinProfitandlossaccount foreachclass
ofasset
3. SuchLossorReversaltobeshownseparatelyforRevaluedassets
4. Mainclassesofassetsaffectedbyimpairmentloss(orreversal)
5. DisclosurerelatedtoestimationofRecoverableAmount
1.IfbasedonNetsellingPrice Basisofcalculationlikeactivemarketorotherbasis
2.IfbasedonValueinUse Discountrateused

Depreciation
MeasurementbaseforGBV HistoricalCost,
TotalDepreciationfortheperiod,Accumulated
Depreciation foreachclassofassets
Methodofdepreciation
UsefulLivesifdifferentfromthosespecifiedin
governingstatute(CompaniesAct)
Surplus/deficiency,ifanyondisposalof
depreciableassets
Effectofrevaluationoffixedassetsonthe
amountofdepreciation
FixedAssets
1.GrossandNetBookValues BeginningandEnding
ofaccountingperiod:ShowingAdditions,
Disposals,otherMovements
2.Expenditureincurredonfixedassetsinprocessof
construction/acquisition
3.Revalued amountssubstitutedforhistoricalcosts
offixedassets
4.Incasewherefixedassetsarestatedatrevalued
amounts detailslike methodadoptedto
computetherevalued amounts,thenatureof
indicesused,theyearofanyappraisalmade,and
whetheranexternalvaluer wasinvolved
35
 Disclosure
Infosys: Significantaccountingpolicies

HINDALCO:

36
Infosys Disclosure:ImpairmentLoss

asset basis

Hindalco

37
E910(p419)

E911(p419)

(b) The return on assets declined from 10% to 8%. This means that the company is not generating as
much income from each dollar invested in assets. It is common for companies to try to maximize their
return on assets, thus top management might not find this proposal very desirable.
The new product line would increase the companys profit margin (the amount of net income
generated from each dollar of sales) from 5% to 6%.
However, because of the huge investment in new assets that the proposal requires, the asset turnover
plummets from 2.0 times down to 1.3 times. 38
 E917(page421)

TheCEOiscorrect regardingtheimpactonnetincome.
Byincreasingtheexpectedusefullifedepreciation,expensewouldbeloweredand
netincomewouldincrease.However,thismovewouldbeappropriateonlyif,infact,
a15yearlifewasabetterestimateoftheexpectedperiodofuse.
TheCEOisincorrect instatingthatcashprovidedbyoperatingactivitieswouldbe
increased. Depreciationexpensedoesnotuseupcash.Therefore,netcashprovided
byoperatingactivitieswouldbethesamenomatterwhatexpectedlifewasused

39
Morepractice

40
 P98A(p424):MorePractice

22082017 IIMC2015 Prof.ArpitaGhosh 41

 Disposal:P93A(page422)
Retired

SoldataGain,
middleofthe
year

Discarded,at
theendofthe
year

42
 Disposal:E98(page419)

Retired

SoldataLoss,
middleofthe
year

SoldataGain,
endofthe
year

IIMC2015 Prof.ArpitaGhosh 43