Description

College of Administrative and Financial Sciences
Assignment 3
Deadline: 30 /04/ 2022 @ 23:59
Course Name: Financial Accounting
Course Code: ACCT 201
Semester: 2
Academic Year: 2020 – 21
For Instructor’s Use only
Student’s Name:
Student’s ID Number:
CRN:
Instructor’s Name:
Students’ Grade: …… /10
Level of Marks: High/Middle/Low
nstructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
•
Submissions without this cover page will NOT be accepted.
College of Administrative and Financial Sciences
Assignment Question(s): Marks 10
Chapters covered 11, 12, 13 & 14
Q1. Presented below are the components related to an office building that ABC Company is
considering purchasing for SAR10,000,000.
Component
Useful Life
Value
Building structure
60-year life
5,400,000
Building engineering
30-year life
2,400,000
Building external works
30-year life
900,000
Instructions: ( 2 marks)
(a) Compute depreciation expense for 2010, assuming that ABC uses component
depreciation.
(b) Assume that the building engineering was replaced in 20 years at a cost of SAR
2,600,000 cash. Prepare the entry to record the replacement of the old component with
the new component.
Answer:
Q2. a. Explain impairment of long-lived tangible.
b. The accountant of X. Ltd conducted an impairment test on a machinery. The carrying amount
of machinery was SAR 195,000, its fair value less costs to sell is SAR 170,000, and its value-inuse is SAR 165,000. Is there impairment or no impairment on machinery? If impairment exists
what would be the journal entry. (2 Mark)
Answer:
College of Administrative and Financial Sciences
Q3. List the classified Intangible Assets with examples. (2 Marks)
Answer
Q4. a. Explain provisions and its types with IFRS requirements.
b. On January 1, 2020, an Oil Company erected an oil platform in the Gulf of KSA. Oil
Company is legally required to dismantle and remove the platform at the end of its useful life,
estimated to be five years. Oil Company estimates that dismantling and removal will cost SAR
3,000,000. Based on a 10 percent discount rate, the fair value of the environmental liability
estimated to be SAR 1,862,760 (3,000,000 x .62092).
Pass entry in books of Oil Company to records this liability on Jan. 1, 2021. Using the straightline method, record entry to be expensed. (2 Marks)
Answer:
Q5. Assume that a Financial Corporation issued SAR 500,000 of 8% term bonds on January 1,
2021, due on January 1, 2026, with interest payable each July 1 and January 1. Investors require
an effective-interest rate of 6%. Is, the bond issued at a premium or discount? Calculate the bond
College of Administrative and Financial Sciences
proceeds and pass journal entry to on date of issue, Jan. 1, 2021 and to record first payment and
amortization of the premium on July 1, 2021. (2 Marks)
Note: PV of principal amount at 6% is 0.74409 and PV of interest amount at 6% is 8.53020
Answer
CHAPTER
11
DEPRECIATION, IMPAIRMENTS,
DEPLETION
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
11-2
AND
Learning Objectives
1.
Explain the concept of depreciation.
2.
Identify the factors involved in the depreciation process.
3.
Compare activity, straight-line, and diminishing-charge methods of
depreciation.
4.
Explain component depreciation.
5.
Explain the accounting issues related to asset impairment.
6.
Explain the accounting procedures for depletion of mineral
resources.
7.
Explain the accounting for revaluations.
8.
Explain how to report and analyze property, plant, equipment, and
mineral resources.
11-3
Depreciation, Impairments, and Depletion
Depreciation
Impairments
Depletion
• Factors
involved
• Methods of
depreciation
• Component
depreciation
• Special issues
• Recognizing
impairments
• Impairment
illustrations
• Reversal of
loss
• Cash-generati
ng units
• Assets to be
disposed of
• Establishing a
base
• Write-off of
resource cost
• Estimating
reserves
• Liquidating
dividends
• Presentation
11-4
Revaluations
Presentation
and Analysis
• Recognition
• Issues
• Presentation
• Analysis
Depreciation – 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-term assets:
11-5
•
Long-lived assets = Depreciation expense
•
Intangibles = Amortization expense
•
Mineral resources = Depletion expense
LO 1 Explain the concept of depreciation.
Depreciation – Method of Cost Allocation
Factors Involved in the Depreciation Process
Three basic questions:
11-6
(1)
What depreciable base is to be used?
(2)
What is the asset’s useful life?
(3)
What method of cost apportionment is best?
LO 2 Identify the factors involved in the depreciation process.
Depreciation – Method of Cost Allocation
Factors Involved in the Depreciation Process
Depreciable Base
Illustration 11-1
11-7
LO 2 Identify the factors involved in the depreciation process.
Depreciation – Method of Cost Allocation
Factors Involved in the Depreciation Process
Estimation of Service Lifes
◆
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).
11-8
LO 2 Identify the factors involved in the depreciation process.
Depreciation – Method of Cost Allocation
Methods of Depreciation
The profession requires the method employed be
“systematic and rational.” Examples include:
11-9
(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.
LO 3 Compare activity, straight-line, and
diminishing-charge methods of depreciation.
Depreciation – Method of Cost Allocation
Activity Method
Illustration 11-2
Stanley Coal
Mines Facts
Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:
Illustration 11-3
11-10
LO 3
Depreciation – Method of Cost Allocation
Straight-Line Method
Illustration 11-2
Stanley Coal
Mines Facts
Illustration: Stanley computes depreciation as follows:
Illustration 11-4
11-11
LO 3
Depreciation – Method of Cost Allocation
Diminishing-Charge Methods
Illustration 11-2
Stanley Coal
Mines Facts
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.
11-12
Alternate
sum-of-the-years’
calculation
n(n+1)
2
=
5(5+1)
2
= 15
LO 3
Depreciation – Method of Cost Allocation
Sum-of-the-Years’-Digits
Illustration 11-6
11-13
LO 3 Compare activity, straight-line, and
diminishing-charge methods of depreciation.
Depreciation – Method of Cost Allocation
Diminishing-Charge Methods
Illustration 11-2
Stanley Coal
Mines Facts
Declining-Balance Method.
►
Utilizes a depreciation rate (%) that is some multiple of the
straight-line method.
►
Does not deduct the residual value in computing the
depreciation base.
11-14
LO 3
Depreciation – Method of Cost Allocation
Declining-Balance Method
Illustration 11-7
11-15
LO 3 Compare activity, straight-line, and
diminishing-charge methods of depreciation.
Depreciation – Method of Cost Allocation
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.
11-16
LO 4 Explain component depreciation.
Depreciation – Method of Cost Allocation
Component Depreciation
Illustration: EuroAsia Airlines purchases an airplane for
€100,000,000 on January 1, 2011. 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
11-17
LO 4 Explain component depreciation.
Depreciation – Method of Cost Allocation
Computation of depreciation expense for EuroAsia for 2011.
Illustration 11-9
Depreciation journal entry for 2011.
Depreciation Expense 8,600,000
Accumulated Depreciation—Airplane
11-18
8,600,000
LO 4 Explain component depreciation.
Depreciation – Method of Cost Allocation
Special Depreciation Issues
(1)
How should companies compute depreciation for
partial periods?
(2)
Does depreciation provide for the replacement of
assets?
(3)
How should companies handle revisions in
depreciation rates?
11-19
LO 4 Explain component depreciation.
Depreciation – Method of Cost Allocation
E11-5 (Depreciation Computations—Four Methods): Maserati
Corporation purchased a new machine for its assembly process on
August 1, 2010. The cost of this machine was €150,000. The
company estimated that the machine would have a salvage value of
€24,000 at the end of its service life. Its life is estimated
at 5 years and its working hours are estimated at 21,000 hours.
Year-end is December 31.
Instructions: Compute the depreciation expense for 2010 under the
following methods.
(a) Straight-line depreciation.
(c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.
11-20
LO 3 Compare activity, straight-line, and
diminishing-charge methods of depreciation.
Depreciation – Method of Cost Allocation
Straight-line Method
11-21
LO 3 Compare activity, straight-line, and
diminishing-charge methods of depreciation.
Depreciation – Method of Cost Allocation
Activity Method
11-22
(Assume 800 hours used in 2010)
LO 3
Depreciation – Method of Cost Allocation
Sum-of-the-Years’-Digits Method
11-23
5/12 = .416667
7/12 = .583333
LO 3
Depreciation – Method of Cost Allocation
Double-Declining Balance Method
11-24
LO 3
Depreciation – Method of Cost Allocation
Depreciation and Replacement of PP&E
Depreciation
►
Does not involve a current cash outflow.
►
Funds for the replacement of the assets come from
the revenues.
11-25
LO 4 Explain component depreciation.
Depreciation – Method of Cost Allocation
Revision of Depreciation Rates
11-26
◆
Accounted for in the current and prospective periods.
◆
Not handled retrospectively
◆
Not considered errors or extraordinary items
LO 4 Explain component depreciation.
Change in Estimate Example
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 2010
(year 8), it is determined that the total estimated life should
be 15 years with a residual value of $5,000 at the end of that
time.
Questions:
11-27
●
What is the journal entry to correct
prior years’ depreciation?
●
Calculate the depreciation expense
for 2010.
No Entry
Requiredthe
LO 4 Explain component depreciation.
Change in Estimate Example
Equipment cost $510,000
Salvage value
– 10,000
Depreciable base 500,000
Useful life (original)
10 years
Annual depreciation
$ 50,000
After 7 years
First, establish NBV
at date of change in
estimate.
x 7 years = $350,000
Balance Sheet (Dec. 31, 2009)
11-28
Equipment
Accumulated depreciation
$510,000
350,000
Net book value (NBV)
$160,000
LO 4 Explain component depreciation.
Change in Estimate Example
Net book value
$160,000
Salvage value (new)
5,000
Depreciable base 155,000
Useful life remaining
8 years
Annual depreciation
$ 19,375
After 7 years
Depreciation
Expense calculation
for 2010.
Journal entry for 2010
Depreciation expense 19,375
Accumulated depreciation
11-29
19,375
LO 4 Explain component depreciation.
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.
11-30
LO 5 Explain the accounting issues related to asset impairment.
Impairments
Recognizing Impairments
If impairment indicators are present, then an impairment test
must be conducted.
Illustration 11-15
11-31
LO 5
Impairments
Example: Assume that Cruz Company 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.
Illustration 11-15
$200,000
$205,000
No
Impairment
11-32
$180,000
$205,000
LO 5
Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is $175,000
rather than $205,000.
$20,000 Impairment Loss
Illustration 11-15
$200,000
11-33
$180,000
$180,000
$175,000
LO 5
Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is $175,000
rather than $205,000.
$20,000 Impairment Loss
Illustration 11-15
$200,000
$180,000
Cruz makes the following entry to record the impairment loss.
Loss on Impairment
20,000
Accumulated Depreciation—Equipment
11-34
20,000
LO 5
Impairments
Impairments Illustrations
Case 1
At December 31, 2011, Hanoi Company 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.
11-35
1.
The equipment’s carrying amount at December 31, 2011, is
VND14,000,000 (VND26,000,000 VND12,000,000).
2.
Hanoi uses straight-line depreciation. Depreciation was VND6,000,000
for 2011 and is recorded.
3.
Hanoi has determined that the recoverable amount for this asset at
December 31, 2011, is VND11,000,000.
4.
The remaining useful life after December 31, 2011, is two years.
LO 5
Impairments
Case 1: Hanoi records the impairment on its equipment at
December 31, 2011, as follows.
VND3,000,000 Impairment Loss
Illustration 11-15
VND14,000,000
Loss on Impairment
VND11,000,000
3,000,000
Accumulated Depreciation—Equipment
11-36
3,000,000
LO 5
Impairments
Equipment VND 26,000,000
Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2011) VND 11,000,000
Hanoi Company determines that the equipment’s total useful life has
not changed (remaining useful life is still two years). However, the
estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the following
journal entry to record depreciation for 2012.
Depreciation Expense
5,500,000
Accumulated Depreciation—Equipment
11-37
5,500,000
LO 5
Impairments
Impairments Illustrations
Case 2
At the end of 2010, 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.
Illustration 11-16
11-38
LO 5
Impairments
Case 2: Computation of the impairment loss on the machine at
the end of 2010.
$33,486 Impairment Loss
Illustration 11-15
$200,000
$166,514
Unknown
11-39
$166,514
LO 5
Impairments
Case 2: Computation of the impairment loss on the machine at
the end of 2010.
$33,486 Impairment Loss
Illustration 11-15
$200,000
Loss on Impairment
$166,514
33,486
Accumulated Depreciation—Machine
Unknown
11-40
33,486
$166,514
LO 5
Impairments
Reversal of Impairment Loss
Illustration: Tan Company purchases equipment on January 1, 2010,
for $300,000, useful life of three years, and no residual value.
At December 31, 2010, Tan records an impairment loss of $20,000.
Loss on Impairment
20,000
Accumulated Depreciation—Equipment
11-41
20,000
LO 5
Impairments
Reversal of Impairment Loss
Depreciation expense and related carrying amount after the
impairment.
At the end of 2011, Tan determines that the recoverable amount of the
equipment is $96,000. Tan reverses the impairment loss.
Accumulated Depreciation—Equipment 6,000
Recovery of Impairment Loss
11-42
6,000
LO 5
Impairments
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.
11-43
LO 5 Explain the accounting issues related to asset impairment.
Impairments
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.
11-44
LO 5 Explain the accounting issues related to asset impairment.
Impairments
Illustration 11-18
Graphic of Accounting
for Impairments
11-45
LO 5
Depletion
Natural resources can be divided into two categories:
1.
Biological assets (timberlands)
►
2.
Fair value approach (chapter 9)
Mineral resources (oil, gas, and mineral mining).
►
Complete removal (consumption) of the asset.
►
Replacement of the asset only by an act of nature.
Depletion – process of allocating the cost of mineral resources.
11-46
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
Establishing a Depletion Base
Computation of the depletion base involves:
11-47
(1)
Pre-exploratory costs.
(2)
Exploratory and evaluation costs.
(3)
Development costs.
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
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.
Calculation:
Total cost – Residual value
Total estimated units available
Units extracted x Cost per unit
11-48
= Depletion cost per unit
= Depletion
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
Illustration: MaClede Co. 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. MaClede estimates that the
mine will provide approximately 100,000 ounces of silver.
Illustration 11-18
11-49
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
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:
Depletion cost related to inventory sold is part of cost of goods sold.
11-50
LO 6
Depletion
Estimating Recoverable Reserves
◆
Same as accounting for changes in estimates.
◆
Revise the depletion rate on a prospective basis.
◆
Divides the remaining cost by the new estimate of the
recoverable reserves.
11-51
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
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
11-52
3,000,000
LO 6 Explain the accounting procedures for depletion of mineral resources.
Depletion
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.
11-53
LO 6 Explain the accounting procedures for depletion of mineral resources.
Revaluations
Recognizing Revaluations
Companies may value long-lived tangible asset after
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.
►
11-54
Unrealized gain is often referred to as revaluation surplus.
LO 7 Explain the accounting for revaluations.
Revaluations
Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2010. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2010, 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 – Land
200,000
Unrealized Gain on Revaluation—Land increases other comprehensive
income in the statement of comprehensive income.
11-55
LO 7 Explain the accounting for revaluations.
Revaluations
Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2010. 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, 2010, as follows.
Depreciation Expense 100,000
Accumulated Depreciation—Equipment
11-56
100,000
LO 7 Explain the accounting for revaluations.
Revaluations
Revaluation—Depreciable Assets
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, 2010, which is ¥460,000.
Accumulated Depreciation—Equipment
Equipment
100,000
40,000
Unrealized Gain on Revaluation—Equipment
11-57
60,000
LO 7 Explain the accounting for revaluations.
Revaluations
Revaluation—Depreciable Assets
Illustration 11-22
Financial Statement
Presentation—Revaluations
Lenovo reports depreciation expense of ¥100,000. The Accumulated Other
Comprehensive Income account related to revaluations cannot have a negative
balance.
11-58
LO 7 Explain the accounting for revaluations.
Revaluations
Revaluations Issues
Company can select to value only one class of assets, say buildings,
and not revalue other assets such as land or equipment.
Most companies do not use revaluation accounting.
11-59
►
Substantial and continuing costs associated with appraisals.
►
Gains associated with revaluations above historical cost are
not reported in net income but rather go directly to equity.
►
Losses associated with revaluation below historical cost
decrease net income. In addition, the higher depreciation
charges related to the revalued assets also reduce net
income.
LO 7 Explain the accounting for revaluations.
Presentation and Analysis
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
11-60
•
Basis of valuation (usually cost)
•
Pledges, liens, and other commitments
LO 8 Explain how to report and analyze property,
plant, equipment, and mineral resources.
Presentation and Analysis
Analysis of Property, Plant, and Equipment
Asset Turnover Ratio
Measure of a firm’s
ability to generate
sales from a
particular
investment in
assets.
Illustration 11-24
11-61
LO 8
Presentation and Analysis
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
11-62
LO 8
Presentation and Analysis
Analysis of Property, Plant, and Equipment
Rate of Return on Assets
Measures a firm’s
success in using
assets to generate
earnings.
Illustration 11-26
11-63
LO 8
Presentation and Analysis
Analyst obtains further insight into the behavior of ROA by
disaggregating it into components of profit margin on sales
and asset turnover as follows:
Rate of Return
on Assets
=
Net Income
Profit Margin on
Sales
Net Income
11-64
Asset Turnover
Net Sales
x
=
Average Total Assets
x
Net Sales
Average Total Assets
LO 8 Explain how to report and analyze property,
plant, equipment, and mineral resources.
Presentation and Analysis
Analyst obtains further insight into the behavior of ROA by
disaggregating it into components of profit margin on sales
and asset turnover as follows:
Rate of Return
on Assets
=
€644
Profit Margin on
Sales
€644
(€9,533 €8,325) / 2
11-65
€10,799
(€9,533 €8,325) / 2
€10,799
=
Asset Turnover
x
=
7.2%
x
5.96%
x
1.21
LO 8 Explain how to report and analyze property,
plant, equipment, and mineral resources.
Under both iGAAP and U.S. GAAP, interest costs incurred during
construction must be capitalized.
The accounting for exchanges of non-monetary assets has recently
converged between IFRS and U.S. GAAP. U.S. GAAP now 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 also views depreciation as allocation of cost over an asset’s
life. U.S. GAAP permits the same depreciation methods (straight-line,
diminishing-balance, units-of-production) as IFRS.
11-66
IFRS requires component depreciation. Under U.S. GAAP, component
depreciation is permitted but is rarely used.
Under IFRS, companies can use either the historical cost model or the
revaluation model. U.S. GAAP does not permit revaluations of property,
plant, and equipment or mineral resources.
In testing for impairments of long-lived assets, U.S. GAAP uses a
two-step model to test for impairments. The IFRS impairment test is
stricter. However, unlike U.S. GAAP, reversals of impairment losses are
permitted.
11-67
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 (decrease of
value below historical cost), the loss reduces income and
retained earnings. Thus, gains on revaluation increase equity
but not net income, whereas losses decrease income and
retained earnings (and therefore equity).
11-68
LO 9 Explain revaluation accounting procedures.
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.
11-69
LO 9 Explain revaluation accounting procedures.
Revaluation of Land
Revaluation—2010: Valuation Increase
Illustration: Unilever Group (GBR and NLD) purchased land on
January 1, 2010, that cost €400,000. Unilever decides to report the
land at fair value in subsequent periods. At December 31, 2010, 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
Illustration 11A-1
11-70
LO 9
Revaluation of Land
Revaluation—2011: Decrease below Cost
Illustration: What happens if the land’s fair value at December 31,
2011, is €380,000, a decrease of €140,000 (€520,000 – €380,000)?
Unrealized Gain on Revaluation—Land 120,000
Loss on Impairment
Land
20,000
140,000
Illustration 11A-2
11-71
LO 9
Revaluation of Land
Revaluation—2012: Recovery of Loss
Illustration: At December 31, 2012, Unilever’s land value increases
to €415,000, an increase of €35,000 (€415,000 – €380,000).
Land
35,000
Unrealized Gain on Revaluation—Land
Recovery of Impairment Loss
15,000
20,000
Illustration 11A-3
11-72
LO 9
Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
11-73
12-1
CHAPTER
12
INTANGIBLE ASSETS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
12-2
Learning Objectives
1.
Describe the characteristics of intangible assets.
2.
Identify the costs to include in the initial valuation of intangible assets.
3.
Explain the procedure for amortizing intangible assets.
4.
Describe the types of intangible assets.
5.
Explain the conceptual issues related to goodwill.
6.
Describe the accounting procedures for recording goodwill.
7.
Explain the accounting issues related to intangible asset impairments.
8.
Identify the conceptual issues related to research and development costs.
9.
Describe the accounting for research and development and similar costs.
10.
12-3
Indicate the presentation of intangible assets and related items.
Intangible Assets
Intangible
Asset Issues
• Characteristics
• Valuation
• Amortization
12-4
Types of
Intangibles
• Marketing-rel
ated
• Customer-rel
ated
• Artistic-relate
d
• Contract-relat
ed
• Technology-r
elated
• Goodwill
Impairment of
Intangibles
• Limited-life
intangibles
• Reversal of
impairment
loss
• Indefinite-life
intangibles
other than
goodwill
• Goodwill
Research and
Development
Costs
Presentation of
Intangibles and
Related Items
• Identifying
R&D
• Accounting for
R&D
• Similar costs
• Conceptual
questions
• Intangible
assets
• R&D costs
Intangible Asset Issues
Characteristics
Three Main Characteristics:
(1)
Identifiable,
(2)
Lack physical existence.
(3)
Not monetary assets.
Normally classified as non-current asset.
12-5
LO 1 Describe the characteristics of intangible assets.
Intangible Asset Issues
Valuation
Purchased Intangibles:
12-6
◆
Recorded at cost.
◆
Includes all costs necessary to make the intangible asset
ready for its intended use.
◆
Typical costs include:
►
Purchase price.
►
Legal fees.
►
Other incidental expenses.
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Valuation
Internally Created Intangibles:
12-7
◆
Companies expense all research phase costs and some
development phase costs.
◆
Certain development costs are capitalized once economic
viability criteria are met.
◆
IFRS identifies several specific criteria that must be met
before development costs are capitalized.
LO 2 Identify the costs to include in the initial valuation of intangible assets.
Intangible Asset Issues
Internally Created Intangibles
12-8
Illustration 12-1
Research and
Development Stages
LO 2 Identify the costs