Revaluation

Answer to Requirement # 5:
Net Selling Price P 6,900,000
Less: Carrying amount
Replacement cost 9,600,000
Less: Accumulated depreciation 9,600,000 minus
Add: 2,400,000
2,880,000
and 480,000
1/1/2018 after revaluation 2,400,000
Depreciation in 2018 480,000 2,880,000 6,720,000
Gain on Sale 180,000

Journal entry- Date of Sale

Cash 6,900,000
Accumulated depreciation 2,880,000
Equipment 9,600,000
Gain on Sale 180,000
#
Revaluation Surplus 2,520,000
Retained Earnings 2,520,000
(The remaining balance. Remember, there was a piecemeal realization worth P180,000).
From the Revaluation Surplus balance, 1/1 of 2,700,000 deducted by piecemeal
realization of 180,000. Close the entire revaluation surplus to retained earnings because
the asset was already derecognized.

F. Impairment
Please read.
IMPAIRMENT OF ASSETS
KEY OBJECTIVES:
1. When to test assets for impairment. Testing for impairment simply means that the
recoverable amount of the asset shall be estimated and compared to the carrying amount.
2. What is the basis of the recoverable amount.
3. When to test cash generating units for impairment rather than single or individual assets and
how to allocate the impairment loss as well as the limitations to the allocation.
4. When to reverse impairment losses, the limitations of the gain to be recognized in profit or
loss as well as how to allocate the gain if the reversal is for a cash generating unit.

DEFINITIONS

Carrying amount Amount at which an asset is recognized after deducting any accumulated
depreciation (amortization) and accumulated impairment losses thereon

Cash-generating unit

Smallest identifiable group of assets that generates cash inflows that are largely independent of
the cash inflows from other assets or groups of assets.

Costs of disposal Incremental costs directly attributable to the disposal of an asset or cash-
generating unit, excluding finance costs and income tax expense.

Depreciable amount The cost of an asset, or other amount substituted for cost in the financial
statements, less its residual value.

Fair value less costs to sell

Amount obtainable from the sale of an asset or cash-generating unit in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal.

Recoverable amount The higher amount between an asset or a cash-generating unit’s fair value
less costs to sell and its value in use.

Value in use The present value of the future cash flows expected to be derived from an asset or
cash-generating unit.

IMPAIRMENT LOSS is the amount by which the carrying amount of an asset or a cash generating
unit exceeds its recoverable amount.

SCENARIO #1
“Internal and external indicators” of impairment
1. Items of property plant and equipment
2. Intangible assets with definite useful
lives
3. Cash generated units that are
tested for impairment due to the
unavailability of estimating the
recoverable amount of an asset
that is impaired included in the
CGU.
SCENARIO #2
Annual impairment testing
1. Intangible assets with indefinite lives.
2. Intangible assets not available for
use.
3. Cash generating units with allocated
goodwill.
Indicators of Impairment

External sources Internal sources

 Market value declines
 Negative changes in technology,
markets, economy, or laws
 Increases in market interest rates
 Company stock price is below book
value
 Obsolescence or physical damage
 Asset is part of a restructuring or
held for disposal
 Worse economic performance than
expected

Determining Recoverable Amount

a. If fair value less costs to sell or value in use is more than carrying amount, it is not
necessary to calculate the other amount. The asset is not impaired.
b. If fair value less costs to sell cannot be determined, then recoverable amount is value in
use.
c. For assets to be disposed of, recoverable amount is fair value less costs to sell.

Fair Value Less Costs to Sell

a. If there is a binding sale agreement, use the price under that agreement less costs of
disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal.
Market price means current bid price if available, otherwise the price in the most recent
transaction.
c. If there is no active market, use the best estimate of the asset's selling price less costs of
disposal.
d. Costs of disposal are the direct costs only.

Value in Use

The calculation of value in use should reflect the following elements:

a. An estimate of the future cash flows the entity expects to derive from the asset in an arm's
length transaction
b. Expectations about possible variations in the amount or timing of those future cash flows
c. The time value of money, represented by the current market risk-free rate of interest
d. The price for bearing the uncertainty inherent in the asset
e. Other factors, such as illiquidity, that market participants would reflect in pricing the future
cash flows the entity expects to derive from the asset.

Recognition of an Impairment Loss

a. An impairment loss should be recognized whenever recoverable amount is below

carrying amount.
b. The impairment loss is an expense in the income statement unless it relates to a
revalued asset where the value changes are recognized directly in equity.
c. Adjust depreciation or amortization charges for future periods.
Solution guide for the Discussion Problem Letter F. Impairment

Requirement 1: Total depreciation in 2016

Machinery Relax. Sa
Cost P1,000,000 machine pa na
Divide by: Useful life 5 yrs P200,000 ha.

Office equipment
Cost P500,000
Divide by: Useful life 4 years 125,000
Add ang
TOTAL 325,000 duha(200 ug
125)
Requirement 2: Revaluation surplus in 2017

Cost Fair value Revaluation surplus

Off. Eqpt. 500,000
Accum. Depn. 125,000 ________ _______________
375,000 498,000 123,000
498-375, use
your calcu if dili
ka mutuo

You might ask, why only the office equipment? Basaha ang problem balik. The company is using
the COST MODEL for the MACHINERY. Ang office equipment maoy nag REVALUATION
MODEL. Remember, the two methods in subsequently measuring the PPE - Cost model and
revaluation model.

Requirement 3: Depreciation in 2017

Machinery P1,000,000
Divide by: Useful life 5 P200,000

Office equipment
Revalued amount P498,000
Remaining life 3 166,000

Total depreciation expense 366,000

Requirement 4: IMPAIRMENT LOSS IN THE INCOME STATEMENT in 2018

Machinery, at cost P1,000,000

Less: Accumulated depn 400,000 2016- 200 thou depr.
CA, 1/1/2018 600,000
Less: Recoverable amount 500,000 2017- 200 thou depr.
Impairment loss-machinery 100,000
Again, IMPAIRMENT LOSS is the amount by which the Given sa
carrying amount of an asset or a cash generating unit problem, ayaw
EXCEEDS its recoverable amount.
kahadlok
Office equipment
Revalued amount 498,000
Less: Subsequent accum. Depreciation 166,000
CA, 1/1/2018 332,000
Less: Recoverable amount 247,000
Revaluation decrease 85,000
Less: Reversal of revaluation surplus 82,000
Impairment loss- office equipment 3,000

Total impairment loss P103,000 ( ang 100 thou. ganina, don’t forget)

How to get the P82,000? (Remaining revaluation surplus)

Revaluation surplus , 1/1/2017 P123,000

Less: Excess of depreciation on revalued amount
Over its cost (piecemeal realization)

Depreciation- revalued amount 166,000

Depreciation- cost 125,000 41,000
Remaining revaluation surplus 82,000

Pwede pod, pina bright style, to get the P41,000:

Revaluation surplus 123,000
Divide by: Remaining life 4
Piecemeal realization 41,000

Take note, PAS 16, standard on PPE, stated, “if an asset’s carrying amount is decreased as a
RESULT OF REVALUATION, the decrease shall be recognized in profit or loss. However, the
decrease shall be debited directly to equity under the heading of revaluation surplus to the extent
of any credit balance existing in the revaluation surplus in respect of that asset.”

Requirement no. 5, ZERO. Ngano zero man? Gihurot og charge as decrement in asset. Naa
narecognized sa Profit or loss. Nahurot na ang revaluation surplus.