Dosen: Dra. Triani Arofah, M.Si.,Ak.

,CA
UNSOED
2020
1
 Depreciation, CHAPTER 11
Impairments, and Depletion
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe depreciation 4. Discuss the accounting
concepts and methods of procedures for depletion of
depreciation. mineral resources.

2. Identify other depreciation 5. Apply the accounting for

issues. revaluations.

3. Explain the accounting issues 6. Demonstrate how to report

related to asset impairment. and analyze property, plant,
equipment, and mineral
resources.

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PREVIEW OF CHAPTER 11

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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 LEARNING OBJECTIVE 1
Depreciation—A Method Describe depreciation
concepts and methods of
of Cost Allocation depreciation.

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-lived assets:

◆ Fixed assets = Depreciation expense
◆ Intangibles = Amortization expense
◆ Mineral resources = Depletion expense

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 Depreciation—Method of Cost Allocation

Factors Involved in the Depreciation Process

Three basic questions:
1. What depreciable base is to be used?
2. What is the asset’s useful life?
3. What method of cost apportionment is best?

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 Factors Involved in Depreciation Process

Depreciable Base for the Asset

ILLUSTRATION 11.1
Computation of Depreciation Base

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 Factors Involved in Depreciation Process

Estimation of Service Lives

◆ 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).

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 Depreciation—Method of Cost Allocation

Methods of Depreciation
The profession requires the method employed be
“systematic and rational.” Methods used include:
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.

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 Methods of Depreciation

Activity Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: If Stanley uses the crane for 4,000 hours the

first year, the depreciation charge is:

ILLUSTRATION 11.3
Depreciation Calculation,
Activity Method—Crane
Example

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 Methods of Depreciation

Straight-Line Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11.4
Depreciation
Calculation,
Straight-Line Method—
Crane Example

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 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

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.

Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
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 Methods of Depreciation

Sum-of-the-Years’-Digits

ILLUSTRATION 11.6
Sum-of-the-Years’-Digits Depreciation Schedule—Crane Example

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 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Declining-Balance Method.
◆ Utilizes a depreciation rate (percentage) that is some
multiple of the straight-line method.
◆ Does not deduct the salvage value in computing the
depreciation base.

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 Methods of Depreciation

Declining-Balance Method

ILLUSTRATION 11.7
Double-Declining Depreciation Schedule—Crane Example

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 LEARNING OBJECTIVE 2
Other Depreciation Issues Identify other depreciation
issues.

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.

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 Component Depreciation

Illustration: EuroAsia Airlines purchases an airplane for

€100,000,000 on January 1, 2020. 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
Airplane Components

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 Component Depreciation

Computation of depreciation expense

for EuroAsia for 2020. ILLUSTRATION 11.9
Computation of
Component Depreciation

Depreciation journal entry for 2020.

Depreciation Expense 8,600,000

Accumulated Depreciation—Equipment 8,600,000

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 Component Depreciation

On the statement of financial position at the end of

2020, EuroAsia reports the airplane as a single amount.

ILLUSTRATION 11.10
Presentation of Carrying Amount of Airplane

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 Other Depreciation Issues

Depreciation and Partial Periods

How should companies compute depreciation for
partial periods?
◆ Companies determine the depreciation expense for
the full year and then

◆ prorate this depreciation expense between the two

periods involved.

This process should continue throughout the useful life of

the asset.

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 Depreciation and Partial Periods

Illustration—(Four Methods): Maserati SpA purchased a new

machine for its assembly process on August 1, 2019. 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 under the
following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.

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 Depreciation and Partial Periods

Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2019 € 126,000 / 5 = $ 25,200 x 5/12 = € 10,500 $ 10,500
2020 126,000 / 5 = 25,200 25,200 35,700
2021 126,000 / 5 = 25,200 25,200 60,900
2022 126,000 / 5 = 25,200 25,200 86,100
2023 126,000 / 5 = 25,200 25,200 111,300
2024 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
€ 126,000
Journal entry:

2019 Depreciation expense 10,500

Accumultated depreciation 10,500

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 Depreciation and Partial Periods

Activity Method (Assume 800 hours used in 2019)

(€126,000 / 21,000 hours = €6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2019 800 x $6 = € 4,800 € 4,800 € 4,800
2020 x =
2021 x =
2022 x =
2023 x =
800 € 4,800

Journal entry:
2019 Depreciation expense 4,800
Accumultated depreciation 4,800

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 Depreciation and Partial Periods
5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.

2019 € 126,000 x 5/15 = 42,000 x 5/12 € 17,500 € 17,500

2020 126,000 x 4.58/15 = 38,500 38,500 56,000

2021 126,000 x 3.58/15 = 30,100 30,100 86,100

2022 126,000 x 2.58/15 = 21,700 21,700 107,800

2023 126,000 x 1.58/15 = 13,300 13,300 121,100

2024 126,000 x .58/15 = 4,900 4,900 126,000

€ 126,000
Journal entry:
2019 Depreciation expense 17,500
Accumultated depreciation 17,500
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 Depreciation and Partial Periods

Double-Declining Balance Method

Current
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense

2019 € 150,000 x 40% = € 60,000 x 5/12 = € 25,000

2020 125,000 x 40% = 50,000 50,000

2021 75,000 x 40% = 30,000 30,000

2022 45,000 x 40% = 18,000 18,000

2023 27,000 x 40% = 10,800 Plug 3,000

€ 126,000
Journal entry:
2019 Depreciation expense 25,000
Accumultated depreciation 25,000

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 Other Depreciation Issues

Depreciation and Replacement of PP&E

Does depreciation provide for the replacement of
assets?
◆ Does not involve a current cash outflow.

◆ Funds for the replacement of the assets come from

the revenues (generated through use of the asset).

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 Other Depreciation Issues

Revision of Depreciation Rates

How should companies handle revisions in
depreciation rates?
◆ Accounted for in the current and prospective periods

◆ Not handled retrospectively

◆ Not considered errors or extraordinary items

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 Revision of Depreciation Rates

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 2019 (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:
● What is the journal entry to No Entry
correct the prior years’ Required
depreciation?
● Calculate the depreciation
expense
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for 2019.
 After 7
Revision of Depreciation Rates years

Equipment cost $510,000

First, establish
Salvage value - 10,000 NBV at date of
Depreciable base 500,000 change in estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31,

2018)
Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

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 After 7
Revision of Depreciation Rates years

Net book value $160,000

Depreciation
Salvage value (new) 5,000 Expense
Depreciable base 155,000 calculation for
Useful life remaining 8 years 2019.
Annual depreciation $ 19,375

Journal entry for 2019

Depreciation Expense 19,375

Accumulated Depreciation 19,375

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 LEARNING OBJECTIVE 3
Impairments Explain the accounting
issues related to asset
impairment.

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.

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 Recognizing Impairments

If impairment indicators are present, then an

impairment test must be conducted.

ILLUSTRATION 11.15
Impairment Test

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 Recognizing Impairments
Example: Assume that Cruz SA 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

€180,000 €205,000
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 Recognizing 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

€180,000 €175,000
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 Recognizing 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 20,000
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 Impairment Illustrations
Case 1
At December 31, 2020, Hanoi Ltd. 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.
1. The equipment’s carrying amount at December 31, 2020, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation
was VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4]
for 2020 and is recorded.
3. Hanoi has determined that the recoverable amount for this
asset at December 31, 2020, is VND11,000,000.
4. The remaining useful life of the equipment after December
31, 2020, is two years.
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 Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2020, as follows.

VND3,000,000 Impairment Loss

ILLUSTRATION 11.15
VND14,000,000 VND11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000

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 Impairment Illustrations

Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2020) VND 11,000,000

Hanoi Ltd. 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 2021.
Depreciation Expense 5,500,000
Accumulated Depreciation—Equipment 5,500,000

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 Impairment Illustrations
Case 2
At the end of 2019, 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
Value-in-Use Computation
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 Impairment Illustrations
Case 2: Computation of the impairment loss on the
machine at the end of 2019.
$33,486 Impairment Loss
ILLUSTRATION 11.15

$200,000 $166,514

Unknown $166,514
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 Impairment Illustrations
Case 2: Computation of the impairment loss on the
machine at the end of 2019.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514
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 Reversal of Impairment Loss

Illustration: Tan Group purchases equipment on

January 1, 2019, for HK$300,000, useful life of three
years, and no residual value.

At December 31, 2019, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
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 Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2020, Tan determines that the recoverable

amount of the equipment is HK$96,000. Tan reverses the
impairment loss.
Accumulated Depreciation—Equipment6,000
Recovery of Impairment Loss 6,000

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 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.

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 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.

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 ILLUSTRATION 11.18
Graphic of Accounting
for Impairments

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 LEARNING OBJECTIVE 4
Depletion Discuss the accounting
procedures for depletion of
mineral resources.

Natural resources can be divided into two categories:

1. Biological assets (timberlands)

► Fair value approach (chapter 9)

2. 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.

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 Depletion

Establishing a Depletion Base

Computation of the depletion base involves:
1. Pre-exploratory costs.

2. Exploratory and evaluation costs.

3. Development costs.

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 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
= Depletion Cost Per
Total Estimated Units Available Unit

Units Extracted x Cost Per Unit = Depletion

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 Depletion

Illustration: MaClede SA 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
ILLUSTRATION 11.19
ounces of gold. Computation of Depletion
Rate

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 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

ILLUSTRATION 11.20
MaClede’s statement of financial position: Statement of Financial Position
Presentation of Mineral Resource

Depletion cost related to inventory sold is part of cost of goods

sold.
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 Depletion

Estimating Recoverable Reserves

◆ Same as accounting for changes in estimates.

◆ Revise the depletion rate on a prospective basis.

◆ Divide the remaining cost by the new estimate of the

recoverable reserves.

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 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 3,000,000

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 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.

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 LEARNING OBJECTIVE 5
Revaluations Apply the accounting for
revaluations.

Recognizing Revaluations
Companies may value long-lived tangible asset
subsequent to 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.

► Unrealized gain is often referred to as revaluation

surplus.

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 Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2019. The company elects to use
revaluation accounting for the land in subsequent periods.
At December 31, 2019, 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.

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 Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2019. 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, 2019,
as follows.
Depreciation Expense 100,000
Accumulated Depreciation—Equipment 100,000

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 Recognizing Revaluation

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, 2019, which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

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

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 Recognizing Revaluation

Revaluation—Depreciable Assets ILLUSTRATION 11.22

Financial Statement
Presentation—Revaluations

Under no circumstances can the Accumulated Other Comprehensive

Income account related to revaluations have a negative balance.

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 Recognizing Revaluation

Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or
equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.

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 LEARNING OBJECTIVE 6
Presentation and Analysis Demonstrate how to report
and analyze property, plant,
equipment, and mineral
resources.
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 ◆ Basis of valuation (usually cost)

◆ Pledges, liens, and other
commitments

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 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Asset Turnover

Siemens Group Measures how

efficiently a company
uses its assets to
generate sales.

ILLUSTRATION 11.24
Asset Turnover
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 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Profit Margin on Sales

Siemens Group Measure of the ability

to generate operating
income from a
particular level of sales.

ILLUSTRATION 11.25
Profit Margin on Sales
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 Presentation and Analysis

Analysis of Property, Plant, and Equipment

Return on Assets

Siemens Group Measures a firm’s

success in using
assets to generate
earnings.

ILLUSTRATION 11.26
Return on Assets
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 Presentation and Analysis

By relating the profit margin on sales to the asset turnover, we

can ascertain how profitably the company used assets during
that period of time in a measure of the return on assets.

Rate of Return Profit Margin on Asset

= x
on Assets Sales Turnover

Net Income Net Income Net Sales

= x
Average Total Assets Net Sales Average Total Assets

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 Presentation and Analysis

By relating the profit margin on sales to the asset turnover, we

can ascertain how profitably the company used assets during
that period of time in a measure of the return on assets.

Rate of Return Profit Margin on Asset

= x
on Assets Sales Turnover

€5,584 €5,584 €79,644

= x
(€125,717 + €79,644 (€125,717 +
€120.348) / 2 €120.348) / 2

4.5% = 7.0% x .65

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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

LEARNING OBJECTIVE 7
Illustrate revaluation accounting procedures.

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.

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.

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 Revaluation of Property, Plant, and
APPENDIX 11A
Equipment

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.

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 Revaluation of Land

Revaluation—2019: Valuation Increase

Assume that Unilever Group (GBR and NLD) purchased
land on January 1, 2019, that cost €400,000. Unilever
decides to report the land at fair value in subsequent
periods. At December 31, 2019, 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
(€520,000 − €400,000)

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 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.1
Summary of Revaluation—2019

◆ Land is now reported at its fair value of €520,000.

◆ The increase in the fair value of €120,000 is reported on
the statement of comprehensive income.
◆ The ending balance in Unrealized Gain on Revaluation—
Land is reported as accumulated other comprehensive
income in the statement of financial position in the
equity section.
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 Revaluation—2020: Decrease below
Historical Cost
What happens if the land’s fair value at December 31, 2020,
is €380,000, a decrease of €140,000 (€520,000 −
€380,000)? In this case, the land’s fair value is below its
historical cost. Unilever makes the following entry on
December 31, 2020 to record the decrease in fair value of
the land.
Unrealized Gain on Revaluation—Land 120,000
Loss on Impairment 20,000
Land (€520,000 − €380,000) 140,000

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 Revaluation—2020: Decrease below Cost
ILLUSTRATION 11A.2
Summary of Revaluation—2020

◆ The debit to Unrealized Gain on Revaluation—Land of

€120,000 reduces other comprehensive income, which
reduces accumulated other comprehensive income.
◆ The debit to Loss on Impairment of €20,000 reduces net
income and retained earnings.
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 Revaluation—2021: Recovery of
Impairment Loss
At December 31, 2021, 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. Unilever makes the following entry
to record this transaction.

Land 35,000
Unrealized Gain on Revaluation—Land 15,000
Recovery of Impairment Loss 20,000

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 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

On January 2, 2022, Unilever sells the land for €415,000.

Unilever makes the following entry to record this
transaction.
Cash 415,000
Land 415,000

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 Revaluation—2021: Recovery of
Impairment Loss
ILLUSTRATION 11A.3
Summary of Revaluation—2021

Since the land is sold, Unilever has the option to transfer

Accumulated Other Comprehensive Income (AOCI) to
Retained Earnings.

Accumulated Other Comprehensive Income 15,000

Retained Earnings 15,000
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 Revaluation—2021: Recovery of
Impairment Loss
◆ The purpose of this transfer is to eliminate the
unrealized gain on the land that was sold.
◆ Transfers from Accumulated Other Comprehensive
Income cannot increase net income.
◆ Even though the land has appreciated in value by
€15,000, Unilever is not able to recognize this gain in
net income over the periods that it held the land.

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 Revaluation of Depreciable Assets

Revaluation—2019: Valuation Increase

Assume that Nokia (FIN) purchases equipment for
€1,000,000 on January 2, 2019. The equipment has a
useful life of five years, is depreciated using the straight-line
method of depreciation, and its residual value is zero. Nokia
chooses to revalue its equipment to fair value over the life of
equipment. On December 31, 2019, Nokia records
depreciation expense of €200,000 (€1,000,000 ÷ 5) as
follows.
Depreciation Expense 200,000
Accumulated Depreciation—Equipment 200,000

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 Revaluation—2019: Valuation Increase
After this entry, Nokia’s equipment has a carrying amount
of €800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report
the equipment at fair value, Nokia does the following.

1. Reduces the Accumulated Depreciation—Equipment

account to zero.

2. Reduces the Equipment account by €50,000—it then

is reported at its fair value of €950,000.

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 Revaluation—2019: Valuation Increase
After this entry, Nokia’s equipment has a carrying amount
of €800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report
the equipment at fair value, Nokia does the following.

3. Records an Unrealized Gain on Revaluation—

Equipment for the difference between the fair value
and carrying amount of the equipment, or €150,000
(€950,000 − €800,000). The entry to record this
revaluation at December 31, 2019, is:
Accumulated Depreciation—Equipment 200,000
Equipment 50,000
Unrealized Gain on Revaluation—Equipment 150,000
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 Revaluation—2019: Valuation Increase
ILLUSTRATION 11A.4
Summary of Revaluation—2019

◆ The carrying amount of the asset is now €950,000.

◆ Nokia reports depreciation expense of €200,000 in the
income statement and Unrealized Gain on Revaluation—
Equipment of €150,000 in other comprehensive income.

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 Revaluation—2020: Decrease below
Historical Cost
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2020 is €237,500
(€950,000 ÷ 4), and the entry to record depreciation expense
on December 31, 2020 as follows.

Depreciation Expense 237,500

Accumulated Depreciation—Equipment 237,500

Under IFRS, Nokia may transfer from AOCI the difference

between depreciation based on the revalued carrying amount
of the equipment and depreciation based on the asset’s
original cost to retained earnings.
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 Revaluation—2020: Decrease below Cost
Depreciation based on the original cost was €200,000
(€1,000,000 ÷ 5) and on fair value is €237,500, or a
difference of €37,500 (€237,500 − €200,000). The entry to
record this transfer at December 31, 2020 is as follows.

Accumulated Other Comprehensive Income 37,500

Retained Earnings 37,500

Before revaluation in 2020, Nokia has the following amounts

related to its equipment.

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 Revaluation—2020: Decrease below Cost

Nokia determines through appraisal that the equipment now

has a fair value of €570,000. To report the equipment at fair
value, Nokia does the following.
1. Reduces the Accumulated Depreciation—Equipment account
of €237,500 to zero.

2. Reduces the Equipment account by €380,000 (€950,000 −

€570,000)—it then is reported at its fair value of €570,000.

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 Revaluation—2020: Decrease below Cost

3. Reduces Unrealized Gain on Revaluation—Equipment by

€112,500, to off set the balance in the unrealized gain
account (related to the revaluation in 2019).

4. Records a loss on impairment of €30,000.

Accumulated Depreciation—Equipment 237,500

Loss on Impairment 30,000
Unrealized Gain on Revaluation—Equipment 112,500
Equipment 380,000
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 ILLUSTRATION 11A.5
Summary of Revaluation—2020

◆ The carrying amount of the equipment is now €570,000.

◆ Nokia reports depreciation expense of €237,500 and an
impairment loss of €30,000 in the income statement.
◆ Nokia reports the reversal of the previously recorded
unrealized gain by recording the transfer to retained
earnings of €37,500 and the entry to Unrealized Gain on
Revaluation—Equipment of €112,500.
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 Revaluation—2021: Recovery of
Impairment Loss
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2021 is €190,000
(€570,000 ÷ 3), and the entry to record depreciation expense
on December 31, 2021 as follows.

Depreciation Expense 190,000

Accumulated Depreciation—Equipment 190,000

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 Nokia transfers the difference between depreciation based on
the revalued carrying amount of the equipment and
depreciation based on the asset’s original cost from AOCI to
retained earnings. Depreciation based on the original cost
was €200,000 (€1,000,000 ÷ 5) and on fair value is €190,000.

Retained Earnings 10,000

Accumulated Other Comprehensive Income 10,000

Before revaluation in 2021, Nokia has the following amounts

related to its equipment.

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 Revaluation—2021: Recovery of Loss
Nokia determines through appraisal that the equipment
now has a fair value of €450,000. To report the equipment
at fair value, Nokia does the following.

1. Reduces the Accumulated Depreciation—Equipment

account of €190,000 to zero.
2. Reduces the Equipment account by €120,000
(€570,000 − €450,000)—it then is reported at its fair
value of €450,000.

3. Records an Unrealized Gain on Revaluation—

Equipment for €40,000.
4. Records a Recovery of Loss on Impairment for
€30,000.
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 Revaluation—2021: Recovery of Loss
Nokia determines through appraisal that the equipment
now has a fair value of €450,000. To report the equipment
at fair value, Nokia does the following. The entry to record
this transaction is as follows.

Accumulated Depreciation—Equipment 190,000

Unrealized Gain on Revaluation—Equipment 40,000
Equipment 120,000
Recovery of Loss on Impairment 30,000

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 ILLUSTRATION 11A.6
Summary of Revaluation—2021

On January 2, 2022, Nokia sells the equipment for €450,000.

Nokia makes the following entry to record this transaction.
Cash 450,000
Equipment 450,000

Nokia does not record a gain or loss because the carrying

amount of the equipment is the same as its fair value.

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 ILLUSTRATION 11A.6
Summary of Revaluation—2021

Nokia transfers the remaining balance in Accumulated Other

Comprehensive Income to Retained Earnings.
Accumulated Other Comprehensive Income 50,000
Retained Earnings 50,000

Even though the equipment has appreciated in value by

€50,000, the company does not recognize this gain in net
income.
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 GLOBAL ACCOUNTING INSIGHTS

LEARNING OBJECTIVE 8
Compare accounting procedures for property, plant, and equipment
under IFRS and U.S. GAAP.

U.S. GAAP adheres to many of the same principles as IFRS in the

accounting for property, plant, and equipment. Major differences relate
to use of component depreciation, impairments, and revaluations.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Following are the key similarities and differences between U.S. GAAP
and IFRS related to property, plant, and equipment.
Similarities
• The definition of property, plant, and equipment is essentially the
same under U.S. GAAP and IFRS.
• Under both U.S. GAAP and IFRS, changes in depreciation method
and changes in useful life are treated in the current and future
periods. Prior periods are not affected.
• The accounting for plant asset disposals is the same under U.S.
GAAP and IFRS.

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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Similarities
• The accounting for the initial costs to acquire natural resources is
similar under U.S. GAAP and IFRS.
• Under both U.S. GAAP and IFRS, interest costs incurred during
construction must be capitalized. Recently, IFRS converged to U.S.
GAAP.
• The accounting for exchanges of non-monetary assets is essentially
the same between U.S. GAAP and IFRS. U.S. GAAP 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 and IFRS both view depreciation as allocation of cost over
93 an asset’s life. U.S. GAAP and IFRS permit the same depreciation LO 8
 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• Under U.S. GAAP, component depreciation is permitted but is rarely
used. IFRS requires component depreciation.
• U.S. GAAP does not permit revaluations of property, plant,
equipment, and mineral resources. Under IFRS, companies can use
either the historical cost model or the revaluation model.
• In testing for impairments of long-lived assets, U.S. GAAP uses a
different model than IFRS. Under U.S. GAAP, as long as future
undiscounted cash flows exceed the carrying amount of the asset, no
impairment is recorded. The IFRS impairment test is stricter.
However, unlike U.S. GAAP, reversals of impairment losses are
permitted under IFRS.
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 GLOBAL ACCOUNTING INSIGHTS

Relevant Facts
Differences
• Under U.S. GAAP, all losses on non-monetary asset exchanges are
recognized immediately.

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 GLOBAL ACCOUNTING INSIGHTS

About The Numbers

As indicated, impairment testing under U.S. GAAP is a two-step
process. Illustration 11.18, in the text, summarizes impairment
measurement under U.S. GAAP. The key distinctions relative to IFRS
relate to the use of a cash flow recovery test to determine if an
impairment test should be performed. Also, U.S. GAAP does not permit
reversal of impairment losses for assets held for use.

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 GLOBAL ACCOUNTING INSIGHTS

On the Horizon
With respect to revaluations, as part of the conceptual framework
project, the Boards will examine the measurement bases used in
accounting. It is too early to say whether a converged conceptual
framework will recommend fair value measurement (and revaluation
accounting) for property, plant, and equipment. However, this is likely
to be one of the more contentious issues, given the long-standing use of
historical cost as a measurement basis in U.S. GAAP.

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