Kế toán, kiểm toán - Depreciation, impairments, and depletion

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 11Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.Allocating costs of long-lived assets:Fixed assets = Depreciation expenseIntangibles = Amortization expenseMineral resources = Depletion expenseDepreciation 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.DEPRECIATION—METHOD OF COST ALLOCATIONLO 1Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.Factors Involved in the Depreciation ProcessThree basic questions:What depreciable base is to be used?What is the asset’s useful life?What method of cost apportionment is best?DEPRECIATION—COST ALLOCATIONLO 2Depreciable Base for the AssetFactors Involved in Depreciation ProcessILLUSTRATION 11-1Computation ofDepreciation BaseLO 2Estimation of Service LivesService life often differs from physical life.Companies retire assets for two reasons: Physical factors (casualty or expiration of physical life).Economic factors (inadequacy, supersession, and obsolescence).Factors Involved in Depreciation ProcessLO 2Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.The profession requires the method employed be “systematic and rational.” Methods used include:Methods of DepreciationDEPRECIATION—COST ALLOCATIONActivity method (units of use or production).Straight-line method. Diminishing (accelerated)-charge methods:Sum-of-the-years’-digits.Declining-balance method.LO 3Activity MethodIllustration: If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is:Data for Stanley Coal MinesMethods of DepreciationILLUSTRATION 11-2Data Used to IllustrateDepreciation MethodsILLUSTRATION 11-3Depreciation Calculation,Activity Method—CraneExampleLO 3Straight-Line MethodIllustration: Stanley computes depreciation as follows:Data for Stanley Coal MinesILLUSTRATION 11-2Data Used to IllustrateDepreciation MethodsILLUSTRATION 11-4Depreciation Calculation,Straight-Line Method—Crane ExampleMethods of DepreciationLO 3Diminishing-Charge MethodsSum-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.n(n+1)2=5(5+1)2=15Alternate sum-of-the-years’ calculationData for Stanley Coal MinesILLUSTRATION 11-2Data Used to IllustrateDepreciation MethodsMethods of DepreciationLO 3Sum-of-the-Years’-DigitsILLUSTRATION 11-6Sum-of-the-Years’-DigitsDepreciation Schedule—Crane ExampleMethods of DepreciationLO 3Diminishing-Charge MethodsDeclining-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.Data for Stanley Coal MinesILLUSTRATION 11-2Data Used to IllustrateDepreciation MethodsMethods of DepreciationLO 3Declining-Balance MethodILLUSTRATION 11-7Double-DecliningDepreciation Schedule—Crane ExampleMethods of DepreciationLO 3Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.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.Component DepreciationDEPRECIATION—COST ALLOCATIONLO 4Illustration: EuroAsia Airlines purchases an airplane for €100,000,000 on January 1, 2016. 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.Component DepreciationILLUSTRATION 11-8Airplane ComponentsLO 4Computation of depreciation expense for EuroAsia for 2016.Depreciation Expense 8,600,000 Accumulated Depreciation—Airplane 8,600,000Depreciation journal entry for 2016.Component DepreciationILLUSTRATION 11-9Computation ofComponent DepreciationLO 4On the statement of financial position at the end of 2016, EuroAsia reports the airplane as a single amount.Component DepreciationILLUSTRATION 11-10Presentation of CarryingAmount of AirplaneLO 4Special Depreciation IssuesHow should companies compute depreciation for partial periods?Does depreciation provide for the replacement of assets?How should companies handle revisions in depreciation rates?DEPRECIATION—COST ALLOCATIONLO 4Special Depreciation IssuesHow 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.DEPRECIATION—COST ALLOCATIONLO 4Illustration—(Four Methods): Maserati Corporation purchased a new machine for its assembly process on August 1, 2015. 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.Depreciation and Partial PeriodsLO 4Straight-line MethodDepreciation and Partial PeriodsLO 4Activity Method(Assume 800 hours used in 2015)Advance slide in presentation mode to reveal answer.Depreciation and Partial PeriodsLO 4Sum-of-the-Years’-Digits Method5/12 = .4166677/12 = .583333Advance slide in presentation mode to reveal answer.Depreciation and Partial PeriodsLO 4Double-Declining Balance MethodAdvance slide in presentation mode to reveal answer.Depreciation and Partial PeriodsLO 4Special Depreciation IssuesDoes 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.DEPRECIATION—COST ALLOCATIONLO 4Special Depreciation IssuesHow should companies handle revisions in depreciation rates?Accounted for in the current and prospective periodsNot handled retrospectivelyNot considered errors or extraordinary itemsDEPRECIATION—COST ALLOCATIONLO 4Questions:What is the journal entry to correct the prior years’ depreciation?Calculate the depreciation expense for 2015.No Entry RequiredArcadia 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 2015 (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.Revision of Depreciation RatesLO 4Equipment$510,000Accumulated depreciation 350,000 Net book value (NBV)$160,000Balance Sheet (Dec. 31, 2014)After 7 yearsEquipment cost $510,000Salvage value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000x 7 years = $350,000 First, establish NBV at date of change in estimate.Revision of Depreciation RatesLO 4Net book value $160,000Salvage value (new) 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375Depreciation Expense calculation for 2015.Depreciation Expense 19,375 Accumulated Depreciation 19,375Journal entry for 2015Revision of Depreciation RatesAfter 7 yearsLO 4The amount of depreciation expense recorded depends on both the depreciation method used and estimates of service lives and residual values of the assets. Differences in these choices and estimates can significantly impact a company’s reported results and can make it difficult to compare the depreciation numbers of different companies.For example, Veolia Environment (FRA) provided information regarding useful lives of its assets in the note to its financial statements, as shown to the right. With the information provided, an analyst determines the impact of these management choices and judgments on the amount of depreciation expense for classes of property, plant, and equipment.WHAT’S YOUR PRINCIPLEDEPRECIATION CHOICES1.7 Property, Plant, and EquipmentProperty, plant, and equipment are recorded at historical acquisition cost to the Group, less accumulated depreciation and any accumulated impairment losses.Property, plant, and equipment are recorded by component, with each component depreciated over its useful life.Useful lives are as follows:LO 4Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.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. Recognizing ImpairmentsIMPAIRMENTSLO 5If impairment indicators are present, then an impairment test must be conducted.Recognizing ImpairmentsILLUSTRATION 11-15Impairment TestLO 5Example: 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€180,000€205,000No ImpairmentRecognizing ImpairmentsLO 5Example: Assume the same information for Cruz Company except that the value-in-use of Cruz’s equipment is €175,000 rather than €205,000.€200,000€180,000€180,000€175,000€20,000 Impairment LossRecognizing ImpairmentsILLUSTRATION 11-15LO 5Example: Assume the same information for Cruz Company except that the value-in-use of Cruz’s equipment is €175,000 rather than €205,000.€200,000€180,000Cruz makes the following entry to record the impairment loss.Loss on Impairment 20,000 Accumulated Depreciation—Equipment 20,000€20,000 Impairment LossRecognizing ImpairmentsILLUSTRATION 11-15LO 5Case 1At December 31, 2016, 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. The equipment’s carrying amount at December 31, 2016, is VND14,000,000 (VND26,000,000 - VND12,000,000).Hanoi uses straight-line depreciation. Hanoi’s depreciation was VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2016 and is recorded.Hanoi has determined that the recoverable amount for this asset at December 31, 2016, is VND11,000,000.The remaining useful life of the equipment after December 31, 2016, is two years.Impairment IllustrationsLO 5Case 1: Hanoi records the impairment on its equipment at December 31, 2016, as follows.VND14,000,000VND11,000,000VND3,000,000 Impairment LossLoss on Impairment 3,000,000 Accumulated Depreciation—Equipment 3,000,000Impairment IllustrationsILLUSTRATION 11-15LO 5Depreciation Expense 5,500,000 Accumulated Depreciation—Equipment 5,500,000Equipment VND 26,000,000Less: Accumulated Depreciation-Equipment 15,000,000Carrying value (Dec. 31, 2016) VND 11,000,000Hanoi 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 2017.Impairment IllustrationsLO 5Case 2At the end of 2015, 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.Impairment IllustrationsILLUSTRATION 11-16Value-in-Use ComputationLO 5Case 2: Computation of the impairment loss on the machine at the end of 2015.$200,000$166,514Unknown$166,514$33,486 Impairment LossImpairment IllustrationsILLUSTRATION 11-15LO 5$200,000$166,514Unknown$166,514$33,486 Impairment LossLoss on Impairment 33,486 Accumulated Depreciation—Machinery 33,486Impairment IllustrationsCase 2: Computation of the impairment loss on the machine at the end of 2015.LO 5Illustration: Tan Company purchases equipment on January 1, 2015, for HK$300,000, useful life of three years, and no residual value. At December 31, 2015, Tan records an impairment loss of HK$20,000. Loss on Impairment 20,000 Accumulated Depreciation—Equipment 20,000Reversal of Impairment LossLO 5Depreciation expense and related carrying amount after the impairment.At the end of 2016, Tan determines that the recoverable amount of the equipment is HK$96,000. Tan reverses the impairment loss.Accumulated Depreciation—Equipment 6,000 Recovery of Impairment Loss 6,000Reversal of Impairment LossLO 5When 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. Cash-Generating UnitsIMPAIRMENTSLO 5Report 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.Impairment of Assets to Be Disposed OfIMPAIRMENTSLO 5ILLUSTRATION 11-18Graphic of Accounting for ImpairmentsIMPAIRMENTSLO 5Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.Natural resources can be divided into two categories:Biological assets (timberlands)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.DEPLETIONLO 6Establishing a Depletion BaseComputation of the depletion base involves: Pre-exploratory costs.Exploratory and evaluation costs.Development costs.DEPLETIONLO 6Write-off of Resource CostNormally, 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 valueTotal Estimated Units Available= Depletion Cost Per UnitUnits Extracted x Cost Per Unit= DepletionDEPLETIONLO 6Illustration: 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 gold. DEPLETIONILLUSTRATION 11-19Computation of Depletion RateLO 6If 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 250,000MaClede’s statement of financial position:Depletion cost related to inventory sold is part of cost of goods sold.DEPLETIONILLUSTRATION 11-20Statement of Financial Position Presentation of Mineral ResourceLO 6Estimating Recoverable ReservesSame 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.DEPLETIONLO 6Liquidating 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 1,650,000Share Premium—Ordinary 1,350,000 Cash 3,000,000DEPLETIONLO 6Presentation on the Financial StatementsDisclosures related to E&E expenditures should include:Accounting policies for exploration and evaluation expenditures, including the recognition of E&E assets.Amounts of assets, liabilities, income and expense, and operating cash flow arising from the exploration for and evaluation of mineral resources.DEPLETIONLO 6Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.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.Recognizing RevaluationsREVALUATIONSLO 7Revaluation—LandIllustration: Siemens Group (DEU) purchased land for €1,000,000 on January 5, 2015. The company elects to use revaluation accounting for the land in subsequent periods. At December 31, 2015, 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 200,000Unrealized Gain on Revaluation—Land increases other comprehensive income in the statement of comprehensive income.Recognizing RevaluationLO 7Revaluation—Depreciable AssetsIllustration: Lenovo Group (CHN) purchases equipment for ¥500,000 on January 2, 2015. 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, 2015, as follows.Depreciation Expense 100,000 Accumulated Depreciation—Equipment 100,000Recognizing RevaluationLO 7Revaluation—Depreciable AssetsAfter 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, 2015, which is ¥460,000.Accumulated Depreciation—Equipment 100,000 Equipment 40,000 Unrealized Gain on Revaluation—Equipment 60,000Recognizing RevaluationLO 7Revaluation—Depreciable AssetsILLUSTRATION 11-22Financial StatementPresentation—RevaluationsUnder no circumstances can the Accumulated Other Comprehensive Income account related to revaluations have a negative balance.Recognizing RevaluationLO 7Company 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.Revaluations IssuesRecognizing RevaluationLO 7Explain the accounting procedures for depletion of mineral resources.Explain the accounting for revaluations.Explain how to report and analyze property, plant, equipment, and mineral resources.After studying this chapter, you should be able to:Depreciation, Impairments, and Depletion11LEARNING OBJECTIVESExplain the concept of depreciation.Identify the factors involved in the depreciation process.Compare activity, straight-line, and diminishing-charge methods of depreciation.Explain component depreciation.Explain the accounting issues related to asset impairment.Presentation of Property, Plant, Equipment, and Mineral ResourcesBasis of valuation (usually cost)Pledges, liens, and other commitmentsDepreciating assets, use Accumulated Depreciation.Depleting assets may include use of Accumulated Depletion account, or the direct reduction of asset.DisclosuresPRESENTATION AND ANALYSISLO 8Measures how efficiently a company uses its assets to generate sales.Analysis of Property, Plant, and EquipmentAsset Turnover RatioPRESENTATION AND ANALYSISadidas AGILLUSTRATION 11-24Asset TurnoverLO 8Measure of the ability to generate operating income from a particular level of sales.Profit Margin on SalesAnalysis of Property, Plant, and Equipmentadidas AGILLUSTRATION 11-25Profit Margin on SalesPRESENTATION AND ANALYSISLO 8Measures a firm’s success in using assets to generate earnings.Return on Assets (ROA)Analysis of Property, Plant, and Equipmentadidas AGILLUSTRATION 11-26Return on AssetsPRESENTATION AND ANALYSISLO 8Analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:Net Income Average Total Assets Rate of Return on Assets = Net Income Net Sales Profit Margin on Sales = Net SalesAsset Turnover x x Average Total Assets PRESENTATION AND ANALYSISLO 8€524(€11,651 + €11,237) / 2Rate of Return on Assets = €524€14,883Profit Margin on Sales = €14,883Asset Turnover x x 4.6% 3.5% = x 1.30 (€11,651 + €11,237) / 2Analyst obtains further insight into the behavior of ROA by disaggregating it into components of profit margin on sales and asset turnover as follows:PRESENTATION AND ANALYSISLO 8PROPERTY, PLANT, AND EQUIPMENTU.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.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to property, plant, and equipment.SimilaritiesThe 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.GLOBAL ACCOUNTING INSIGHTSRelevant FactsSimilaritiesThe 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 an asset’s life. U.S. GAAP and IFRS permit the same depreciation methods (straight-line, diminishing-balance, units-of-production).GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesUnder 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.GLOBAL ACCOUNTING INSIGHTSAbout The NumbersGLOBAL ACCOUNTING INSIGHTSAs indicated, impairment testing under U.S. GAAP is a two-step process. The graphic on page 520 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.On the HorizonWith 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.GLOBAL ACCOUNTING INSIGHTSLO 9 Explain revaluation accounting procedures.The general rules for revaluation accounting are as follows.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.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).APPENDIX 11AREVALUATION OF PROPERTY, PLANT, AND EQUIPMENTIf 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.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.APPENDIX 11AREVALUATION OF PROPERTY, PLANT, AND EQUIPMENTLO 9Copyright © 2014 John Wiley & Sons, Inc. All rights reserved. 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