Kế toán, kiểm toán - Chapter 11: Depreciation, impairment, and disposition

1CHAPTER 11:DEPRECIATION, IMPAIRMENT, and DISPOSITION2Chapter 11: Depreciation, Impairment, and DispositionAfter Studying this chapter you should be able to:Understand the importance of depreciation, impairment, and disposition from a business perspective.Explain the concept of depreciation and identify the factors to consider when determining depreciation charges.Identify how depreciation methods are selected; calculate and recognize depreciation using the straight-line, decreasing charge and activity methods.Explain the accounting issues for depletion of mineral resources.Explain and apply the accounting procedures for partial periods and a change in depreciation rate.Explain the issues and apply the accounting standards for capital asset impairment under both IFRS and ASPE.Account for derecognition of property, plant and equipment and explain and apply the accounting standards for long-lived assets that are held for sale. Describe the types of disclosures required for property, plant and equipment.Analyze a company’s investment in assets.Identify difference in account between IFRS and ASPE, and what changes are expected in the near future.34Chapter 11: Depreciation, Impairment, and DispositionDepreciation – ConceptDepreciation (and amortization more broadly) is a means of cost allocationIt is not a method of valuationDepreciation involves:allocating the depreciable amount of property, plant, and equipment over the periods expected to benefit from the use of the assetsThis allocation is generally recognized as Depreciation Expense5Factors in the Depreciation ProcessQuestions to be answered to determine the amount of depreciation expense:What asset components are depreciated separately?What is the asset’s depreciable amount? Over what period is the asset depreciated?What pattern best reflects how the asset’s economic benefits are used up?6Components Depreciated SeparatelyEach significant part of a PP&E asset should be identified and depreciated as a separate componentMultiple components may be grouped for calculating depreciation if they have same useful lives and depreciation methodsParts of each PP&E asset that are not individually significant can be grouped and depreciated as a single componentApplication of components for the purpose of depreciation is required by both ASPE and IFRS. However, IFRS is more detailed and strict.7Depreciable Amount Depreciable amount is initially calculated as:Original cost of the assetless estimated residual value (or salvage value)IFRS does not permit the use of salvage valueResidual value is the net amount expected to be received for the asset today if it were of the age and in the condition expected at the end of its useful life Salvage value is the asset’s estimated net realizable value at the end of the asset’s lifeResidual value should be reviewed regularly (at least annually under IFRS)Depreciation continues as long as residual value is lower than asset’s carrying amount8Depreciation PeriodDepreciation begins when the asset is available for useDepreciation ends when the asset is derecognized or classified as held for sale.An asset’s useful life and physical life are not the same (expressed in time or units)Useful life is sometimes referred to as the economic life—the period of time over which the asset will produce revenue for the companyFactors affecting useful life are:economic factors (e.g. obsolescence)physical factors (e.g. wear and tear)legal life (e.g. expiration of contract)9Choice of Depreciation MethodDepreciation method determines the systematic allocation of the depreciable amount over the asset’s useful lifeDepreciation should reflect the pattern of benefits expected from the use of the assetAdditional considerations for choosing a particular depreciation method include simplicity, cost, as well as perceived economic consequencesDepreciation method affects: The statement of financial positionThe income statementThe ratios (e.g. return on assets, etc) 10Depreciation Methods: Overview11DepreciationMethodsFinancial AccountingDepreciation MethodsTaxDepreciationStraight-LineMethodDiminishingBalanceMethodSpecialmethodsActivity MethodComparison of Methods12Activity MethodOnly appropriate where usage is not a function of timeDifficult to estimate total number of units over life of assetStraight-Line MethodSimple to useBased on two broad assumptions:Constant usageOther costs same each yearDistorts rate of return analysisDiminishing Balance MethodBest match of some assets’ productivity to costMore depreciation in earlier years when asset has greatest benefitDepreciation Methods: ExampleCrane Ltd. buys a crane at the beginning of the current fiscal year. Information relating to the crane follows:Cost: $500,000Estimated useful life: five years (or 30,000 hours)Residual value (end of five years of use): $50,000Actual hours used during the current year: 4,000 hours and assume 4,700 in next yearBased on this information, calculate the amortization for the current year using: straight-line, diminishing balance, and activity methods13Straight-Line MethodCopyright John Wiley & Sons Canada, Ltd.142. Annual Depreciation = $450,000 / 5 years = $90,0001. Depreciable amount = $500,000 – $50,000 = $450,0003. Depreciation Schedule: Book Depreciation Accumulated Book valueYear Value Expense Depreciation End of year1 $500,000 $90,000 $ 90,000 $410,0002 $410,000 $90,000 $180,000 $320,000Note that the depreciation expense is the same each yearDiminishing Balance Method: Double-Declining-Balance Method151. Rate of Depreciation = 2 × (1/5) = 40% 2. Depreciation (current) = $500,000 × 0.40 = $ 200,000 Depreciation (next) = ($500,000 - $200,000) × 0.40 = $120,0003. Depreciation Schedule: Book Depreciation Accumulated Book valueYear Value Expense Depreciation End of year1 $500,000 $200,000 $200,000 $300,0002 $300,000 $120,000 $320,000 $180,0003 $180,000 $ 72,000 $392,000 $108,0004 $108,000 $ 43,200 $435,200 $ 64,8005 $ 64,800 $ 14,800 $450,000 $ 50,000Rate= (100%  Useful Life) x 2Last year is rounded. Book value cannot be less than residual value.Asset’s residual value is not deductedActivity Method (unit = hour)161. Depreciable amount = $500,000 – $50,000 = $450,0002. Depreciation per hour = $450,000 / 30,000 = $15.003. Depreciation (current) = $15.00 × 4,000 hours = $60,000 Depreciation (next) = $15.00 × 4,700 hours = $70,5004. Depreciation Schedule: Book Depreciation Accumulated Book valueYear Value Expense Depreciation End of year1 $500,000 $60,000 $ 60,000 $440,0002 $440,000 $70,500 $130,500 $369,500This same rate is used each yearDepletion of Mineral ResourcesNatural resources are depleted (amortized) over time as they are removedDepletion is calculated using an activity method (such as units-of-production)The depletion charge is initially debited to InventoryWhen the resource is sold, Inventory is credited and Cost of Goods Sold is debitedWhere an equipment’s useful life is clearly linked to the life of the resource, it is also amortized using the units-of-production method17Depletion: Example18Mining Company has right to use land to mine gold:Lease cost: $ 50,000Exploration cost: $ 100,000Development cost: $ 3,850,000Total capitalized cost: $ 4,000,000Estimated production (useful life*) = 5,000 ounces of gold*Note: useful life is the # of units estimated to be in the resource depositDepletion: Example19Depletion Rate = Total cost – residual value Total estimated unitsDepletion Rate = $4,000,000 – 0 = $800 per ounce 5,000Entry to record 1,250 ounces mined:Inventory 1,000,000 Accumulated depletion 1,000,000Partial Year DepreciationWhen an asset is acquired sometime during the year, a partial depreciation charge is sometimes takenThe procedure is:determine depreciation for a full year, andallocate the amount between the two periods affected (see upcoming example) 20Depreciation and Partial PeriodsStraight-Line MethodCalculate the amortization for the portion of the yearGenerally use the nearest full monthDeclining-Balance MethodMore complex calculations involvedUnits of Production/Use MethodNo special calculations requiredCalculate the usage rate and apply to actual usage for the periodSame rate used in subsequent years21Partial Year Depreciation: Example22Asset purchased on July 1, 2017. Information relating to the asset is:Cost: $10,000Estimated service life: five yearsResidual value end of five years: none Determine depreciation expense under the double-declining-balance method Determine full year depreciation as follows:First full year = $10,000 x 40% = $4,000Second full year = $6,000 x 40% = $2,400Third full year = $3,600 x 40% = $1,440Partial Year Depreciation: Example23Date of purchase, July 1, 2017 Allocate first full year’sdepreciation of $4,000between 2017 and 2018$2,000$2,000Allocate second full year’s depreciation of $2,400between 2018 and 2019$1,200$1,200201720182019Revision of Depreciation EstimatesDetermination of depreciation involves estimates of useful life, residual value, pattern in which asset benefits will be receivedThese estimates need to be reviewed regularly (under IFRS, at least at the end of every fiscal year end)When these estimates are revised, depreciation is recalculatedThe revised depreciation is applied prospectively to the remaining life of the asset, i.e., it is accounted for in the period of the change and to future periodsThe changes do not affect prior periods24Revision of Depreciation Estimates: ExampleDepreciable asset purchased for $90,000 Estimated life was 20 yearsEstimated residual value was $10,000Pattern of benefits received: equal amounts per periodIn year 9, estimates were revised as follows:Estimated life: total of 30 yearsEstimated residual value: $2,000Determine amortization for 9th year based on the straight-line method of depreciation25Revision of Depreciation Estimates: ExampleBook value of the asset at the date of revision of estimates:($90,000 – $10,000) / 20 years = $4,000 per year$4,000 × 8 years = $32,000 of Accumulated DepreciationBook value: $90,000 – $32,000 = $58,000Amount to be depreciated (9th to 30th year = 22 years remaining)($58,000 – $2,000) / 22 years = $2,545 each year26Impairment: OverviewImpairment occurs when the carrying amount of the long-lived asset (such as PP&E) is greater than its future economic benefit to the companyThere are many external and internal indicators that provide evidence of possible impairmentManagement needs to regularly evaluate assets for these indicators of impairmentIFRS requires this at the end of each reporting periodIf there is an indicator of possible impairment, then the asset must be tested for impairmentTwo main approaches to measuring impairment losses are:Cost recovery impairment modelRational entity impairment model27Cost Recovery Impairment ModelUnder this model, an asset is impaired only if carrying amount cannot be recovered from using and eventually disposing of the asset (recoverability test)i.e. impaired if carrying amount > undiscounted future net cash flowsImpairment loss is then measured as asset’scarrying amount less fair valueFair value of the asset is best measured by quoted market prices in active marketsIt is by its nature a present value or discounted measureImpairment losses cannot be reversedApplied by ASPE28Rational Entity Impairment ModelThis approach assumes that an entity makes rational decisions in managing its long-term assetsIf management can earn a higher return from using an asset (value in use) then the company will continue to use itIf management can earn a higher return from selling the asset, then the rational decision is to sell it (fair value less cost of disposal)An impairment loss is determined by comparing the asset’s carrying amount and recoverable amount (greater of the value in use and the fair value less cost of disposal)If carrying amount recoverable amount, then impairment loss is difference between two values29Rational Entity Impairment ModelValue in useIs the present value of the future cash flows expected to be derived from the asset’s use and subsequent disposalFair Value Less Cost of DisposalIs the amount currently expected to be received from the sale of the asset in an orderly transaction between market participants after subtracting incremental costs directly related to the sale or disposal30Asset Groups and Cash-Generating Units (CGU)Many assets do not generate cash flows independently, so impairment analysis cannot be done at the level of the individual assetThese assets are identified with an asset group or cash-generating unit (CGU)i.e. “smallest identifiable group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets” (IAS 36.6)Both cost recovery and the rational entity impairment models are then applied to the groups of assets, instead of the individual assetAny impairment losses are then allocated to individual assets on a pro-rata basisNo individual asset should be reduced below its fair value (under cost recovery model) or recoverable amount (under rational entity model) – if these amounts are known31Held for SaleLong-lived asset is classified as held for sale if the company intends on disposing the asset by sale and meets strict criteria (described in Ch. 4)Held for sale assets are Reported separately on the statement of financial positionNot depreciatedMeasured at the lower ofCarrying amount, and Fair value less costs to sellSubsequent increases in net realizable value may be recognized as gains, but only to the extent they offset previously recognized losses32DerecognitionPlant assets may be:retired voluntarily, or disposed of by sale, exchange, involuntary conversion, donationDepreciation is recorded up to the date of disposal before determining gain or lossGains or losses from disposal are normally shown with “Other” revenues and expenses in the income statement33Presentation and DisclosureThere are many significant disclosures required for property, plant, and equipment Types of disclosures include the following:cost and the accumulated depreciationdepreciation method and rate or periodassumptions surrounding fair-value-related measurementscarry amounts of assets held for saleoutstanding contingenciesSpecific standards under IFRS generally have more extensive disclosure requirements compared to ASPE34Analysis of Property, Plant, and Equipment351. Activity analysis(efficiency in using assets to generate revenues)Average Total AssetsNet RevenueTotal Asset Turnover = Net IncomeProfit Margin = Net Revenue2. Profitability analysis(net income earned from each sales dollar):Analysis of Property, Plant, and Equipment36Net RevenueAverage Total Assets××Return on Assets (effect long-lived assets have on profitability):Net Income= Net Revenue= Net Income Average Total AssetsProfit Margin= Asset TurnoverIFRS and ASPEASPE and IFRS are consistent in many areas of accounting for depreciation and disposition Most significant difference between the two standards relates to measurement of impairment losses There are no major changes expected in this area37Looking AheadFew changes are expected in the near future to standards covering the majority of property, plant and equipment, with one possible exceptionAccounting standards related to the upstream extractive activities undertaken by companies in the mining and oil and gas industries38