Chapter 10 - Lecture notes 9 PDF

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lecture notes on chapter 10 from arsineh class...

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Chapter 10 Revaluation model of measuring carrying values subsequent to initial acquisition     

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Revaluation model – restates the carrying value of an asset to the asset’s fair value on the date of revaluation Can be applied to PPE and intangible assets Cost model still an option Cost model required if fair value not reliably measured Subsequent to initial recognition o Revalued amount – fair value at revaluation date – subsequent accumulated depreciation + impairment losses o Not required to evaluate each year o Revelations dependent on asset type and changes in fair value vs. carrying value o Applied consistently to assets in the same class o Class – grouping of assets of similar nature Adjusting asset values for revaluation o Assets not subject to depreciation or amortization  Adjust carrying value  Record adjustment through profit or loss o Assets subject to depreciation or amortization  Split the adjustment between the gross carrying amount and accumulated depreciation  Proportional method o Restates asset’s gross carrying value and its accumulated depreciation on the date of revaluation proportionally o Both amounts increase by the same percentage o The asset, the depreciation, and net book value would increase by the same percentage o (FV-BV)/BV = percent to decrease  Elimination method o resets the balance of accumulated depreciation to zero on the date of revaluation o Result – gross carrying amount equals the net carrying amount o Revaluation of the net carrying amount involves adjusting the gross carrying amount o Would get rid of depreciation value so BV = Assets value

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Comparison of the proportional and elimination methods  Proportional method maintains the character of the original purchase  Elimination method produces numbers that result from a purchase at revaluation date  Neither method is ideal  Professional judgement used to select method Accounting for the effect of revaluation on equity  Answer is not simple  Depends if revaluation is upward or downward  Depends on past revaluations for the same asset  Treatment is asymmetric depending on cumulative adjustment Adjusting depreciation in periods subsequent to revaluation  After a revaluation, depreciation needs to be revised  Treated as a change in estimate because the accounting policy hasn’t changed, the following year the same depreciation policy is used  Accounted for prospectively

Impairment     

Impairments are not optional Prudence/conservatism requires assets not be carried at > than recoverability Tangible and long term assets must be tested if indicators are there Intangible with indefinite and Goodwill life must be tested every year Involves three stages o Preliminary steps to determine what should be tested for impairment  Consider if item generates cash flows independent from others  Need to separate or group assets into cash generating units  Cash generating units – smallest identifiable group of assets that generates cash inflows largely independent from other assets  Test for impairment only if indication of impairment  Exception to IAS – annual search  Intangible assets with indefinite lives and goodwill  Since amortization not recorded there is no gradual decrease of the carrying value  IAS 36 requires testing for impairment o Testing for impairment  Compare asset’s carrying value with “recoverable amount”  Recoverable amount – higher of:  An asset’s fair value less cost to sell  Its value in use  If carrying value > recoverable amount, then asset is impaired, therefore, required write-down to recoverable amount  If not, no impairment and no write-down  Fair value less cost to sell  Fair value – same meaning as used for other fair value application

Sources of fair value in order of preference o The price of the particular asset in a binding sale agreement o The market price of the particular asset in an active market o Actual transactions involving similar assets within the same industry  Costs to sell are referred to as costs of disposal o Cost of disposal – incremental costs directly attributable to the disposal excluding finance costs and income tax exense o Examples  Removal and transportation costs if paid by the seller  Costs of cleaning and refurbishment Recognition of any impairment in the financial statement 

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