IA NCA, PPE, TOA - INTERMEDIATE ACCOUNTING PDF

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NCA HELD FOR SALENONCURRENT ASSETA ​ noncurrent asset ​ is an asset that does not meet the definition of a current asset.The non-current asset may be an individual asset, like land and building, or a disposal group.A ​ disposal group ​ is a group of assets to be disposed of, by sale or otherwise, to...

Description

NCA HELD FOR SALE NONCURRENT ASSET A noncurrent asset is an asset that does not meet the definition of a current asset. The non-current asset may be an individual asset, like land and building, or a disposal group. A disposal group is a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. NONCURRENT ASSET HELD FOR SALE PFRS 5, paragraph 6, provides that a non-current asset or disposal group is classified as held for sale if the carrying amount will be recovered principally through a sale transaction rather than through continuing use. This simply means that the entity does not intend to use the asset as part of the on-going business but instead intends to sell it and recover the carrying amount principally through sale. CONDITIONS FOR CLASSIFICATION AS HELD FOR SALE A noncurrent asset or disposal group shall be classified as held for sale if the following conditions are present: 1. The asset or disposal group is available for immediate sale in the present condition subject only to terms that are usual and customary for sale of such assets or disposal group. In other words, the current condition of the asset should be adequate to be effectively “sold as seen”. 2. The sale must be highly probable . DEFINITION OF HIGHLY PROBABLE For the sale to be highly probable, the following conditions must be met: 1. Management must be committed to a plan to sell the asset or disposal group. 2. An active program to locate a buyer and complete the plan must have been initiated. 3. The sale is expected to be a c  ompleted sale within one year from the date of classification as held for sale. An extension of the one-year period does not preclude the asset or disposal group from being classified as a held for sale if the delay is caused by events or circumstances beyond the entity's control. 4. The asset or disposal group must be actively marketed for sale at the sale price that is reasonable in relation to the fair value. 5. Actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.

MEASUREMENT OF ASSET HELD FOR SALE PFRS 5, paragraph 15, provides that an entity shall measure a noncurrent asset or disposal group classified as held for sale at the lower of carrying amount or fair value less cost of disposal. PFRS 5, paragraph 25, further provides that a noncurrent asset classified as held for sale shall not be depreciated. WRITEDOWN TO FAIR VALUE LESS COST OF DISPOSAL If the fair value less cost of disposal is LOWER than the carrying amount of the asset or disposal group, the writedown to fair value less cost of disposal is treated as an impairment loss. If the noncurrent asset is a disposal group, the impairment loss is apportioned across the assets based on carrying amount after writing off and goodwill first. SUBSEQUENT INCREASE IN FAIR VALUE If subsequently there is an increase in the fair value less cost of disposal, PFRS 5, paragraph 21, provides that an entity shall recognize a gain but not in excess of any impairment loss previously recognized. Illustration On January 1, 2020, an entity acquired an equipment at a cost of P5,000,000 to be used in the ordinary course of business. The equipment has an estimated useful life of 10 years and a residual value of P500,000. On January 1, 2023, the equipment was classified as held for sale. On such date, the fair value less cost of disposal was estimated at P1,900,000. On June 30, 2023, The equipment was sold for P1,500,000. 1.

To remove the equipment from property, plant, and equipment and classify it as held for sale on January 1, 2023. Equipment Held for Sale 3,650,000 Accumulated Depreciation 1,350,000 Equipment 5,000,000

[Solution] Cost Accumulated Depreciation Carrying Amount (01/01/23)

5,000,000 1,350,000 ( 5,000,000 - 500/10 x 3) 3,650,000

2. To measure the equipment held for sale at the lower of carrying amount and fair value less cost of disposal on January 1, 2023. Impairment Loss Equipment Held for Sale [Solution]

1,750,000 1,750,000

Carrying Amount Fair Value less Cost of Disposal Impairment Loss

3,650,000 1,900,000 1,750,000

3. The record the sale of the equipment on June 30, 2023: Cash Loss on Sale of Equipment Equipment Held for Sale

1,500,000 400,000 1,900,000

Note: The equipment held for sale is no longer depreciated from January 1 to June 30, 2023. Another Illustration On January 1, 2020, an entity acquired and equipment at a cost of P4,000,000 to be used in the ordinary course of business. The equipment has an estimated useful life of 5 years and has no residual value. On December 31, 2021, the equipment was classified as held for sale. On such date, the fair value less cost of disposal was P3,000,000. On July 1, 2020, the equipment was sold for P2,900,000. 1. To remove the equipment from property, plant and equipment and classify it as held for sale on December 31, 2021. Equipment Held for Sale Accumulated Depreciation Equipment [Solution] Cost Accumulated Depreciation Carrying Amount (01/01/23)

2,400,000 1,600,000 4,000,000

4,000,000 1,600,000 ( 4,000,000/5 x 2) 2,400,000

2. To measure the equipment held for sale at the lower of carrying amount and fair value less cost of disposal on December 31, 2021: No entry is required because the equipment held for sale is measured at the carrying amount of P2,400,000 which is lower than the fair value less cost of disposal. [Solution] Fair Value less Cost of Disposal Carrying Amount Expected Gain

3,000,000 2,400,000  600,000

The gain is not recognized at this time because any gains should not be anticipated at the point of classification as held for sale.

3. To record the sale of the equipment on July 1, 2022: Cash 2,900,000 Equipment Held for Sale 2,400,000 Gain on Sale of Equipment 500,000 REVALUED ASSET CLASSIFIED AS HELD FOR SALE PFRS 5, paragraph 18, provides that when an entity adopts the revaluation model for the measurement of assets, any asset classified as held for sale should be revalued to fair value immediately prior to the classification as held for sale. The additional revaluation surplus is equal to the fair value at the classification date less the carrying amount at that date. Any cost of disposal at the classification date should be recognized as impairment loss for the period and deducted from the asset held for sale. However, at subsequent year-end, the revalued asset classified as held for sale shall be measured at the lower of carrying amount and fair value less cost of disposal. Illustration On January 1, 2020, an entity acquired land at a cost of P2,500,000. The land is measured at fair value in accordance with the revaluation model. On December 30, 2020, the fair value of the land was P3,000,000. On June 30, 2021, the land was classified as held for sale. On such date, the fair value was estimated at P3,500,000 and the cost of disposal at P100,000. On December 31, 2021, the land was sold for P3,350,000. 1. To record the acquisition of land on January 1, 2020: Land

2,500,000 Cash

2,500,000

2. To revalue the land at fair value on December 31, 2020: Land 500,000 Revaluation Surplus 500,000 [Solution] Fair Value (12/31/20) Cost Revaluation Surplus

3,000,000 2,500,000 500,000

3. To revalue the land at fair value on the date of classification as held for sale on June 30, 2021: Land

500,000 Revaluation Surplus

500,000

[Solution] Fair Value (06/30/21) Carrying Amount (12/31/20) Additional Revaluation Surplus

3,500,000 3,000,000 500,000

4. To remove the land from property, plant, and equipment and classify it as held for sale on June 30, 2021: Land Held for Sale Land

3,500,000 3,500,000

5. To recognize the cost of disposal as impairment loss on June 30, 2021: Impairment Loss Land Held for Sale

100,000 100,000

6. To record the sale of land on December 31, 2021 Cash Loss on Sale of Land Land Held for Sale

3,350,000 50,000 3,400,000

7. To transfer the revaluation surplus to retained earnings: Revaluation Surplus Retained Earning s

1,000,000 1,000,000

ABANDONED NONCURRENT ASSET PFRS 5, paragraph 13, provides that an entity shall not classify as held for sale a noncurrent asset or disposal group that is to be abandoned. This is because the carrying amount will be recovered principally through continuing use or the noncurrent asset is to be used until the end of its economic life. TEMPORARILY ABANDONED PFRS 5, paragraph 14, provides that an entity shall not account for a noncurrent asset that has been temporarily taken out of use as if it had been abandoned. For example, an entity ceases to use a manufacturing plant because the demand for its product has declined. However, the plant is maintained in workable condition and it is expected that it will be brought back into use if demand picks up. In this case, the plant is not regarded as abandoned.

CHANGE IN CLASSIFICATION Circumstances could arise leading to the noncurrent asset no longer being classified as held for sale. For example, there is a decision not to sell the noncurrent asset, or the criteria for being classified as held for sale may no longer be met. In such a case, PFRS 5, paragraph 27, provides that the entity shall measure the noncurrent asset that ceases to be classified as held for sale at the lower of a. Carrying amount before the asset was classified as held for sale adjusted for any depreciation, amortization, or revaluation that could have been recognized if the asset had not been classified as held for sale. b. Recoverable amount at the date of the subsequent decision not to sell. Illustration An entity purchased equipment for P5,000,000 on January 1, 2020 with a useful life of 10 years and no residual value. On December 31, 2021, the entity classified the asset as held for sale. The fair value of the equipment on December 31, 2021 is P3,300,000 and the cost of disposal is P100,000. On December 31, 2022, the fair value of the equipment is P3,800,000 and the cost of disposal is 200,000. On the same date, the entity believed that the criteria for classification as held for sale can no longer be met. Accordingly, the entity decided not to sell the asset but to continue to use it. 1. To record the purchase of equipment on January 1, 2020: Equipment Cash

5,000,000 5,000,000

2. To record depreciation for 2020: Depreciation Accumulated Depreciation

500,000 500,000

(5,000,000/10)

3. To record depreciation for 2021: Depreciation Accumulated Depreciation

500,000 500,000

4. To remove the asset from property, plant, and equipment and classify it as held for sale on December 31, 2021:

Equipment Held for Sale Accumulated Depreciation Equipment

4,000,000 1,000,000 5,000,000

5. To measure the equipment held for sale at the lower of fair value less cost of disposal and carrying amount on December 31, 2021: Impairment Loss Equipment Held for Sale [Solution] Carrying Amount Fair Value less Cost of Disposal Impairment Loss

800,000 800,000

4,000,000 3,200,000 800,000

(3,300,000 - 100,000)

6. To measure the equipment that ceases as held for sale at the lower of carrying amount adjusted for depreciation that would have been recognized had the equipment not been classified as held for sale and the recoverable amount on December 31, 2022: Equipment Held for Sale Gain on Reclassification

300,000 300,000

[Solution] Carrying Amount (12/31/21) Depreciation that would have been recognized in 2022 Carrying Amount (12/31/22)

4,000,000 ( 500,000) 3,500,000

Recoverable Amount (3,800,000 - 200,000)

3,600,000

Measurement of Equipment - lower Carrying Amount per book (12/31/21) Gain on Reclassification

3,500,000 (3,200,000) 300,000

On December 31, 2022, the equipment is measured at P3,500,000 because it is lower than the fair value less cost of disposal of P3,600,000. PFRS 5, paragraph 28, states that any adjustment to the carrying amount of a noncurrent asset that ceases to be classified as held for sale should be included in the profit or loss. However, if the noncurrent asset is measured using the revaluation model before it was classified as held for sale, any adjustment shall be treated as a revaluation increase or decrease. 7. To reclassify the asset as property, plant, and equipment on December 31, 2022: Equipment Equipment Held for Sale

3,500,000 3,500,000

8. To record depreciation for 2023: Depreciation Accumulated Depreciation

500,000 500,000

(3,500,000/7 years

remaining)

PRESENTATION OF ASSET CLASSIFIED AS HELD FOR SALE PFRS 5, paragraph 3, provides that assets classified as noncurrent in accordance with PAS 1 show not be reclassified as current assets until they meet the criteria to be classified as held for sale. Simply stated, a noncurrent asset that is already classified as held for sale shall be presented separately as current asset. PFRS 5, paragraph 38, provides that if the noncurrent asset is a disposal group classified as held for sale, the assets and liabilities of the group shall be presented separately and cannot be offset as a single amount. In other words, the assets of the disposal group shall be described as “noncurrent assets classified as held for sale” presented separately at the single amount under current assets. The liabilities of the disposal group shall be described as “liabilities directly associated with noncurrent assets classified as held for sale” presented separately as a single amount under current liabilities. CHANGE IN METHOD OF DISPOSAL The IASB amended IFRS 5 to clarify the accounting treatment when an entity reclassifies an asset or disposal group from “held for sale” to “help for distribution to owners” or vice versa without any time lag. a. The change in classification is considered a continuation o  f the original plan of disposal. b. The entity shall continue to apply the “held for sale” or “held for the distribution” accounting. In other words, the assets shall be measured at the lower between carrying amount and fair value less cost of disposal or fair value less cost to distribute. c. At the time of reclassification, the entity shall recognize any impairment loss or subsequent increase in fair value less cost of disposal or distribution. d. The change in classification does not, in itself, extend the period in which a sale has to be completed.

1. An entity shall classify a non-current asset or disposal group as held for sale when a. The carrying amount of the asset or disposal group will be recovered through a sale transaction

b. The carrying amount of the asset or disposal group will be recovered through continuing use c. The noncurrent asset or disposal group is to be abandoned d. The noncurrent asset or disposal group is idle or retired from active use 2. Noncurrent asset or disposal group is classified as held for sale when the asset is available for immediate sale in the present condition and the sale is highly probable. For the sale to be highly probable which of the following statements is incorrect? a. Management must be committed to a plan to sell the asset b. Active program to locate a buyer and complete the plan must be initiated c. The asset must be actively marketed for sale at a reasonable price in relation to the fair value d. The sale is expected to qualify for recognition as a completed sale within two years from the date of the classification of the asset as held for sale 3. An entity acquired a subsidiary exclusively with a view to selling it. The subsidiary met the criteria to be classified as held for sale. At the end of the reporting period, the subsidiary has not yet been sold and six months have passed since the acquisition. How will the subsidiary be measured in the statement of financial position at the date of the first financial statements after acquisition? a. b. c. d.

At fair value At the lower of cost and fair value less cost of disposal At carrying amount In accordance with applicable IFRS

4. In order for a noncurrent asset to be classified as held for sale, the sale must be highly probable. What is the meaning of highly probable? a. b. c. d.

The future sale is likely to occur The future sale is more likely than not to occur The sale is certain The probability is higher than more likely than not

5. An entity shall measure a noncurrent asset or disposal classified as held for sale at a. b. c. d.

Carrying amount Fair value less cost of disposal Lower between carrying amount and fair value less cost of disposal Higher between carrying amount and fair value less cost of disposal

6. How should the assets and liabilities of a disposal group classified as held for sale be shown in the statement of financial position? a. The assets and liabilities shall be offset and presented as a single amount b. The assets of the disposal group be shown separately as current assets and the liabilities of the disposal group shall be shown separately as current liabilities c. The assets and liabilities shall be presented as a single amount and a deduction from equity d. There should be no separate disclosure of assets and liabilities that form part of a disposal group 7. What is the treatment of any gain on a subsequent increase in the fair value less cost of disposal of a noncurrent asset classified as held for sale? a. The gain shall be recognized in full b. The gain shall not be recognized c. The gain shall be recognized but not in excess of the cumulative impairment loss previously recognized d. The gain shall be recognized but only in retained earnings 8. A noncurrent asset that is to be abandoned shall not be classified as held for sale because a. b. c. d.

The carrying amount will be recovered principally through continuing use The noncurrent asset is difficult to value It is unlikely that the noncurrent asset will be sold within 12 months It is unlikely that there will be an active market for the noncurrent asset

9. An entity classified as a noncurrent asset accounted for under the cost model as held for sale at the current year-end. Because No offers were received at an acceptable price, the entity decided at the end of next year not to sell the asset but to continue to use it. The asset shall be measured at the end of next year at what amount? a. The lower of carrying amount and recoverable value b. The higher of carrying amount and recoverable value c. The lower of carrying amount on the basis that the asset had never been classified as held for sale and recoverable amount d. The higher of carrying amount on the basis that the asset had never been classified as held for sale and recoverable amount

10. An entity recently moved to a new building. The old building is actively marketed for sale and the entity expects to complete the sale in four months. Which statement is incorrect regarding the old building? a. b. c. d.

It will be reclassified as an asset held for sale It will be classified as a current asset It will no longer be depreciated It will be measured at historical cost

PPE DEFINITION. Property, plant and equipment are tangible assets that are held for use in production or supply of goods or services, for rental to others, or for administrative purposes, and are expected to be used during more than one period. Accordingly, the major characteristics in the definition of property, plant and equipment are: a. The property, plant and equipment are tangible assets, meaning with physical substance. b. The property, ...