IFRS Chapter 9 - Apunts 9 PDF

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CHAPTER 9

IFRS related to property, plant, and equipment is found in 16 (“Property, Plant and Equipment”) and 23 (“Borrowing Costs”). IFRS follows most of the same principles as GAAP in the accounting for property, plant, and equipment. There are, however, some significant differences in the implementation: IFRS allows the use of revaluation of property, plant, and equipment, and it also requires the use of component depreciation. In addition, there are some significant differences in the accounting for both intangible assets and impairments. IFRS related to intangible assets is presented in 38 (“Intangible Assets”). IFRS related to impairments is found in 36 (“Impairment of Assets”).

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The definition for plant assets for both IFRS and GAAP is essentially the same.

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Both international standards and GAAP follow the cost principle when accounting for property, plant, and equipment at date of acquisition. Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

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Under both IFRS and GAAP, interest costs incurred during construction are capitalized. Recently, IFRS converged to GAAP requirements in this area.

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IFRS, like GAAP, capitalizes all direct costs in self-constructed assets such as raw materials and labor. IFRS does not address the capitalization of fixed overhead, although in practice these costs are generally capitalized.

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IFRS also views depreciation as an allocation of cost over an asset’s useful life. IFRS permits the same depreciation methods (e.g., straight-line, accelerated, and units-of-activity) as GAAP. However, a major difference is that IFRS requires component depreciation. specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. Component depreciation is allowed under GAAP but is seldom used.

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A look at IFRS

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IFRS uses the term , rather than salvage value, to refer to an owner’s estimate of an asset’s value at the end of its useful life for that owner.

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IFRS allows companies to revalue plant assets to fair value at the reporting date. Companies that choose to use the revaluation framework must follow revaluation procedures. If revaluation is used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.

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Under both GAAP and IFRS, changes in the depreciation method used and changes in useful life are handled in current and future periods. Prior periods are not affected. GAAP recently conformed to international standards in the accounting for changes in depreciation methods.

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The accounting for subsequent expenditures, such as ordinary repairs and additions, are essentially the same under IFRS and GAAP.

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The accounting for plant asset disposals is essentially the same under IFRS and GAAP.

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Initial costs to acquire natural resources are essentially the same under IFRS and GAAP.

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The definition of intangible assets is essentially the same under IFRS and GAAP.

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Intangibles generally arise when a company buys another company. In this case, specific criteria are needed to separate goodwill from other intangibles. Both GAAP and IFRS follow the same approach to make this separation, that is, companies recognize an intangible asset separately from goodwill if the intangible represents contractual or legal rights or is capable of being separated or divided and sold, transferred, licensed, rented, or exchanged. In addition, under both GAAP and IFRS, companies recognize acquired inprocess research and development (IPR&D) as a separate intangible asset if it meets the definition of an intangible asset and its fair value can be measured reliably.

A look at IFRS

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IFRS requires an impairment test at each reporting date for plant assets and intangibles and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell or its value-in-use. Value-in-use is the future cash flows to be derived from the particular asset, discounted to present value. Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value.

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IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for asset. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.

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The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in

A look at IFRS

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 plant assets and intangibles. 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 GAAP.

A look at IFRS

1.

As a recent graduate of State University you're aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.

2.

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and personal property costing ₤ 750,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2014? a. b. c. d.

₤ 335,000 ₤ 200,000 ₤ 426,250 ₤ 376,250

A look at IFRS 3.

Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and personal property costing ₤750,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company's December 31, 2014 statement of financial position? a. b. c. d.

4.

₤7,665,000 ₤7,573,750 ₤6,483,750 ₤7,800,000

IFRS allows companies to revalue plant assets to fair value. Which of the following statements is correct regarding revaluation? a. At the time a company purchases an asset it must decide whether to follow revaluation procedures for the asset; once the election is made, it must be followed for the remainder of the asset's useful life. b. Assets that are experiencing rapid price changes must be revalued quarterly, other assets can be revalued on an annual basis. c. The journal entry to record a revaluation when the asset's price has increased includes a credit to the account revaluation surplus. d. All of these answer choices are correct.

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IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value, where is the account "Revaluation Surplus" reported? a. On the income statement as part of income from continuing operations (other revenues and gains). b. On the income statement as part of discontinued operations (discontinuing historical cost). c. On the statement of financial position as part of accumulated comprehensive income (equity). d. All of the choices are acceptable methods for the reporting of "Revaluation Surplus".

A look at IFRS

6.

Nicholson Company purchased equipment on January 1, 2012, for €28,000 with an estimated residual value of €7,000 and estimated useful life of 8 years. On January 1, 2014, Nicholson decided the equipment will last 12 years from the date of purchase. The residual value is still estimated at €7,000. Using the straight-line method the new annual depreciation will be: a. b. c. d.

7.

An asset was purchased for ¥200,000. It had an estimated residual value of ¥40,000 and an estimated useful life of 10 years. After 5 years of use, the estimated residual value is revised to ¥32,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. b. c. d.

8.

€1,575. €1,750. €2,100. €2,333.

¥24,000. ¥17,600. ¥12,000. ¥16,800.

Under U.S. GAAP a. b. c. d.

property, plant, and equipment may not be revalued. component depreciation is not required. research and development costs are expensed as incurred. All of these answer choices are correct.

A look at IFRS

9.

Which of the following statements concerning IFRS and U.S. GAAP is correct? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of these answer choices are correct....