ACCT3102 External Reporting Issues

Lecture 1
Property, Plant and Equipment:
Revaluations and Impairment

1
Reading
• HPHAH, Chapter 8
• Focus on section 8.3: Revaluation and impairment
• Section 8.2 & 8.4 are revision from ACCT2101. You will need a very thorough
knowledge of section 8.4 (depreciation) for next week’s topic, Accounting for
income tax.
• AASB 116 Property, Plant & Equipment
• AASB 136 Impairment of Assets
• AASB 13 Fair Value Measurement
• Tutorial questions
• Question: 12, 14, 15
• Problems: 8, 9, 10

2
Learning Objectives
1. Identify the issues involved in the initial recognition and subsequent
measurement of property, plant and equipment and apply the relevant
requirements of AASB 116 ‘Property, Plant and Equipment’.
2. Evaluate the role of revaluation in accounting for property, plant and equipment
and apply the relevant requirements in AASB 116 ‘Property, Plant and Equipment’
3. Explain asset impairment and implement the requirements of AASB 136
‘Impairment of Assets’

3
Lecture Outline
• Measurement of PPE
• Cost model
• Revaluation model
• Revaluation increments and decrements
• Example 1
• Example 2
• Disposal of revalued assets
• Example 3
• Impairment of assets
• Example 4
• Reversal of impairment loss
• Example 5
• Cash generating units

4
Measurement
• Measurement at recognition (Initial recognition)
• An item of property, plant and equipment that qualifies for recognition as an
asset shall be measured at its cost(AASB116, para15).
• Revision from ACCT2101 or referring to section 8.2 of textbook.
• Measurement after recognition (Subsequent measurement)
• A class of property, plant and equipment must be measured using either the
cost model or revaluation model (AASB 116, para. 29).
• Nature of a class of assets (para. 37):
• Grouping of assets of a similar nature and use in an entity’s operations
• Examples of PPE classes: land, land and buildings, machinery, ships, aircraft, motor
vehicles, furniture and fixtures

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Cost Model
• ‘After recognition as an asset, an item of PP&E shall be carried at
its cost less any accumulated depreciation and any accumulated
impairment losses’ (para. 30, AASB 116)

Straight-forward and simple.

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Revaluation Model

• After recognition, an item of PPE whose fair value can be measured reliably shall
be carried at a revalued amount being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent
impairment losses (para. 31, AASB 116)
• If an entity chooses revaluation model, the assets must be revalued at fair
value.
• Revaluations are to be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using
fair value at the reporting date (para. 31, AASB 116)
• The fair value must be kept up to date.

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Revaluation Model - Definitions
Carrying amount:
• Extract from Wesfarmers Ltd 2017 Financial Statements

Carrying amount: is the amount at which an asset is

recognised after deducting any accumulated depreciation and
accumulated impairment losses. Also called ‘net book value’.

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 Revaluation Model - Definitions
• Fair value:
1. It is a current exit price: the price that would be received
to sell an asset or paid to transfer a liability.
2. The asset is sold in an orderly transaction: The seller is not
in or near bankruptcy. No need or intention to liquidate its
assets.
3. The transaction is between market participants.

Disclosure in the notes: how fair values were determined for

the purpose of a revaluation.

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Revaluation Model - Definitions
• Sufficient regularity:
Depends on the nature of the class of asset
• If the fair value of an asset changes frequently, it should be revalued at
shorter intervals than an asset whose value is stable (para. 34)
• Where the fair value changes frequently and the changes are material, a
revaluation could be necessary each reporting period.
• Where such changes are not material, revaluations every three to five years
will be sufficient.

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Revaluation Model

• If an item of PPE is revalued, then all items in its asset class

must also be revalued.

• Why?
To avoid selective revaluation

Class of Assets:

Equipment A Equipment B Equipment C

(FV increases) (FV decreases) (FV decreases)

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Revaluation increments and decrements
• If an asset’s carrying amount is increased as a result of a revaluation,
the increase shall be credited directly to equity under the heading of
revaluation surplus (AASB 116 para. 39)
Dr Asset
Cr Revaluation surplus

• If an asset’s carrying amount is decreased as a result of a revaluation,

the decrease shall be recognised in profit or loss.

Dr Revaluation expense
Cr Asset

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Placement of revaluation increments and decrements
Eumundi Group Annual Report 2015

• Revaluation expense

Revaluation
expense

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Placement of revaluation increments and decrements

Revaluation surplus

Revaluation surplus

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 Reversal of Revaluation Increments
• Where a revaluation decrement reverses a previous increment: be debited to the
revaluation surplus previously credited.
• Any excess over the previous surplus would be debited to the revaluation expense.
e.g. $4 000 decrement to be recognised in this period; One year ago, asset was
revalued by $1000 (existing balance of revaluation surplus is $1 000).

Last year:
Dr Asset 1 000
Cr Revaluation surplus 1 000
This year:
Dr Revaluation surplus 1 000
Dr Revaluation expense 3 000
Cr Asset 4 000
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Example 1 - Increment and reversal
Burchells Ltd owns a machine that originally cost $36 000. It has been depreciated using
the straight-line method for 3 years, giving an accumulated depreciation of $15 000 (the
salvage value was estimated at $6000 and the useful life at 6 years).

At the beginning of the current financial year its carrying value is therefore $21000. It has
been decided by the directors to revalue it to fair value, which is assessed to be $39 000.

The salvage value and useful life are considered to be unchanged.

($36 000 - $6000)/6 yrs

Carry amount=$36 000 cost - $15 000 A.D.
= $5 000 dep’n p.a.
=$21 000
x 3 yrs
= $15 000 accum dep’n
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EXAMPLE 1 CONT:
All answers must be in accordance with the requirements of AASB 116.

REQUIRED:
(a)What are the appropriate journal entries to record
• the revaluation at the start of the year and

• the depreciation expense for the current year (rounded to the nearest
dollar)?
(b)Assume that at the end of the year, an unforeseeable technological break-
through has occurred. The directors believe that the fair value of the machine
has decreased to $8 000 as a result of the change in technology and revalue
the equipment accordingly. Ignore impairment.
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Example 1: Part (a)
Beginning of the year: Revaluation increment
Dr Accumulated depreciation – machine 15 000
Cr Machine 15 000
(Step 1: Close accumulated depreciation. Net method)- see slide 24

Dr Machine 18 000
Cr Revaluation surplus 18 000 ($39 000 - $21 000)
(Step 2: Revalue the asset to fair value.)

Depreciation for the current period:

Dr Depreciation expense 11 000
Cr Accumulated depreciation – machine 11 000
($39 000 – 6 000)/3yrs
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 Example 1 cont:
• (b) Assume that at the end of the year, an unforeseeable technological
break- through has occurred. The directors believe that the fair value
of the machine has decreased to $8 000 as a result of the change in
technology and revalue the equipment accordingly.
(Ignore impairment at this stage)

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19
Example 1: Part (b)

Revaluation downward – end of year

Carrying amount = 28 000 [$39 000 – 11 000]
Fair value = 8 000
Decrement = 20 000
Is there a balance in the revaluation surplus that needs to be reversed before
recording the decrement?

YES - $18 000 ---- Reversal of revaluation increment

Dr Accum dep’n – machine 11 000
Cr Machine 11 000

Dr Revaluation surplus 18 000

Dr Revaluation expense 2 000
Cr Machine 20 000
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Reversals of Revaluation Decrements
Where a revaluation increment reverses a previous decrement: be credited
to revaluation income. Any excess over the previous revaluation decrement
(revaluation expense) would be credited to the revaluation surplus.
e.g. $5 000 increment to be recognised this year;
last year $3000 revaluation expense was recorded
Last year:
Dr Revaluation expense 3 000
Cr Asset 3 000
This year:
Dr Asset 5 000
Cr Revaluation income 3 000
Cr Revaluation surplus 2 000
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Example 2 – Decrement and reversal

Pigeon Ltd purchased land for $750 000 6 years ago. It was revalued on 31
December 2018 to $600 000.
A subsequent revaluation on 31 December 2020 found the market value to be
$930 000 due to a change in council zoning for the area.

REQUIRED:
What are the journal entries required to record the revaluations on 31
December 2018 and 31 December 2020? (Compliance with AASB 116 is
required). Ignore any impairment implications.
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Example 2
31 December 2018
Dr Revaluation expense 150 000
Cr Land 150 000
$750 000 - $600 000 = $150 000 decrement (loss)

31 December 2020
$930 000 - $600 000 = $330 000 increment
Reverse loss of $150 000, recognise balance
$180 000 directly in equity
Dr Land 330 000
Cr Revaluation income 150 000
Cr Revaluation surplus 180 000
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Treatment of accumulated depreciation upon revaluation
Two allowable treatments of the balance of accumulated depreciation when an
asset is revalued (AASB 116, para. 35):
• Net method (Example 1, most frequently used approach)
• The accumulated depreciation of the asset to be revalued is closed to the asset
account before revaluation.
• Gross method
• Both the gross asset value and existing accumulated depreciation at the date
of revaluation is increased by the same proportion as the gross carrying
amount of the asset
• The end result is that the carrying amount of the asset represents its revalued
amount.
• Not required in ACCT3102!

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Is a switch between measurement models allowable?

• AASB 116 provides no comment on this issue.

• Instead, need to refer to AASB 108 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’
• Para. 14 of AASB 108 allows a change in measurement only if it results in
‘reliable and more relevant’ financial information.
• Professional judgement is required.

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Disposal of Revalued Assets
Derecognition
• Gain or loss from derecognition of an item of PPE is to be calculated as
the difference between (AASB 116):
• net disposal proceeds (if any); and
• the asset’s carrying amount
• Derecognition:
• the point in time when an asset is removed from the balance sheet
• when an asset is sold; or
• when no future economic benefits are expected from an asset’s
use or disposal
Cash 10,500
Accumulated depreciation 10,000
Machinery 20,000
Gain on sale 500
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Disposal of Revalued Assets
Treatment of Revaluation Surplus on Derecognition
• When an asset is sold, any resulting balance in the revaluation
surplus (AASB 116):
• May be transferred directly to retained earnings (Note ‘may’ not
‘must’)
• Cannot be transferred to the profit and loss account
• Revaluation surplus may also be transferred to retained earnings as
asset depreciates.

• Alternative option: just leave amounts in the revaluation surplus.

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Example 3: Disposal of Revalued Assets
• On 1 July 2017, Bombo Ltd acquires a block of land at a cost of $60 000. On 1 July
2018 it is revalued to $75 000. On 30 June 2019 the land is sold for $90 000.
Required: Prepare the journal entry to record the sale.
30 June 2019:
Carry amount of the land: $75 000
Gain on sale=90 000-75 000=$15 000
Dr Cash at bank 90 000
Cr Gain on sale of land 15 000
Land 75 000
To eliminate the balance of the revaluation surplus (optional)
Dr Revaluation surplus 15 000
Cr Retained earnings 15 000
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What have we covered so far?

An asset, an item of PPE shall be carried at: its

Cost Model cost less any accumulated depreciation and
any accumulated impairment losses.

Subsequent
Measurement
An item of PPE whose fair value can be
measured reliably shall be carried at a
Revaluation revalued amount being its fair value at the date
Model of the revaluation less any subsequent
accumulated depreciation and subsequent
impairment losses.

Therefore, need to consider impairment losses….

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Impairment of Assets
• What is impairment?
• A term to describe a significant reduction in the value of long-lived assets.
• AASB 136 ‘Impairment of Assets’ applies to all assets regardless
of tangibility or the measurement method
• except those excluded from scope in para. 2 such as inventories,
biological assets, employee benefit assets, deferred tax assets…
• Basic requirements of AASB 136:
‘An entity shall assess at each reporting date whether there is any indication that an asset
may be impaired. If such an indication exists, the entity shall estimate the recoverable
amount of the asset.’ (para. 9)

‘If, and only if, the recoverable amount of an asset is less than its carrying amount, the
carrying amount of the asset shall be reduced to its recoverable amount. That reduction is
an impairment loss.’ (para. 59)
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Impairment Events

31
Indication of Impairment
External sources of information (para. 12):
• declines in market value greater than would be expected as a result of normal wear and tear;
• technological changes that could affect the entity;
• increases in interest rates that would reduce fair value calculations involving future cash flows;
• the carrying amount of net assets exceeds the entity’s market capitalisation;

Internal sources of information (para. 12):

• evidence of obsolescence or physical damage to an asset;
• changes, such as restructuring, that could affect the value in use of an asset; and
• evidence that an asset’s economic performance will be worse than expected.

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Indication of Impairment
• Where any of these factors indicate impairment, the
recoverable amount must be calculated.

• If the recoverable is less than its carrying amount, the asset

must be immediately written down to its recoverable amount
and an impairment loss recognised as an expense in the income
statement.

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Impairment of Assets

34
Definitions
Recoverable amount of an asset or a cash generating unit is the higher of its
fair value less costs of disposal and its value in use (AASB 136, para. 6)
Fair value less costs of disposal is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (AASB 13 Fair Value Measurement, para.
6)… less costs of disposal
(include items such as legal costs, stamp duty, costs of removing the asset, and
direct incremental costs to ready the asset for its sale )
(AASB 13, para. 28).
Value in use is the present value of the future cash flows expected to be derived
from an asset or cash-generating unit (AASB 136, para. 6)
Cash-generating unit is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash flows from other assets or
groups of assets (AASB 136, para. 6).
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Cash-Generating Units
• Why does AASB 136 refer to cash-generating units?
• In many cases it is not possible to calculate the recoverable amount of an
individual asset because it belongs to a much larger unit.
• The asset by itself may not produce cash flows, but does so in combination
with other assets

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 Wesfarmers 2016 (note 17)

Identification of CGU involves judgement. Not required in ACCT3102. 37

Impairment of Assets
Recognizing Impairments
Example: 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.

$200,000 $205,000
No
Impairment

$180,000 $205,000
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Impairment of Assets
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is $175,000
rather than $205,000.
$20,000 Impairment Loss

$200,000 $180,000

$180,000 $175,000
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Impairment of Assets
In summary:
• AASB 136 requires that tests be made on each asset or cash-
generating unit at each reporting date to see whether there is any
indication of an impairment loss on that asset.
• When the tests indicate a possible impairment loss, the asset’s
recoverable amount must be measured.

• Different accounting procedures for PP&E measured using:

• Cost model and
• Revaluation model

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Example 4
The H Company has property, plant and equipment (PPE) with
a carrying amount of $400 000 at 30 June 2019. Significant
technological changes have occurred in relation to the PPE that
are likely to impact on H Company in general. Also, a
restructuring of H Co is under discussion which will likely lead
to lower usage of the item of PPE.

The net selling price of the PPE is $300 000 and its value in use
to H Company is $375 000.

Fair value less costs of

disposal

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Example 4
a) What journal entries, if any, would be passed in accordance with AASB 116 and
AASB 136 if the asset is measured using the cost model?
• Are there indicators of impairment?
• Yes, significant technological change and possible restructuring of H Co which
will reduce the value in use of the item of PPE
• Required to measure recoverable amount
• Recoverable amount is $375 000 (higher of fair value less costs of disposal and
value in use)
• Recoverable amount is less than carrying amount
$375 000 < $400 000
• Recognise impairment loss of $25 000
Dr Impairment loss $25 000
Cr Accumulated Impairment loss $25 000
($400 000 - $375 000)
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Example 4
(b) What journal entries, if any, would be passed in accordance with AASB 116
and AASB 136 if the asset is measured using the revaluation model?
Assume that there is an associated revaluation surplus balance of $20 000.
Assume the same steps as (a) to measure impairment loss.

Dr Revaluation surplus 20 000

Dr Impairment loss 5 000
Cr Accum. impairment losses 25 000

“Any impairment loss of a revalued asset shall be treated as a revaluation

decrease in accordance with that standard” (para. 60, AASB 136).
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Reversal of Impairment Losses
• AASB 136 also provides that at the end of each reporting period, there
should be an assessment of each asset that has suffered an impairment
loss in a prior period to determine if the carrying amount is now less
than the asset’s recoverable amount.
• Indicators to consider for a reversal of an impairment loss
• Outlined in AASB 136, para. 11
• Mirror image of those in AASB 136, para.12 to determine if there are
indications of an impairment loss
• If recoverable amount is greater than carrying amount:
• the carrying amount is increased to recoverable amount,
• revenue item ‘reversal of impairment loss’ is recognised (para. 114).

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Reversal of Impairment Losses
• Para. 117 places a ceiling (maximum) on the carrying amount of the
asset:
‘The increased carrying amount of an asset, other than goodwill,
attributable to the reversal of an impairment loss, shall not exceed
the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been
recognised for the asset in prior years.’

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Example 5 – Reversal of impairment loss

Dan Ltd acquired a non-current depreciable asset on 1 July 2018 for $1 million
cash. The asset has a useful life of 5 years, no residual value and is
depreciated on a straight-line basis. The cost model is used for non-current
depreciable assets.
The recoverable amounts for the asset are as follows:
30 June 2019 $700 000
30 June 2020 $575 000
Management identified indicators of impairment as per AASB 136 (para. 12)
for the period ended 2019 and indicators of a reversal of impairment for 2020.
Required: Account for this asset in accordance with the requirements
of AASB 116 and AASB 136.

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Example 5
Cost model
1 July 2018 – Record purchase of asset
Dr Asset 1 000 000
Cr Cash 1 000 000
30 June 2019- Record depreciation
Dr Depreciation expense 200 000 ($1m/5 yrs)
Cr Accum dep’n 200 000
30 June 2019 – Assess indicators of impairment
• Indicators of impairment present
• $700 000 (RA) < $800 000 (CA), therefore recognise impairment loss of
$(100 000)
Dr Impairment loss 100 000
Cr Accum. impairment losses 100 000
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Example 5
30 June 2020 – Record depreciation, assess indicators of impairment or
reversal of impairment
Dr Depreciation expense 175 000
Cr Accum dep’n 175 000 ($700 000/4 years)

• Indicators of a reversal of impairment present

• $575 000 (RA) > $525 000 (CA $700 000 – 175 000)
• Therefore, recognise a $50 000 reversal of the impairment loss
But….
Remember, the increased carrying amount of the asset, attributable to
the reversal of an impairment loss, shall not exceed the carrying
amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset
in prior years 48
Example 5
Determination of ceiling on reversal:
Date Cost - Accum dep’n = Ceiling
30/6/19 $1 000 000 - 200 000 = $800 000
30/6/20 $1 000 000 - 400 000 = $600 000
Ceiling = $600 000,
Increased carrying amount of asset = $575 000
Therefore, permitted to reverse impairment loss

30 June 2020
Dr Accum impairment losses 50 000
Cr Reversal of impairment loss 50 000

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Example 5
What would happen if at 30 June 2020 the RA was $620 000?
CA=$525 000 (unchanged)
RA=$620 000
Ceiling = $600 000 (unchanged)
Potential reversal = RA - CA
= (620 000-525 000) = $95 000
Maximum allowed = CA without impairment - CA
= (600 000- 525 000) = $75 000

30 June 2018 Journal entry would be:

Dr Accum impairment losses 75 000
Cr Reversal of impairment loss 75 000

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Example 5
Revaluation model
Assume that the fair value for the asset are as follows:
30 June 2019 $800 000; 30 June 2020 $550 000
The recoverable amounts for the asset are as follows:
30 June 2019 $700 000; 30 June 2020 $575 000
30 June 2019
1. Recognize depreciation expense
Dr Depreciation expense 200 000 ($1m/5 yrs)
Cr Accum dep’n 200 000
2. Revaluation
Carrying amount=800 000 Fair value=800 000 no revaluation
3. Impairment loss
• Indicators of impairment present
• $700 000 (RA) < $800 000 (CA), therefore recognise impairment loss of $(100 000)
Dr Impairment loss 100 000
Cr Accum impairment losses 100 000 51
Example 5
30 June 2020
1. Recognize depreciation expense
Dr Depreciation expense 175 000
Cr Accum dep’n 175 000 ($700 000/4 years)
Carrying amount=700 000-175 000=525 000 Fair value=550 000 > CA
2. Revaluation
Dr Accumulated depreciation 375 000
Cr Asset 375 000
Dr Asset 25 000
Cr Revaluation surplus 25 000
3. Reversal of impairment loss
• $575 000 (RA) > $550 000 (Fair value)
• Recognise a $25 000 reversal of the impairment loss
But….Remember, the increased carrying amount of the asset, attributable to the reversal of an
impairment loss, shall not exceed the carrying amount that would have been determined
(net of amortisation or depreciation) had no impairment loss been recognised for the asset 52
in prior years
Example 5
Determination of ceiling on reversal under revaluation model:
Ceiling = fair value=550 000
Carrying amount = fair value =550 000
Therefore, no reversal of impairment loss is recorded.

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Impairment vs.
Revaluation Decrements
On a reporting day, if you need to do revaluation and impairment
together
• Step 1: Revaluation based on fair value determined from market-
based information.
• Step 2: Are there any indicators of impairment?
- No: stop here.
- Yes: calculate recoverable amount, compare with carry amount.

No reversal of impairment for assets measured with revaluation model.

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Some interesting research:
• Due to discretion available with impairment testing, firms
undertaking asset impairment are able to exercise some degree of
choice around the timing of the recognition of asset impairment.

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Earnings management through taking
impairment loss
• It is appropriate to take impairment loss if the asset is
indeed impaired; however, many companies use this
opportunity to manage earnings.

• The idea is that taking impairment loss in a year results in

very low earnings; but future earnings will become better
because no or less depreciation expenses need to be taken.
Take a big bath!
Especially when there is a turnover of CEO (CFO).

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 Not taking
Impairment
loss
Net
income

Taking
impairment
loss

Assuming there is no Time

Real impairment
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Earnings management through taking
impairment loss
• Furthermore, companies tend to emphasize to investors earnings
from continuing operations, which do not include the impairment
loss (decrease in earnings) in the impairment year, but do include
the benefits (increase in earnings) in future years.

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Next Week
Lecture: Topic 2 Accounting for Income Tax

Tutorials start next week:

 Tutors will work through assigned questions.
 Each week there will be an in-class question. These questions and the
solution are only available in tutorials. If you are unable to attend your
tutorial, you will need to attend consultation of any teaching staff to get
the questions. Students also have to attempt the questions before asking
teaching staff to check the answer.

YOU MUST ATTEND THE TUTORIAL THAT YOU HAVE

SIGNED ON TO.
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