CHAPTER 23

REVALUATION, IMPAIRMENT AND NONCURRENT ASSETS HELD FOR SALE

TOPIC OVERVIEW:
This chapter discusses liabilities, its characteristics, types and classification, initial recognition, initial
measurement, subsequent measurement, and reclassification, derecognition and financial statement
presentation.

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1, Describe revaluation model.
2. Identify assets subject to impairment under PAS 36.
3. Enumerate the stages in the impairment process.
4. Identify criteria for non-current asset held for sale.
5. Describe financial statement presentation of non-current asset held for sale and discontinued
operation,
6. Differentiate accounting of revaluation, impairment and non-current asset held for sale under
full PFRS and PFRS for SME.

SUBSEQUENT MEASUREMENT - REVALUATION MODEL

After recognition as an asset, an item of property, plant and equipment 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 accumulated impairment
losses. Revaluations shall 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 end of the reporting
period.

Necessity of Revaluation
When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation
is required. In other words, revaluation is not necessary if the fair value and carrying amount does not
differ materially.

Frequency of Revaluation
The frequency of revaluations depends upon the changes in fair values of the items of property, plant
and equipment being revalued. When there is a:
1. significant and volatile changes in fair value - annual revaluation.
2. insignificant changes in fair value -revaluation every three or five years.

Revaluation of Entire Class of PPE

If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
This is to avoid a mixture of costs and revalued amounts with in a class of property, plant and
equipment.

Fair Value of Land and Building

The fair value of land and buildings is usually determined from market-based evidence by appraisal that
is normally undertaken by professionally qualified valuers.

If there is no market-based evidence of fair value because of the specialized nature of the item of
property, plant and equipment and the item is rarely sold, except as part of a continuing business, an
entity may need to estimate fair value using an income or a depreciated replacement cost approach.

Revaluation of Depreciable PPE

Note:
1. Actual accumulated depreciation based on depreciable cost. In computing the accumulated
depreciation on the date of revaluation, use the original residual value.
2. Accumulated depreciation based on depreciable replacement cost. This is also called the
observed depreciation and computed by multiplying the depreciable replacement cost on the
proportion.
Depreciable replacement cost is the replacement cost minus new or revised residual value, if any.
Proportion is the age divided by original useful life or accumulated depreciation divided by cost minus
original residual value.
3. This is also the depreciated replacement cost or fair value.

Revaluation Decrease

If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognized
in profit or loss. However, the decrease shall be debited directly to other comprehensive income under
the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus
in respect of that asset.
If a revaluation results in a decrease in the carrying amount of a fixed asset, recognize the decrease in
profit or loss. However, if there is a credit balance in the revaluation surplus for that asset, recognize the
decrease in other comprehensive income to offset the credit balance. The decrease recognized in other
comprehensive income decreases the amount of any revaluation surplus already recorded in equity.

Two Methods of Recording Revaluation

When an item of property, plant and equipment is revalued, the carrying amount of that asset is
adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the
following ways:
A. Proportional Method
The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying
amount of the asset. For example the gross carrying amount may be restated by reference to
Observable market data or it may be restated proportionately to the change in the carrying amount. The
accumulated depreciation at the date of the revaluation is adjusted to equal the difference between the
gross carrying amount and the carrying amount of the asset after taking into account accumulated
impairment losses;

The proportional method is also called depreciated replacement cost basis.

B. Elimination Method
The accumulated depreciation is eliminated against the gross carrying amount of the asset.

Transfer of Revaluation Surplus to Retained Earnings

The revaluation surplus included in equity in respect of an item of property, plant and equipment may
be transferred directly to retained earnings when the asset is derecognized. This may involve
transferring the whole of the surplus when the asset is retired or disposed of. However, some of the
surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus
transferred would be the difference between depreciation based on the revalued carrying amount of
the asset and depreciation based on the asset's original cost. Transfers from revaluation surplus to
retained earnings are not made through profit or loss (that is, no "recycling" through profit or loss).

Formulas:
Subsequent Depreciation on cost (Book value less new
depreciation residual value divided remaining useful life)
Depreciation on appreciation (Revaluation surplus divided by remaining useful
life)
Total OR (Sound value less new residual value divided by remaining useful life)

Piecemeal Equal to Depreciation based on appreciation

realization (Revaluation surplus divided by remaining useful life)

PAS 36: IMPAIREMENT OF ASSETS

Applicability of PAS 36
PAS 36 applies to (among other assets):
• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates, and joint ventures carried at cost
• Assets carried at revalued amounts under PAS 16 and PAS 38 Inapplicability of PAS 36

PAS 36 does not apply to the following assets:

 Inventories (see PAS 2)
 Contract assets and assets arising from costs to obtain or fulfill a contract that are recognized
in accordance with P FRS 15 Revenue from Contracts with Customers;
 Deferred tax assets (see PAS 12)
 Assets arising from employee benefits (see PAS 19)
 Financial assets within the scope of PFRS 9
 Investment property measured at fair value (see PAS 40)
 Biological assets carried at fair value (see PAS 41)
 Insurance contract assets (see PFRS 4)
 Non-current assets(or disposal groups) classified as held for sale (see PFRS 5)

IMPAIRMENT
Impairment occurs when the carrying amount of an asset or a cash generating unit exceeds its
recoverable amount. Carrying amount is the amount at which an asset is recognized in the statement of
financial position after deducting accumulated depreciation and accumulated impairment losses.

Key Stages in the Impairment Process

The stages in the process of identifying and accounting for an impairment loss are as follows:
1) At each reporting date, assess whether there is an indication that an asset may be impaired,
Note that if there is no such indication, then, subject to the exceptions, no further action is
required.
Exceptions:
The recoverable amounts of the following types of intangible assets should be measured
annually whether or not there is any indication that it may be impaired:
a) An intangible asset with an indefinite useful life;
b) An intangible asset not yet available for use; and
 c) Goodwill acquired in a business combinations
2) If there is an indication of impairment, then measure the assets recoverable amount; and
3) Reduce the asset's carrying amount to its recoverable amount, usually by treating the loss as a
separately disclosed expense.

Indicators of Impairment
External sources Internal sources
Significant decline in market value Obsolescence or physical damage
Negative changes in technology, markets, economy , or laws Asset is part of a restructuring or held
for disposal
Increases in market interest rates or other factors affecting the discount rate used in calculating an
asset's 'value in use' Worse economic performance than expected
Company stock price is below book value

These lists are not intended to be exhaustive and an entity must consider materiality. Further, the
asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted if an
indication that an asset may impaired.

RECOVERABLE AMOUNT
Rules:
1, Recoverable amount is the Higher between value in use and fair value less cost to sell;
2. If fair value less costs to sell or value in use is more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired;
3. If fair value less costs to sell cannot be determined, then recoverable amount is value in use; and
4. For assets to be disposed of) recoverable amount is fair value less costs to sell.

FAIR VALUE LESS COST TO SELL

The fair value less cost to sell of the asset is sometimes called net selling price. The following rule should
be observed in determining the fair value less cost to sell of an asset:

I) If there is a binding sale agreement, use the price under that agreement less costs of disposal.
2) If there is an active market for that type of asset, use market price less costs of disposal. Market price
means current bid price if available, otherwise the price in the most recent transaction.
3) If there is no active market use the best estimate of the asset's selling price less costs of disposal.
Costs of disposal are incremental costs (not existing costs or overhead) directly attributable to the
disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.

QUERY: Is transaction cost same with cost to sell or cost of disposal under PAS 36, 41 and PFRS 5?
Answer: Transaction cost is the same with cost to sell or cost of disposal and they are also called net
selling price.

VALUE IN USE
Value in use is the discounted present value of the future cash flows expected to arise from:
1) the continuing use of an asset, and from
2) its disposal at the end of its useful life

The calculation of value in use should reflect the following elements:

1) An estimate of the future cash flows that the entity expects to derive from the asset in an arm's
length transaction;
2) Expectations about possible variations in the amount or timing of those future cash flows;
3) The time value of money, represented by the current market risk-free rate of interest;
4) The price for bearing the uncertainty inherent in the asset; and
5) Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows
that the entity expects to derive from the asset.
Value in use = Cash flow(s) x PV Factor(s)

Value in use of intangible asset with INDEFINITE LIFE

Considerations for Cash Flow Projections

Cash flow projections should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projections. PAS 36 presumes
that budgets and forecasts should not go beyond five years; for periods after five years, extrapolate
from the earlier budgets. Management should assess the reasonableness of its assumptions by
examining the causes of differences between past cash flow projections and actual cash flows,
Cash flow projections should relate to the asset in its current condition — future restructurings to which
the entity is not committed and expenditures to improve or enhance the asset's performance should not
be anticipated.
Estimates of future cash flows should exclude cash inflows or outflows from financing activities, or
income tax receipts or payments.

Discount Rate
In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the asset.

The discount rate should not reflect risks for which future cash flows have been adjusted and should
equal the rate of return that investors would require if they were to choose an investment that would
generate cash flows equivalent to those expected from the asset.

For impairment of an individual asset or portfolio of assets, the discount rate is the rate the company
would pay in a current market transaction to borrow money to buy that specific asset or portfolio.
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the
time value of money over the asset's life as well as country risk, currency risk, price risk, and cash flow
risk. The following would normally be considered:
1. The enterprise's own weighted average cost of capital;
2. The enterprise's incremental borrowing rate; or
3. Other market borrowing rates.

Note: To easily understand why the recoverable amount is the HIGHER between the value in use and fair
value less cost to sell, think that if an asset is impaired, the company will choose the action that will
result in higher return either thru sale or continuing use. This is also provided under PFRS 13 that for
non- financial asset, the entity should consider the highest and best use.

Recognition of an Impairment Loss

An impairment loss should be recognized whenever recoverable amount is below carrying amount. The
impairment loss is an expense in the income statement (unless it relates to a revalued asset where the
value changes are recognized directly in equity)

Illustration: Revaluation and Impairment of PPE

On January 1, 2014, James Russel Company acquired two classes of PPE. Data relating to the asset
follow:

REQ. 2 According to Par. 39 of PAS 16, “If an asset’s CA is increased as a result of a revaluation, the
increase shall be credited directly to equity under the heading of revaluation surplus.
This rule applies to asset using the revaluation model thus, no revaluation surplus is recorded for the
machinery because the company is using the cost model in this asset.

REQ. 4 According to par. 40 of PAS 16 “If an asset’s CA is decreased as a result of revaluation, the
decrease shall be debited directly to equity under the heading of revaluation surplus to the extent of any
credit balance existing in the revaluation surplus in respect of that asset.”