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MODULE 15 PACKET
AE 15 and ELEC 1 – INTERMEDIATE ACCOUNTING
MODULE 15 REVALUATION and IMPAIRMENT of ASSET

Welcome to Module 15
In this module, we will understand the measurement of property, plant and equipment using the revaluation
model. We will also learn how to explain, calculate, and record the impairment of long-lived assets. At
the end of this module, you will be answering multiple choice questions and straight problems.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

MODULE 15 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:
1. Know the requirements for the revaluation of property, plant and equipment
2. Identify the basis of revaluation
3. Understand the proportional and elimination approach of recording revaluation
4. Know the treatment of the revaluation surplus arising from the revaluation
5. Know the basic principle for the recognition of impairment
6. Know the proper accounting for an impairment loss

COURSE CONTENT FOR MODULE 15:

ACTIVITY DESCRIPTION TIME TO COMPLETE

Lecture Discussion Revaluation and Impairment of Assets 2 hours

https://www.youtube.com/watch?v=WkxuPxe6BLU
Video https://www.youtube.com/watch?v=KlFkmkvAcxU&t=176s 1 hour
Australian Video uses the format dd/mm/yy

ACTIVITY 15 Problem Solving and Discussions 1.5 hours

Quiz Summative quiz for module 15 (to be announced) 1.5 hours

Answers to ACTIVITY 15 will be due on , 2020 thru NEO LMS or Facebook

Group. Correct answers will be posted thereafter for your reference.

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LECTURE DISCUSSION

15. 1 Measurement of property, plant and equipment

Accounting for revaluation:

If a company chooses to account for PP&E and natural resources at fair value using the revaluation
method:
o Cost or fair value must be applied to an entire class of PP&E.
o Different classes can have different policies.
o Fair value is the amount at which an asset could be exchanged in an arm’s length transaction
between knowledgeable and willing parties.
o A professional appraiser may be used to establish fair value.
o Revaluations must be performed periodically to ensure the carrying value of that asset class is
not materially different than its fair value.
o Increases in value should be credited through OCI to a revaluation surplus account in equity, unless
it reverses a loss that was previously expensed, in which case that portion may be credited to
income. The revaluation surplus may be transferred directly to retained earnings when the surplus
is realized. The whole surplus may be realized on retirement or disposal of the asset.
o Decreases in value should be expensed unless it reverses a previous revaluation surplus account
relating to the same asset. Reversal of a revaluation surplus should be debited to any remaining
revaluation surplus first and the remainder is charged to revaluation loss.
o If the revalued basis of an asset exceeds the cost basis, there will be an increase in annual
depreciation. To the extent there is an increase in depreciation expense, per IAS , an entity may
reverse the portion of reserve surplus related to this increase by debiting revaluation surplus and
crediting retained earnings. Alternatively, this transfer may be computed upon disposal.
o If the revalued asset is being depreciated, part of the surplus is being realized as the asset is used.
The revaluation surplus is allocated or realized over the remaining useful life of the asset and
reclassified through retained earnings.

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15. 2 Important Terms

Revalued amount is the fair value or depreciated replacement cost of the item of property, plant and
equipment.

Replacement cost = current purchase price of the property, plant and equipment
Depreciated replacement cost or Sound value = Replacement cost of the PPE less the corresponding
accumulated depreciation

Revaluation surplus or Revaluation increment = fair value or sound value less carrying amount of the PPE
OR = appreciation less corresponding accumulated depreciation

Appreciation or revaluation increase = excess of revalued amount over the historical cost

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Illustration taken from Intermediate Accounting 1, Valix, 2019

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15.3 Two approaches in recording the revaluation

Proportional approach – accumulated depreciation at Elimination approach – the accumulated

the date of revaluation is restated proportionately with depreciation is eliminated against the gross
the change in the gross carrying amount of the asset. carrying amount of the asset and the net
Revalued amount = Carrying amount of asset after amount restated to the revalued amount of the
revaluation asset.
Cost of asset = 4,000,000 and accumulated depreciation is P1,000,000. Useful life = 20 years, Age of
asset = 5 years. The percent an asset is depreciated may be computed: Accum. Depreciation / Cost
or Age of Asset / Useful Life. This percentage will also apply to the replacement cost.

Hence, asset is 25% depreciated = P1,000,000/P4,000,000 or 5 yrs / 20 yrs

Cost Replacement Cost Appreciation (RC-C)

Machinery 4,000,000 6,000,000 2,000,000
Accum. Depreciation 1,000,000 1,500,000 500,000
CA / SV / RS 3,000,000 4,500,000 1,500,000
Machinery 2,000,000 Accum. Depreciation 1,000,000
Accum. Depreciation 500,000 Machinery 1,000,000
Revaluation Surplus 1,500,000 accum depreciation = zero & machinery = 3M
Machinery 1,500,000
This method can provide subsequent annual Revaluation Surplus 1,500,000
depreciation on cost and on revaluation increase, and Sound value – debit balance of machinery
the piece-meal realization of the revaluation surplus.

Annual depreciation subsequent to the revaluation

Depreciation = sound value / remaining life = 4,500,000 / 15 years (see problem above)

Depreciation Expense 300,000 Depreciation on cost (3M/15yrs) 200,000

Accum. Depreciation 300,000 Depreciation on appreciation (1.5M/15) 100,000

Piecemeal realization of the revaluation surplus

Revaluation surplus 100,000 Revaluation surplus / remaining life = 1.5 / 15 yrs
Retained earnings 100,000 or an annual realization through retained earnings

9
When revaluation takes place, the following shall be disclosed:
a. Historical cost and carrying amount of each class of revalued PPE and their effective date of revaluation
b. Involvement of independent valuer, if any
c. Method and significant assumptions applied in estimating fair value
d. Reference to observable prices in active market or recent market transaction or other valuation
techniques
e. Revaluation surplus, indicating movement and restrictions on distribution of the balance to
shareholders

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15.4 Impairment of Assets

Under generally accepted accounting principles, management must compare the recoverable amount of
a long-lived asset with its carrying amount (cost less accumulated depreciation) at the end of each
reporting period. The recoverable amount is the fair value of the asset at the time less any estimated costs
to sell it. If the recoverable amount is lower than the carrying amount, an impairment loss must be
recorded.

An impairment loss may occur because of a variety of reasons such as technological obsolescence, an
economic downturn, or a physical disaster. When an impairment is recorded, subsequent years’
depreciation expense must also be revised.

Assume that P200,000 equipment purchased January 1, 2019 with a useful life of five years and a residual
value of P20,000. Depreciation has been recorded for 2019 and 2020 at P36,000 per year. At December
31, 2020, the carrying amount of the equipment is P128,000 (200,000 – 36,000 – 36,000). At that point
management determines that new equipment with equivalent capabilities can be purchased for much less
than the old equipment due to technological changes. As a result, the recoverable value of the original
equipment at December 31, 2020 is estimated at P70,000. Because the recoverable amount is less than its
carrying amount of P128,000, an impairment loss of P58,000 (128,000 – 70,000) is recorded as follows:

Impairment Loss 58,000

Accumulated Depreciation 58,000

After the recognition of an impairment loss, the depreciation for the asset shall be adjusted in future periods
to allocate the revised carrying amount which is the fair value less cost of disposal or the recoverable value
of P70,000 – 20,000 = P50,000 over the remaining useful life of 3 years, assuming no change in estimated
residual value or useful life. Depreciation for 2021 to 2023 will be P16,667 per year.

Reversal of an impairment loss occurs when the recoverable amount of an asset that has previously been
impaired turns out to be higher than the current carrying amount. The asset shall be increased to new
recoverable amount, but in no case to exceed the carrying amount that would have been determined, had
no impairment loss been recognized for the asset in prior years.

To record the impairment reversal:

Carrying amount – no impairment
Accumulated Depreciation XXX Less: Carrying amount – with impairment
Gain on reversal of impairment XXX GAIN on reversal of impairment

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15.4 Impairment of Assets – Cash Generating Unit

A cash generating unit is the smallest identifiable group of assets that generate cash inflows from
continuing use that are largely independent of the cash inflows from other assets or group of assets. It
may be a department, product line or a factory for which the output of product and the input of raw materials,
labor and overhead can be identified. The recoverable amount of an asset shall be determined individually.
However, if it is not possible to estimate the recoverable amount of the individual asset, the entity shall
determine the recoverable amount of the cash generating unit to which the asset belongs.

A value in use which is the present value of the future cash flows expected to be derived from an asset or
cash-generating unit is used as the recoverable amount if it is higher than the fair value less cost of
disposal.

An entity has a building with a carrying amount of P600,000 has been impaired. In estimating the
recoverable amount, the entity determined that the fair value less costs of disposal of the asset is
P400,000. Value in use based on the cash inflows resulted to P445,800. The impairment loss is P154,200.

Cash generating unit with goodwill

The recoverable amount of goodwill as an individual asset cannot be determined since goodwill does not
generate cash flows independently from other assets or group of assets. Hence, if there is an indication
that good will may be impaired, recoverable amount is determined for the cash generating unit to which
goodwill belongs.

If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill
allocated to that unit is not impaired. But, if the carrying amount exceeds the recoverable amount, the
entity must recognize an impairment loss.

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15.6 Derecognition of Property, Plant and Equipment

Property, Plant, and Equipment is derecognized (that is, the cost and any related accumulated
depreciation are removed from the accounting records) when it is sold or when no future economic
benefit is expected. To account for the disposal of a PPE asset, the following must occur:

ACTIVITY 15 – Submit your handwritten answers through Google Classroom

Items 1 to 4. On January 1, 2020, Skill Company reported the following:

Equipment at cost P5,000,000 Accum. Depreciation 1,500,000
The equipment was measured using the cost model and depreciated on a straight line basis for
10 years.
On December 31, 2020, the entity decided to change the measurement from the cost model to
the revaluation model.
On revaluation date, the equipment had a fair value of P4,500,000 with an expected remaining
life of 5 years.

1. Prepare the journal entry to record the revaluation (proportional approach)

2. What is the depreciation for 2020?
3. What is the depreciation for 2021?
4. What is the revaluation surplus on December 31, 2021?

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5. On December 31, 2019, the building of Nigo Co. with historical cost of P20,000,000 and
accumulated depreciation of P5,000,000 is estimated to have a replacement cost of
P30,000,000. Actual life is 5 years. Fill in the table and label appropriately:

At Cost Replacement Cost Appreciation

Building
Accum. Depreciation
What do you call the
balances?

6. On December 31, 2019, Bell determines that its warehouse with a cost of P1,000,000 and accumulated
depreciation of P300,000 is impaired. The fair value of the asset is P720,000 and cost of disposal is
P80,000. How much is the impairment loss and the carrying value of the warehouse in Dec. 31, 2019?

Items 7 and 8. On January 1, 2019, Predo Inc. purchased equipment with a cost of P2,550,000, a useful
life of 15 years and no salvage value. The company uses straight-line depreciation. At December 31, 2019,
an independent appraiser determines that the fair value of the equipment is P2,500,000 Predo prepares
financial statements using IFRS and elects to revalue the asset.

7. At December 31, 2019, the journal entry to revalue the equipment will include a
a. debit to Depreciation Expense for P255,000
b. credit to Equipment for P50,000.
c. credit to Accumulated Depreciation for P170,000.
d. credit to Revaluation Surplus for P150,000.

8. The 2020 (second year) income statement will report depreciation expense for the equipment of
a. P178,571
b. P170,000
c. P166,667

Items 9 to 10. Black Company acquired another entity in a business combination and goodwill were
recorded for the two units: Service at P350,000 and Finance at P500,000. When a new competitor
entered the market, a significant decline in the value of goodwill was expected with the implied value of
the goodwill at year-end: Service at P250,000 and Finance at P700,000.

9. What is the impairment of goodwill attributable to Service Unit?

a. P350,000 b. P250,000 c. P100,000 d. 0

10. What is the impairment of goodwill attributable to Service Unit?

a. P600,000 b. P400,000 c. P200,000 d. 0

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