Depreciation, Impairments, and

Revaluation

11-1
 Depreciation—Method of Cost Allocation

Depreciation is the accounting process of allocating the cost

of tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the use of
the asset.

Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense
 Intangibles = Amortization expense
 Mineral resources = Depletion expense

11-2
 Depreciation—Cost Allocation

Factors Involved in the Depreciation Process

Three basic questions:
1. What depreciable base is to be used?
 Depreciable Base=Cost-Residual Value
1. What is the asset’s useful life?
2. What method of cost apportionment is best?

11-3
 Factors Involved in Depreciation Process

Estimation of Service Lives

 Service life often differs from physical life.
 Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of physical life).

2. Economic factors
 inadequacy: results when an asset ceases to be useful
to a company because the demands of the firm have
changed,
 Supersession: is the replacement of one asset with
another more efficient and economical asset, and
 Obsolescence: is the catchall for situations not involving
11-4
inadequacy and supersession.
 Depreciation—Cost Allocation

Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:

1. Activity method (units of use or production).

2. Straight-line method.
3. Diminishing (accelerated)-charge methods:
a) Sum-of-the-years’-digits.
b) Declining-balance method.

11-5
 Methods of Depreciation

Activity Method ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:

ILLUSTRATION 11-3
Depreciation Calculation,
Activity Method—Crane
Example

11-6
 Methods of Depreciation

Straight-Line Method ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11-4
Depreciation Calculation,
Straight-Line Method—
Crane Example

11-7
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Sum-of-the-Years’-Digits. Each fraction uses the sum of the

years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator
is the number of years of estimated life remaining as of the
beginning of the year.

Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
11-8
 Methods of Depreciation

Sum-of-the-Years’-Digits

ILLUSTRATION 11-6
Sum-of-the-Years’-Digits
Depreciation Schedule—
Crane Example

11-9
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11-2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Declining-Balance Method.
 Utilizes a depreciation rate (percentage) that is some multiple
of the straight-line method.
 Does not deduct the salvage value in computing the
depreciation base.

11-10
 Methods of Depreciation

Declining-Balance Method

ILLUSTRATION 11-7
Double-Declining
Depreciation Schedule—
Crane Example

11-11
 Component Depreciation

IFRS requires that each part of an item of property, plant,

and equipment that is significant to the total cost of the
asset must be depreciated separately.
Illustration: EuroAsia Airlines purchases an airplane for
€100,000,000 on January 1, 2016. The airplane has a useful life
of 20 years and a residual value of €0. EuroAsia uses the straight-
line method of depreciation for all its airplanes. EuroAsia identifies
the following components, amounts, and useful lives.

ILLUSTRATION 11-8
Airplane Components
11-12
 Component Depreciation

Computation of depreciation expense for

ILLUSTRATION 11-9
EuroAsia for 2016. Computation of
Component Depreciation

Depreciation journal entry for 2016.

Depreciation Expense 8,600,000
Accumulated Depreciation—Airplane 8,600,000

11-13
 Component Depreciation

On the statement of financial position at the end of 2016,

EuroAsia reports the airplane as a single amount.

ILLUSTRATION 11-10
Presentation of Carrying
Amount of Airplane

11-14
 Depreciation—Cost Allocation

Special Depreciation Issues

1. How should companies compute depreciation for
partial periods?
 Companies determine the depreciation expense for
the full year and then
 prorate this depreciation expense between the two
periods involved.

This process should continue throughout the useful life of

the asset.

11-15
 Depreciation and Partial Periods

Illustration—(Four Methods): Maserati Corporation purchased a

new machine for its assembly process on August 1, 2015. The cost
of this machine was €150,000. The company estimated that the
machine would have a salvage value of €24,000 at the end of its
service life. Its life is estimated at 5 years and its working hours are
estimated at 21,000 hours. Year-end is December 31.

Instructions: Compute the depreciation expense under the

following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-
digits.
(b) Activity method (d) Double-declining balance.

11-16
 Depreciation and Partial Periods

Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2015 € 126,000 / 5 = $ 25,200 x 5/12 = € 10,500 $ 10,500
2016 126,000 / 5 = 25,200 25,200 35,700
2017 126,000 / 5 = 25,200 25,200 60,900
2018 126,000 / 5 = 25,200 25,200 86,100
2019 126,000 / 5 = 25,200 25,200 111,300
2020 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
€ 126,000
Journal entry:

2015 Depreciation expense 10,500

Accumultated depreciation 10,500

11-17
 Depreciation and Partial Periods

Activity Method (Assume 800 hours used in 2015)

(€126,000 / 21,000 hours = €6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2015 800 x $6 = € 4,800 € 4,800 € 4,800
2016 x =
2017 x =
2018 x =
2019 x =
800 € 4,800

Journal entry:
2015 Depreciation expense 4,800
Accumultated depreciation 4,800

11-18 Advance slide in presentation mode to reveal answer.

 Depreciation and Partial Periods

5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.

2015 € 126,000 x 5/15 = 42,000 x 5/12 € 17,500 € 17,500

2016 126,000 x 4.58/15 = 38,500 38,500 56,000

2017 126,000 x 3.58/15 = 30,100 30,100 86,100

2018 126,000 x 2.58/15 = 21,700 21,700 107,800

2019 126,000 x 1.58/15 = 13,300 13,300 121,100

2020 126,000 x .58/15 = 4,900 4,900 126,000

€ 126,000
Journal entry:
2015 Depreciation expense 17,500
Accumultated depreciation 17,500
11-19
Advance slide in presentation mode to reveal answer.
 Depreciation and Partial Periods

Double-Declining Balance Method

Current
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense

2015 € 150,000 x 40% = € 60,000 x 5/12 = € 25,000

2016 125,000 x 40% = 50,000 50,000

2017 75,000 x 40% = 30,000 30,000

2018 45,000 x 40% = 18,000 18,000

2019 27,000 x 40% = 10,800 Plug 3,000

€ 126,000
Journal entry:
2015 Depreciation expense 25,000
Accumultated depreciation 25,000
11-20 Advance slide in presentation mode to reveal answer.
 Depreciation—Cost Allocation

Special Depreciation Issues

2. Does depreciation provide for the replacement of assets?
 Does not involve a current cash outflow.
 Funds for the replacement of the assets come from the
revenues.
3. How should companies handle revisions in
depreciation rates?
 Accounted for in the current and prospective periods
 Not handled retrospectively
 Not considered errors or extraordinary items
11-21
 Revision of Depreciation Rates

Arcadia HS, purchased equipment for $510,000 which was estimated to

have a useful life of 10 years with a residual value of $10,000 at the end
of that time. Depreciation has been recorded for 7 years on a straight-
line basis. In 2015 (year 8), it is determined that the total estimated life
should be 15 years with a residual value of $5,000 at the end of that
time.

Questions:
 What is the journal entry to correct No Entry
the prior years’ depreciation? Required

 Calculate the depreciation expense

for 2015.
11-22
 After
After77
Revision of Depreciation Rates years
years

Equipment cost $510,000 First,

First,establish
establishNBV
NBV
Salvage value - 10,000 at
atdate
dateof ofchange
changein
in
Depreciable base 500,000 estimate.
estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2014)

Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

11-23
 After
After77
Revision of Depreciation Rates years
years

Net book value $160,000 Depreciation

Depreciation
Salvage value (new) 5,000 Expense
Expensecalculation
calculation
Depreciable base 155,000 for
for2015.
2015.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2015

Depreciation Expense 19,375

Accumulated Depreciation 19,375

11-24
 Impairments

A long-lived tangible asset is impaired when a company is not able

to recover the asset’s carrying amount either through using it or by
selling it. A company records a write-off referred to as an impairment
On an annual basis, companies review the asset for indicators
of impairments—that is, a decline in the asset’s cash-generating
ability through use or sale.
Events leading to an impairment:
a. Decrease in the market value of an asset.
b. Change in the manner in which an asset is used.
c. Adverse change in legal factors or in the business climate.
d. An accumulation of costs in excess of the amount originally
expected to acquire or construct an asset.
e. A projection or forecast that demonstrates continuing losses
associated with an asset.
11-25
 Impairments

Measuring Impairments/ Impairment test

1. Review events for possible impairment.
2. If the review indicates impairment, apply the recoverability
test. If the sum of the expected future net cash flows from
the long-lived asset is less than the carrying amount of the
asset, an impairment has occurred.
3. Assuming an impairment, the impairment loss is the
amount by which the carrying amount of the asset exceeds
the fair value of the asset. The fair value is the market value
or the present value of expected future net cash flows.

11-26
 IMPAIRMENTS

ILLUSTRATION 11-18
Graphic of Accounting for
Impairments

11-27 LO 5
 Recognizing Impairments

If impairment indicators are present, then an impairment test

must be conducted.

ILLUSTRATION 11-15
Impairment Test

11-28
 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.
ILLUSTRATION 11-15

€200,000 €205,000
No
Impairment

€180,000 €205,000
11-29
 Recognizing Impairments

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
ILLUSTRATION 11-15

€200,000 €180,000

€180,000 €175,000
11-30
 Recognizing Impairments

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
ILLUSTRATION 11-15

€200,000 €180,000

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000

11-31
 Impairment Illustrations
Case 1
At December 31, 2016, Hanoi Company has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2016, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2016
and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2016, is VND11,000,000.
4. The remaining useful life of the equipment after December 31,
2016, is two years.
11-32 LO 5
 Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2016, as follows.

VND3,000,000 Impairment Loss

ILLUSTRATION 11-15
VND14,000,000 VND11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment
3,000,000

11-33 LO 5
 Impairment Illustrations

Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2016) VND 11,000,000

Hanoi Company determines that the equipment’s total useful life

has not changed (remaining useful life is still two years). However,
the estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2017.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment
5,500,000
11-34 LO 5
 Impairment Illustrations
Case 2
At the end of 2015, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated
remaining useful life of five years. Because there is little market-related
information on which to base a recoverable amount based on fair value,
Verma determines the machine’s recoverable amount should be based on
value-in-use. Verma uses a discount rate of 8 percent. Verma’s analysis
indicates that its future cash flows will be $40,000 each year for five
years, and it will receive a residual value of $10,000 at the end of the five
years. It is assumed that all cash flows occur at the end of the year.

ILLUSTRATION 11-16
Value-in-Use Computation
11-35 LO 5
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss
ILLUSTRATION 11-15

$200,000 $166,514

Unknown $166,514
11-36 LO 5
 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery
33,486
Unknown $166,514
11-37 LO 5
 Reversal of Impairment Loss

Illustration: Tan Company purchases equipment on January 1,

2015, for HK$300,000, useful life of three years, and no residual
value.

At December 31, 2015, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment
11-38 20,000 LO 5
 Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2016, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.

Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000

11-39 LO 5
 Impairment Illustrations
Example 1 : Presented below is information related to equipment
owned by Suzan Company at December 31, 2007. Assume that
Suzan will sell the asset in the future. As of December 31, 2007,
the equipment has a remaining useful life of 4 years.
Cost $ 9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash flows 7,000,000
Fair value 4,800,000

Instructions:
(a) Prepare the journal entry (if any) to record the impairment of the
asset at December 31, 2007.
(b) Prepare the journal entry to record depreciation expense for 2008.

11-40
 Impairment Illustrations

(a). Cost $9,000,000

Accumulated depreciation 1,000,000
Carrying amount 8,000,000
Fair value 4,800,000
Loss on impairment $3,200,000

12/31/07

Loss on impairment 3,200,000

Accumulated depreciation 3,200,000

11-41
 Impairment Illustrations

(b). Net carrying amount $4,800,000

Useful life 4 years
Depreciation per year $1,200,000

12/31/08

Depreciation expense 1,200,000

Accumulated depreciation 1,200,000

11-42
 IMPAIRMENTS

Cash-Generating Units
When it is not possible to assess a single asset for impairment
because the single asset generates cash flows only in
combination with other assets, companies identify the
smallest group of assets that can be identified that generate
cash flows independently of the cash flows from other assets.

11-43 LO 5
 IMPAIRMENTS

Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).
 No depreciation or amortization is taken on assets held
for disposal during the period they are held.
 Can write up or down an asset held for disposal in future
periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before
the impairment.

11-44 LO 5
 Presentation of PPE & Natural Resources

Presentation of Property, Plant, Equipment, and

Mineral Resources

Depreciating assets, use Accumulated Depreciation.

Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.

Disclosures Basis of valuation (usually cost)

Pledges, liens, and other commitments

11-45
 REVALUATION OF PROPERTY, PLANT, AND EQUIPMENT

As indicated in previous part, companies can use

revaluation accounting subsequent to acquisition.
When companies choose to fair value their long-
lived tangible assets subsequent to acquisition,
they account for the change in the fair value by
adjusting the appropriate asset account and
recording an unrealized gain on the revalued
long-lived tangible asset. This unrealized gain is
often referred to as revaluation surplus.

11-46
 The general rules for revaluation accounting are as follows.

1. When a company revalues its long-lived tangible

assets above historical cost, it reports an unrealized
gain that increases other comprehensive income.
Thus, the unrealized gain bypasses net income,
increases other comprehensive income, and
increases accumulated other comprehensive income.
2. If a company experiences a loss on impairment
(decrease of value below historical cost), the loss
reduces income and retained earnings. Thus, gains
on revaluation increase equity but not net income,
whereas losses decrease income and retained
earnings (and therefore equity).

11-47
 The general rules for revaluation accounting are as follows.

3. If a revaluation increase reverses a decrease that was

previously reported as an impairment loss, a company
credits the revaluation increase to income using the
account Recovery of Impairment Loss up to the
amount of the prior loss. Any additional valuation
increase above historical cost increases other
comprehensive income and is credited to Unrealized
Gain on Revaluation.
4. If a revaluation decrease reverses an increase that
was reported as an unrealized gain, a company first
reduces other comprehensive income by eliminating
the unrealized gain. Any additional valuation decrease
reduces net income and is reported as a loss on
11-48 impairment.
 Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2015. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2015, the land’s fair value is €1,200,000. The entry
to record the land at fair value is as follows.

Land 200,000
Unrealized Gain on Revaluation - Land 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

11-49 LO 7
 Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2015. The equipment has a useful life of
five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the equipment.
Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5)
at December 31, 2015, as follows.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000

11-50
 Recognizing Revaluation

Revaluation—Depreciable Assets
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment at December 31, 2015,
which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000

11-51
 Recognizing Revaluation

Revaluation—Depreciable Assets

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

11-52
 Recognizing Revaluation

Revaluation—Land
Illustration: Unilever Group (GBR and NLD) purchased land on January
1, 2015, that cost €400,000. Unilever decides to report the land at fair value
in subsequent periods. At December 31, 2015, an appraisal of the land
indicates that its fair value is €520,000. Unilever makes the following entry
to record the increase in fair value.

Land 120,000
Unrealized Gain on Revaluation - Land 120,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

11-53
 Recognizing Revaluation
Summary of the revaluation adjustments for Unilever in 2015.

The land is now reported at its fair value of €520,000. The increase in the fair
value of €120,000 is reported on the statement of comprehensive income as other
comprehensive income. In addition, the ending balance in Unrealized Gain on
Revaluation—Land is reported as accumulated other comprehensive income in
the statement of financial position in the equity section.
11-54
 Revaluation–2016: Decrease below Historical Cost

What happens if the land's fair value at

December 31, 2016, is €380,000, a decrease of
€140,000 (€520,000 − €380,000)? In this case,
the land's fair value is below its historical cost.
Therefore, Unilever debits Unrealized Gain on
Revaluation—Land for €120,000 to eliminate its
balance. In addition, Unilever reports a Loss on
Impairment of €20,000 (€400,000 − €380,000),
reducing net income. Unilever makes the
following entry to record the decrease in fair
value of the land.
11-55
 I

summary of the revaluation adjustments for

Unilever in 2016.

11-56
 The decrease to Unrealized Gain on Revaluation
—Land of €120,000 reduces other
comprehensive income, which then reduces the
balance in accumulated other comprehensive
income. The Loss on Impairment of €20,000
reduces net income and retained earnings. In this
case, Unilever had a revaluation decrease which
first reverses any increases that Unilever
reported in prior periods as an unrealized gain.
Any additional amount is reported as an
impairment loss. Under no circumstances can the
revaluation decrease reduce accumulated other
11-57 comprehensive income below zero.
 Revaluation–2017: Recovery of Impairment Loss

At December 31, 2017, Unilever's land value

increases to €415,000, an increase of €35,000
(€415,000 − €380,000). In this case, the Loss on
Impairment of €20,000 is reversed and the
remaining increase of €15,000 is reported in
other comprehensive income. Unilever makes the
following entry to record this transaction.

11-58
 I

summary of the revaluation adjustments for

Unilever in 2017.

11-59
 The recovery of the impairment loss of
€20,000 increases income (and retained
earnings) only to the extent that it reverses
previously recorded impairment losses.
On January 2, 2018, Unilever sells the
land for €415,000. Unilever makes the
following entry to record this
transaction.

11-60
 In this case, Unilever does not record a gain or
loss because the carrying amount of the land is
the same as its fair value. At this time, since the
land is sold, Unilever has the option to transfer
Accumulated Other Comprehensive Income
(AOCI) to Retained Earnings. The entry to record
the transfer is as follows.

11-61
 The purpose of this transfer is to eliminate
the unrealized gain on the land that was
sold. It should be noted that transfers from
Accumulated Other Comprehensive
Income cannot increase net income.
This last entry illustrates why revaluation
accounting is not popular. Even though the
land has appreciated in value by €15,000,
Unilever is not able to recognize this gain
in net income over the periods that it held
11-62 the land.
 REVALUATION OF DEPRECIABLE ASSETS

To illustrate the accounting for revaluations using

depreciable assets, assume that Nokia (FIN)
purchases equipment for €1,000,000 on January
2, 2015. The equipment has a useful life of five
years, is depreciated using the straight-line
method of depreciation, and its residual value is
zero.
Revaluation–2015: Valuation Increase
Nokia chooses to revalue its equipment to fair
value over the life of equipment. Nokia records
depreciation expense of €200,000 (€1,000,000 ÷
11-63
5) as follows.
 I

After this entry, Nokia's equipment has a carrying amount of

€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2015, is €950,000. To report the
equipment at fair value, Nokia does the following.
Reduces the Accumulated Depreciation—Equipment account
to zero.
Reduces the Equipment account by €50,000—it then is
reported at its fair value of €950,000.
Records an Unrealized Gain on Revaluation—Equipment for
the difference between the fair value and carrying amount of
the equipment, or €150,000 (€950,000 − €800,000). The entry
to record this revaluation at December 31, 2015, is as follows.
11-64
 I

summary of the revaluation adjustments for

Nokia in 2015.

11-65
 Following these revaluation adjustments, the
carrying amount of the asset is now €950,000.
Nokia reports depreciation expense of €200,000
in the income statement and Unrealized Gain on
Revaluation—Equipment of €150,000 in other
comprehensive income. This unrealized gain
increases accumulated other comprehensive
income (reported on the statement of financial
position in the equity section).

11-66
 Revaluation–2016: Decrease below Historical Cost

Assuming no change in the useful life of the

equipment, depreciation expense for Nokia in
2016 is €237,500 (€950,000 ÷ 4), and the entry
to record depreciation expense is as follows.

11-67
 Under IFRS, Nokia may transfer from AOCI the
difference between depreciation based on the
revalued carrying amount of the equipment and
depreciation based on the asset's original cost to
retained earnings. Depreciation based on the
original cost was €200,000 (€1,000,000 ÷ 5) and
on fair value is €237,500, or a difference of
€37,500 (€237,500 − €200,000). The entry to
record this transfer is as follows.

11-68
 At this point, before revaluation in 2016,
Nokia has the following amounts related to its
equipment.

11-69
Nokia determines through appraisal that the equipment now
has a fair value of €570,000. To report the equipment at fair
value, Nokia does the following.
Reduces the Accumulated Depreciation—Equipment account
of €237,500 to zero.
Reduces the Equipment account by €380,000 (€950,000 −
€570,000)—it then is reported at its fair value of €570,000.
Reduces Unrealized Gain on Revaluation—Equipment by
€112,500, to offset the balance in the unrealized gain account
(related to the revaluation in 2015).
Records a loss on impairment of €30,000.

11-70
 The entry to record this transaction is as follows.

11-71
summary of the revaluation adjustments for Nokia in 2016.

11-72
 Following the revaluation entry, the carrying
amount of the equipment is now €570,000. Nokia
reports depreciation expense of €237,500 and an
impairment loss of €30,000 in the income
statement (which reduces retained earnings).
Nokia reports the reversal of the previously
recorded unrealized gain by recording the
transfer to retained earnings of €37,500 and the
entry to Unrealized Gain on Revaluation—
Equipment of €112,500. These two entries
reduce the balance in AOCI to zero.
11-73
 Revaluation–2017: Recovery of Impairment Loss

Assuming no change in the useful life of the

equipment, depreciation expense for Nokia in
2017 is €190,000 (€570,000 ÷ 3), and the entry
to record depreciation expense is as follows.

11-74
 Nokia transfers the difference between
depreciation based on the revalued carrying
amount of the equipment and depreciation based
on the asset's original cost from AOCI to retained
earnings. Depreciation based on the original cost
was €200,000 (€1,000,000 ÷ 5) and on fair value
is €190,000, or a difference of €10,000 (€200,000
− €190,000). The entry to record this transfer is
as follows.

11-75
 At this point, before revaluation in 2017,
Nokia has the following amounts related to its
equipment.

11-76
 Nokia determines through appraisal that the equipment
now has a fair value of €450,000. To report the
equipment at fair value, Nokia does the following.
Reduces the Accumulated Depreciation—Equipment
account of €190,000 to zero.
Reduces the Equipment account by €120,000 (€570,000
− €450,000)—it then is reported at its fair value of
€450,000.
Records an Unrealized Gain on Revaluation—Equipment
for €40,000.
Records a Recovery of Loss on Impairment for €30,000.

11-77
 The entry to record this transaction is as
follows.

11-78
 summary of the revaluation adjustments for Nokia in 2017.

11-79
 Following the revaluation entry, the carrying amount of the
equipment is now €450,000. Nokia reports depreciation
expense of €190,000 and an impairment loss recovery of
€30,000 in the income statement. Nokia records €40,000 to
Unrealized Gain on Revaluation—Equipment, which
increases AOCI to €50,000.
On January 2, 2018, Nokia sells the equipment for €450,000.
Nokia makes the following entry to record this transaction.

11-80
Nokia does not record a gain or loss because the carrying
amount of the equipment is the same as its fair value. Nokia
transfers the remaining balance in Accumulated Other
Comprehensive Income to Retained Earnings because the
equipment has been sold. The entry to record this transaction
is as follows.

The transfer from Accumulated Other Comprehensive Income

does not increase net income. Even though the equipment has
appreciated in value by €50,000, the company does not
recognize this gain in net income over the periods that Nokia
held the equipment.
11-81