Lecture references

• Textbook
– Chapters 6&8
Revaluations of Non-current Assets and
Accounting for Intangibles • Accounting Standards
1. IAS 16 Property, Plant and Equipment Requirements for
revaluations, depreciation and determining acquisition cost of
property, plant and equipment
2. IAS 38 Intangible Assets
Accounting for intangible assets and other issues
3. IAS 36 Impairment of Assets
When to recognise an ‘impairment loss’

Property, Plant and equipment –

Lecture Outline IAS 16
• To understand the measurement of property, plant and equipment
(PPE) • PPE include “tangible” assets that are held for use, not resale, and
are expected to benefit the entity for more than one reporting
• To understand and apply the impairment requirement period

• To understand the definition and recognition of intangible assets • Depreciation: allocation of PPE’s economic benefit over an
estimated useful life

• Revaluation: adjustment of PPE’s carrying amount so that it

reflects its current fair value

Measurement – at recognition Measurement – subsequent periods

• PPE that qualifies for recognition as an asset shall be measured • Either cost or revaluation model must apply on each class of
at its cost PPE

• Elements of cost • Cost model: PPE shall be carried at its cost less accumulated
depreciation and accumulated impairment losses, i.e. carrying
– Purchase price amount
– Directly attributable costs
• E.g. delivery fees, installation and testing costs, professional fees • Revaluation model: PPE shall be carried at its fair value if it
can be measured reliably. Also, revaluation shall be made
with sufficient regularity

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Revaluation model Revaluation increments

• Fair value: the price that would be received to sell an asset or •General procedure (IAS 16)
paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
Debit Asset
• Fair value is determined from market-based evidence, e.g. by Credit Revaluation surplus
professional qualified valuers

• Sufficient regularity: • The revaluation surplus is part of shareholders’ funds and

– Annually for assets with volatile changes in value
comprehensive income
– Every three or five years for assets with insignificant changes in value • Directors may approve cash distributions to shareholders from the
revaluation surplus but they must exercise extreme caution

Treatment of balances of accumulated Example 1

depreciation upon revaluation
• If a revalued asset is a depreciable asset, any balance of accumulated As at 1 July 2011, Farrelly Ltd has an item of machinery that
depreciation is credited to the asset account prior to revaluation (IAS 16)
originally cost $40 000 and has accumulated depreciation of $15
• Journal entry (net-amount method)
000. Its remaining life is assessed to be five years, after which time
it will have no residual value. Farrelly decided on 1 July 2011 that
Dr Accumulated depreciation
the item should be revalued to its current fair value, which was
Cr Asset
assessed as $45 000.
Dr Asset
Cr Revaluation surplus

• Subsequent depreciation is to be based on the revalued amount of the asset

Example 1 - Solution Treatment of balances of accumulated

depreciation upon revaluation

The total revaluation increment will represent the difference between the carrying • Alternative method (IAS 16)
amount and the fair value. In this case it would be: – Accumulated depreciation may be restated proportionately with
the change in gross carrying amount of the asset, so the carrying
amount after revaluation equals the revalued amount
The journal entries on 1 July 2011 would be:
– This is referred to as the gross method
Dr Accumulated depreciation—machinery • Journal entry
Cr Machinery
Debit Asset
Dr Machinery
Cr Revaluation surplus Credit Accumulated depreciation
Credit Revaluation surplus

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Revaluation decrements Example 2 – revaluation decrement

• In line with the concept of conservatism, revaluation The fair value of the building (acquired for $400 000 and having accumulated
decrements are recognised as an expense in the statement of depreciation of $190 000) is $150,000.
comprehensive income
What are the journal entries?
• Journal entry (IAS 16)
Dr Accumulated depreciation
Dr Accumulated depreciation Cr Building
Cr Asset
Dr Loss on reval. of building
Dr Loss on revaluation of asset Cr Building
Cr Asset

Reversal of revaluation decrements and Example 3 - A reversal of a previous

increments revaluation increment
• For an asset class, reversals of previous revaluations should be • PK Ltd acquires a block of land on 1 January 2010 for $200 000 in
recorded by the reverse of the initial revaluation entries cash.
• If a revaluation decrement reverses a previous increment for the
same asset, then the entries are: • Due to increased housing demand in the area, the land has a
market value of $290 000 on 1 January 2011.
Dr Accumulated depreciation
Cr Asset • Some time later, however, the market value falls to $140 000 on
30 June 2013.
Dr Revaluation surplus
Dr Loss on revaluation (the excess, if any)
Cr Asset

Reversal of revaluation decrements and

Example 3 - Solution increments

1 January 2010
• If a revaluation increment reverses a previous
Dr Land decrement for the same asset:
Cr Cash

1 January 2011
Dr Land
Dr Asset
Cr Revaluation surplus Cr Gain on revaluation
30 June 2013 Cr Revaluation surplus (the excess if any)
Dr Revaluation surplus
Dr Loss on revaluation of land
Cr Land

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Example 4 - reversal of a previous Accounting for the gain or loss on disposal of a
revaluation decrement revalued non-current asset
Land was acquired for $200,000 on 1 July 2009. On 30 June 2010 it has a fair value of • Gain or loss from derecognition of an item of property, plant and
$150,000. On 30 June 2012, due to increased population, the land is considered to have a
fair value of $270,000. equipment is to be calculated as the difference between (IAS 16)
– net disposal proceeds (if any); and
1 July 2009
– the asset’s carrying amount
Dr Land
Cr Cash • Derecognition
– the point in time when an asset is removed from the statement of
30 June 2010 financial position (balance sheet)
Dr Loss on revaluation of land
Cr Land – when an asset is sold; or
– when no future economic benefits are expected from an asset’s use or
30 June 2012 disposal
Dr Land
Cr Gain on revaluation of land
Cr Revaluation surplus

Accounting for profit on disposal of a revalued Disclosures

non-current asset

• When an asset is sold, any resulting balance in the
revaluation surplus (IAS 16)
– may be transferred directly to retained earnings
– cannot be transferred to the profit or loss
• If a non-current asset is revalued upwards, any gain on sale
will be less than the gain if the asset had not previously
been revalued
• The required disclosures regarding asset revaluations (IAS 16) are
– effective date of revaluation
– whether an independent valuer was involved
– methods and assumptions applied
– extent to which fair values were determined, with reference to observable
prices in active markets or recent market transactions
– for each revalued class, the carrying amount if the cost model was used
– the revaluation surplus, indicating the change for the period and any
restrictions on distribution of the balance to shareholders

Impairment – IAS 36 Impairment test

• Objective: ensure that assets are carried at no more than their

Compared
recoverable amount Carrying to Recoverable
Amount amount
• Differences between depreciation and impairment: (Book value)

– Depreciation: allocates amount over asset’s useful life The

higher
of
– Impairment: reassessment of the worth of future benefits within the
asset

• Applies to all assets except inventories and monetary assets

Value-in-use Fair value less
• Applies to individual asset or to the cash generating unit (Discounted cash selling costs
flow) (Market value)

If carrying amount > recoverable amount, impairment loss arises.

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Impairment test Journal entries – Impairment loss

• Regularity: shall assess at each reporting date whether there is • Cost model:
any indication of impairment Dr Expense – impairment
Cr Accumulated impairment – asset class X
• Annual impairment test required for intangible assets with
indefinite useful life and goodwill • Revaluation model:
• External sources of information: Significant decline in market Dr Accumulated depreciation – asset class X
value, significant changes in technological, economic or legal Cr Asset class X
environment
Dr Asset revaluation reserve – asset class X
• Internal sources of information: Obsolescence or physical Dr Expense – impairment
damage of an asset, internal reporting Cr Asset class X

Journal entries – Impairment

Example 5
reversal
• Cost model: Garnett Ltd purchased a machinery for $100 000 on 1 July
Dr Accumulated impairment – asset class X 2008. Straight line depreciation is adopted and the estimated
Cr Revenue – impairment reversal
useful life of the asset was 4 years. The cash from disposal at
• Revaluation model: the end of the useful life is estimated to be $20 000. Also, the
Dr Accumulated depreciation – asset class X company adopted cost model for all their machineries and
Cr Asset class X impairment test is applied annually. The estimated fair value
less selling cost and value in use at each reporting date were:
Dr Asset class X
Cr Asset revaluation reserve – asset class X
Note: After the reversal, the CA cannot exceed the CA (net of depreciation)
prior to the impairment loss

Example 5 Cont… Example 5 - Solution

Fair value less selling cost Value in use 30 June 2009:

Carrying amount $80 000
30 June 2009 82 000 85 000
30 June 2010 55 000 52 000
Value in use $85 000
30 June 2011 40 000 42 000 Fair value less selling costs $82 000
Value in use > fair value
Present journal entries for depreciation and impairment in Recoverable amount
accordance to IAS 16 and IAS 36 for 2009, 2010 and 2011. Carrying amount < recoverable amount
Impairment loss

Dr Depreciation expense
Cr Accumulated depreciation

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 Solution Cont… Solution Cont…

30 June 2010: 30 June 2011:

Carrying amount Carrying amount
Value in use $52 000
Value in use $42 000
Fair value less selling costs $55 000
Fair value > value in use Fair value less selling costs $40 000
Recoverable amount Value in use > fair value
Carrying amount > recoverable amount Recoverable amount
Impairment loss Carrying amount < recoverable amount
Impairment reversal
Dr Depreciation expense
Cr Accumulated depreciation Note: calculate carrying amount without any impairment:
Dr Impairment expense
Cr Accumulated impairment
(Maximum amount after impairment reversal)

Solution Cont… Intangible Assets

Dr Depreciation expense • Intangible assets are generally defined as non-monetary assets without physical
substance.
Intangible assets

Cr Accumulated depreciation

Identifiable Unidentifiable
Dr Accumulated impairment
Cr Impairment reversal (rev)
Other Research & Intellectual capital Goodwill
Development

-patents
-trademarks
-licenses
-brand names
-copyrights

Relevant Accounting Standard

Accounting for Intangible Assets

IAS 38 Intangible Assets
• Identifiable Intangibles - can be separately identified and sold as specific value
can be placed on each individual asset.
• Unidentifiable intangible asset – can not be separately identified and sold as
specific values cannot be placed on each individual asset. These assets are
usually treated as a composite asset – goodwill.
• Goodwill - unidentifiable intangible asset representing the future economic
benefits associated with an existing customer base, efficient management,
reliable suppliers and the like.
• IAS 38 (par. 51) prohibits the recognition of internally generated intangible
assets, other than internally generated development expenditure, to be carried
forward as an asset.
• Intangible assets other than goodwill are required to be ‘separable’ if they are
to be carried forward as an asset.
“Separable” (par. 12a) – is capable of being separated or divided from the
entity and sold, transferred, licensed, rented or exchanged, either individually
or together with related contract, asset or liability; or arises from contracted
or other legal rights, regardless of whether rights are transferable or separable
from the entity or from other rights and obligations.
– Hence, acquired intangibles can be carried forward as an asset.

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 Acquired Intangibles
• An intangible asset shall be measured initially at cost (par. 24)
• Any subsequent expenditure is to be expensed, unless both the following
criteria are satisfied:
1. it is probable that the expenditure will increase the future economic benefits
embodied in the asset in excess of the standard of performance assessed
immediately before the expenditure was made; and
2. the expenditure can be measured reliably to the asset.
• Expenditure on an intangible item that was initially recognised as an
expense cannot be recognised as part of the cost of an intangible asset at a
later date (par. 71).
Revaluation of Intangible Assets
• Intangible assets – can be revalued only if there is an “active
market”.
Active market – a market exhibiting all of the following: the items
traded are homogenous; willing buyers and sellers can normally be
found at any time; and prices are publicly available.
• Where revaluation occurs, it has to be the fair value of the asset.
Research and Development Costs
Research (par. 8) – is original and planned investigation
undertaken with the prospect of gaining new scientific or technical
knowledge and understanding.
Development (par. 8) – is the application of research findings or
other knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes,
systems or services before the start of commercial production or
use.
Amortization of Intangible Assets
• Intangible assets (with a finite useful life) – are to be amortized
over their useful life.
• Useful life – the period of time over which the asset is expected to
be used by the entity, or the number of production or similar units
expected to be obtained from the asset by the entity.
Sale of Intangible Assets
• Gain or loss on disposal of intangibles – will be determined as the
difference between the net proceeds from the disposal, and
carrying amount of the asset.
Accounting for Research and Development
• High degree of uncertainty about whether expenditure incurred on
research and development ultimately generate future economic
benefits.
• Research expenditure must be written of when incurred, whereas
development expenditure may be capitalised to the extent that
certain conditions are met.
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 Research Phase
• Research should be considered separately from development.
Research generally precedes development.
• Research is original investigation, while development is defined as
activities undertaken with specific commercial objectives, and
involves the translation of research knowledge into designs for
new products.
• In relation to research expenditures (par. 54) states “No
intangible asset arising from research (or from the research phase
of an internal project) shall be recognised. It shall be recognised
as an expense when it is incurred”.
Development Phase
• As we move towards the development stage uncertainty of future
economic benefits is deemed to reduce.
• Paragraph 57 requires that expenditure on development may be deferred only
if the entity can show all of the following:
a) the technical feasibility of completing the intangible asset so that it will be
available for use or sale;
b) its intention to complete the intangible asset, and use or sell it;
c) its ability to use or sell the intangible asset;
d) how the intangible asset will generate probable future economic benefits,
including the existence of a market for the output of the intangible asset, or the
intangible asset itself, or where the intangible asset is to be used internally, its
usefulness;
Example 6
Classic Laboratories Ltd is undertaking a major research and development
project, major components of which are described below.
2011
January
Classic established a new research project concerned with identifying radically
different poisons, useful for controlling pests. During January experiments were
conducted, using a variety of chemical compositions, on a variety of pests. Costs
incurred were $1 million.
Cont…
• Research is expensed by virtue of the view that it is undertaken in
the early stages of development of new product or process and the
likelihood of it being possible to link the expenditure with future
economic benefits is deemed to be uncertain.
• “In the research phase of an internal project, an entity cannot
demonstrate that an intangible asset exists that will generate
probable future economic benefits. Therefore, this expenditure is
recognised as an expense when it is incurred” (par. 55).
Cont…
e) the availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
f) its ability to measure reliably expenditure on the intangible asset during its
development.
• The test for deferral is the same that applies to other intangible assets (par.
21):
An intangible asset should be recognised if and only if:
(a) it is probable that the future economic benefits that are attributable
to the asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
Cont…
March
The experiments conducted established that a particular chemical composition
was lethal to mice. Classic's management believed that a large potential market
existed for an effective mice poison that was chemically different from those
currently available. While experiments established that the poison was lethal to
mice, a large quantity of it (in its present form) was required to kill significant
mice populations. Thus, the poison was not a commercially viable product in
its present form. Classic undertook additional research to find a more
concentrated form of the new poison. Costs incurred in March were $1.5
million.
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Cont… Cont…

June
Additional research resulted in a more concentrated form of the new poison
and experiments confirmed that it was lethal to mice. However, as the new Required
poison had a radically different chemical composition, it was necessary for the
research team to undertake additional work to determine how to produce the 1. Determine the total research and development costs that should be deferred,
new poison economically. Production might require modifications to the in accordance with IAS 38, at the end of 2011. Justify your answer.
chemical composition of the new poison. Market research confirmed that there 2. Show the necessary journal entries to record all the events.
was a large market for a chemically different mice poison. Costs incurred in
June were $4 million.

September
The research team devised a means of mass producing the new poison
economically. The costs incurred in September on this task were $3 million.
Classic constructed production facilities for the new poison at a cost of $10
million. Production began in October.

Solution Cont…

1. The criteria in par. 57 of IAS 38 are:

2. January
$1m
Cash $1m

March
$1.5m
On the basis of the analysis, the criteria in par. 57 of IAS 38 are met in Cash $1.5m
September. Hence, costs incurred before this point are __________:

Cont… Cont…

• Internally generated brands, mastheads, publishing titles,

June customer lists and items similar in substance shall not be
$4m recognised as intangible assets (par. 63).
Cash $4m

September • Where the total of the deferred development costs exceeds the
$3m expected recoverable amount, the deferred costs must be written
Cash $3m down to the recoverable amount.

$10m
Cash $10m

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Costs to be included in Research &
Development
• Capital expenditure…
• costs of materials and services used or consumed in generating the
intangible asset;
• costs of employee benefits (as defined in AASB 119 'Employee Benefits')
arising from generation of the intangible asset;
• costs incurred by external parties for the company in R&D activities;
• fees to register a legal right;
• amortisation of patents and rights that are used to generate the intangible
asset.
• Acquisition by way of a government grant – an entity recognises both the
intangible asset and grant initially at fair value (par. 44)
Cont…
An intangible asset with an indefinite useful life (such as goodwill) is not to
be amortized.
However, an entity is required to test an intangible asset with an indefinite
useful life for impairment by comparing its recoverable amount with its
carrying amount:
– annually, and
– whenever there is an indication that the intangible asset may be impaired.
(for additional details on impairment, see IAS 36, Impairment of Assets).
Cont…
An entity shall also disclose (par. 122):
(a) for an intangible asset assessed as having an indefinite useful life, the
carrying amount of that asset and the reasons supporting the assessment of
an indefinite useful life. In giving these reasons, the entity shall describe the
factor(s) that played a significant role in determining that the asset has an
indefinite useful life;
(b) a description, the carrying amount and remaining amortisation period of
any individual intangible asset that is material to the entity's financial
report;
Goodwill
Goodwill – excess of the cost of acquisition over the acquirer’s interest in the net
fair value of the identifiable assets, liabilities and contingent liabilities.
– Can not identify individually;
– A composite asset;
– Can only be identified in relation to total business value during a sale or purchase.
The acquirer shall, at the acquisition date:
– recognise goodwill acquired as an asset; and
– initially measure that goodwill at its cost (IFRS 3, Business Combinations, par. 51).
Intangible Assets
General disclosure (par. 118)
An entity shall disclose the following for each class of intangible
assets, distinguishing between internally generated intangible and
other intangible assets:
(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the
amortisation rates used;
(b) the amortisation methods used for intangible assets with finite useful lives;
(c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated
impairment losses) at the beginning and end of the period;
(d) the line item(s) of the income statement in which any amortization of intangible assets is
included;
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
• additions, indicating separately those from internal development, those acquired
separately, and those acquired through business combinations;
• any amortisation recognised during the period;
• etc (see par. 118)
Cont…
(c) for intangible assets acquired by way of a government grant and initially
recognised at fair value (see paragraph 44):
• the fair value initially recognised for these assets;
• their carrying amount; and
• whether they are measured after recognition under the cost model or the revaluation
model;
(d) the existence and carrying amounts of intangible assets whose title is
restricted and the carrying amounts of intangible assets pledged as security
for liabilities; and
(e) the amount of contractual commitments for the acquisition of intangible
assets.
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