8/31/2020

COST MODEL
IMPAIRMENT OF ASSET
- assess every reporting period if there are indicators of impairment
SUBSEQUENT MEASUREMENT  i.e. technological advancement, legal environment, physical
damage, decline in performance (net cash flow)
OF PROPERTY, PLANT AND - if with indications of impairment, perform impairment test:
 CARRYING VALUE > RECOVERABLE AMOUNT
EQUIPMENT
- IMPAIRMENT LOSS: recognized immediately in P/L in year incurred
: a non-continuous adjustment made as and when
required

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SUBSEQUENT MEASUREMENT COST MODEL

• Either COST MODEL or REVALUATION MODEL
• To be applied to all assets within the same class of PPE
• i.e. All land at revaluation model
• All building at cost model
COST MODEL
every year end at: COST – ACCUMULATED DEPRECIATION –
ACCUMULATED IMPAIRMENT LOSS
REVALUATION MODEL
every year end at:
REVALUED AMOUNT= FAIR VALUE – SUBSEQ ACCUMULATED DEPRECIATION
– SUBSEQ ACCUMULATED IMPAIRMENT LOSS
RECOVERABLE AMOUNT
- benefit of the company for the use or sale of the asset.
- HIGHER  fair value less cost of disposal (if asset is sold)
 value in use (if continue usage of asset)
• FAIR VALUE: a market based measurement, not entity specific.
: 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. (exit price)
• COST OF DISPOSAL: i.e. legal cost, cost of removing asset, doc stamp tax
• VALUE IN USE: present value of the future cash flows expected to be derived from an
asset

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COST MODEL REVALUATION MODEL

REVERSAL OF IMPAIRMENT
- a subsequent increase in the asset’s recoverable amount can be regarded
as a reversal of previous impairment.
- with limit: since an asset can’t be carried at amount that exceeds its
carrying value had there been no previous impairment loss
REVALUED AMOUNT > CARRYING VALUE
WITHOUT PREVIOUS ILOSS: Excess as Revaluation Surplus (reported in OCI)
WITH PREVIOUS ILOSS: Excess as 1st Recovery of previous Iloss (reported in P/L)
2nd Revaluation Surplus (reported in OCI)

- STEPS FOR RECOVERY REVALUED AMOUNT < CARRYING VALUE

1. Recoverable amount > Carrying Value with impairment WITH PREVIOUS RS: Deficiency as 1st Reduction to previous RS (reported in OCI)
2. Choose HIGHER  Recoverable Amount 2nd Impairment loss (reported in P/L)
 Carrying Value had no previous impairment WITHOUT PREVIOUS RS: Deficiency as Impairment loss (reported in P/L)
3. RECOVERY = Higher in Step 2 - Carrying Value with impairment

*RECOVERY – recorded in P/L

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REVALUATION MODEL REVALUATION MODEL

- REVALUED AMOUNT = fair value = sound value = depreciated replacement cost TREATMENT OF ACCUMULATED DEPRECIATION ON REVALUATION DATE
either:
- the carrying amount of an asset can be adjusted both upward and downward if PROPORTIONATE METHOD
there is an indication that it differs materially from an asset’s fair value - restated proportionately with the change in the gross carrying
- The frequency of revaluations depends upon the changes in fair values of the amount so that the carrying amount of the asset equals its revalued
items of PPE being revalued. If the fair value of a revalued asset differs materially amount
from its carrying value, then a further revaluation is required
- allows carrying an item of property, plant, and equipment at its fair value or value ELIMINATION METHOD
in use, whichever is higher - eliminated against the gross carrying amount and the asset account
- Reversal of impairment loss is permitted and not limited by the amount of is restated to its revalued amount
accumulated impairment losses in the past as in the cost model

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REVALUATION MODEL IMPAIRMENT LOSS SUMMARY

TRANSFER OF REVALUATION SURPLUS TO RETAINED EARNINGS COST MODEL REVALUATION MODEL
either:
AS THE ASSET IS USE
Initial
- allocate revaluation surplus to retained earnings over the useful life of Initial
increase
increase
the asset from CV
from CV

UPON DERECOGNITION OF ASSET

- transfer the balance of the revaluation surplus to retained earnings when CARRYING
the related asset is derecognized VALUE

Impairment Recovery Recovery Impairment Recovery Recovery

loss until CV beyond CV loss until CV beyond CV
had no IL had no IL had no IL had no IL

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IMPAIRMENT LOSS SUMMARY 2-29 JOURNAL ENTRY

1/1/16 Equipment 860k
Cash 860k

12/31/16 – 2019 Depreciation exp 90k

Accum. Depn 90k

12/31/19 Impair loss 80k

Accum. Depn 80k

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2-32 JOURNAL ENTRY 2-35 JOURNAL ENTRY

1/1/14 Building 10M 12/31/21-22 Depn exp 390k
Cash 10M Accum depn 390k
Rev Surplus 30k
12/31/17 Impair loss 2.4M Retained earnings 30k
Accum. Depn 2.4M
12/31/22 Accum depn 220k
Rev Surplus 180k
12/31/19 Depn exp 350k Impair loss 150k
Accum. Depn 350k Machine 550k

Accum Depn 2.1M

Recovery of Impair loss 2.1M

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2-35 JOURNAL ENTRY 2-35 JOURNAL ENTRY

1/1/19 Machine 3.6M 12/31/23-24 Depn exp 335k
Cash 3.6M Accum depn 335k

12/31/19-20 Depn exp 360k 12/31/24 Machine 1.150M

Accum depn 360k Accum depn 690k
Recovery prev Iloss 100k
12/31/20 Machine 300k Rev Surplus 360k
Accum depn 60k
Rev Surplus 240k 12/31/25 Depn exp 450k
Accum depn 450k
Rev Surplus 90k
Retained earnings 90k

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REVALUATION: LIFE AND RESIDUAL VALUE CHANGES WASTING ASSETS

• An entity acquired a building on January 1, 2017 at a cost of P20M.
The building had a useful life of 6 years and residual value of P2M.
The building was revalued on January 1, 2020 and the revaluation
revealed a replacement cost of P30M, residual value of P4M and
revised useful life of 8 years from date of acquisition
• QUESTIONS:
• Revaluation surplus on January 1, 2020
• Revaluation surplus on December 31, 2020
• Annual depreciation in 2020
• Natural resources such as oils, minerals and petroleum are consumed
physically over the period of use and do not maintain their physical
characteristics
DEPLETION
- allocation of the depletable cost of the wasting asset over the
periods benefits are received. ( OUTPUT METHOD)
- DEPLETION EXPENSE
 product cost if asset is not yet sold
cost of goods sold if asset is already sold

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WASTING ASSETS
DEPLETABLE COST
Acquisition Cost xx

DEPLETION OF WASTING Exploration Cost

Development Cost
xx
xx

ASSETS Restoration Cost at pv

Residual Value
xx
(xx)
DEPLETABLE COST xx

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WASTING ASSETS WASTING ASSETS

ACQUISITION COST RESTORATION COST
- price paid to obtain property right to search and find natural - at the fair value of the obligation to restore the property after
resources extraction
- when there is an existing legal obligation to retire the asset or restore
EXPLORATION COST the property and it can reasonably estimate the amount of liability
- costs incurred to find the natural resources - i.e. Dismantling, restoring, reclaiming oil and gas properties, removal
cost of mining facilities
- 2 METHODS
 SUCCESSFUL METHOD: capitalize costs that only resulted in
a successful discovery of natural
resources, otherwise expense
 FULL COST: capitalize costs whether successful or unsuccessful
discovery of natural resources

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WASTING ASSETS WASTING ASSETS

DEVELOPMENT COST ESTIMATION OF RECOVERABLE RESERVES
- costs incurred to extract the natural resources located - when there is new information or more sophisticated production
 INTANGIBLE: no physical characteristics but needed for the extraction process is available
of the natural resource - revision of depletion rate which is accounted as Change in Accounting
: part of depletable cost Estimate
: i.e. drilling, tunnels, shafts, well
 TANGIBLE: includes transportation and equipment needed to extract
the natural resources and get it ready for market.
: present separately as PPE since may be transferred
to other projects
: depreciated over asset’s useful life or mining period
which ever is shorter
: SHORTER ->LIFE (SL method); MINING PERIOD (output)

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