Professional Documents
Culture Documents
Presented to:
Bhandamme R. Paragas
Presented by:
Criselda G. Torricer
Konrad Lorenz M. Uychoco
Nicael Arvin D. Valmonte
Rachel A. Villanueva
Cost model
Property, plant, and equipment shall be carried at cost less any accumulated depreciation and
any accumulated impairment losses.
o Formula=Cost – Accum . Depreciation – Accum . Impairment Losses
Revaluation model
After recognition as an asset, any item of property, plant and equipment whose fair value can be
measured reliably can be carried at revalued amount.
Revalued amount = Fair value at revaluation date – subsequent accumulated depreciation –
subsequent accumulated impairment losses
Frequency of revaluation depends upon changes in the fair value of property, plant and equipment
being revalued
Revaluation necessary if fair value of asset revalued differs materially from carrying amount.
When property plant and equipment are revalued, the entire class of property, plant and equipment
should be revalued.
o Class of property, plant and equipment – grouping of assets having similar nature and use
in entity’s operations, like:
Land
Land and buildings
Machinery
Ships
Aircraft
Motor vehicles
Furniture and fixtures
Office equipment
Basis of revaluation
Revalued amount – fair value/depreciated replacement cost of the item of property, plant and
equipment.
o Note: If the problem states fair value, seek for the depreciated replacement cost and vice
versa.
Fair value – price that would be received to sell an asset or paid to transfer a liability
Depreciated replacement cost – replacement cost less corresponding accumulated depreciation.
Also known as the sound value of the asset.
Replacement cost – current purchase price
Carrying amount – historical cost less corresponding accumulated depreciation
Revaluation surplus – fair value or depreciated replacement cost less carrying amount of property,
plant and equipment. Also known as revaluation increment
Appreciation or revaluation increase – excess of revalued amount over historical cost
Revaluation surplus – Appreciation less corresponding accumulated depreciation
Formulas list:
The equipment is classified as property, plant and equipment and presented as follows:
The historical cost and the related accumulated depreciation shall be disclosed in the notes as
follows:
Accounting for revaluation
Illustration 1 – No change in useful life
The following data pertains to a machinery on revaluation date (January 1, 2020):
Cost: P8,000,000
Accumulated depreciation: P2,000,000
Replacement cost: P12,000,000
The machinery was revalued 5 years from the date of acquisition
To compute for the original useful life of the machinery:
Accumulated depreciation – cost P2,000,000
Divide: Age of the machinery 5 years
Annual depreciation P 400,000
Machinery at cost P8,000,000
Divide: Annual depreciation at cost 400,000
Original useful life 20 years
Approaches in recording revaluation
Proportional approach
a. Accumulated depreciation at revaluation date is restated proportionally with the change in
the gross carrying amount of the asset
b. Carrying amount after revaluation = Revalued amount
Cost Replacement cost Appreciation
The accumulated depreciation is eliminated/offset against the gross carrying amount of the
machinery. This has the effect of eliminating the accumulated depreciation account to 0,
while the PPE is recorded at carrying amount (cost less accumulated depreciation).
To conform with the depreciated replacement cost (sound value), the PPE will be adjusted.
Cost−Residual Value
Depreciation=
Useful life (¿ years)
Given the formula, we should be able to compute for the depreciation of the machine per year
Php8,500,000−Php500,000
Depreciation= =Php 800,000 ( 1 year depreciation )
10
Php 3,200,000÷ Php 800,000=4 years depreciated ÷10 ye ars useful life =40 % depreciation
Why is the residual value of the machinery at cost P400,000? Why not P500,000?
Because the asset is revalued, the basis for the residual value at cost will be the same as the
replacement cost, as well.
o However, the initial P500,000 is used as basis for the computation of the accumulated
depreciation at cost.
Reversal of a revaluation surplus
Revaluation decrease shall be charged directly against any revaluation surplus to the extent
that the decrease is a reversal of a previous revaluation and the balance is charged to expense.
Illustration
On January 01, 2019, the statement of financial position shows the following data concerning an
equipment:
If the sound value is available, “gross up” the sound value or compute the gross replacement
cost.
Cost Replacement cost Appreciation
Equipment P5,000,000 P8,000,000 P3,000,000
Accumulated depreciation (40%) (2,000,000) (3,200,000) (1,200,000)
Carrying amount/ P3,000,000 P4,800,000 P1,800,000
Sound value/
Revaluation surplus
Note: Depreciated replacement cost is replacement cost less accumulated depreciation at replacement
cost. If we know that Asset at cost less accumulated depreciation is carrying amount, then an identical
concept can be applied to the formula for depreciated replacement cost (sound value).
Going back to the illustration, we have P4,800,000 depreciated replacement cost. It’s like your carrying
amount but it’s for replacement cost. Therefore:
Journal entries
Note that, since there are 3 years remaining in the useful life of the asset, the annual depreciation is
computed as P1,050,000 / 3 to get P350,000 per year.
Sale of revalued asset
All accounts related to revaluation of an asset are closed to determine the gain (loss) on the sale
Sale price – carrying amount of revalued asset = Gain (loss)
Illustration
Building: P50,000,000
Accumulated depreciation: P30,000,000
Revaluation surplus: P4,000,000
Sale price: P22,000,000
To compute for the gain/loss on sale:
Sale price P22,000,000
Less: Carrying amount of building 20,000,000
Gain on sale of building P 2,000,000
Cash P22,000,000
Accumulated depreciation 30,000,000
Building P50,000,000
Gain on sale of building 2,000,000
To record sale of revalued building.
Property, plant, and equipment is initially recognized at cost, then the entity should either use the:
o Cost method – carried at cost less accumulated depreciation and impairment losses;
o Fair value method – applicable if fair value can be measured reliably.
If the asset revalued has no useful life, the procedures are:
Compute annual depreciation;
Compute original useful life of the asset;
Find the depreciation rate by dividing the accumulated depreciation by the cost of the asset.
If the asset revalued will have a change in life and residual value, then the procedures are:
Compute annual depreciation;
MULTIPLE CHOICE – THEORIES
1. Subsequent to initial recognition, an entity shall use this model to account for its items of property,
plant, and equipment
A. Cost model
B. Revaluation model
C. Fair value model
D. A or B as an accounting policy choice
Answer: A.
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 197
2. The carrying amount of an item of property, plant and equipment subsequently accounted for under
the cost model is equal to
A. Simultaneously
B. Every year
C. On all assets in a class
D. A and C
Answer: D
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 199
5. Revaluations of items of property, plant and equipment are recorded using the
A. Proportional method
B. Elimination method
C. Replacement method
D. A or B
Answer: D.
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 200
6. An entity owns a fleet of cars and ships. The entity operates on a capital-intensive industry and thus
has significant other property, plant and equipment. Which of the following statements is correct?
A. Revalue only one-half of each class of property, plant and equipment as that method is less
cumbersome and easy compared to revaluing all assets together
B. Revalue an entire class of property, plant and equipment
C. Revalue one ship at a time as it is easier than revaluing all ships together
D. Since assets are being revalued regularly, there is no need to depreciate.
Answer: B.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 815
7. The revaluation surplus resulting from initial revaluation of property, plant and equipment shall be
treated in which one of the following?
A. When 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
B. A class of property, plant and equipment is a grouping of assets of a similar nature and use in an
entity’s operations
C. The items within a class of property, plant and equipment are revalued selectively
D. A class of assets may be revalued on a rolling basis provided revaluation of the class of assets is
completed within a short period of time and provided the revaluations are kept up to date
Answer: C.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p. 828
10. What is the treatment of the accumulated depreciation on the date of revaluation?
I. Restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount after revaluation equals the revalued amount.
II. Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
Answer: B.
Reference: Theory of Accounts Volume 1 2012, C. Valix, p.812
11. Under the cost model, the gain or loss on disposal of an item of property, plant and equipment is
computed as
A. The difference between the net disposal proceeds and the carrying amount
B. The difference between the net disposal proceeds and the revalued amount
C. The difference between the net disposal proceeds and accumulated depreciation
D. The difference between the sale price and the carrying amount
Answer: A.
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 201
12. This fair valuation technique uses prices and other relevant information generated by market
transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities
A. Market approach
B. Proportional approach
C. Income approach
D. Cost approach
Answer: A.
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 200
13. Which of the following is not an acceptable method of measuring the fair value of a property that is
being revalued?
A. Market approach
B. Proportional approach
C. Income approach
D. Cost approach
Answer: B.
Reference: Intermediate Accounting 1B 2019, Z. Millan, p. 199
14. Using the cost model, how are property, plant and equipment measured on the statement of financial
position?
Replacement
Cost Cost Appreciation
Equipment ₱ 5,200,000 ₱ 8,000,000 ₱ 2,800,000
Less: Residual value 200,000 200,000 0
Depreciation amount 5,000,000 7,800,000 2,800,000
Less: Accumulated
depreciation
(40% x 4,800,000) 1,920,000 - 0
(40% x 7,800,000) - 3,120,000 1,200,000
Balance ₱ 3,080,000 ₱ 4,680,000 ₱ 1,600,000
Land 70,000,000
Building 315,000,000
There were no additions or disposals during 2014. Depreciation is computed on straight line. The
estimated life of the building is 20 years.
Ignoring income tax, what amount should be reported as revaluation surplus on December 31, 2014?
A. 117,500,000
B. 125,000,000
C. 105,000,000
D. 119,750,000
Answer: A
Percentage of accumulated depreciation
(90,000,000/300,000,000) 30%
Remaining useful life (70% x 20 years) 14 years
Equipment ₱2,000,000
Accumulated depreciation ₱700,000
Revaluation Surplus 1,300,000
To record the revaluation
surplus
Reference: Intermediate Accounting 2019, Volume 1, C Valix, p.839
Problems VI, VII & VIII
Seaside Company applied revaluation accounting to plant asset with carrying amount of 4,000,000 on
January 1, 2014, useful life of 4 years, and no residual value. Depreciation is calculated on the straight-
line basis.
On December 31, 2014, independent appraisers determined that the asset has a fair value of 3,750,000.
1. What is the journal entry to record the revaluation on December 31,2014?
A. Debit accumulated depreciation 250,000
B. Credit depreciation 750,000
C. Credit plant asset 750,000
D. Credit revaluation surplus 750,000
2. The financial statement for 2014 shall include which of the following information?
A. Accumulated depreciation 1,000,000
B. Depreciation 250,000
C. Plant asset 3,750,000
D. Revaluation surplus 250,000
Question 2 Answer: C
Question 3 Answer: B
Building ₱ 6,000,000
Less: Accumulated depreciation 2,000,000 ₱ 4,000,000
Question 2 Answer: C
Reference: CPA Examination Reviewers: Auditing Problems, 2014 Edition G. Roque, p 472-474
Carrying amount
- Amount at which an asset is recognized in the statement of financial position AFTER deducting
accumulated depreciation and accumulated impairment loss.
Recoverable Amount
- Asset in its fair value less cost to sell or value in use, whichever is higher
BASIC PRINCIPLE
- The asset SHALL NOT be carried AT ABOVE the recoverable amount
- However, in case the carrying amount is not recoverable in full, the entity shall write down the
carrying amount as the recoverable amount
▪ Carrying Amount > Recoverable Amount = Impairment Loss; therefore, the asset shall be reduced
by the amount of the IMPAIRMENT LOSS
ACCOUNTING FOR IMPAIRMENT
Level 2
- inputs are observable either directly or indirectly
- it includes quoted prices for similar assets in an active market
- quotes prices for identical or similar assets in a market that is not active
Level 3
- inputs are unobservable inputs for the asset
- unobservable inputs - usually developed by using the best available information from the
entity’s own data
Active Market
- it is a market in which transactions for the asset take place with sufficient regularity and volume to
provide pricing information on an ongoing basis
- the items traded within the market are homogenous
- willing buyers and sellers can normally be found at any time
- prices are available to the public
Principal Market
- it is a market with the greatest volume and level of activity for the asset
Market Participants
- these are the buyers and sellers in the principal market who are
o independent
o knowledgeable
o willing
Value in Use
- measured as the present value of estimated future net cash flows expected to be derived from an
asset
- cash flows are pretax cash flows, and pretax discount rate is applied in determining the present value
PAS 36 provides the following in determining value in use:
a. Cash flow projections shall be based on reasonable and supportable assumptions
b. Cash flow projections shall be based on the most recent budgets on financial forecasts, usually up
to a maximum period of 5 years, unless a longer period can be justified
c. Cash flow projections beyond the 5-year period shall be estimated by extrapolating the 5-year
projections using a steady or declining growth rate each subsequent year, unless as increasing
rate can be justified
COMPONENTS OF ESTIMATED FUTURE CASH FLOW
Cash inflow
- Money received by a company or a business that could be from financial activities like sales,
investments or income.
Cash outflow
- It is the opposite of cash inflow, these are money paid to suppliers, banks, and other parties.
Net cash flow
- It refers to the difference between a company’s cash inflows and outflows. It also refers to the change
in a company’s cash balance as detailed on its cash flow statement
Estimated future cash flows include:
a. Projections of cash inflows from the continuing use of the asset
b. Projections of cash outflows necessarily incurred to generate the cash inflows from the
continuing use of the asset
c. Net cash flows received or paid on the disposal of the asset at the end of its meaningful life in
an arm’s length transaction
Estimated future cash flows do not include:
a. Future cash flows relating to restructuring to which the entity is not yet committed
b. Future costs of improving or enhancing the asset’s performance
c. Cash inflows or outflows from financing activities
d. Income tax receipts or payments
Illustration;
DEF Manufacturing Company uses a machinery in its operations. The machinery was acquired
on January 1, 2020 at a cost of P550,000. It has as estimated useful life of eight years and an estimated
residual value of P50,000 at the end of its useful life. The company uses straight-line method of
depreciation. As a result of a recent development in technology, DEF reviews the machinery for
impairment.
At the beginning of 2020, it is estimated that total remaining cash inflows attributable to the asset
are estimated to be P600,000, (P100,00 at the end of each year) while total cash outflow in using and
maintaining the machine are estimated to be P54,000 a year, expected to be uncured at the end of each
year. Based on current prices and the condition of the asset, DEF estimates the fair value of the
machinery to be P200,000. The disposal cost of the asset is approximately P25,000. DEF plans to
continue using the asset in production even at a significantly lower rate of utilization. The company’s
discount rate is 10%.
Analysis and computations:
Value in use:
P46,000 x 4.3553 P200,344
P50,000 x 0.5645 28,225
The value in use, which is P228,569, is the recoverable amount since it is higher than the net
selling price of P175,000.
Impairment loss:
Carrying value P425,000
Recoverable amount 228,567
Accordingly, the impairment loss shall be recorded immediately by reducing the asset’s
carrying amount to its recoverable amount
The impairment loss is recognized in profit or loss and presented separately in the
income statement
REVERSAL OF IMPAIRMENT LOSS
Under PAS 36, Paragraph 114 it provides that an impairment loss recognized for an asset in
prior years shall be reversed if there has been a change in the estimate of the recoverable amount
Recoverable Amount > Current Carrying Amount = Carrying Amount shall be
(previously been impaired) increased to new recoverable amount
However, Under PAS 36, Paragraph 117 it provides that the “increased carrying amount of an
asset due to reversal of impairment loss shall not exceed the carrying amount that would have been
determined, had no impairment loss been recognized for the asset in prior years”
Illustration:
Assuming that the enterprise uses straight-line method, the annual depreciation after recording
impairment is P200,000 which is derived by dividing the recoverable amount, P1,200,000 (the adjusted
carrying amount) over the remaining useful life of 6 years.
Further assume that two years after recording the initial impairment, the asset is evaluated and is
found to have a recoverable amount of P900,000.
The asset’s carrying value and the recovery of impairment are computed as follows;
Cost P2,400,000
Accumulated Depreciation
600,000 + 600,000 + (2x200,000) 1,600,000
The asset illustrated above shall have a carrying value of P1,200,000 if no impairment had been
previously recorded, as follows:
Cost P2,400,000
Accumulated Depreciation
Prior to impairment P600,000
Depreciation expense for
2 years (1,800,000/6) x 2 600,000 1,200,000
Because the new recoverable amount does not exceed the carrying value had no impairment loss
been recorded, the recovery of P100,000 is fully recognized in profit or loss.
Assume instead that two years after recording the initial impairment loss, the asset is evaluated
and is found to have a recoverable amount of P1,250,000. The increase in asset value is computed as
follows:
Cost P2,400,000
Accumulated Depreciation
600,000 + 600,000 + (2x200,000) 1,600,000
If the full increase in asset value shall be recorded, the asset shall be carried at P1,250,000 which
already exceeds the asset’s carrying value had no impairment loss been previously recorded
(P1,200,000).
Cost P2,400,000
Accumulated Depreciation
Prior to impairment P600,000
Depreciation expense for
2 years (1,800,000/6) x 2 600,000 1,200,000
The limit of the carrying value is, therefore, P1,200,000 and the recovery is recorded as follows:
Difference P100,000
x 2 years 200,000
I. Amount obtainable from the sale of an asset in arm’s length transaction between
knowledgeable and willing parties, less cost of disposal
II. Present value of estimated future cash flows expected to arise from the continuing use of
an asset and from its disposal at the end of its useful life
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Answer: A
Reference: Theory of Accounts, C. Valix, 2012, p.824
Answer: A
Reference: Theory of Accounts, C. Valix, 2012, p.824
3. The estimates of future cash flows in calculating value in use include all the following, except:
Answer: D
Reference: Theory of Accounts, C. Valix, 2012, p.825
4. The external sources of information indicating possible impairment include all of the following,
except:
A. Significant change in the technological, market, legal or economic environment of the business in
which the asset is employed
B. An increase in the interest rate or market rate of return on investment which will likely affect the
discount rate used in calculating value in use
C. The carrying amount of the net assets of the entity is more than the market capitalization
D. Significant decrease in budgeted net cash flows or significant increase in budgeted loss flowing
from the asset
Answer: D
Reference: Theory of Accounts, C. Valix, 2012, p.827
5. Which of the following statements is true in relation to recognition of impairment?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Answer: C
Reference: Theory of Accounts, C. Valix, 2012, p.827
A. Legal costs
B. Stamps and similar transaction taxes
C. Cost of removing the asset
D. Finance cost
Answer: D
7. Which of the following statements is incorrect concerning the reversal of an impairment loss?
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Answer: A
Answer: B
Answer: B
Reference: Theory of Accounts, C. Valix, 2012, p.831
10. Which of the following statements best describes “value in use”?
A. The present value of estimated future cash flows expected to arise from the continuing use of an
asset and from its ultimate disposal
B. The amount of cash or cash equivalents that could currently be obtained by selling an asset in an
orderly disposal
C. The amount which an entity expects to obtain for an asset at the end of its useful life
D. The amount at which as asset could be exchanged between knowledgeable and willing parties in
an arm’s length transaction
Answer: A
Reference: Theory of Accounts, C. Valix, 2012, p.831
11. Which of the following is not relevant in determining an asset’s “value in use”?
A. Impairment
B. Depreciation
C. Amortization
D. Decline in use
Answer: A
Reference: Theory of Accounts, C. Valix, 2012, p.824
14. If the assets are to be disposed of
A. Recoverable amount
B. Revalued amount
C. Depreciable amount
D. Carrying amount
Answer: A
Reference: Theory of Accounts, C. Valix, 2012, p.831
16. Which of the following is incorrect?
A. If an item of property, plant and equipment is revalued, the entire class property, plant and
equipment to which that asset belongs shall be revalued
B. The depreciation method use shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity
C. The carrying amount of an item of property, plant and equipment shall be derecognized on
disposal or when no future economic benefits are expected from its use or disposal
D. Recoverable amount is the lower of an asset’s net selling price and it value in use
Answer: D
Reference: Intermediate Accounting, P. Empleo, 2010, p.358
17. If an asset’s carrying value is decreased as a result of a revaluation, the decrease shall be
recognized in profit or loss. However, if there is a revaluation surplus account balance as a result of
prior evaluation, the decrease shall be?
Reference:
Practical Accounting One Volume 1, 2014 edition, C Valix, p. 671
Problem V
Mortal Company acquired a machine for 3,200,000 on august 31, 2016
The machine has a 5-year useful life, a 500,000 residual value, and a depreciated using the straight line
method.
On May 31, 2019, attest for recoverability revealed that the expected net future undiscounted cash inflows
related to the continued use and eventual disposal of the machine amount to 1,500,000.
The fair value less cost of disposal of the machine on May 31, 2019 is 1,350,000 with no residual value.
What is the depreciation of the machine for June 2019?
A. 51,000
B. 50,000
C. 45,000
D. 53,000
Answer: B.
Cost ₱ 3,200,000
Less: Accumulated depreciation- 5/31/2019 (3,200,000-500,000x33/60) 1,485,000
Carrying amount-5/31/2019 1,715,000
Less: Fair value less cost of disposal 1,350,000
Impairment loss ₱ 365,000
From August 31, 2016 to May 31,2019 is a period of 33 months. Thus, the remaining life of the machine is
27 months, 60 months original life minus 33.
Definition
A cash generating unit (CGU) 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.
CGU 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.
Example:
Retail store of a fast food chain
Bookstore of a school
Convenient store of a gasoline station
Supermarket of a mall
-These examples generate cash flows that are independent from the cash flows of the entity as a whole. If
these segments are the smallest identifiable group of assets, then they are considered as CGUs.
Concepts
The recoverable amount of an asset shall be determined for the asset individually. If it is not
possible to estimate the recoverable amount of the individual asset, an entity shall determine the
recoverable amount of the cash generating unit to which the asset belongs to.
Assets whose recoverable amount can be determined reliably are tested for impairment
individually.
Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not generate
their own cash flows) are included in a CGU. The CGU is the one tested for impairment. However,
when management is committed to sell an individual asset belonging to a CGU, that individual asset
is separately tested for impairment.
Measurement/Principles
Recoverable Amount of CGU: Higher of the CGU’s fair value less cost of disposal and value in use.
Note: Most often, the recoverable amount of a CGU is equal to the value in use because the unit is
not to be disposed of.
-Includes the carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the CGU and can generate the future cash inflows used in
determining the value in use of the cash generating unit. (PFRS 36, par. 76).
-It does not include the carrying amount of any recognized liability, unless the recoverable
amount of the CGU cannot be determined without consideration of this liability. (par. 76, PFRS 36).
Note: An impairment loss shall be recognized for a CGU if, and only if, the recoverable amount of
the unit is less than the carrying amount of the unit. (RA < CA)
Impairment Loss recognized for the CGU shall be allocated to the assets of the unit in the following
order:
1. Goodwill, if any.
2. Noncash Assets of the unit prorata based on their carrying amount.
Remember: When allocating the impairment loss, the carrying amount of an asset belonging to the
CGU shall not be reduced below the highest of:
Any amount that cannot be allocated to an asset because of the limitation above is allocated to the
other assets of the CGU pro rata based on their carrying amounts.
Goodwill
Goodwill does not generate cash flows independently from other assets or groups of assets, and
therefore, the recoverable amount of goodwill as an individual asset cannot be determined.
Consequently, the recoverable amount is determined for the CGU to which goodwill belongs, if
there is an indication that goodwill may be impaired.
A CGU to which goodwill has been allocated shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the goodwill, with the recoverable amount.
a. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit shall be regarded as not impaired.
b. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must
recognize an impairment loss.
Corporate Assets
Corporate assets are assets that contribute to the future cash flows of several departments or
divisions within an entity.
To test a corporate asset for impairment, it needs to be allocated to the various CGUs using that
asset-quite similar to goodwill.
Illustrations
An entity has determined that one of its cash generating units is impaired.
Building 2,400,000
Land 1,800,000
Equipment 1,500,000
Inventory 300,000
Carrying amount of CGU 6,000,000
The entity calculated the value in use of the cash generating unit to be Php 4,500,000.
Since there is no goodwill, the impairment loss is allocated across the assets based on carrying amount-
Pro rata allocation.
II. Fair value less cost of disposal of one of the assets determinable
An entity has determined that its fine china division is a cash generating unit. The entity calculated the
value in use of the division to be Php 8,000,000.
The assets of the cash generating unit at carrying amount are as follows:
Building 5,000,000
Equipment 3,000,000
Inventory 2,000,000
Carrying amount of CGU 10,000,000
The entity has also determined that the fair value less cost of disposal of the building is
Php 4,500,000.
Observe that after allocating the Php 1,000,000 loss to the building, the carrying amount of the building
would be Php 4,000,000 which is lower than the fair value less cost of disposal of Php 4,500,000.
Take note that the carrying amount of an asset shall not be reduced below the highest of fair value less
cost of disposal. The amount of impairment loss that would otherwise have been allocated to the asset
shall be allocated prorata to the other assets of the CGU.
Accordingly, only Php 500,000 loss is allocated to the building and balance of Php 500,000 is reallocated
to the equipment and inventory prorata.
After the adjustment, the carrying amount of the building is Php 4,500,000 which is equal to its fair value
less cost of disposal.
The assets of a cash generating unit at carrying amount at year-end are as follows:
An annual impairment review is required as the cash generating unit contains goodwill.
The most recent review assesses the value in use of the cash generating unit to be Php 4,500,000.
Allocate first the impairment loss to goodwill and then the excess to the noncash assets prorata based on
carrying amount.
An entity has a cash generating unit that has been experiencing significant losses in prior years. There is
objective indication that such cash generating unit is impaired.
At current year-end, the cash generating unit is tested for impairment with the following assets and
liabilities:
Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation 3,000,000
Goodwill 1,000,000
Accounts payable 2,500,000
Accrued liabilities 500,000
It is reliably determined that the value in use of the cash generating unit is Php 8,000,000.
Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation (3,000,000)
Goodwill 1,000,000
Carrying amount of CGU 12,000,000
Value in use 8,000,000
Impairment loss 4,000,000
Applicable to goodwill 1,000,000
Applicable to noncash assets 3,000,000
The remaining impairment loss of Php 3,000,000 is allocated to other noncash assets based on carrying
amount:
CA Fraction Loss
A/R. 2,000,000 20/100 600,000
Inv. 3,000,000 30/100 900,000
Land 1,500,000 15/100 450,000
P&E-net 3,500,000 35/100 1,050,000
10,000,000 3,000,000
Observe that the liabilities of the CGU are ignored in determining the carrying amount of the CGU.
Take note that only the carrying amount of those assets directly attributable to the CGU are included in
the computation of the CGU’s carrying amount. The carrying amount of any recognized liability is not
included, unless the CGU’s recoverable amount cannot be determined without consideration of this
liability.
An entity has two cash generating units, CGU one and CGU Two. There is no goodwill allocated to the
cash generating units. The carrying amounts of the cash generating units are:
The entity has an office building that has not been included in the carrying amounts of the cash
generating units and can be allocated to the units on the basis of carrying amount. The office building has
a carrying amount of Php 5,000,000.
The entity calculated the value in use of the cash generating units as follows:
The carrying amounts of the units including an allocated portion of the office building are determined as
follows:
CGU Two is not impaired because the value in use is higher than the carrying amount. The impairment
loss on CGU One is allocated as follows:
If an asset’s recoverable amount can be determined reliably, it is tested for impairment on its own.
If its recoverable amount cannot be determined reliably, the CGU to which that asset belongs is the
one tested for impairment.
For purposes of impairment, goodwill and corporate assets are allocated to CGUs.
The impairment loss on a CGU is allocated first to any goodwill in the CGU. The excess is
allocated to the other assets of the CGU prorata based on their carrying amount.
In allocating an impairment loss, the carrying amount of an asset should not be reduced below the
highest of:
1. It 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.
Answer: A.
2. These are assets other than goodwill that contribute to the future cash flows of both the cash
generating unit under review and other cash generating units.
A. Corporate assets
B. Property, plant and equipment
C. Group
D. Cash generating unit
Answer: A
A. Corporate assets are group or divisional assets such as head office building, EDP, equipment or
a research center.
B. Essentially, corporate assets generate cash inflows independently from other assets.
C. The recoverable amount of an individual corporate asset cannot be determined unless
management has decided to dispose of the asset.
D. If there is an indication that a corporate asset may be impaired, the recoverable amount of the
cash generating unit to which the corporate asset belongs is determined and compared with the
carrying amount of the cash generating unit.
Answer: B
4. When impairment testing a cash generating unit, any corporate assets shall
Answer: A
I. If the individual asset does not generate cash inflows that are largely independent of those from
other assets, the cash generating unit shall be identified.
II. If the individual asset generates an insignificant proportion of the cash inflows of the entity as a
whole, the cash generating unit shall not be identified.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Answer: C
A. Goodwill arising from business combination can only be tested for impairment in conjunction with
the cash generating unit to which the goodwill is allocated.
B. Impairment loss recognized on goodwill shall never be reversed.
C. The impairment loss on a cash generating unit (CGU) is allocated to goodwill and the other
assets belonging to the CGU on a prorata basis.
D. Impairment losses on goodwill are never recognized in other comprehensive income.
Answer: D
Answer: A
8. What is the allocation of an impairment loss recognized for a cash generating unit?
Answer: D
Reference: Conceptual Framework and Accounting Standards 2018, C. Valix et. al, p.496
9. If the recoverable amount of an individual asset cannot be estimated, the impairment test is instead
applied to:
Answer: C
Answer: A
Answer: C
Cash ₱ 600,000
Inventory 1,400,000
Land 2,500,000
Plant and equipment 9,000,000
Accumulated depreciation 1,500,000
Goodwill 1,000,000
₱ 13,000,000
Carrying amount
As part of the impairment testing procedure, the management determined the value in use of the cash
generating unit at ₱8,500,000. The fair value less cost of disposal for the inventory is greater than the
carrying amount. What is the impairment loss to be allocated to plant and equipment?
A. 3,500,000
B. 4,500,000
C. 2,625,000
D. 3,375,000
Answer: C.
No impairment loss is allocated to inventory because the fair value less cost of disposal of inventory is
higher than carrying amount.
Reference: Practical Accounting One Volume 1, 2014 edition, C Valix, p. 694
Problem III
On July 1, 2014, Nicole Company acquired Jones Company in a business combination. As a result of the
combination, the following amounts of the goodwill were recorded for each of the three reporting units of
the acquired entity:
Retailing 300,000
Service 200,000
Financing 400,000
Near the end of 2014, anew major competitor entered the entity’s market and the entity was concerned
that this might cause a significant decline in the value of goodwill. Accordingly, the entity computed the
implied value of the goodwill for the three major reporting units on December 31, 2014 as follows:
Retailing 250,000
Service 100,000
Financing 600,000
What is the amount of impairment of goodwill that should be recorded on December 31, 2014?
A. 100,000
B. 250,000
C. 150,000
D. 0
Answer: C.
Goodwill impairment is determined at the level of the individual reporting unit and not at the entity level.
Thus, no loss is recognized for the Financing unit because the implied value of goodwill exceeds the
carrying amount.
Reference: Practical Accounting One Volume 1, 2014 edition, C Valix, p. 695
Problem IV
Divine Company is testing two reporting units for impairment of goodwill. Information about results os
such tests are shown below.
Telecommunications Networking
Segment carrying amount
Including goodwill 2,500,000 3,000,000
Carrying amount of goodwill 500,000 500,000
Estimated fair value of total 2,900,000 2,800,000
Estimated fair value other than goodwill 2,100,000 2,500,000
What total amount should be reported as impairment loss on goodwill?
A. 200,000
B. 900,000
C. 500,000
D. 0
Answer: C.
Telecommunication
Segment carrying amount including goodwill ₱ 2,500,000
Estimated total fair value of segment 2,900,000
Impairment loss -
The carrying amount of goodwill of ₱ 500,000 is not affected because the Telecommunication reporting
unit is not impaired.
Networking
Segment carrying amount including goodwill ₱ 3,000,000
Less: Estimated total fair value of segment 2,800,000
Impairment loss- all allocated to goodwill ₱ 200,000
Goodwill ₱ 500,000
Impairment loss 200,000
Carrying amount of goodwill ₱ 300,000
There has been a favorable change in the estimate of recoverable amount of the net asset since the
impairment loss was recognized. The recoverable amount is now 8,000,000 on December 31, 2020.
The carrying amount of the net assets of would have been 7,200,000 on December 31, 2020 if there was
no impairment loss recognized on December 31, 2019. Assets are depreciated at 20% of reducing
balance.
What amount should be recognized as gain on reversal of impairment for 2020?
A. 1,000,000
B. 2,400,000
C. 1,600,000
D. 0
Answer: C.
1. Answer: B
2. Answer: D
Observe that after allocating the 2,500,000 loss to the building, the carrying amount of the building would
be 5,500,000 which is lower than its fair value of 6,500,000.
Accordingly, only 1,500,000 loss is allocated to the building and the balance of 1,000,000 is reallocated to
the equipment and inventory prorate.
Building Equipment Inventory
Allocated loss ₱ 2,500,000 ₱ 1,250,000 ₱ 1,250,000
Less: Reallocated loss 1,000,000
(4/8x1,000,000) 500,000
(4/8x1,000,000) 500,000
Impairment loss ₱ 1,500,000 ₱ 1,750,000 ₱ 1,750,000
The entity determined that the value in use of the cash generating unit is 30,000,000.
The accounts receivable is considered doubtful.
1. What is the carrying amount of the cash generating unit?
A. 37,000,000
B. 34,000,000
C. 42,000,000
D. 36,000,000
2. The amount Debited to impairment loss is?
A. 3,000,000
B. 7,000,000
C. 4,120,000
D. 2,880,000
1. Answer: A
Cash ₱ 4,000,000
Accounts receivable-net 5,000,000
Inventory 7,000,000
Property, plant and equipment-net 18,000,000
Goodwill 3,000,000
Carrying amount of CGU ₱ 37,000,000
2. Answer: B
No impairment loss is allocated to the accounts receivable because the accounts considered collectible
except those doubtful.
Reference: Intermediate Accounting 2019, Volume 1, C Valix, p.872