Module On Intermediate Accounting 2 Unit 1 Part 2

UNIT 1
(Part 2)
Topic 7: Depletion of Natural Resources
Introduction
This module focuses on the accounting and reporting of depletion
of natural resources. It introduces the learner to the subject, guides the
learner through the official text, develops the learner’s understanding of
the requirements through the use of examples and indicates significant
judgments that are required in accounting for depletion of natural
resources. Furthermore, the module includes questions designed to test the
learner’s knowledge of the requirements and to develop the learner’s
ability to account for depletion.
Learning Outcome:
 Understand the concepts of Depletion.
 Develop the ability to compute depletion rates and expenditures
Learning Objectives:
 Define Depletion
 Describe and illustrate entries for
 Explain the accounting procedures for depletion of natural resources.
 Compute for Depletion
Topic Outline:
7.1. Exploration and evaluation of mineral 7.4. Wasting asset

resources 7.5. Acquisition cost
7.2. Exploration and evaluation of 7.6. Exploration cost
expenditures 7.7. Development Cost
7.3. Exploration and evaluation asset 7.8. Estimated restoration cost
Presentation of Topic:
7.1 Exploration and evaluation of mineral resources - the search for mineral
resources, including minerals, oil, natural gas and similar non-regenerative
resources after the entity has obtained legal rights to explore in a specific area,
as well as the determination of the technical feasibility and commercial
viability of extracting the mineral resource. (IFRS 6)
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Example of Exploration and Evaluation Activities
 acquisition of rights to explore
 topographical, geological, geochemical and geophysical studies
 exploratory drilling
 trenching
 sampling
 activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource
7.2 Exploration and evaluation expenditures - expenditures incurred in

connection with the exploration and evaluation of mineral resources before the
technical feasibility and commercial viability of extracting a mineral resource
is demonstrable.
7.3 Exploration and evaluation assets – an entity treat exploration and

evaluation assets as a separate class of assets and make the disclosures
required by either IAS 16 Property, Plant and Equipment or IAS 38 Intangible
Assets consistent with how the assets are classified.
IFRS 6 requires disclosure of information that identifies and explains the

amounts recognized in its financial statements arising from the exploration for
and evaluation of mineral resources, including:
 its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets
 the amounts of assets, liabilities, income and expense and
operating and investing cash flows arising from the exploration for
and evaluation of mineral resources.
7.4 Wasting Asset

A wasting asset is an item that has a limited life span and irreversibly declines
in value over time.
Cost of Wasting Asset
 Acquisition
 Exploration and evaluation
 Development
 Restoration
7.5 Acquisition Cost – price paid to obtain the property right to search and find an
undiscovered natural resource.
7.6 Exploration and Evaluation Cost - Expenditures incurred by an entity in

connection with the exploration for and evaluation of mineral resources before
the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable
Note: An exploration and evaluation asset shall no longer be classified as
such when the technical feasibility and commercial viability of extracting
a mineral resource are demonstrable. Exploration and evaluation assets
shall be assessed for impairment, and any impairment loss recognized,
before reclassification.
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7.7 Development Cost –
Intangible - Include in the cost of wasting asset
e.g. Cost of drilling and construction of wells
Tangible - Recognize as separate asset
e.g. Building and machinery and equipment
Depreciation method: - Same method for other PPE

Note: If the problem is silent
Useful life > Life of WA – Output method
Useful life < Life of WA – Straight line Method
7.8 Restoration Cost – Costs entities incur to restore property to its natural state
after extraction has occurred.
Included when recognized as provision. Therefore, the restoration cost must:
 Be a present obligation,
 Represent a probable outflow of economic resources, and
 Be measurable reliably
Presentation of Depletion:
Unsold - Inventory
Sold – Cost of Sales
Depletion is calculated using the units of production method.
Depletion per unit = Cost - Residual Value / Est. total units of natural
resource
Journal entry:
Depletion Expense (Depletion per unit * Units)
Accumulated Depletion (Depletion per unit * Units)
Key Points:
 The depletion method is the same as Units of Production Method.
 The accumulated depletion account is credited when the asset is
amortized.
Practice Problems
Problem 1
In 2015, Hukay Mining Company purchased property with natural resources
P6,200,000. The property was relatively close to a large city and had an
expected residual value of P900,000.
The following information relates to the use of the property.

a) In 2015, Hukay spent P400,000 in development costs and P300,000 in
buildings on the property, Hukay does not anticipate that the buildings will
have utility after the natural resources are depleted.
b) In 2016 and 2018, P300,000 and P800,000, respectively, were spent for
additional developments on the mine.
c) The tonnage mined and estimated remaining tons for years 2015-2019 are
as follows:
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Year Tons Extracted Estimated Tons Remaining
2015 0 5,000,000
2016 1,500,000 3,500,000
2017 1,800,000 2,000,000
2018 1,700,000 900,000
2019 900,000 0
REQUIRED:
Compute the depletion and depreciation expense for the years 2015 – 2019.
SOLUTION GUIDE:
Depletion
Year Output Rate Depletion

2015 - -
2016 1,500,000 1.20 1,800,000
2017 1,800,000 1.11 1,998,000
2018 1,700,000 1.15 1,955,000
2019 900,000 1,047,000
Computation of depletion rate - 2016
Cost of land P6,200,000

Development cost – 2015 400,000
Total cost 6,900,000
Residual value ( 900,000)
Depletable amount 6,000,000
/Estimated reserves 5,000,000
Depletion rate 1.20
Original DA P6,000,000
Depletion – 2016 (1,800,000)
Remaining DA, 1/1/17 4,200,000
/Est. reserves, 1/1/17 3,800,000
Depletion rate 1.11
Remaining DA, 1/1/17 P4,200,000

Depletion – 2017 (1,998,000)
Remaining DA, 1/1/18 2,202,000
Depletable amount-2018 3,002,000
/Est. reserves, 1/1/18 2,600,000
Depletion rate 1.15
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Depreciation
Year Output Rate Depreciation

2015 - -
2016 1,500,000 0.06 90,000
2017 1,800,000 0.06 108,000
2018 1,700,000 0.04 68,000
2019 900,000 34,000
Computation of depreciation rate - 2016
Cost/DA of building P 300,000

/Estimated reserves 5,000,000
Depreciation rate 0.06
Cost/DA of building P 300,000

Depreciation – 2016 ( 90,000)
Remaining DA, 1/1/17 210,000
/Est. reserves, 1/1/17 3,800,000
Remaining DA, 1/1/07 P 210,000

Depreciation – 2017 ( 108,000)
Remaining DA, 1/1/18 102,000
/Est. reserves, 1/1/18 2,600,000
Problem 2
Zambales Company acquired property in 2019 which contains mineral deposit.
The acquisition cost of the property was P20,000,000. Geological estimates
indicate that 5,000,000 tons of mineral may be extracted. It is further estimated
that the property can be sold for P5,000,000 following mineral extraction. For
P2,000,000, Zambales is legally required to restore the land to a condition
appropriate for resale. After acquisition, the following costs were incurred:
Exploration cost P13,000,000
Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000
The company extracted 600,000 tons of the mineral in 2019 and sold 450,000
tons. In the 2019 income statement, what amount of depletion is included in
cost of sales?
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Solution:
Acquisition cost P20,000,000
Est. restoration cost 2,000,000
Exploration cost 13,000,000
Development cost – drilling 10,000,000
Total cost 45,000,000
Residual value ( 5,000,000)
/Total est. reserves 5,000,000
Depletion rate P8/ton
Total depletion: (600T x P8) P4,800,000

Depletion in ending inventory: (150T x P8) P1,200,000
Depletion in COS: (450T x P8) P3,600,000
Problem 3
Natural, Incorporated embarked on a new venture in Northern Luzon in 2019. It
expects to glean 2,000,000 ounces of a precious ore from its holdings there, over
several years. Relevant data follow:
Cost of the Mineral Rights P 500,000

Exploration Cost, 2019 (1/3 successful) 1,500,000
Extraction Cost, 2019 2,000,000
Ore extracted, 2019 500,000 oz.
Ore sold, 2019 300,000 oz.
What is the depletion for 2019, using the successful efforts method of accounting
for exploration costs?
Acquisition cost P 500,000

Successful exploration cost (P1.5M x 1/3) 500,000
Total cost/DA 1,000,000
Depletion rate P 0.5/oz
x Output 500,000 oz
Depletion for 2019 P 250,000
Problem 3
On January 1, 2019, Major Company purchased a uranium mine for P800,000.
On that date, Major estimated that the mine contained 1,000 tons of ore. At the
end of the productive years of the mine, Major Company will be required to spend
P4,200,000 to clean up the mine site. The appropriate discount rate is 8%, and it
is estimated that it will take approximately 14 years to mine all of the ore. Major
uses the productive-output method of depreciation. During 2019, Major extracted
100 tons of ore from the mine. Compute the amount of depletion for 2019.
Solution:

Est. restoration cost (P4.2M x PVF) ?
Present value of 1: (1 + i)^-n

Used for single cash flow or series of unequal cash flows
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PV of ordinary annuity of 1: (1-(1 + i)^-n)/i
Used for series of equal cash flows payable or receivable at the end of
each period
PV = (1+8%)^-14
PV = 0.3405

Est. restoration cost (P4.2M x 0.3405) 1,430,100
Total cost/DA 2,230,100
/Total est. reserves 1,000
Depletion rate P2,230/ton
x Output 100 tons
Depletion for 2019 P 223,000
Problem 4
Botolan Company quaries limestone, crushes it and sells it to be used in road
building. Botolan paid P20,000,000 for a certain quarry on January 1, 2018. The
property can be sold for P4,000,000 after production ceases. The original total
estimated reserves totaled 5,000,000 tons. Botolan quarried 500,000 tons in 2018
and 1,500,000 tons in 2019. An engineering study performed in 2019 indicated that
as of December 31, 2019, 4,500,000 tons were available. Botolan Company should
record 2019 depletion at
Solution:
Acquisition cost P 20,000,000
Residual value ( 4,000,000)
Depletion rate - 2018 P 3.2/ton
x Output 500,000 tons
Depletion for 2018 P 1,600,000
Depletable amount P 16,000,000

Depletion – 2019 ( 1,600,000)
Remaining DA, 1/1/19 14,400,000
/Est. reserves, 1/1/19 (4.5M + 1.5M) 6,000,000
Depletion rate - 2019 P 2.4/ton
x Output 1.5M tons
Depletion - 2019 P 3,600,000
Problem 5
Masinloc Company purchased a tract of resource land in 2018 for P39,600,000.
The content of the tract was estimated at 1,200,000 units. When the resource has
been exhausted, it is estimated that the land will be worth P1,200,000. Fixed
installations were set up at a cost of P9,600,000. Mining equipment was purchased
on January 2, 2019 for P12,400,000. The life of the fixed installations is 8 years
and the equipment, 4 years. In 2019, 120,000 units have been extracted. This was
one half of the annual extraction which can be expected following the first year of
operations.
Masinloc Company should record total depreciation for 2019 at
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Solution:
Depreciation method:
Useful life > Life of WA – Output
Useful life < Life of WA – SL
*Life of WA (1,200,000/240,000) = 5 years
Fixed installations:
Useful life – 8 years; method – Output
Equipment:
Useful life – 4 years; method – SL
Fixed installations:
Depletion Rate = P9.6M/1.2M units
Depletion Rate = P8/unit (120,000 units x P8) P 960,000
Equipment (P12,400,000/4yrs) 3,100,000

Total P4,060,000
Problem 6
ABC Company provides the following balances at the end of 2019:
Wasting asset, at cost P80,000,000

Accumulated depletion 20,000,000
Retained earnings 10,000,000
Capital liquidated 15,000,000
Depletion based on 100,000 units extracted at P50 per unit 5,000,000
Inventory of resource deposit (20,000 units) 2,000,000
Compute for the maximum amount of dividend that ABC can declare on December
31, 2019.
Solution:
Retained earnings P10,000,000
Accumulated Depletion 20,000,000
Total 30,000,000
Capital liquidated – Prior Year (15,000,000)
Depletion-Ending Inventory (20,000 x P50) ( 1,000,000)
Maximum P14,000,000
Journal entry
Retained earnings P10,000,000
Dividends payable P14,000,000
End of Topic 7
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APPLICATION:
Answer the questions below. Assume all amounts are material.

Choose the most correct statement/answer.
1. Lemery Company acquired property in 2019 which contains mineral

deposit. The acquisition cost of the property was P20,000,000.
Geological estimates indicate that 5,000,000 tons of mineral may be
extracted. It is further estimated that the property can be sold for
P5,000,000 following mineral extraction. For P2,000,000, Lemery is
legally required to restore the land to a condition appropriate for
resale. After acquisition, the following costs were incurred:
Exploration cost 13,000,000

Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000
The company extracted 600,000 tons of the mineral in 2019 and sold
450,000 tons. In the 2019 income statement, what amount of depletion
is included in cost of sales?
2. Calaca Company quaries limestone, crushes it and sells it to be used in

road building. Calaca paid P20,000,000 for a certain quarry on January
1, 2019. The property can be sold for P4,000,000 after production
ceases. The original total estimated reserves totaled 5,000,000 tons.
Calaca quarried 500,000 tons in 2019 and 1,500,000 tons in 2020. An
engineering study performed in 2020 indicated that as of December
31, 2020, 4,500,000 tons were available. Calaca Company should
record 2020 depletion at
3. On July 1, 2019 Balayan Company purchased rights to a mine. The

total purchase price was P50,000,000 of which P5,000,000 was
allocated to the land. Estimated reserves were 6,000,000. Balayan
expects to extract and sell 100,000 tons per month. Balayan Company
purchased new equipment on July 1, 2019 for P21,000,000 with
estimated life of 8 years. However, after all the resource is removed,
the equipment will be of no use and will be sold for P3,000,000. What
is the depreciation of the equipment for 2019?
4. Calatagan Company provides the following balances at the end of

2019:
Wasting asset, at cost 100,000,000
Accumulated depletion 30,000,000
Depletion based on 250,000 units extracted at P50 per unit 12,500,000
Inventory of resource deposit (50,000 units) 6,000,000
Calatagan can declare maximum dividend on December 31, 2019 of
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Feedback/Assessment
In 2015, Honest Corporation acquired a silver mine in Mr. Diwalwal. Because

the mine is located deep in the Mr. Diwalwal, Honest was able to acquire the
mine for the low price of P50,000. In 2016, Honest constructed a road to the
silver mine costing P5,000,000. Improvements to the mine made in 2016 cost
P750,000. Because of the improvements to the mine and the surrounding land, it
is estimated that the mine can be sold for P600,000 when the mining activities are
complete.
During 2017, five buildings were constructed near the mine site to house the mine
workers and their families. The total cost of the five buildings was P1,500,000.
Estimated residual value is P250,000. In 2015, geologists estimated 4 million
tons of silver ore could be removed from the mine for refining. During 2018, the
first year of operations, only 5,000 tons silver ore were removed from the mine.
However, in 2019, workers mined 1 million tons of silver. During that same year,
geologists discovered that the mine contained 3 millions tons of silver in addition
to the original 4 million tons Improvements of P275,000 were made to the mine
early in 2019 to facilitate the removal of the additional silver. Early in 2019, an
additional building was constructed at a cost of P225,000 to house the additional
workers needed to excavate the added silver. This building is not expected to
have any residual value.
In 2020, 2.5 million tons of silver were mined and costs P1,100,000 were incurred
at the beginning of the year for improvement to the mine.
Questions: Based on the above and the result of your audit, determine the
following: (round off depletion and depreciation rates to two decimal places)
1. Depletion for 2018
3.Depreciation for 2019
5. Depreciation for 2020
End of Topic 7
Topic 8: Revaluation
Introduction
This topic centers on Revaluation Model as a means of
subsequently recognizing Property, Plant and Equipment. Further it
includes proper accounting for revaluation of PPE.
Learning Outcome:
 Account for the Revaluation of item of PPE
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 Understand the concepts of Revaluation of PPE

 Perform computation on Revaluation of PPE
Topic Outline:
8.1 Frequency and basis of revaluation 8.5 Subsequent accounting for revaluation
8.2 Accounting for Revaluation of PPE surplus
8.3 Methods of recording revaluation 8.6 Reversal of revaluation
8.4 Revaluation applied to all assets in a
class
8.1 Basis for Revaluation
An entity shall apply PFRS 13 Fair Value Measurement when determining the
fair value of an asset that is being revalued. When determining fair value, the
entity shall:
a. Consider the no-financial asset’s Highest and best use, determining from
the perspective market participants;
b. Observe the fair value hierarchy; and
c. Use valuation techniques that are appropriate in the circumstance and for
which sufficient data are available to measure fair value, maximizing the
use of relevant observable inputs and minimizing the use of unobservable
inputs.
Highest and best use - the use of financial asset by market participants that would
maximize the value of the asset or the group of assets and liabilities within which
the asset would be used.
Considerations for highest and best use

a. Physical characteristics of the non-financial asset (e.g. location or size of
the property);
b. Legal restrictions on the use of the non-financial asset (e.g. zoning
regulations applicable to the property;)
c. Financial feasibility whether the use of the asset generates adequate
income or cash flows
Fair Value Hierarchy – PFRS 13 establishes a fair value hierarchy which gives the
highest priority to quoted prices (unadjusted) in active markets.
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Fair Value Hierarchy
Level 1 Observable inputs that reflect quoted Most reliable
prices for identical assets or liabilities in
active markets
Level 2 Inputs other than quoted prices included
in Level 1 that are observable for the
assets or liability either directly or
through corroboration with observable
data Least reliable
Level 3 Unobservable inputs (for example, an
entity’s own data or assumptions).
Frequency of Revaluation
Revaluation shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which the carrying amount
does not differ materially from that which would be determined using fair value at
the end of reporting period. When the fair value of a revalued asset differs
materially from its carrying amount, further revaluation is required.
For items with significant and volatile changes in fair value, annual
revaluation is necessary. For items with insignificant changes in fair value,
revaluation may be made every 3 or 5 years.
8.2 Accounting for Revaluations of PPE

Increase in assets carrying amount – if assets carrying amount is
increased as a result of revaluation, the increase shall be recognized in other
comprehensive income and accumulated in equity under the heading of
revaluation surplus.
However, the increased shall be recognized in profit or loss as gain on
impairment reversal to the extent that it reverses an important loss of the same
asset previously recognized in profits or loss
Formula:
*Fair value – determined using the
Fair Value * xx
appropriate valuation technique, taking
Less: Carrying amount xx into account the principles set forth
Revaluation surplus xx under PFRS 13.
Illustration:
On December 31, 20x1, the building of ABC Co. with historical cost of P
20,000,000, accumulated depreciation of P 5,000,000, and an estimate useful life
of 20 years has been determined to have a fair value of P 25,000,000. Compute
for the revaluation surplus.
Solution:
Fair Value * 25,000,000
Less: Carrying amount 15,000,000
Revaluation surplus 10,000,000
Decrease in assets carrying amount - if the asset’s carrying amount is

decreased as a result of revaluation, the decrease shall be recognized in profit or
loss.
However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existence in the revaluation surplus in
respect of that asset.
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Three widely used valuation techniques are
1. Market Approach
Fair value measurement is based on the sale prices of similar
properties that were recently sold, adjusted for the differences in
the properties. The factors to consider in the comparison include
but not limited, the following:
a. Location - the closer the location of the property being revalued to
the location of the property that was recently sold
b. Features of the location – e.g. accessibility, panoramic views,
street traffic and noise and proximity to business establishment like
schools, malls and the like may affect the fair valuation of the
property.
c. Size of the property – e.g. lot area and floor area
d. Physical features – e.g. design, condition of the property, parking
area and the like
e. Legal restrictions on the use of the property – e.g. a bar is normally
prohibited from being established near a school; deed restrictions
and encumbrances.
2. The Cost Approach

The fair value measurement is based on the amount currently
needed to replace the asset (current replacement cost). The premise
under this approach is that “an informed buyer will not pay more
than the cost of constructing an equal, substitute property minus
the depreciation and assuming no delay.
The approach is most applicable when there is insufficient data on

recent market transactions for similar assets, the asset being
revalued is relatively new, is a special use property, and there is
adequate pricing information to value the property and its
components.
Steps:
1. Estimate the replacement cost of the building
2. Estimate the depreciation taking into consideration the
building’s physical deterioration, functional obsolescence and
location obsolescence.
3. Estimate the fair value of the building
Key terms:
 Actual Life (Chronological/Historical life) - the number of
years that have elapsed since construction of the building
was completed
 Effective life (Effective age) – based on the amount of the
observed deterioration and obsolescence the building has
sustained. The effective life may be different from the
actual life.
 Remaining economic life - the remaining life of the
building as of the date of the revaluation.
Total economic life = Effective life + Remaining economic life

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Percentage depreciation = Effective life + Total economic life
Depreciation = Percentage depreciation * Replacement cost
Fair value = Replacement cost - Depreciation
Illustration:
On December 31, 20x1, the building of ABC Co. with historical cost of P
20,000,000, accumulated depreciation of P 5,000,000, and is estimated to have a
replacement cost of P35,000,000. Additional information follows:
Effective life 10 years
Remaining life 30 years
Compute for the revaluation surplus.
Solution:
Replacement Cost = P 35,000,000

Total economic life = 10 + 30
Total economic life = 40

Percentage depreciation = 10/40
Percentage depreciation = 25%

Depreciation = (25% * P 35,000,000)
Depreciation = P 8,750,000
Fair Value = Replacement cost – Depreciation

Fair Value = P35,000,000 – P8,750,000
Fair Value = P 26,250,000
*Notice that the actual life is ignored in the computation of the depreciation
above. The actual age is NEVER USED in the age/life method of estimating
depreciation.
**Replacement cost cannot be used as basis for the revaluation of an asset that
is already partially depreciated. Therefore, the replacement cost is adjusted for the
depreciation to come up with the fair value (also called the depreciated replacement
cost).
***Sound Value is the equivalent of the cost of replacement of the service
potential of the asset, adjusted to reflect the relative loss in its utility due to the passage
of time or the fraction of total productive capacity that has already been utilized
3. Income Approach
The valuation is based on the amount of income that the property
can potentially generate. This involves estimating the following
a. The annual income, net of operating expenses, which the property
can potentially generate; and
b. The appropriate discount rate or capitalization rate which shall be
applied to the amount determined in (a) above.
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8. 3 Methods of Recording Revaluation
a. Proportional Method – gross carrying amount adjusted in a manner
that is consistent with the revaluation of the carrying amount of the
asset. The accumulated depreciation is adjusted at the date of the
revaluation is adjusted to equal the difference between the gross
carrying amount and the carrying amount of the asset after taking
into account accumulated impairment losses.
b. Elimination Method – the accumulated depreciation is eliminated
against the gross carrying amount of the asset.
Illustration: (Cost approach)

On December 31, 20x1, the building of MBL Co. with historical cost of
P20,000,000 and accumulated depreciation of P10,000,000 is estimated to have a
replacement cost of P42,000,000. Additional information follows:
Actual life 25 years
Remaining life 40 years
Income tax rate 30%
Requirement: Provide the entry to record the revaluation surplus under each of the
following methods:
a. Proportional Method
b. Elimination Method
Solution:
Replacement Cost = P 42,000,000


Percentage depreciation = 33 1/3%

Depreciation = (33 1/3% * P 42,000,000)

Fair Value = P42,000,000 – P14,000,000
Fair Value * 28,000,000

Deferred tax (18M*30%) 5,400,000
Revaluation surplus – net of tax 12,600,000
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Historical Cost Replacement cost Increase
Building 20,000,000 42,000,000 22,000,000
Accumulated Depreciation (10,000,000) (14,000,000) (4,000,000)
CA/DRC/RS* 10,000,000 28,000,000 18,000,000
* Carrying amount/Depreciated replacement cost/Revaluation surplus – gross of tax
Proportional Method
December Building 22,000,000
31, 20x1 Accumulated Depreciation 4,000,000
Deferred Tax Liability 5,400,000
Elimination Method
December Building (balancing figure) 10,000,000
31, 20x1 Accumulated Depreciation (elimination) 8,000,000
Deferred Tax Liability* 5,400,000
Under the elimination method, the revaluation surplus and the related deferred tax liability are
recorded by eliminating the balance of the accumulate depreciation. Any remaining increase is
recorded to the asset account.
Carrying amounts after revaluation

Proportional Elimination
Building (20M +22M); (20M+8M) 42,000,000 28,000,000
Accumulated depreciation (10M+4M);(10M-10M) (14,000,000) -
Carrying amount (equal to fair value) 28,000,000 24,000,000
Illustration: (Market approach)

On December 31, 20x1, the building of MBL Co. with historical cost of
P20,000,000 and accumulated depreciation of P5,000,000 is estimated to have a
fair value of P24,000,000. Income tax rate is 30%.
Requirement: Provide the entry to record the revaluation surplus under each of the
following methods:
b. Elimination Method
Solution:
Fair Value 24,000,000

Less: Carrying amount (20M-5M) 15,000,000
Revaluation surplus - gross of tax 9,000,000
Deferred tax (9M*30%) 2,700,000
Since the building was revalued using the market approach, rather than
cost approach (i.e., through depreciated replacement cost), the revaluation
shall be accounted for as follows:
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1. The gross carrying amount is restated proportionately to the change in
the carrying amount
2. The accumulated depreciation is adjusted to equal the difference
between the gross carrying amount and the carrying amount of the
asset after taking into account accumulated impairment losses.
Historical Cost Fair Value % Change

Building 20,000,000
Accumulated depreciation (5,000,000)
Carrying amount 15,000,000 24,000,000 160%
*(24,000,000/15,000,000) = 160%
Historical Cost % Change Revalued amounts

Building 20,000,000 160% 32,000,000
Accumulated depreciation (5,000,000) 160% (8,000,000)
Carrying amount 15,000,000 24,000,000
Proportional Method
December Building (32M – 20M) 12,000,000
31, 20x1 Accumulated Depreciation (8M-5M) 3,000,000
Elimination Method
December Building (balancing figure) 5,000,000
31, 20x1 Accumulated Depreciation (elimination) 4,000,000
Carrying amounts after revaluation

Proportional Elimination
Building (20M +12M); (20M+4M) 32,000,000 24,000,000
Accumulated depreciation (5M+3M);(5M-5M) (8,000,000) -
Carrying amount (equal to fair value) 24,000,000 24,000,000
8.4 Revaluation applied to all assets in a class

If an item of PPE is revalued, the entire class of PPE to which that asset
belongs shall be revalued.
The items within a class of PPE are revalued simultaneously to avoid
selective revaluation of assets and the reporting of amounts in the financial
statements that are mixture of costs and values as at different.
However, a class of assets may be revalued on a rolling basis provided the
revaluation of the class of assets is completed within a short period and the
revaluation are kept up to date.
8.5 Subsequent accounting for revaluation surplus

Initial recognition - Other comprehensive income, either revaluation gain or
revaluation loss unless the revaluation represents impairment loss and or reversal
of impairment loss, in which case it is recognized in profit or loss.
17 | P a g e
Subsequent measurement:
a. Asset revalued is non-depreciable

The revaluation surplus is transferred directly to retained earnings when
the asset is derecognized. This may involve transferring the whole of the
surplus when the asset is retired or disposed of.
e.g. Land
Illustration:
On December 31, 20x1, the land of XYZ Co. with a historical cost of P
20,000,000 has been determined to have a fair value of P 35,000,000.
Income tax rate applicable to profits s 30% and the tax rate applicable to
profits made on the sale of property is 6%.

Revaluation surplus - before tax 15,000,000
Deferred tax liability (15,000,000*6%) 900,000

Revaluation surplus after tax (15,000,000*94%) 14,100,000
The entry on December 31, 20x1

December Land 15,000,000
31, 20x1 Revaluation surplus 900,000
The revaluation surplus is initially recognized in the December 31, 20x1.

a. Statement of profit or loss and other comprehensive income – as “gain
on property revaluation” a component of other comprehensive income;
b. Statement of financial position – as part of “other components of
equity.” The related deferred tax liability is presented in noncurrent
liabilities.
Subsequently, the revaluation surplus and deferred tax liability remain

in equity and noncurrent liability, respectively, until the asset is
derecognized (e.g. sold or disposed of), at which time the revaluation
surplus is transferred directly to retained earnings and the reversal of
deferred tax liability is adjusted to income tax payable.
However, when there are subsequent increase or decreases in the
revelation surplus due to impairment loss or new revelations, adjustments
shall be made to both the revaluation surplus and the related deferred tax
liability.
Assuming the asset is sold for P30,000,000 on January 1, 20x3, the

entry to record the sale is as follows:
December Cash 30,000,000
31, 20x1 Revaluation surplus 14,100,000
Deferred Tax Liability 900,000
Loss on Sale 5,000,000
Land 35,000,000
Retained earnings* 14,100,000
Income tax payable** 900,000
18 | P a g e
* Under PAS 1 Presentation of Financial Statements, gains on property revaluation shall
no result to reclassification adjustments. Thus, when a revalued asset is derecognized,
any balance in the related revaluation surplus is transferred directly in equity, i.e.;
transferred directly to retained earnings.
** The accounting for deferred will discussed the succeeding chapters.
b. Asset revalued is depreciable

A portion of revaluation surplus may be transferred periodically to
retained earnings as the asset is being used. The amount transferred
is the difference between the depreciation based on the revalued
carrying amount and the depreciation based on the original cost.
Transfers from revaluation surplus to retained earnings are not
through profit or loss.
Illustration:
On December 31, 20x1, the land of XYZ Co. with a historical cost of P
20,000,000 and remaining useful life of 10 years has been determined to
have a fair value of P35,000,000. Income tax rate is 30%. XYZ Co.
depreciates its building using the straight line method.

Revaluation surplus - before tax 15,000,000
Deferred Tax Liability (15,000,000*30%) 4,500,000

Revaluation Surplus after tax (15,000,000*70%) 10,500,000

31, 20x1 Revaluation surplus 4,500,000
Fair value 35,000,000

Divided by: Remaining Life 10
Revised Annual Depreciation 3,500,000
Depreciation based on fair value (revised depreciation) 3,500,000

Depreciation based on historical cost
(20M historical cost/10 years original useful life) 2,000,000
Difference – gross of tax 1,500,000
Transfer of revaluation surplus – net of tax (1,500,000*70%) 1,050,000

Reversal of deferred tax liability (1,500,000*30%) 450,000
Entries on December 31, 20x2 are as follows:

December Depreciation Expense 3,500,000
31, 20x2 Accumulated depreciation 3,500,000
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December Revaluation surplus 1,050,000
31, 20x2 Deferred tax liability 450,000
Income tax payable 450,000
8.5 Reversal of Revaluation

Revaluation increases or decreases are recognized in equity through other
comprehensive income unless they are representing impairment losses or
reversals thereof. Impairment losses and gains on reversal of impairment are
recognized in profit or loss.
Illustration A: Revaluation decrease representing impairment loss
The land of BCD Co. with historical cost of P 8,000,000 has fair values of P
12,000,000 and P 7,000,000 on December 31, 20x1 and December 31, 20x4;
respectively.
Provide the journal entries on December 31, 20x1 and 20x4, respectively. Ignore
income taxes.
Solutions:
12/31/20x1

Carrying amount (8,000,000)
Entry:
31, 20x1 Revaluation Surplus 4,000,000
12/31/20x4
Decrease in carrying amount ( 5,000,000)
The decrease in carrying amount is allocated as follows:
Decrease in carrying amount (5,000,000)

Balance in revaluation surplus 4,000,000
Excess charged to impairment loss (1,000,000)
The decrease is charged first to the credit balance in revaluation surplus. The
excess is recognized as impairment loss.
December Revaluation Surplus 4,000,000

31, 20x4 Impairment loss 1,000,000
Land 5,000,000
20 | P a g e
Illustration B: Revaluation increase representing reversal of impairment loss
On December 31, 20x1, the land of BCD Co. with an original cost of P
10,000,000 has been determined to have a fair value of P 7,000,000. This was the
first revaluation made on the land since it was purchased 2 years ago. On
December 20x4, the building has been determined to have a fair value of P
12,000,000.
Provide the journal entries on December 31, 20x1 and 20x4, respectively. Ignore
income taxes.
Solutions:
12/31/20x1

Decrease in Carrying amount (3,000,000)
The decrease in carrying amount is allocated as follows
Decrease in carrying amount (3,000,000)

Balance in revaluation surplus -*
Impairment loss (3,000,000)
*There is no existing balance in revaluation surplus because the problem states

that this is the first revaluation made on the asset. Accordingly, the entire decrease
is charged to impairment loss.
Entry to record the revaluation is as follows

December Impairment loss 3,000,000
31, 20x1 Land 3,000,000
12/31/20x4
Carrying amount ( 7,000,000)
Increase in carrying amount 5,000,000
The increase in carrying amount is allocated as follows:
Increase in carrying amount 5,000,000

Previous impairment loss (gain on impairment reversal 3,000,000
Excess credited to revaluation surplus 2,000,000
The entry to record the revaluation increase on December 31, 20x4 is as follows.
31, 20x4 Gain on impairment reversal 3,000,000
21 | P a g e
The revaluation increase is applied first to the impairment loss recognized
previously. The excess is credited to revaluation surplus.
Illustration C. Depreciated replacement cost (with residual value)
On December 31, 20x1, the building of SAD Co. was revalued. Information on
revaluation date is as follows:
Historical Cost Replacement Cost
Building 18,000,000 36,000,000
Accumulated Depreciation 4,000,0000
Residual Value 2,000,000 2,000,000
Additional Information
Total economic life 25 years
Remaining economic life 12 years
Required: Compute for the revaluation surplus.
Solutions:
Replacement cost = 36,000,000

25 = Effective life + 12
Effective life (25-12) = 13

Depreciation = Percentage depreciation * Replacement cost (net of residual value)

Depreciation = (52% * (P 36,000,000 – 2,000,000))

Fair Value = P36,000,000 – P17,680,000
Fair Value 18, 320,000

Less: Carrying Value 14,000,000
Revaluation Surplus 4,320,000
Illustration D. Change residual value
On December 31, 20x1, the building of SAD Co. was revalued. Information on
revaluation date is as follows:
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Historical Cost Replacement Cost
Building 18,000,000 36,000,000
Accumulated Depreciation 4,000,0000
Residual Value 4,000,000 4,000,000
Total economic life 25 years
Solutions:

25 = Effective life + 12
Effective life (25-12) = 13


Depreciation = (52% * (P 36,000,000 – 4,000,000))

Fair Value = P36,000,000 – P16,640,000

Less: Carrying Value 14,000,000
Revaluation Surplus 5,360,000
Illustration E. Change in useful life and residual value
On January 1, 20x1, the building of CML Co. with historical cost of P

20,000,000 purchased 5 years ago with an estimated useful life of 20 years has
been estimated to have a replacement cost of P35,000,000. Depreciation is
computed using the straight line method. Income tax rate is 30%.
Original estimate of residual value 1,000,000
Revised estimate of the residual value on revaluation date 2,000,000
Actual Life 5 years
Remaining historical life 15 years
23 | P a g e
Solutions:



Depreciation = (12% * (P 35,000,000 – 2,000,000))

Fair Value = P35,000,000 – P3,960,000
Fair Value 31, 040,000

Less: Carrying Value* 15,250,000
Revaluation Surplus - gross of tax 15,790,000
Deferred tax liability (15,790,000*30%) 4,737,000
*Historical Cost 20,000,000

Less: Original estimate of residual value (1,000,000)
Depreciable amount 19,000,000
Divided by: Original estimate of historical life 20
Annual depreciation 950,000
Historical Cost 20,000,000

Less: Accumulated depreciation (950,000* 5 years) (4,750,00)
Carrying amount – 12/31/20x1 15,250,000
APPLICATION:
.
1.Lian Company acquired a building on January 1, 2001 at a cost of

P50,000,000. The building has an estimated life of 10 years and residual
value of P5,000,000. The building was revalued on January 1, 2005 and
the revaluation revealed replacement cost of P80,000,000, residual value
of P2,000,000 and revised life of 12 years. What is the revaluation surplus
on December 31, 2005?
a. 30,000,000
b. 26,250,000
c. 16,800,000
d. 14,700,000
24 | P a g e
2. On January 1, 2020, the historical balances of the land and building of Lipa
Company are:
Cost Accumulated Depreciation
Land 50,000,000
Building 300,000,000 90,000,000
The land and building were appraised on same date and the revaluation revealed
the following:
Sound value
Land 80,000,000
Building 350,000,000
There were no additions or disposals during 2020. Depreciation is computed on

the straight line. The estimated life of the building is 20 years. The depreciation of
the building for the year ended December 31, 2020 should be
a. 25,000,000
b. 10,000,000
c. 15,000,000
d. 17,500,000
Feedback/Assessment
Capiz Company has the following information on January 1, 2020 relating to its
land and building.
Land 20,000,000
Building 450,000,000
Accumulated depreciation 75,000,000
There were no additions or disposals during 2020. Depreciation is computed using
straight line over 15 years for building. On June 30, 2020, the land and building
were revalued as follows:
Replacement cost Sound value
Land 35,000,000 35,000,000
Building 600,000,000 480,000,000
1. What is the depreciation of the building for 2020?

a. 30,000,000
b. 35,000,000
c. 40,000,000
d. 32,000,000
What is the revaluation surplus on June 30, 2020?

a. 135,000,000
b. 125,000,000
c. 120,000,000
d. 160,000,000
3. What is the revaluation surplus on December 31, 2020?

a. 125,000,000
b. 130,000,000
c. 123,750,000
d. 115,000,000
End of Topic 8
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Topic 9: Intangible Assets (PAS 38)
Introduction
This module focuses on the accounting and reporting for
intangible. It introduces the learner to the subject, guides the learner
through the official text, develops the learner’s understanding of the
requirements through the use of examples and indicates significant
judgments that are required in accounting for intangible assets.
Furthermore, the module includes questions designed to test the learner’s
knowledge of the requirements and to develop the learner’s ability to
account for intangible assets.
Learning Outcome:
 Comprehend the concepts on accounting and reporting for intangible
assets
 Define an intangible asset

 State the initial measurement of intangible assets that are (a) externally
acquired and (b) internally generated
 State the subsequent measurement of intangible assets that (a) have finite
useful life and (b) indefinite useful life
 Account for subsequent expenditures on intangible assets
Topic Outline:
9.1 Definition of Intangible Assets 9.11 Measurement after Initial

9.2 Characteristics of Intangible Recognition
Assets 9.12 Useful Life
9.3 Criteria in the Definition 9.13 Disposal/Retirement
9.4 Categories of Intangible Assets 9.14 Amortization
9.5 Two types of Intangible Assets 9.15 Factors to Consider in
9.6 Criteria for Recognition Estimating the life of an Intangible
9.7 Initial Measurement and Modes Asset
of Acquisition 9.16 Disclosures
9.8 Recognition as an Expense 9.17 Research and Development
9.10 Subsequent Expenditures
26 | P a g e
9.1 Definition of Intangible Asset

Identifiable non-monetary asset without physical substance, controlled by
the entity as a result of past event from which future economic benefits are
expected to flow to the entity.
9.2 Characteristics of Intangible Asset

2.Lacks physical substance
3.Used in business
4.Provides future economic benefit
9.3 Criteria in the definition

 Identifiability
o Can be distinguished clearly
o There is a legal right that would make the intangible asset
identifiable so that it is separable from the other assets of the
enterprise.
 Control – power of the enterprise to obtain future economic benefits
flowing from the intangible asset and restricts the access of others to those
benefits.
 Future economic benefits – include:
o Revenue from the sale of produces or services
o Cost savings or other benefits resulting from the use of the asset by
the entity.
Intangible Assets Include

 Scientific or technical  Copyrights;
knowledge  Motion picture films;
 The design and  Customer lists;
implementation of new  Mortgage servicing rights;
processes or systems;  Fishing licenses;
 Licenses;  Import quotas;
 Intellectual property;  Franchises;
 Market knowledge;  Customer or supplier
 Trademarks (including brand relationships;
names and publishing);  Customer loyalty;
 Computer software;  Market share; and
 Patents;  Marketing rights
Note: Not all the items, (eg. market shares, customer relationships and customer loyalty) described
above meet the definition of an intangible asset, i.e. identifiability, control over a resource and
existence of future economic benefits. If an item within the scope of this Standard does not meet the
definition of an intangible asset, expenditure to acquire it or generate it internally is recognized as
an expense when it is incurred. However, if the item is acquired in a business combination, it forms
part of the goodwill recognized at the acquisition date. (PAS 38, par. 10)
9.4 Categories of Intangible Assets

1. Marketing – related intangible assets used mainly in the marketing or
promotion of products or services.
a. Examples are trademarks or tradenames, newspaper mastheads,
Internet domain names, and non-competition agreements.
27 | P a g e
2. Customer – related intangible assets occur as a result of interactions with
outside parties. Examples are customer lists, order or production backlogs,
and both contractual and non-contractual customer relationships.
3. Artistic – related intangible assets involve ownership rights to literary

works, musical works, pictures, photographs, and video and audiovisual
material. These ownership rights are protected by copyrights
4. Contract – related intangible assets represent the value of rights that arise
from contractual arrangements. Examples are franchise and licensing
agreements, construction permits, broadcast rights, and service or supply
contracts.
5. Technology – related intangible assets relate to innovations or

technological advances. Examples are patented technology and trade
secrets.
6. Goodwill relate to future economic benefits arising from the other assets
acquired in a business combination that are not individually identified and
separately recognized.
9.5 TWO Types of Intangible Assets

Identifiable
1. Acquired through purchase
2. Can be rented or sold separately
3. Examples are:
 Patent  Leasehold or lease rights
 Copyright  Computer software
 Franchise  Fishing rights and other
 Trademark or brand name specific rights
Unidentifiable
1. It cannot be purchased, sold or rented separately.
2. Inherent in a continuing business
3. Can only be identified with the business as a whole
a. Example is Goodwill
9.6 Criteria for Recognition

1. Future economic benefits are probable
2. Cost can be reliably measured
9.7 Initial Measurement and Modes of Acquisition

Initial Measurement - At cost
Modes of Acquisition
A. Separate Acquisition
1. Cash basis – purchase price, import duties and non-refundable purchase
taxes after deducting trade and cash discounts and any directly attributable
cost of preparing the asset for its intended use.
Examples of directly attributable costs are:
cost of employee benefits
professional fees
28 | P a g e
cost testing whether the asset is functioning properly
2. Deferred – use cash price equivalent
3. Lump sum – allocate using fair market values
B. Acquisition as Part of Business Combination

The cost of the intangible asset is its fair value (PFRS 3 Business
Combination). PAS 38 does not refer to goodwill but to other intangible asset
such as in-process research and development project of the acquiree if the project
meets the definition of an intangible asset and its fair value can be measured
reliably. If an intangible asset acquired in a business combination has a finite
useful life, there is a rebuttable presumption that its fair value can be measured
reliably.
Fair value can be measured on the basis of the following:

 Quoted market prices in an active market. An active market is defined as
one which has all the following conditions:
o The items traded within the market are homogeneous
o Willing buyers and sellers can normally be found at any time
o Prices are available to the public
o Where there is an active market, the fair value is determined by
reference to quoted market prices. (It is expected that active markets
will be rare for intangible assets).
 Recent transactions. Where there is no active market, the fair value of the
intangible asset is equal to the amount which would be paid by the entity in
an arm’s length transaction between knowledgeable and willing parties.
 Valuation techniques. With the increasing importance of intangible assets,

there has been a growing establishment of entities who specialize in
measuring intangible assets, particularly brand names. These valuation
firms measure the worth of intangible assets by using variations of present
value techniques, and multiples of variables such as royalty rates. These
methods should reflect current transactions and practices in the industry.
C. Acquisition by way of Government Grant (PAS 20)

Intangible asset may be acquired free of charge, or for nominal
consideration.
Examples of this are airport landing rights, licenses to operate radio or TV
stations, import licenses or quotas or rights to access other restricted
resources.
The intangible asset may be recorded initially, at -
1. fair value (benchmark treatment)
2. at nominal amount (permitted treatment) plus any expenditure that is directly
attributable to preparing the asset for its intended use.
D. Exchange of assets
1. The intangible asset may be acquired in exchange for a non-monetary asset or a
combination of monetary and non-monetary asset. It is measured at fair value
unless the exchange is without commercial substance.
2. The cost of intangible asset is measured at the carrying amount of the asset
given up if the exchange is without commercial substance.
29 | P a g e
Note: An exchange transaction has commercial substance when:
a) The cash flows of the asset received differ from the cash flows
of the asset transferred and the difference is significant relative to the fair
value of the assets exchanged.
b) The entity specific value of the portion of the entity’s operations
affected by the transaction changes as a result of the exchange and the
amount of change is significant relative to the fair value of the assets
exchanged.
Note: Entity specific value is the present value of the cash flows an entity
expects to arise from the continuing use of an asset and from its disposal at the end of its
useful life.
E. Internally Generated Intangible Assets

the cost of an internally generated intangible asset comprises all directly
attributable costs necessary to create, produce and prepare the asset to be capable
of operating in the manner intended by management.
Examples are -
1. Cost of materials and services used in generating the intangible asset
2. Cost of employee benefits arising from the generation of the intangible
asset
3. Fees to register a legal right
4. Amortization of patents and licenses that are used to generate the
intangible asset.
Costs that are not included:

a. selling, administrative and other general overhead, unless this can be
directly attributed to preparing the asset for use.
b. clearly identified inefficiencies and initial operating losses incurred before
an asset achieves planned performance.
c. expenditure on training staff to operate the asset.
d. cost of internally generated brands, mastheads, publishing titles, customer
lists and items similar in substance.
e. cost of internally generated goodwill.
o Costs incurred internally to create intangibles are generally expensed as
incurred (such as internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance).
o Thus, even though a company may incur substantial research costs to
create an intangible, these costs are expensed
o Some people argue that with a purchased intangible, a reliable number
for the cost of the intangible, can be determined; with internally
developed intangibles, it is difficult to associate costs with specific
intangible assets.
o Others argue that because of the underlying subjectivity relating to
intangibles, a conservative approach should be followed – that is,
expense as incurred.
9.8 Recognition as an Expense

 An expenditure on an intangible item that does not meet the recognition
criteria for an intangible asset shall be expensed when incurred.
 However, if this item is acquired in “purchase” business combination,
this expenditure shall form part of the amount attributed to goodwill at
the date of acquisition.
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 Examples of expenditures that shall be expensed when incurred
include:
o Start up costs
o Training costs
o Advertising and promotional costs
o Business relocation or reorganization costs
 An expenditure on an intangible item that was initially recognized as an
expense shall not be included as part of the cost of intangible asset at a
later date.
 Prepayment can be recognized as an asset when payment for delivery of
goods or services has been made in advance of the delivery of goods or
the rendering of services.
9.10 Subsequent Expenditures

1. As a general rule, subsequent expenditure should be recognized as an expense.
2. Subsequent expenditure may be capitalized if the following conditions are
present.
It will increase or enhance the amount of future economic benefits.
It can be measured reliably.
t can be attributed directly to the intangible asset.
3. An expenditure previously expensed should not be recognized as part of the
cost of an intangible asset subsequently.
9.11 Measurement After Initial Recognition

 Benchmark (Cost Model)
1. Cost less accumulated amortization and any impairment losses
 Allowed alternative (Revaluation Model)
1. Fair value less accumulated amortization and any impairment
losses
2. Fair value
 Determine by reference to an active market
 The fair value is kept to date. Regular revaluation
(annually) is made for intangible assets that have volatile
fair values. Frequent revaluations are unnecessary for
intangible assets with only insignificant movements in fair
value.
 To be applied to all assets in class (unless no active market)
3. If no active market
 carry at cost less accumulated amortization and impairment
losses
9. 12 Useful Life
A. Intangible Asset with Finite Useful Life:
1. The entity shall assess the length of, or number of production constituting the
useful life.
2. Cost is amortized over its useful life or production units
3. Amortization method used shall reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity.
4. If the pattern cannot be determined reliably, the straight-line method is used.
5. Residual value is assumed to be zero unless there is a commitment by a third
party to purchase the asset at the end of its useful life or there is an active market
for the asset.
31 | P a g e
6. The amortization period, amortization method, and residual value are reviewed
at least at each financial year-end.
7. A change in residual value and amortization method are accounted for as a
change in accounting estimate in accordance with PAS 8.
B. Intangible Asset with Indefinite Useful Life (Goodwill):

1. Useful life is indefinite when there is no foreseeable limit to the period over
which the asset is expected to generate net cash flows.
2. Cost is not amortized
3. Intangible asset is tested for impairment annually and whenever there is an
indication that the intangible asset may be impaired.
9. 13 Disposal/Retirement
1. Intangible asset is derecognized on disposal or when no future economic
benefits are expected from its use or disposal.
2. Gain or loss on disposal is the difference between the net disposal proceeds and
the carrying amount of the asset.
3. The gain or loss is recorded in the Income Statement
4. Derecognition gains shall not be included in revenue but treated as other
income.
5. Amortization of an intangible with a finite useful life does not cease when the
asset becomes temporarily idle or is retired from active use.
9. 14 Amortization
1. The process of allocating the cost of an intangible asset as expense over the
expected useful life of the asset in a systematic and rational matter.
2. Pro-forma Entry
Amortization of intangible asset xxx
Intangible asset xxx
3. An Accumulated Amortization account may also be maintained.
4. Amortization should start when the asset is ready for use.
 Intangible assets with finite useful life are amortized over the shorter
of the asset’s useful life and legal life.
 Intangible assets with indefinite useful life are not amortized but
tested for impairment at least annually.
 The default method of amortization is the straight line method.
Type of
Initial cost Amortization
intangible asset
Patent  Purchase cost + direct cost, if  Over shorter of
purchased. useful life and
 Legal and registration costs legal life of 20
only, if self-created. years.
Copyright  Purchase cost + direct cost if  Over shorter of
purchased. useful life and
 All necessary costs that meet legal life equal to
all of the conditions for the creator’s life
capitalization, if internally plus 50 years.
generated.  May be expensed
outright, if
32 | P a g e
internally
generated.
Type of
intangible asset
Franchise  Purchase cost + direct cost if  Over finite useful
purchased. life.
 Not amortized if
with indefinite
useful life.
Trademark  Purchase cost + direct cost if  Not amortized;
purchased. legal life is 10
 All necessary costs that meet years renewable
all of the conditions for indefinitely.
capitalization, if internally
generated.
Type of
intangible asset
Computer  Purchase cost + direct cost if  Over useful life.
software purchased.
 Only costs after technological
feasibility is established,
normally include:
i. Costs of coding and testing
after technological feasibility,
ii. Cost of producing product
master, and
iii. Cost of installation for internal
use software
Type of
intangible asset
Web site cost  Purchase cost + direct cost if  Over useful life
purchased. which should be
 Only costs incurred in short.
i. Application and Infrastructure
Development
ii. Graphical Design stage, and
iii. Content Development stages
are capitalized as intangible
asset, if self-created.
 Costs of web sites used solely

for advertisement and
promotion are expensed.
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Type of
intangible asset
Brands,  Recognized only if externally  Over useful life.
mastheads, generated.
customers’ list,
order or  Internally generated are
production expensed immediately.
backlog and
similar items
9. 15 Factors to Consider in Estimating The Life Of An Intangible Asset

Many factors are considered in determining the useful life of an intangible asset,
including:
a. the expected usage of the asset by the entity and whether the asset could
be managed efficiently by another management team;
b. typical product life cycles for the asset and public information on
estimates of useful lives of similar assets that are used in a similar way;
c. technical, technological, commercial or other types of obsolescence;
d. the stability of the industry in which the asset operates and changes in
the market demand for the products or services output from the asset;
e. expected actions by competitors or potential competitors;
f. the level of maintenance expenditure required to obtain the expected
future economic benefits from the asset and the entity’s ability and
intention to reach such a level;
g. the period of control over the asset and legal or similar limits on the use
of the asset, such as the expiry dates of related leases; and
h. whether the useful life of the asset is dependent on the useful life of
other assets of the entity.
9.16 Disclosures
PAS 38 contains numerous disclosure requirements. Among them is a
requirement for the financial statements to disclose the following for each class of
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intangible assets, distinguishing between internally generated intangible assets
and other intangible assets:
a. . Whether the useful lives are indefinite or finite and, if finite, the useful
lives or the amortization rate used;
b. The amortization methods used for intangible assets with finite useful
lives;
c. The gross carrying amount and any accumulated amortization
(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:
1. Additions, indicating separately those from internal
development, those acquired separately, and those acquired
through business combinations;
2. Retirements and disposals;
3. Increases or decreases during the period resulting from
revaluations and from impairment losses recognized or
reversed directly in equity;
4. Impairment losses recognized in the income statement during
the period;
5. Impairment losses reversed in the income statement during the
period;
6. Any amortization recognized during the period.
The financial statements are also to disclose:
a. If an intangible asset is 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 it
has an indefinite useful life;
b.A description, the carrying amount and remaining amortization period of
any individual intangible asset that is material to the financial statement
as a whole;
c. For intangible assets acquired by way of government grant and initially
recognized at fair value:
1. The fair value initially recognized for these assets;
2. Their carrying amount;
3. Whether they are carried under the benchmark or the
allowed alternative treatment for subsequent measurement;
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.
Note: An entity shall disclose the aggregate amount of research and
development expenditure recognized as an expense during the period.
PATENT
1. Definition: An exclusive right granted by the government to an inventor
enabling him to control the manufacture, sale or other use of his invention
for a specified period of time.
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2. Invention – any technical solution of a problem in any field of human
activity, which is new, involves inventive step, and is industrially
applicable.
3. Legal life is 20 years (in accordance with R.A. 8293, or the Intellectual
Property Code of the Philippines, effective January 1, 1998)
4. Cost of patent
a. If acquired – purchase price plus incidental costs
b.If internally developed - licensing and legal fees and other related fees
in securing the patent. As a rule, Research and development costs
should be expensed as incurred.
c. Legal fees and other costs of successfully prosecuting or defending a
patent should be expensed.
d.Cost of unsuccessful litigation and the remaining cost of the patent
should be written off as a loss.
5. Amortization of patent
a. he original cost is amortized over the legal or useful life whichever is
shorter.
b.Cost of a competitive patent that was acquired to protect an original
patent should be amortized over the remaining life of the old patent.
c. Cost of a related patent that extends the life of the old patent should be
amortized over the extended life. The unamortized cost of the old
patent should also be amortized over the extended life.
d.If there is no extension of life, the new patent should be amortized
over its own life, and the cost of the old patent is amortized over the
remainder of its life.
COPYRIGHTS
1. A copyright is an exclusive right granted by the government to the
author, composer or artist enabling him to publish, sell or otherwise
benefit from his literary, musical or artistic work.
2. The cost assigned to copyright consists of all expenses incurred in the
production of the work including those required to establish or obtain
the right.
3. If the copyright is purchased the cost includes cash paid, and directly
attributable cost necessary for its intended use.
4. The term of protection for copyrights is during the life of the author
and for 50 years after his death.
5. It is difficult to estimate the useful life of a copyright
6. The cost of the copyright is written off against the revenue of the first
printing.
TRADEMARK
1. A trademark is a symbol, sign, slogan or name used to mark a product
to distinguish it from other products.
2. Trademark is also known as trade name and brand name.
3. When a trademark is purchased, the cost includes the purchase price
plus costs directly attributable to the acquisition.
4. When a trademark is internally developed, the cost includes
expenditures required to establish it, including filing fees, registry fees,
and other expenses incurred in securing the trademark such as design
cost of the trademark.
5. The cost of successful litigation is an outright expense.
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6. The legal life of trademark is 10 years and may be renewed for period
of 10 years each.
7. Trademark may be considered as an intangible asset with an indefinite
life.
8. The cost of a trademark is not amortized
9. The cost of a trademark is tested for impairment at least annually.
COMPUTER SOFTWARE COSTS

The main rules are:
1. All costs incurred in creating a computer software prior to establishing
the technological feasibility should be expensed when incurred.
2. Technological feasibility is established when an enterprise has
produced either a detailed program design or working model.
3. Cost incurred subsequent to establishing technological feasibility shall
be capitalized. These costs include coding and testing and the cost to
produce the product masters.
4. Cost incurred to actually produce the software from the master copy
shall be charged as inventory.
AMORTIZATION OF CAPITALIZED SOFTWARE COSTS

1. The amortization method shall reflect the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity.
2. If such pattern cannot be determined reliably, the straight-line method
is used.
CLASSIFICATION OF COMPUTER SOFTWARE
1. As a rule, computer software is classified as an intangible asset
2. Computer software purchased for resale should be treated as inventory
3. A computer software purchased as an operating system for the
hardware or as an integral part of a computer-controlled machine tool
that cannot operate without the specific software should be treated as
property, plant, and equipment.
4. However, if the computer software is not an integral part of the related
hardware, it is classified as an intangible asset.
GOODWILL
 Definition: An intangible asset that is not specifically identifiable,
has an indeterminate life, in inherent in a continuing business and
relates to the enterprise as a whole.
 Goodwill arises when the earnings of a business exceed normal
earnings.
 Factor leading to goodwill

o Good name
o Capable staff and personnel
o High credit standing
o Reputation for fair dealings
o Reputation for superior products
o Favorable location
o List of regular customers
 Two kinds
o Developed goodwill – generated internally; not recorded.
o Purchased goodwill – paid for; arises when a business is sold.
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MEASUREMENT
1. Indirect valuation approach or Residual Approach– excess of the
amount paid over the fair market value of the net assets acquired.
2. Direct valuation approach – based on the future earnings of a
company. The following information are required:
 Normal rate of return – rate of return which attracts
investors in a particular industry.
 Fair value of net assets – assets should be reported at
current market value and liabilities at adjusted amounts.
 Estimated future earnings – 3 to 5 years past earnings;
exclude extraordinary items; should be based only on
earnings arising from normal operations.
 Probable duration of excess earnings
DIRECT VALUATION METHODS

1. Purchase of average excess earnings
Average earnings P xxx
Less: Normal earnings (Rate x Net assets) xxx
Average excess earnings P xxx
No. of years x
Goodwill P xxx
2. Capitalization of average excess earnings

Less: Normal earnings (Rate x Net Assets) xxx
Divide by capitalization rate x%
Goodwill P xxx
3. Capitalization of average earnings

Divide by capitalization rate x%
Net assets, including goodwill P xxx
Less: Net assets excluding goodwill xxx
Goodwill P xxx
4. Present value method

Less: Normal earnings (Rate x Net Assets) xxx
Multiply by present value factor xxx
Goodwill P xxx
9.17 Research and Development Costs

DEFINITIONS
1. Research – original and planned investigation undertaken with the prospect of
gaining scientific or technical knowledge and understanding.
2. Development – application of research findings to develop a product, service or
process.
RESEARCH EXPENDITURE
1. Recognize as expense when incurred
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Rationale: At the research phase of a project, an entity cannot be certain that
future economic benefits will probably flow to the entity.
DEVELOPMENT EXPENDITURE - capitalize development expenditure if able

to demonstrate all of the following:
1. Technical feasibility (planning, design, coding and testing is established)
2. Intention to complete and use or sell
3. Ability to use or sell
4. Ability to generate probable future economic benefits
5. Availability of adequate technical, financial and other resources to complete
development and to use of sell
6. Ability to measure attributable expenditure reliably during development
Rationale: the probability of success may be more apparent.
Note:
If an entity owns a research facility consisting of buildings, laboratories and equipment
where R&D activities are conducted and that has alternative future uses (in other R&D
projects or other uses), facility would be accounted for as a capitalized operational asset.
The depreciation and other costs related to such research facilities are accounted for as
an expense.
EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD BE INCLUDED

IN RESEARCH
1. Laboratory research aimed at discovery of new knowledge
2. Searching for applications of new research findings or other knowledge
3. Conceptual formulation and design of possible product or process alternatives
4. Testing in search for, or evaluation of, product or process alternative.
EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD BE INCLUDED

IN DEVELOPMENT
1. Design, construction, and testing of pre-production prototypes and model.
2. Design of tools, jigs, moulds, and dies involving new technology.
3. Design, construction, and testing of a pilot plant that is not of a scale
economically feasible to the enterprise for commercial production.
4. Design, construction, and testing of a chosen alternative for new or improved
product or process.
EXAMPLES OF ACTIVITIES THAT TYPICALLY WOULD NOT BE

CONSIDERED RESEARCH OR DEVELOPMENT
1. Engineering follow-through in an early phase of commercial production
2. Quality control during commercial production, including routine testing of
products
3. Trouble-shooting in connection with breakdowns during commercial
production
4. Routine or periodic alterations to existing products, production lines to improve
quality.
5. Manufacturing processes and other ongoing operations, even though such
alternations may represent improvements.
6. Adaptation of an existing capability to a particular requirement or customer’s
need as part of a continuing commercial activity.
7. Routine design of tools, jigs, moulds and dies
8. Activity, including design and construction engineering, related to the
construction, relocation, rearrangement or start-up of facilities or equipment other
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than facilities or equipment whose sole use is for a particular research and
development project.
ACQUIRED IN PROCESS RESEARCH AND DEVELOPMENT PROJECT

 Arises when acquired separately or in a business combination.
 Recognized it as an asset at cost, even if a component is research.
 Subsequent expenditure on that project may be capitalized or expensed
depending on the recognition criteria for an intangible asset.
 If the subsequent expenditure is research expenditure, recognize it as an
expense.
 If the subsequent expenditure is development expenditure and it satisfies
the recognition criteria for an asset, it is added to the carrying amount of
the in-process research and development project. Otherwise, the
subsequent development expenditure is recognized as an expense.
APPLICATION:
Answer the questions below. Write True if the statement is correct and
False if the statement if incorrect.
1. Intangible assets derive their value from the right (claim) to receive cash
in the future.
2. Internally created intangibles are recorded at cost.
3. Internally generated intangible assets are initially recorded at fair value.
4. Amortization of limited-life intangible assets should not be impacted by
expected residual values.
5. Some intangible assets are not required to be amortized every year.
6. Limited-life intangibles are amortized by systematic charges to expense
over their useful life.
7. The cost of acquiring a customer list from another company is recorded as
an intangible asset.
8. The cost of purchased patents should be amortized over the remaining
legal life of the patent.
9. If a new patent is acquired through modification of an existing patent, the
remaining book value of the original patent may be amortized over the life
of the new patent.
10. In a business combination, a company assigns the cost, where possible, to
the identifiable tangible and intangible assets, with the remainder recorded
as goodwill.
11. Internally generated goodwill should not be capitalized in the accounts.
12. Internally generated goodwill associated with a business may be recorded
as an asset when a firm offer to purchase that business unit has been
received.
13. All intangibles are subject to periodic consideration of impairment with
corresponding potential write-downs.
14. If the fair value of an unlimited life intangible other than goodwill is less
than its book value, an impairment loss must be recognized.
15. If market value of an impaired asset recovers after an impairment has been
recognized, the impairment may be reversed in a subsequent period.
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16. The same recoverability test that is used for impairments of property,
plant, and equipment is used for impairments of indefinite-life intangibles.
17. Periodic alterations to existing products are an example of research and
development costs.
18. Research and development costs that result in patents may be capitalized
to the extent of the fair value of the patent.
19. Research and development costs are recorded as an intangible asset if it is
felt they will provide economic benefits in future years.
20. Contra accounts must be reported for intangible assets in a manner similar
to accumulated depreciation and property, plant, and equipment
Feedback/Assessment
1. Lynne Corporation acquired a patent on May 1, 2020. Lynne paid cash of

P40,000 to the seller. Legal fees of P1,000 were paid related to the acquisition.
What amount should be debited to the patent account?
2. Contreras Corporation acquired a patent on May 1, 2020. Contreras paid cash

of P35,000 to the seller. Legal fees of P900 were paid related to the acquisition.
What amount should be debited to the patent account?
3. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of
Mini Corp.’s P5 par value common stock and P90,000 cash. When the patent was
initially issued to Maxi Co., Mini Corp.’s stock was selling at P7.50 per share.
When Mini Corp. acquired the patent, its stock was selling for P9 a share. Mini
Corp. should record the patent at what amount?
4. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of P300,000. The
patents were carried on Shaq’s books as follows: Patent AA: P5,000; Patent BB:
P2,000; and Patent CC: P3,000. When Alonzo acquired the patents their fair
values were: Patent AA: P20,000; Patent BB: P240,000; and Patent CC: P60,000.
At what amount should Alonzo record Patent BB?
5. Jeff Corporation purchased a limited-life intangible asset for P150,000 on May

1, 2018. It has a useful life of 10 years. What total amount of amortization
expense should have been recorded on the intangible asset by December 31,
2020?
6. Rich Corporation purchased a limited-life intangible asset for P270,000 on May

1, 2018. It has a useful life of 10 years. What total amount of amortization
expense should have been recorded on the intangible asset by December 31,
2020?
7. Thompson Company incurred research and development costs of P100,000 and

legal fees of P20,000 to acquire a patent. The patent has a legal life of 20 years
and a useful life of 10 years. What amount should Thompson record as Patent
Amortization Expense in the first year?
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8. ELO Corporation purchased a patent for P180,000 on September 1, 2018. It
had a useful life of 10 years. On January 1, 2020, ELO spent P44,000 to
successfully defend the patent in a lawsuit. ELO feels that as of that date, the
remaining useful life is 5 years. What amount should be reported for patent
amortization expense for 2020?
9. Danks Corporation purchased a patent for P900,000 on September 1, 2018. It

had a useful life of 10 years. On January 1, 2020, Danks spent P220,000 to
successfully defend the patent in a lawsuit. Danks feels that as of that date, the
remaining useful life is 5 years. What amount should be reported for patent
amortization expense for 2020?
10. The general ledger of Vance Corporation as of December 31, 2012, includes
the following accounts:
Copyrights P 30,00
Deposits with advertising agency
(will be used to promote goodwill) P 27,000
Discount on bonds payable P 70,000
Excess of cost over fair value of
identifiable net assets of Acquired subsidiary P 440,000
Trademarks P 90,000
In the preparation of Vance's balance sheet as of December 31, 2020, what should
be reported as total intangible assets?
End of Topic 9
Topic 10: Impairment of Assets (PAS 36)
Introduction
This module focuses on the accounting and reporting for
impairment of assets. It introduces the learner to the subject, guides the
learner through the official text, develops the learner’s understanding of
the requirements through the use of examples and indicates significant
judgments that are required in accounting for asset impairment.
Furthermore, the module includes questions designed to test the learner’s
knowledge of the requirements and to develop the learner’s ability to
account for impairment of assets.
Learning Outcome:
 Comprehend and Apply the concept of PAS 36 Impairment of
Assets
 State the core principle of PAS 36
 Account for the impairment of individual assets and cash generating units
 Accounts for the reversal of impairment
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Topic Outline:
10.1 Core principle

10.2 Identifying an asset that may be impaired
10.3 Indications of impairment
10.4 Measuring recoverable amount
10.5 Fair Value Less Costs of Disposal
10.6 Value in Use
10.7 Estimate of Future cash flows
10.8 Recognizing and Measuring an Impairment Loss
10.9 Cash Generating Units
10.10 Recoverable amount and Carrying amount of a CGU
10.11 Impairment of a CGU
10.12 Reversal of Impairment loss
10.1 Core principle
The carrying amount of an asset shall not exceed its recoverable amount.
If the carrying amount of an asset exceeds its recoverable amount. The asset is
impaired. The excess shall be written – off as impairment loss.
Note: If the carrying amount is greater than recoverable amount. The asset is
impaired. The excess is impairment loss.
If the carrying amount is equal or less than the recoverable amount the
asset is not impaired. No accounting problem.
Carrying amount - the amount at which an asset is recognized after deducting any
accumulated depreciation (amortization) and accumulated impairment loss
thereon.
Recoverable amount – the amount expected to be recovered from the sale or use
of an asset. It is the higher of an asset’s
a. Fair value less costs of disposal (FVLCD) and
b. Value in Use (VIU)
 Fair value - the 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
 Cost of disposal – incremental costs directly attributable to the disposal of
an asset or cash generating unit, excluding finance cost and income tax
expense
 Value in use - the present value of the future cash flows expected to be
derived from an asset or cash generating unit.
10.2 Identifying an asset that may be impaired

The entity assesses at the end of each reporting period whether there is an
indication that an asset may be impaired
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 If such an indication exists, the entity estimates the recoverable amount of
the asset.
 If no such indication exists, the entity need not estimate the recoverable
amount of the asset.
10.3 Indications of impairment

I. External sources of information:
a. Significant decline in the assets’ (market) value.
b. Significant changes in technological, market, economic, or legal
environment that adversely affect the recoverable amount of an asset
c. Increase in market interest rates that adversely affect the discount rate
used in calculating an asset’s value in use, and consequently, its
recoverable amount
d. The carrying amount of the entity’s net assets exceeds its market
capitalization
II. Internal sources of information

a. Obsolescence or physical damage of an asset
b. Significant changes in the expected use of an asset that adversely affect its
recoverable amount (e.g. the asset becomes idle, plan to discontinue or
restructure the operations to which an asset belongs, plan to dispose of the
asset earlier than expected and reassessments of an asset’s useful life from
indefinite to finite).
c. Indications that the economic performance of an asset is, or will be, worse
than expected (e.g. the maintenance costs of the asset are significantly
higher than expected or the cash inflows from the asset are significantly
lower than expected)
Required testing for impairment:

The following assets are required to be tested for impairment at least annually
even if there are no indications for impairment
a. Intangible asset within indefinite useful life
b. Intangible asset not yet available for use
c. Goodwill acquired in a business combination
10.4 Measuring recoverable amount

PAS 36 provides the following guidance when measuring an asset’s
recoverable amount.
a. It is not always necessary to determine both the FVLCD and VIU. If one
of the them exceeds the asset’s carrying amount, the asset is not impaired ,
and the other amount need not be computed
b. If it is not possible to determine the FVLCD, the VIU is used as the
recoverable amount
c. If there is no reason to believe that the VIU exceeds the FVLCD, the
FVLCD is used as the recoverable amount. This is normally the case if the
asset is held for disposal.
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10.5 Fair Value Less Costs of Disposal
An entity uses PFRS 13 Fair Value Measurement when measuring as
asset’s fair value
Cost of disposal, except those that have been recognize as liabilities, are
deducted in measuring fair value less costs of disposal. Example of such cost
a. Legal costs, stamp duty and similar transactions taxes
b. Costs of removing the asset
c. Direct incremental costs to bring an asset into condition for its sale
Termination benefits and costs associated with reducing or reorganizing a

business following the disposal of an asset are not regarded as cost of disposal.
10.6 Value in Use

the present value of the future net cash flows expected to be derived from
the continuing use of an asset and from its disposal at the end of its useful life.
VIU is computed using the following steps.
a. Estimate the future cash inflows and outflows expected to be derived from
continuing use of the asset and from its final disposal
b. Apply an appropriate discount rate to those future cash flows
10.7 Estimate of Future cash flows

 Cash flow projections are based on management’s best estimates. When
making the estimates, management gives greater weight to eternal
evidence
 Cash flow projections are based on the most recent financial
budgets/forecasts approved by management
 Cash flow projections are based on the asset’s current condition and
excluded and included the following
Exclude cash flows arising from Include cash flows arising from
 Future restructuring not yet  Revenues to be derived from the
committed continuing use of the asset
 Improving or enhancing the asset’s  Day – to day costs of using the
performance asset
 Income taxes  Any residual value of asset and
disposal costs
 Financing activities
 Cash flow projections cover a maximum period of 5 years, unless a longer

period can be justified
 Estimated of future cash flow do not include
o Cash inflows from assets that generate cash inflows that are largely
independent of the cash inflows from the asset under review
o Cash outflows that relate to obligations that have been recognized
as liabilities
 Cash flow projection based on a foreign currency are translated using the
spot exchange rate at the date of the VIU is calculated.
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10.8 Recognizing and Measuring an Impairment Loss
If the carrying amount of an asset exceeds its recoverable amount, the
carrying amount is reduced to the recoverable amount. The reduction is
impairment loss.
Impairment loss is recognized immediately in profit or loss, unless the
asset is carried at revalued amount, in which case revaluation surplus is decrease
first and any excess is recognized in profit or loss. The decrease in the revaluation
surplus is recognized n other comprehensive income.
If the impairment loss exceeds the carrying amount of the asset, a liability
is recognized if this is required by another PFRS.
After impairment, the subsequent depreciation (amortization) for the asset
is based on the asset’s recoverable amount.
Illustration A:
On December 31, 20x1, MBL Co. identified that is machinery with a carrying
amount of P 1,000,000 and remaining useful life of 5 years has been impaired. In
estimating the recoverable amount, MBL determined that the fair value of the
asset is P800,000. The following costs were also estimated:
Transaction taxes 50,000

Legal cost, stamp duty, commissions and similar fees 10,000
Costs of dismantling or removing the asset included in 5,000
provision for restoration and decomposing cost
Termination benefits and costs associated with reducing or 15,000
reorganizing a business following the disposal of an asset
MBL does not have any reason to believe that the value in use of the asset
materially exceeds fair value less costs of disposal. The remaining useful life of
the machinery is unchanged. MBL uses the straight – line method of depreciation.
Requirements:
Compute for impairment loss
Compute for the revised annual depreciation expense after the impairment testing.
Solutions:
Impairment loss
Fair value less costs of disposal is computed as follows:
Fair value 800,000

Less: Cost of disposal:
Transaction taxes 50,000
Legal costs, stamp duty, commission and similar fees 10,000
Fair value less costs of disposal 740,000
Recoverable amount - FVLCS 740,000

Impairment loss (260,000)
Dec. 31, 20x1 Impairment loss 260,000

Accumulated depreciation 260,000
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Depreciation after impairment testing
After the impairment testing, the revised carrying amount of the impaired
machinery is P 740,000, the recoverable amount. This amount will be depreciated
over the remaining useful life of the asset.
The revised annual depreciation expense is computed as follows:
Revised carrying amount (Recoverable amount) 740,000

Residual value -
Depreciable amount 740,000
Divided by: Remaining useful life 5
Revised annual depreciation after impairment 148,000
Illustration B. Value in Use

On December 31, 20x0, ZYX Co. identified that its building with a carrying
amount of P 600,000 has been impaired. In estimating the recoverable amount,
ZYX has determined that the fair value less costs of disposal of the asset is
P400,000
In estimating the value in use, ZYX determined the following:

Year Future cash inflows Future cash outflows
20x1 300,000 100,000
20x2 280,000 100,000
20x3 260,000 80,000
Discount rate is 10%

Required. Compute for the impairment loss
Solution:
The future net cash flows are computed as follows
Year Cash inflows (a) Cash outflows (b) Net cash flows (c) = (a) – (b)
20x1 300,000 100,000 200,000
20x2 280,000 100,000 180,000
20x3 260,000 80,000 180,000
Year Net cash flows PV of P1 factors Preset value

20x1 200,000 0.909091 181,818
20x2 180,000 0.826446 148,760
20x3 180,000 0.751315 135,237
The recoverable amount is determined as follows:
Fair value less cost of disposal 400,000

Value in use 465,815
Recoverable amount (higher) 465,815
Impairment loss is computed as follows:
Recoverable amount 465,815

Carrying amount (600,000)
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Illustration C. Value in Use – with adjustment to cash flows
P400,000
In estimating the value in use, ZYX determined the following:

Year Future cash inflows Future cash outflows
20x1 300,000 100,000
20x2 280,000 100,000
20x3 260,000 80,000
Additional information:
 Each year’s estimated future cash outflows include P100,000 representing

cash outflows from future restructuring not yet committed and P5,000
representing cash outflows on planned improvement and enhancement of
the asset.
 Not included in the estimated future cash outflows are cost of day-to-day
servicing of the asset amounting to P2,000 per year
 The discount rate is 10%
Year Unadjusted Future cost not Cost of day- Adjusted cash out
cash yet committed to-day flows
outflows &Costs of servicing
improvement
(a) (b) = (10k + 5k) (c) (d) = (a) – (b) + (c)
20x1 100,000 15,000 2,000 87,000
20x2 100,000 15,000 2,000 87,000
20x3 80,000 15,000 2,000 67,000
Notice that future costs not yet committed and costs of planned improvement and
enhancement of the asset are excluded while costs of day – to –day servicing of
the asset are included in the projected cash outflows.
The future net cash flows are computed as follows:

Year Cash inflows (a) Adjusted Cash Net cash flows (c) = (a) – (b)
outflows (b)
20x1 300,000 87,000 213,000
20x2 280,000 87,000 193,000
20x3 260,000 87,000 193,000
The value in use is computed as follows:

Year Net cash flows PV of P1 factors Preset value
20x1 213,000 0.909091 193,636
20x2 193,000 0.826446 159,504
20x3 193,000 0.751315 145,004
48 | P a g e
The recoverable amount is determined as follows:


Illustration D. Value in Use – with adjustment to cash flows

P400,000. ZYX estimated that the future net cash flows expected to arise from the
continuing use of the asset is P100,000 per year for the remaining useful life of 5
years. The estimate of future cash flows includes cash out flows for income taxes
and financing activities totaling P10,000 per year. The equipment has a residual
value of 20,00. The discount rate is 10%
Requirement: How much is the impairment loss?
Solution:
The adjusted net cash flows per year are determined as follows:
Unadjusted net cash flows per year 100,000

Add back: Cash outflows from income taxes and financing activities* 10,000
Adjusted net cash flows per year 110,000
Cash flow from residual value at end of useful life 20,000
* The cash flows from income taxes and financing activities are added back to the net
cash flows because they have decreased the net cash flows but they should be excluded
Net cash flows @10%, n=5 PV factors Present value

110,000 PV of an ordinary annuity of P 1 3.790787 416,987
20,000 PV of P1 0.620921 12,418
49,404
Notice that the residual value (i.e., P20,000) is included in the cash flow
projections
The recoverable amount is determined as follows

49 | P a g e
Illustration E. Recoverable amount exceeding Carrying amount

One of ABC Co.’s plant has a carrying amount of P800,000 and a value in use of
P780,000. A recent market transaction for a similar plant involved a net selling
price of P 820,000.
Requirement: How much is the impairment loss?
Solution: None, the asset is not impaired because the recoverable amount (i.e.,
FVLCS higher) exceeds the carrying amount.
Illustration F. Impairment loss on newly constructed asset
ZYX Co. has just completed constructing a new building. Costs incurred are
shown below:
Materials, labor, and overhead P 700,000
Borrowing costs appropriately capitalized 80,000
Total Construction costs P 780,000
Requirement: if the recoverable amount of the building is P750,000, how much is
the impairment loss?
Solution: (P750,000 –P780,000) = (P30,000)

*An asset is impaired if its carrying amount exceeds its recoverable amount even if the
asset is newly constructed and even if it was not yet put to use.
Illustration G. Impairment loss – subsequent depreciation

On January 1, 20x1, DEL acquired an equipment for P500,000. The equipment is
depreciated using the straight line method over an estimated useful life 10 years
and residual value of P50,000.
On January 1, 20x6, ABC determined that the equipment is impaired. Fair value
less costs of disposal is P140,000. Projected future net cash flows from revenues
produced by the equipment is P50,000 annually. The revised estimated useful life
is 4 years and the new estimated residual value s P10,000. The appropriate
discount rate is 10%.
Requirement: Compute for the depreciation expense in 20x6.
Solution:
The value in use is computed as follows:
Future cash flows PV factors @10%, n=4 Present value

Annual cash flows from revenue 50,000 3.169865 158,493
produced
Residual value 10,000 0.683013 6,830
165,323
50 | P a g e
New carrying amount on January 1, 20x6 (Value in use – higher) P165,323
Revised residual value (10,000)
New depreciable amount 155,323
Divided by: Revised useful life 4
Depreciation expense – 20x6 38,831
Illustration H: Impairment loss – Revaluation model

Information on DEL’s impaired building is shown below:
Carrying amount 800,000

Revaluation surplus 80,000
Requirement: Compute for the impairment loss
Solution:
Recoverable amount (FVLCS – higher) P 700,000
Excess over carrying amount (100,000)
Offset to revaluation surplus 80,000
Excess charged as Impairment loss (P 20,000)
The entry to record impairment loss is as follows:
Dec. 31, 20x1 Revaluation surplus 80,000

Impairment loss 20,000
Accumulated depreciation 100,000
*Note: The balance in the revaluation surplus is decreased first and the remaining
amount is charged to profit or loss as impairment loss. The decrease in the revaluation surplus is
recognized in “other comprehensive income” as “Loss on property revaluation.”
Illustration I. Intangible asset with indefinite useful life

JKL Co. determined that its trademark is impaired. JKL cannot estimate reliably
the trademark’s fair value less cost of disposal. However, the following
information has been determined:
Carrying amount 130,000

Annual future cash flows from the trademark 10,000
Discount rate 10%
Requirement: Compute for the impairment loss
Solution:
The recoverable amount or value in use is determined as follows:
Annual future cash flows from the trademark 10,000

Divided by: Discount Rate 10%
Present value of indefinite cash flows (value in use) 100,000
Notice that when there is series of indefinite cash flows, the present value is
determined simply by dividing the cash flows by the discount rate.
51 | P a g e
This is called present value of a perpetuity. When the value of “n” (period) in
the PV of an annuity formula becomes infinitely large, the present value factor
will tend toward 0. (i.e., as the value of “n” increases, present value decreases),
leading to the simplification of formula

Recoverable amount (value in use) P100,000
Impairment loss P 30,000
Illustration J. Impairment loss – asset to be disposed

One of the JKL Co.’s machines has been impaired. Repairs and maintenance costs
on the machine have been increasing over the past years making the machine a
bottleneck in JKL’s production. At year – end, management made a decision to
sell the machine as soon as a pending application for a loan is approved and a
replacement machine is acquired. Information on the machine is shown below.
Carrying amount P100,000

Value in use 60,000
How much is the impairment loss?

Solution: P50,000 (50,000 – 100,000)
When an asset is to be disposed of rather than to be used continually, the

recoverable amount of the asset is its fair value less cost of disposal. Value in use
is the present value of future net cash flows expected to arise from the continuing
use and subsequent disposal of the asset. If the asset is not to be used continually,
its value in use is disregarded.
10.9 Cash Generating Units

Cash Generating Unit (CGU) is “the smallest identifiable group of assets
that generates cash inflows that are largely independent of the ash inflows from
the other assets or groups of assets.
 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 may be tested for impairment separately, first before testing the CGU
as a whole.
10.10 Recoverable amount and Carrying amount of a CGU

The recoverable amount of a CGU is the higher of the CGU’s FVLCD and
VIU.
Carrying amount of CGU –

Determined in a manner that is consistent with how the CGU’s
recoverable amount is determined. Accordingly, the carrying amount of a CGU
includes only those assets and liabilities that are directly attributable to the CGU
52 | P a g e
or are allocated to the CGU on a reasonable basis and will generate the future
cash flows used in determining the CGU’s value in use
It does not include financial assets, such as receivables and recognized
liabilities, such as payables, pensions, or provisions, just as these item are
excluded in determining the CGU’s recoverable amount.
For practical reasons, the recoverable amount of CGU is sometimes
determined by considering financial assets, such as receivables and recognized
liabilities such as payables, pensions or provisions. In such case, these items are
also included in the CGU’s carrying amount.
*Note: Goodwill for the purposes of impairment testing, goodwill recognized in a

business combination is allocated to each of the acquirer’s CGU in the year of
business combination. If the allocation cannot be completed before the end of
that year, it must be completed before the end of the immediately following year
.
Illustration A. Allocation of Goodwill - business combinations
At the end of 20x1, LMN Co. acquire Alpha Corp. for P 10,000,000. Alpha has
manufacturing plants in three countries. Data at the end of 20x1 is shown below.
Fair value of identified assets

Activities Country 1 1,000,000
Total fair value of identified assets 8,000,000
How much goodwill is allocated to each of the CGU’s?
Solution:
Consideration transferred 10,000,000

Fair Value of Identified assets acquired (8,000,000)
Purchased Goodwill 2,000,000
Goodwill is allocated as follows:

CGU Fair values Fraction Allocation of Goodwill
Country 1 1,000,000 1/8 250,000
Country 2 3,000,000 3/8 750,000
Country 3 4,000,000 4/8 1,000,000
2,000,000
*Note: Bottom up test – means goodwill is allocated to the CGU and an impairment loss
has occurred if the CGU’s recoverable amount is less than its carrying amount, including
the allocated goodwill.
Illustration B. Disposal of portion of CGU

IMU Co. has a cash-generating unit for which goodwill of P60,000 was allocated.
During the year, an operation that was part of the CGU was sold for P500,000.
The relative values of the portions sold and retained cannot be determined
reliably. Information on the assets include in the CGU is as follows:
Carrying amount of operation sold excluding goodwill P400,000

Carrying amount of portion not sold excluding goodwill 1,200,000
Total carrying amount of CGU excluding goodwill 1,600,000
53 | P a g e
How much is the gain or loss on the sale of the operation?
Carrying amount of operation sold excluding goodwill P 400,000

Allocation of goodwill (P600,000*400,000/1,600,000) 15,000
Carrying amount of operation sold including goodwill 415,000
Proceeds from sale 500,000
Gain on sale P 85,000
The entry to record the sale is as follows:

Date Cash 500,000
Various asset accounts 400,000
Goodwill 15,000
Gain on Sale 85,000
Illustration C: Reallocation of Goodwill

OPM Co. previously allocated P60,000 goodwill to CGU O. The goodwill
allocated to CGU A cannot be identified or associated with an asset group at a
level lower than CGU O, except arbitrarily.
During the year, OPM Co. reorganizes its reporting structure such that CGU O is
divided and integrated into three other cash – generating units – CGU’s P, M and
R. Additional information is shown below:
CGU Fair values

P 200,000
M 400,000
R 600,000
1,200,000
At the end of the year, CGU R is sold for P 500,000 when its carrying amount is
P580,000 excluding allocated goodwill.
Requirement: How much is the gain or loss on the sale?
Carrying amount of operation sold excluding goodwill P 580,000

Allocation of goodwill (P600,000*600/1,200) 30,000
Carrying amount of operation sold including goodwill 610,000
Proceeds from sale 500,000
Loss from sale (P 110,000)
10.11 Impairment of a CGU

A CGU to which goodwill has been allocated or contains an intangible
asset with indefinite useful life or an intangible asset not yet available for use is
tested for impairment at least annually whether or not there are indications of
impairment.
CGU is impaired if its carrying amount, including the allocated goodwill,
exceeds its recoverable amount. In such case, the impairment loss on the CGU is
allocated as follows:
a. First, to any goodwill including the CGU
b. Then, to the other assets of the CGU pro rata based on their carrying
amounts.
54 | P a g e
When allocating the impairment loss, the carrying amount of an asset
belonging to the CGU shall not be reduced below the highest of:
a. Its fair value less cost of disposal (if determinable);
b. Its value in use (if determinable); and
c. Zero
If the recoverable amount of individual asset cannot be determined, no
impairment loss, is recognized for that asset if the CGU to which t
belongs is not impaired. This applies even if the individual asset’s fair
value less costs of disposal is less than its carrying amount.
Illustration A. Impairment of a CGU – with allocated goodwill
Entity A determine that one of its cash – generating units is impaired. The
following information was gathered.
Carrying amount of CGU:

Assets Carrying amount
Inventory 200,000
Investment property (at cost model) 400,000
Building 600,000
Goodwill 300,000
1,500,000
 Fair value less costs of disposal of CGU: 900,000

 Value in use of CGU 1,000,000
The impairment loss is computed as follows:
Recoverable amount (value in use – higher) 1,000,000

The impairment loss is allocated as follows:
First, to goodwill
Allocation to goodwill 300,000
Excess impairment loss 200,000
Then, to the other non-current assets in the CGU:
Assets Carrying Fractions Allocation of Impairment

amounts Excess Loss
Inventory N/A N/A N/A -
Investment property 400,000 400/1,000 (-200K*400/1,000) (80,000)
Building 600,000 600/1,000 (-200K*600/1,000) (120,000)
1,000,000 1,000/1,000 (200,000)
Date Impairment loss 600,000

Goodwill 300,000
Accumulated depreciation – IP 120,000
Accumulated depreciation - Bldg. 180,000
The allocation shall be made to investment property since inventories are outside
the scope of PAS 36.
55 | P a g e
Carrying amount building before impairment 600,000
Allocated impairment loss (180,000)
Carrying amount of building after impairment 420,000
Fair value less cost of disposal (given) (510,000)
Amount to be allocated to other assets (90,000)
Date Building 90,000

Carrying amount of the CGU after impairment testing is.
Inventory 200,000
Building 510,000
Goodwill -
900,000
Illustration B: Impairment of Individual asset belonging to CGU
One of the machines of BCD Co. has suffered physically damage but is still
working, although not as well as before it was damaged. The machine does not
generate independent cash inflows. The smallest identifiable group of assets that
includes the machine and generates cash inflows that are largely independent of
the cash inflows from other assets is the production line to which the machine
belongs. Information on the machine and the production line is shown below:
Carrying amount of machine 20,000

Fair value less costs of disposal of machine 150,000
Carrying amount of production line 8,000,000
Recoverable amount of production line 9,000,000
Case 1. The budget/forecast approved by management reflect no commitment of

management to replace the machine
Question: How much is the impairment loss?

Answer: NONE
The recoverable amount of the machine alone cannot be estimated because the machine’s
value in use:
a. May differ from its fair value less costs of disposal
b. Can be determined only for the cash – generating unit to which the machine belongs (the
production line)
Case 2. The budgets/forecasts approved by management reflect a commitment of

management to replace the machine and sell it in the near future. Cash flows from
continuing use of the machine until its disposal are estimated to be negligible.
Question: How much is the impairment loss?

Answer: P50,000 (150,000 recoverable amount less P200,000 carrying amount)
Since management is committed on disposing the asset, the machine’s value in use can be
estimated to be close to its fair value less costs of disposal. Therefore, the recoverable amount of
the machine can be determined and no consideration is given to the cash-generating unit to which
the machine belong (i.e., the production line). Impairment loss is recognized for the excess of the
machine’s carrying amount over its recoverable amount.
56 | P a g e
Illustration C: Impairment of individual asset – with commitment for
disposal
NOP Co. determined that on of it cash – generating units is impaired. Information
on the assets of the CGU is show below:
Inventory 200,000
Building 600,000
Goodwill 300,000
1,500,000
 The recoverable amount of the CGU was estimated at P1,400,000

 The building’s fair value less costs of disposal is P400,000. Management is
committed on selling the building.
Since management is committed on selling the building, the building is tested for
impairment first before testing the CGU.
The impairment loss on the building is computed first as follows:
Recoverable amount (fair value less costs of disposal) P 400,000

Impairment loss P (200,000)
The entry to record the impairment loss on the building is:

Date Building 200,000

Inventory 200,000
Building 400,000
Goodwill 300,000
1,300,000
Recoverable amount 1,400,000

Additional impairment loss 0
*Since the recoverable amount of the CGU is higher than its adjusted carrying amount,
no further impairment loss is recognized.
10.12 Reversal of Impairment loss
Reversal of impairment loss

If the recoverable amount of the previously impaired asset exceeds its
carrying amount, the carrying amount is increased to equal the recoverable
amount. The increase is the “reversal of impairment loss”.
Limitations of the Reversal:
a. The reversal of impairment loss shall not result to a carrying
amount in excess of the asset’s would-be carrying amount had no
impairment loss been recognized in prior periods
b. Impairment loss on goodwill is never reversed.
57 | P a g e
The reversal of impairment loss is recognized in profit or loss, unless the
asset is carried at revalued amount, in which case, revaluation surplus is
increased. The revaluation increase is recognized in other comprehensive income.
After reversal of impairment, the subsequent depreciation (amortization)
for the asset is based on the asset’s revised carrying amount.
For CGU, the reversal of impairment loss is allocated as increases in the
carrying amounts of the assets in the CGU, except goodwill, pro rata based on
their carrying amounts. In making this allocation, the carrying amount of an asset
shall not be increased above the lower of:
a. Its recoverable amount (if determinable); and
b. It’s would be carrying amount had no impairment loss ben
recognized in prior periods.
Illustration A: Reversal of Impairment loss

On January 1, 20x1, Entity Z acquires a building for a total cost of P1,200,000.
The building is estimated to have a 30-year useful life and a 5% residual value.
Entity Z uses straight line method of depreciation.
On December 31, 20x5, Entity Z determines that the building is impaired and
makes the following estimates:
Fair value less cost to sell P 650,000

Value in Use 750,000

Recoverable amount (VIU –higher) 750,000
Carrying amount [1.2M- (38,000*5years)] 1,010,000
Following the impairment Entity Z revises the building’s residual value to

5% of the recoverable amount.
The revised annual depreciation in subsequent period is P 28,500 [(750K

*95%)/25 years].
On December 31, 20x8, Entity Z determines an indication that the impairment

loss recognized in the prior year may no longer exist. Entity Z makes the
following estimates and computations
Fair value less costs to sell P 800,000

Value in Use P 900,000
The new recoverable amount if P900,000 (higher)

The actual carrying amount on December 31, 20x8 is computed as follows:
Carrying amount (C.A.)12/31/x5 750,000

Accumulated depreciation (28,500*3 yrs.) (85,500)
Carrying amount 12/31/x8 664,500
The would be carrying amount had there been no impairment loss been
recognized in the prior period is computed as follows:
Historical Cost 1,200,000

Accumulated (original) depreciation (38,000*8 years) (304,000)
58 | P a g e
Carrying amount had no impairment loss been recognized in prior period 896,000
C.A. had no impairment loss been recognized in prior pd. 896,000

C. A. on date of reversal (664,500)
Gain on reversal of impairment loss 231,500
New recoverable amount 900,000

C.A. had no impairment loss been recognized in prior pd. (896,000)
Revaluation increase (other comprehensive income) 4,000
Total increase in carrying amount 235,500
APPLICATION:
Answer the questions below. Assume all amounts are material. Choose the
most correct statement/answer.
Basic concepts
1. The impairment rules for long-lived assets apply to all of the following, except
A. Land
B. Financial instrument
C. Building currently used in business
D. Minicomputer used to run a production process
2. It is a fall in the market value of an asset so that the recoverable amount is now
less than the
carrying amount in the statement of financial position.
A. Amortization C. Depreciation
B. Decline in value D. Impairment
3. What is impairment of asset?

A. A change in the estimated useful life of an asset.
B. An allocation of cost over the useful life of an asset.
C. A decline in value of an asset so that the recoverable amount is more than
carrying amount.
D. A fall in the market value of an asset so that the recoverable amount is less
than carrying amount.
4. 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.
A. Cash generating unit C. Goodwill
B. Corporate asset D. The entity as a whole
5. What is a cash generating unit?

A. The group of assets that generate cash inflows from continuing use that are
largely independent of the cash flows from other group of assets.
B. The group of assets that generate cash inflows from continuing use that are not
independent of the cash flows from other group of assets.
59 | P a g e
C. The largest group of assets that generate cash inflows from continuing use that
are largely independent of the cash flows from other group of assets.
D. The smallest group of assets that generate cash inflows from continuing use
that are largely independent of the cash inflows from other group of assets.
6. 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 C. Group
B. Property, plant and equipment D. Cash generating unit
7. Which of the following statements is incorrect concerning corporate assets?

A. Essentially, corporate assets generate cash inflows independently from other
assets.
B. Corporate assets are group or divisional assets such as I head office building,
EDP, equipment or a research center.
C. The recoverable amount of an individual corporate asset I cannot be
determined unless management has decided I to dispose of the asset.
D. If there is an indication that a corporate asset may be I 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.
8. Long-lived assets are required to be reviewed for impairment

A. When the asset is fully depreciated.
B. Every year at the end of reporting period.
C. Every three years at the end of reporting period.
D. When circumstances indicate that the carrying amount of an asset might not be
recoverable.
9. When impairment testing a cash generating unit, any corporate assets shall
A. Be separately impairment tested.
B. Not be allocated to cash generating units.
C. Be allocated on a reasonable and consistent basis.
D. Be included in the head office assets or parent's assets and impairment tested
along with that cash generating unit.
10. The internal sources of information indicating possible impairment include all
of the following, except
A. Significant decrease in the market value of the asset.
B. Evidence of obsolescence or physical damage of an asset.
C. Evidence that the economic performance of an asset will be worse than
expected.
D. Significant change in the manner or extent in which the asset is used with an
adverse effect on the entity.
11. The internal sources of information indicating possible impairment include all
A. Obsolescence or physical damage of an asset.
B. Significant decrease in the market value of the asset.
C. Evidence that the economic performance of an asset will be worse than
expected.
D. Significant change in the manner or extent in which the asset is used with an
adverse effect on the entity
60 | P a g e
12. The external sources of information indicating possible impairment include all
A. Significant decrease in budgeted net cash flows flowing from the asset.
B. The carrying amount of the net assets of the entity is more than the market
capitalization.
C. Significant change in the technological, market, legal or economic
environment of the business in which the asset is employed.
D. 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.
13. When an entity is considering whether to apply an impairment test to an

individual asset or to the cash generating unit to which that asset belongs, which
of the following statements is true?
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 C. Both I and II
B. II only D. Neither I nor II
14. Which of the following statements is true is relation to recognition of

impairment?
I. An impairment loss shall be recognized in profit or loss immediately.
II. After the recognition of an impairment loss, depreciation charge for the future
periods shall be adjusted to allocate the revised carrying amount, less residual
value, on a systematic basis over the remaining useful life.
15. An impairment loss that relates to an asset that has been revalued shall be
recognized in
A. Profit or loss
B. Any reserve in equity
C. Opening retained earnings
D. Revaluation surplus that relates to the revalued asset
16. An entity shall test an intangible asset with indefinite useful life or an
intangible asset not yet
available for use, or goodwill acquired in business combination for impairment
A. Annually C. On acquisition of subsidiary
B. Every 5 years D. If there is an indication of impairment
17. What is the recoverable amount of an asset?

A. Value in use
B. Fair value less cost of disposal
C. Fair value less cost of disposal or value in use, whichever is lower
D. Fair value less cost of disposal or value in use, whichever is higher
61 | P a g e
18. What is fair value of an asset?
A. The discounted value of future cash flows expected to be derived from the
asset.
B. The undiscounted value of future cash flows expected to be derived from an
asset.
C. The price that would be received to sell an asset in an orderly transaction
between
market participants at the measurement date.
D. The price that would be paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
19. Fair value is defined as

I. The 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.
II. Present value of estimated future cash flows expected to arise from the
continuing use of an asset and from the disposal at the end of the useful life.
20. What is the best evidence of fair value?

A. Quoted price in an active market for similar asset.
B. Quoted price in an inactive market for similar asset.
C. Quoted price in an active market for identical asset.
D. Quoted price in an inactive market for identical asset.
Feedback/Assessment
Problems: Basic Problems
Impairment loss
1. On January 1, 2019, Laity Company purchased a patent with a cost of

P5,200,000 and a useful life of ten years. On December 31, 2019, the entity
determined that impairment indicators were present'. The fair value less cost of
disposal of the patent was estimated to be P3,600,000. The, value in use is
estimated to be P3,800,000. What amount should be reported as impairment loss
for 201 9?
A. 0 B. 360,000 C. 560,000 D. 880,000
2. At the beginning of current year, Uptown Company acquired an intangible

asset for P3,000,000. The intangible asset has an estimated useful life of 10 years.
At the current year-end, the intangible asset was evaluated to determine whether it
was impaired. On same date, the fair value less cost of disposal of the intangible
asset is P2,000,000. The asset is expected to generate future cash flows of
P300,000 annually for the remaining 9 years. The appropriate discount rate is 5%.
The present value of an ordinary annuity of 1 at 5% for nine periods is 7.11. What
is the impairment loss to be recognized for the current year?
A. 0 B. 567,000 C. 700,000 D. 867,000
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3. Listless Company acquired equipment on January 1, 2019 for P5,000,000. The
equipment had a 10-year useful life and no residual value. Cm December 31,
2020, the following information was obtained:
Expected value of undiscounted cash flows 3,600,000
Fair value estimated with in-use premise 3,700,000
Fair value estimated with in-exchange premise 3,500,000
What amount should be recognized as impairment loss for 2020?
A. 0 B. 300,000 C. 400,000 D. 500,000
4. On January 1, 2019, Leah Company owned a machine having a carrying

amount of P2,400,000. The machine was purchased four years earlier for
P4,000,000. The straight line depreciation is used. During December 2019, the
entity determined that the machine suffered permanent impairment and will not be
economically useful after December 31, 2019. The entity sold the machine for
P650,000 on January 5,2020. What amount should be recognized as impairment
loss in 2019?
A. 0 B. 1,350,000 C. 1,750,000 D. 2,000,000
5. On January 1, 2016, Walton Company purchased a machine for P2,000,000 and

established an annual straight line depreciation rate of 10%, with no residual
value. During 2019, the entity determined that the machine will not be
economically useful in production process after December 31, 2019. The entity
estimated that the machine had no residual value on December 31, 2019 and
would be disposed of in early 2020, at a cost of P50,000. In the income statement
for the year ended December 31, 2019, what amount of impairment loss should be
reported for the machine?
A. 50,000 B. 1,000,000 C. 1,050,000 D. 1,250,000
End of Topic 10
63 | P a g e

Module On Intermediate Accounting 2 Unit 1 Part 2

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Module On Intermediate Accounting 2 Unit 1 Part 2

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UNIT 1

Topic 7: Depletion of Natural Resources

7.1. Exploration and evaluation of mineral 7.4. Wasting asset

7.2 Exploration and evaluation expenditures - expenditures incurred in

7.3 Exploration and evaluation assets – an entity treat exploration and

IFRS 6 requires disclosure of information that identifies and explains the

7.4 Wasting Asset

7.6 Exploration and Evaluation Cost - Expenditures incurred by an entity in

Depreciation method: - Same method for other PPE

Depletion is calculated using the units of production method.

The following information relates to the use of the property.

Year Output Rate Depletion

Computation of depletion rate - 2016

Cost of land P6,200,000

Computation of depletion rate - 2017

Computation of depletion rate - 2018

Remaining DA, 1/1/17 P4,200,000

Year Output Rate Depreciation

Computation of depreciation rate - 2016

Cost/DA of building P 300,000

Computation of depreciation rate - 2017

Cost/DA of building P 300,000

Computation of depreciation rate - 2018

Remaining DA, 1/1/07 P 210,000

Total depletion: (600T x P8) P4,800,000

Cost of the Mineral Rights P 500,000

Acquisition cost P 500,000

Acquisition cost P 800,000

Present value of 1: (1 + i)^-n

Acquisition cost P 800,000

Depletable amount P 16,000,000

*Life of WA (1,200,000/240,000) = 5 years

Equipment (P12,400,000/4yrs) 3,100,000

Wasting asset, at cost P80,000,000

Answer the questions below. Assume all amounts are material.

1. Lemery Company acquired property in 2019 which contains mineral

Exploration cost 13,000,000

2. Calaca Company quaries limestone, crushes it and sells it to be used in

3. On July 1, 2019 Balayan Company purchased rights to a mine. The

4. Calatagan Company provides the following balances at the end of

In 2015, Honest Corporation acquired a silver mine in Mr. Diwalwal. Because

1. Depletion for 2018

2. Depletion for 2019

3.Depreciation for 2019

4. Depletion for 2020

5. Depreciation for 2020

 Understand the concepts of Revaluation of PPE

8.1 Basis for Revaluation

Considerations for highest and best use

8.2 Accounting for Revaluations of PPE

Decrease in assets carrying amount - if the asset’s carrying amount is

2. The Cost Approach

The approach is most applicable when there is insufficient data on

Total economic life = Effective life + Remaining economic life

Total economic life = Effective life + Remaining economic life

Percentage depreciation = Effective life + Total economic life

Depreciation = Percentage depreciation * Replacement cost

Fair Value = Replacement cost – Depreciation

Illustration: (Cost approach)

Total economic life = Effective life + Remaining economic life

Percentage depreciation = Effective life + Total economic life

Depreciation = Percentage depreciation * Replacement cost

Fair Value = Replacement cost – Depreciation