CHAPTER 63

REVERSAL OF IMPAIRMENT

Problem 63-1 (AICPA Adapted)

Lobo Company reported an impairment loss of P2,000,000 in 2017. This loss was related to an
item of property, plant and equipment which was acquired on January 1, 2016 with cost of
P10,000,000, useful life of 10 years and no residual value. The straight line method is used in
recording depreciation.

On December 31, 2017, the entity reported this asset at P6,000,000 which is the fair value on
such date.

On December 31, 2018, the entity determined that the fair value of the impaired asset had
increased to P7,500,000.

1.What is the carrying amount of the impaired asset on December 31, 2018?
a 5,250,000
b. 6,000,000
c. 5,400,000
d. 8,000,000

2.What is the carrying amount of the asset on December 31, 2018 on the basis that it was not
impaired?
a. 8,000,000
b. 7,000,000
C. 9,000,000
d. 6,000,000

3.What amount of gain on reversal of impairment should be reported in the income statement
for 2018?
a. 2,250,000
b. 1,750,000
c. 1,500,000

Solution 63-1
Question 1 Answer a
Fair value - January 1, 2018 6,000,000
Depreciation for 2018 (6,000,000/8) 750,000
Carrying amount- 12/31/2018 -- with impairment 5,250,000

Question 2 Answer b
Cost - January 1, 2016 10,000,000
Accumulated depreciation -- December 31, 2018 (10,000,000/10 x 3) 3,000,000
Carrying amount - 12/31/2018 - assuming no impairment 7,000,000
Question 3 Answer b
Carrying amount - 12/31/2018 – no impairment 7,000,000
Carrying amount - 12/31/2018 - with impairment 5,250,000
Gain on reversal of impairment 1,750,000

PAS 36, paragraph 117, provides that the fair value or recoverable amount cannot exceed the
carrying amount assuming there was no impairment.

The fair value of P7,500,000 on December 31, 2018 is higher than the carrying amount of
P7,000,000 assuming no impairment.

Thus, the basis of the reversal is P7,000,000.

Problem 63-2 (IFRS)

Tausug Company reported the following calculation relating to an impairment loss suffered on
December 31, 2018:
Goodwill Other assets
Carrying amount 3,000,000 9,000,000
Impairment loss (3,000,000) (2,000,000)
Adjusted carrying amount - 7,000,000

There has been a favorable change in the estimate of the recoverable amount of the net assets.
The recoverable amount is now P8,000,000 on December 31, 2019.

The carrying amount of the net assets would have been P7,200,000 on December 31, 2019 if
there was no impairment loss recognized on December 31, 2018.

Assets are depreciated at 20% of reducing balance.

1. What is the carrying amount on December 31, 2019 assuming there was impairment?
a. 7,000,000
b. 5,600,000
c. 7,200,000
d. 9,600,000

2. What amount of gain on reversal of impairment should be recognized in 2019?

a. 1,000,000
b. 2,400,000
c. 1,600,000
d. 0

3. What amount of the gain is applied as a reversal of the impairment loss on goodwill?
a. 1,600,000
b. 1,000,000
c. 960,000

Solution 63-2
Question 1 Answer b
Carrying amount - December 31, 2018 7,000,000
Depreciation for 2019 (20%) x 7,000,000) (1,400,000)
Carrying amount -- 12/31/2019 with impairment 5,600,000

Question 2 Answer
Carrying amount - 12/31/2019 assuming no impairment 7,200,000
Carrying amount - 12/31/2019 with impairment 5,600,000
Gain on reversal of impairment 1,600,000

The recoverable amount of P8,000,000 is ignored because it exceeds the carrying amount of
P7,200,000 on December 31, 2019 assuming no impairment.

Question 3 Answer d
PAS 36, paragraph 124, explicitly provides that an impairment loss recognized for goodwill shall
not be reversed in a subsequent period.

Thus, the total gain is a reversal only of the impairment loss recognized for the assets other than
goodwill.

Problem 63-3 (IAA)

On January 1, 2018, Elite Company purchased equipment with cost of P11,000,000, useful life of
10 years and no residual value. The entity used straight line depreciation.

On December 31, 2018 and December 31, 2019, the entity determined that impairment
indicators are present. There is no change in the useful life or residual value.

December 31, 2018 December 31, 2019

Fair value less cost of disposal 8,100,000 9,400,000
Value in use 8,550,000 8,200,000

1. What is the impairment loss for 2018?

a. 1,800,000
b. 1,350,000
c. 2,450,000
d. 0

2. What is the gain on reversal of impairment for 2019?

a. 400,000
b. 250,000
c. 800,000
3. What is the depreciation for 2020?
a. 1,100,000
b. 1,050,000
c. 1,025,000
d. 950,000

Solution 63-3
Question 1 Answer b
Cost - January 1, 2018 11,000,000
Accumulated depreciation (11,000,000/10) ( 1,100,000)
Carrying amount - December 31, 2018 9,900,000
Value in use -- higher than fair value 8,550,000
Impairment loss for 2018 1,350,000

Question 2 Answer c
Carrying amount - January 1, 2018 8,550,000
Depreciation for 2019 (8,550,000/9) ( 950,000)
Carrying amount - 12/31/2019 with impairment 7,600,000

Fair value less cost of disposal - December 31, 2019,

higher than value in use 8,400,000
Carrying amount- 12/31/2019 with impairment 7,600,000
Gain on reversal of impairment for 2019 800,000

The fair value less cost of disposal of P8,400,000 is the proper basis for the gain on reversal
because it does not exceed the carrying amount of P8,800,000 assuming no impairment.

Question 3 Answer b
Depreciation for 2020 (8,400,000 / 8 years) `1,050,000

The remaining life of the equipment is 8 years on January 1, 2020 because original life is 10 years
and two years already expired.

Problem 63-4 (IAA)

On January 1, 2018, Valentine Company purchased equipment with cost of P10,000,000, useful
life of 5 years and no residual value. The entity used straight line depreciation.

On December 31, 2018 and December 31, 2019, the entity determined that impairment
indicators are present. There is no change in useful life or residual value.
December 31, 2018 December 31, 2019
Fair value less cost of disposal 7,200,000 6,600,000
Value in use 6,500,000 6,300,000
1. What is the impairment loss for 2018?
a. 800,000
b. 750,000
c. 400,000
d. 0

2. What is the depreciation for 2019?

a. 2,000,000
b. 1,800,000
c. 1,625,000
d. 1,000,000

3. What is the gain on reversal of impairment for 2019?

a. 300,000
b. 900,000
C. 600,000

4. What is the depreciation for 2020?

a. 2,200,000
b. 2,100,000
c. 1,800,000
d. 2,000,000

Solution 63-4
Question 1 Answer a
Cost - January 1, 2018 10,000,000
Depreciation for 2018 (10,000,000/5) ( 2,000,000)
Carrying amount – December 31, 2018 8,000,000
Recoverable amount - fair value less cost of disposal 7,200,000
Impairment loss for 2018 800,000

Question 2 Answer b
Depreciation for 2019 (7,200,000 / 4 years remaining) 1,800,000

Question 3 Answer c
Recoverable amount - December 31, 2018 7,200,000
Depreciation for 2019 (1,800,000)
Carrying amount - December 31, 2019 with impairment 5,400,000

Original cost - January 1, 2018 10,000,000

Accumulated depreciation - December 31, 2019
(10,000,00075 x 2) (4,000,000)
Carrying amount - 12/31/2019 no impairment 6,000,000
Carrying amount - 12/31/2019 no impairment 6,000,000
Carrying amount - 12/31/2019 with impairment 5,400,000
Gain on reversal of impairment 600,000

The recoverable amount is the fair value less cost of disposal of P6,600,000.

This amount is not the basis in computing gain on reversal because It exceeds the carrying
amount of P6,000,000 on the basis that there was no impairment. The maximum carrying
amount is the carrying amount assuming no impairment.

Question 4 Answer d
Depreciation for 2020 (6,000,000 / 3 years remaining) 2,000,000