4 - Property, Plant & Equipmentabc

PROPERTY, PLANT, AND EQUIPMENT
IFRS Edition
10-1
Property, Plant, and Equipment
Percentages of plant assets

in relation to total assets
10-2
Recognition and Measurement:
IFRS and US GAAP Compared
Areas with significant differences

 Inventory (IAS 2)
 Property, Plant, and Equipment (PP&E)
(IAS 16)
 Intangible Assets (IAS 38)
 Impairment of Assets (IAS 36)
 Borrowing Costs (IAS 23)
 Leases (IAS 17)
10-3
Acquisition and Disposition of
Cost Subsequent
Acquisition Valuation Dispositions
to Acquisition
Acquisition costs: Cash discounts Additions Sale

land, buildings, Deferred contracts Improvements and Involuntary
equipment replacements conversion
Lump-sum
Self-constructed purchases Rearrangement
assets Stock issuance and reorganization
Interest costs Repairs
Non-monetary
Observations exchanges Summary
Government
grants
10-4
Property, plant, and equipment is defined as tangible assets

that are held for use in production or supply of goods and
services, for rentals to others, or for administrative purposes; they
are expected to be used during more than one period.
► “Used in operations” and not for Includes:

resale.  Land,
 Building structures
► Long-term in nature and usually (offices, factories,
depreciated. warehouses), and
 Equipment
► Possess physical substance.
(machinery, furniture,
tools).
10-5
Acquisition of PP&E
Historical cost measures the cash or cash equivalent price of

obtaining the asset and bringing it to the location and condition
necessary for its intended use.
Companies value property, plant, and equipment in
subsequent periods using either the
 cost method or
 fair value (revaluation) method.
 Historical cost -- (the benchmark treatment) recognizes the asset at cost

less accumulated depreciation, required by U.S. GAAP.
 Revaluation -- (the alternative treatment) requires that all assets within a class be
revalued periodically. Revaluation is generally not allowed under U.S. GAAP.
10-6
Acquisition of PP&E
Cost of Land
Includes all costs to acquire land and ready it for use. Costs
typically include:
(1) purchase price;
(2) closing costs, such as title to the land, attorney’s fees, and
recording fees;
(3) costs of grading, filling, draining, and clearing;
(4) assumption of any liens, mortgages, or encumbrances on
the property; and
(5) additional land improvements that have an indefinite life.
10-7 LO 2
Acquisition of PP&E
Cost of Land
Improvements with limited lives, such as private
driveways, walks, fences, and parking lots, are recorded
as Land Improvements and depreciated.
► Land acquired and held for speculation is classified
as an investment.
► Land held by a real estate concern for resale should
be classified as inventory.
10-8
Acquisition of PP&E
Cost of Buildings
Includes all costs related directly to acquisition or
construction. Cost typically include:
(1) materials, labor, and overhead costs incurred during

construction and
(2) professional fees and building permits.
10-9
Acquisition of PP&E
Cost of Equipment
Include all costs incurred in acquiring the equipment and
preparing it for use. Costs typically include:
(1) purchase price,
(2) freight and handling charges
(3) insurance on the equipment while in transit,
(4) cost of special foundations if required,
(5) assembling and installation costs, and
(6) costs of conducting trial runs.
10-10
Acquisition of PP&E
E10-1 (variation): The expenditures and receipts below are related to
land, land improvements, and buildings acquired for use in a business
enterprise. Determine how the following should be classified:
Classification
(a) Money borrowed to pay building contractor Notes Payable
(b) Payment for construction from note proceeds Building
(c) Cost of land fill and clearing Land
(d) Delinquent real estate taxes on property
assumed Land
(e) Premium on 6-month insurance policy during

Building
construction
(f) Refund of 1-month insurance premium because
construction completed early (Building)
10-11
Acquisition of PP&E
E10-1 (variation): The expenditures and receipts below are related to
land, land improvements, and buildings acquired for use in a business
enterprise. Determine how the following should be classified:
Classification
(g) Architect’s fee on building Building
(h) Cost of real estate purchased as a plant site (land
Land
€200,000 and building €50,000)
(i) Commission fee paid to real estate agency Land
(j) Installation of fences around property Land Improvements
(k) Cost of razing and removing building Land
(l) Proceeds from salvage of demolished building (Land)
(m) Cost of parking lots and driveways Land Improvements
(n) Cost of trees and shrubbery (permanent) Land
10-12 LO 2
Acquisition of PP&E
Self-Constructed Assets
Costs typically include:
(1) Materials and direct labor
(2) Overhead can be handled in two ways:
1. Assign no fixed overhead
2. Assign a portion of all overhead to the construction
process.
Companies use the second method extensively.
10-13
Acquisition of PP&E
Interest Costs During Construction

Three approaches have been suggested to account for the
interest incurred in financing the construction.
Illustration 10-1
$0
Increase to Cost of Asset $?
Capitalize no Capitalize
interest during Capitalize actual
all costs of
construction costs incurred during
funds
construction (with
modification)
IFRS
10-14
Valuation of PP&E
Companies should record property, plant, and equipment:

► at the fair value of what they give up or
► at the fair value of the asset received,
whichever is more clearly evident.
10-15
Valuation of PP&E
Cash Discounts — Whether taken or not — generally

considered a reduction in the cost of the asset.
Deferred-Payment Contracts — Assets, purchased through

long term credit, are recorded at the present value of the
consideration exchanged.
Lump-Sum Purchases — Allocate the total cost among the

various assets on the basis of their fair market values.
Issuance of Shares — The market value of the shares issued

is a fair indication of the cost of the property acquired.
10-16
Valuation of PP&E
Exchanges of Nonmonetary Assets

Ordinarily accounted for on the basis of:
► the fair value of the asset given up or
► the fair value of the asset received,
whichever is clearly more evident.
Companies should recognize immediately any gains or losses

on the exchange when the transaction has commercial
substance.
10-17
Valuation of PP&E
Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows
change as a result of the transaction.
That is, if the two parties’ economic positions change, the
transaction has commercial substance.
Illustration 10-10
10-18
Valuation of PP&E
Exchanges - Loss Situation
Companies recognize a loss immediately whether the

exchange has commercial substance or not.
Rationale: Companies should not value assets at more than
their cash equivalent price; if the loss were deferred, assets
would be overstated.
10-19
Valuation of PP&E
Illustration: Information Processing, Inc. trades its used machine for a

new model at Jerrod Business Solutions Inc. The exchange has
commercial substance. The used machine has a book value of $8,000
(original cost $12,000 less $4,000 accumulated depreciation) and a fair
value of $6,000. The new model lists for $16,000. Jerrod gives
Information Processing a trade-in allowance of $9,000 for the used
machine. Information Processing computes the cost of the new asset
as follows.
Illustration 10-11
10-20
Valuation of PP&E
Illustration: Information Processing records this transaction as

follows:
Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000
Illustration 10-12
Loss on
Disposal
10-21 LO 5 Understand accounting issues related to acquiring and valuing plant assets.
Valuation of PP&E
Exchanges - Gain Situation
Has Commercial Substance. Company usually records the

cost of a nonmonetary asset acquired in exchange for
another nonmonetary asset at the fair value of the asset
given up, and immediately recognizes a gain.
10-22 LO 5 Understand accounting issues related to acquiring and valuing plant assets.
Valuation of PP&E
Illustration: Interstate Transportation Company exchanged a

number of used trucks plus cash for a semi-truck. The used trucks
have a combined book value of $42,000 (cost $64,000 less $22,000
accumulated depreciation). Interstate’s purchasing agent,
experienced in the second-hand market, indicates that the used
trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate
computes the cost of the semi-truck as follows.
Illustration 10-13
10-23
Valuation of PP&E
Illustration: Interstate records the exchange transaction as follows:
Semi-truck 60,000
Accumulated Depreciation—Trucks 22,000
Trucks 64,000
Gain on disposal of Used Trucks 7,000
Cash 11,000
Illustration 10-14
Gain on
Disposal
10-24
Valuation of PP&E
Exchanges - Gain Situation
Lacks Commercial Substance.

Now assume that Interstate Transportation Company
exchange lacks commercial substance. That is, the
economic position of Interstate did not change significantly
as a result of this exchange. In this case, Interstate defers
the gain of $7,000 and reduces the basis of the semi-truck.
10-25
Valuation of PP&E
Illustration: Interstate records the exchange transaction as

follows:
Semi-truck 53,000
Accumulated Depreciation—Trucks 22,000
Trucks 64,000
Cash 11,000
Illustration 10-15
10-26
Valuation of PP&E
Summary of Gain and Loss Recognition

on Exchanges of Non-Monetary Assets
Illustration 10-16
Disclosure include:
 nature of the transaction(s),
 method of accounting for the assets exchanged, and
 gains or losses recognized on the exchanges.
10-27
Valuation of PP&E
E10-19: Santana Company exchanged equipment used in its

manufacturing operations plus $2,000 in cash for similar equipment
used in the operations of Delaware Company. The following
information pertains to the exchange.
Santana Delaware
Equipment (cost) $28,000 $28,000
Accumulated Depreciation 19,000 10,000
Fair value of equipment 13,500 15,500
Cash given up 2,000
Instructions: Prepare the journal entries to record the exchange on

the books of both companies.
10-28
Valuation of PP&E
Calculation of Gain or Loss

Santana Delaware
Fair value of equipment received $15,500 $13,500
Cash received / paid (2,000) 2,000
Less: Bookvalue of equipment
($28,000-19,000) (9,000)
($28,000-10,000) (18,000)
Gain or (Loss) on Exchange $4,500 ($2,500)
10-29
Valuation of PP&E
Has Commercial Substance
Santana:
Equipment 15,500
Accumulated depreciation 19,000
Cash 2,000
Equipment 28,000
Gain on exchange 4,500
Delaware:
Cash 2,000
Equipment 13,500
Loss on exchange 2,500
Equipment 28,000
10-30
Valuation of PP&E
Santana (Has Commercial Substance):

Equipment 15,500
Cash 2,000
Equipment 28,000
Gain on disposal of equipment 4,500
Santana (LACKS Commercial Substance):

Equipment (15,500 – 4,500) 11,000
Cash 2,000
Equipment 28,000
10-31
Valuation of PP&E
Delaware (Has Commercial Substance):

Cash 2,000
Equipment 13,500
Loss on disposal of equipment 2,500
Equipment 28,000
Delaware (LACKS Commercial Substance):

Cash 2,000
Equipment 13,500
Loss on disposal of equipment 2,500
Equipment 28,000
10-32
Valuation of PP&E
Government Grants
Grants are assistance received from a government in the form
of transfers of resources to a company in return for past or
future compliance with certain conditions relating to the
operating activities of the company.
IFRS requires grants to be recognized in income (income
approach) on a systematic basis that matches them with the
related costs that they are intended to compensate.
10-33
Valuation of PP&E
Example 1: Grant for Lab Equipment. AG Company received a

€500,000 subsidy from the government to purchase lab equipment
on January 2, 2011. The lab equipment cost is €2,000,000, has a
useful life of five years, and is depreciated on the straight-line basis.
IFRS allows AG to record this grant in one of two ways:
1. Credit Deferred Grant Revenue for the subsidy and amortize

the deferred grant revenue over the five-year period.
2. Credit the lab equipment for the subsidy and depreciate this
amount over the five-year period.
10-34
Valuation of PP&E
Example 1: Grant for Lab Equipment. If AG chooses to record

deferred revenue of $500,000, it amortizes this amount over the
five-year period to income ($100,000 per year). The effects on the
financial statements at December 31, 2011, are:
Illustration 10-17
10-35
Valuation of PP&E
Example 1: Grant for Lab Equipment. If AG chooses to reduce

the cost of the lab equipment, AG reports the equipment at
€1,500,000 (€2,000,000 €500,000) and depreciates this amount
over the five-year period. The effects on the financial statements at
December 31, 2011, are:
Illustration 10-18
10-36
Valuation of PP&E
Contributions
When a company contributes a non-monetary asset, it should
record the amount of the donation as an expense at the fair
value of the donated asset.
Illustration: Kline Industries donates land to the City of San
Paulo for a city park. The land cost $80,000 and has a fair value
of $110,000. Kline Industries records this donation as follows.
Contribution Expense 110,000

Land 80,000
Gain on Disposal of Land 30,000
10-37
Costs Subsequent to Acquisition
Recognize costs subsequent to acquisition as an asset when

the costs can be
► measured reliably and
► it is probable that the company will obtain future economic
benefits.
Future economic benefit would include increases in

1. useful life,
2. quantity of product produced, and
3. quality of product produced.
10-38
Costs Subsequent to Acquisition
Illustration 10-21
10-39 LO 6
Disposition of PP&E
A company may retire plant assets voluntarily or dispose of

them by involuntary conversion, sale, or exchange.
Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
10-40
Disposition of PP&E
A company may retire plant assets voluntarily or dispose of

them by
 sale,
 exchange,
 involuntary conversion, or
 abandonment.
Depreciation must be taken up to the date of disposition.

10-41 debiting Accumulated Depreciation, and crediting the asset account.
Disposition of PP&E
Sale of Plant Assets

BE10-15: Ottawa Corporation owns machinery that cost
$20,000 when purchased on July 1, 2007. Depreciation has
been recorded at a rate of $2,400 per year, resulting in a
balance in accumulated depreciation of $8,400 at December 31,
2010. The machinery is sold on September 1, 2011, for
$10,500.
Prepare journal entries to
a) update depreciation for 2011 and
b) record the sale.
10-42
Disposition of PP&E
a) Depreciation for 2011
Depreciation expense ($2,400 x 8/12) 1,600

b) Record the sale
Cash 10,500
Accumulated depreciation 10,000 *
Machinery 20,000
Gain on sale 500
10-43
* $8,400 + $1,600 = $10,000
Disposition of PP&E
Involuntary Conversion
Sometimes an asset’s service is terminated through some type
of involuntary conversion such as fire, flood, theft, or
condemnation.
Companies report the difference between the amount
recovered (e.g., from a condemnation award or insurance
recovery), if any, and the asset’s book value as a gain or loss.
They treat these gains or losses like any other type of
disposition.
10-44
DEPRECIATION, IMPAIRMENTS, AND
DEPLETION
10-45
Depreciation, Impairments, and Depletion
Presentation
Depreciation Impairments Depletion Revaluations
and Analysis
Factors Recognizing Establishing a Recognition Presentation

involved impairments base Issues Analysis
Methods of Impairment Write-off of
depreciation illustrations resource cost
Component Reversal of Estimating
depreciation loss reserves
Special issues Cash- Liquidating
generating dividends
units Presentation
Assets to be
disposed of
10-46
Depreciation - Method of Cost Allocation
Depreciation is the accounting process of allocating the

cost of tangible assets to expense in a systematic and
rational manner to those periods expected to benefit
from the use of the asset.
Allocating costs of long-term assets:

Long-lived assets = Depreciation expense
Intangibles = Amortization expense
Mineral resources = Depletion expense
10-47
Factors Involved in the Depreciation Process

Three basic questions:
(1) What depreciable base is to be used?
(2) What is the asset’s useful life?
(3) What method of cost apportionment is best?
10-48

Depreciable Base
Illustration 11-1
10-49

Estimation of Service Lifes
 Service life often differs from physical life.
 Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of

physical life)
2. Economic factors (inadequacy, supersession,

and obsolescence).
10-50
Methods of Depreciation
The profession requires the method employed be
“systematic and rational.” Examples include:
(1) Activity method (units of use or production).

(2) Straight-line method.
(3) Diminishing (accelerated)-charge methods:
a) Sum-of-the-years’-digits.
b) Declining-balance method.
10-51
Activity Method
Illustration 11-2
Stanley Coal
Mines Facts
Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:
Illustration 11-3
10-52 LO 3
Straight-Line Method
Illustration 11-2
Stanley Coal
Mines Facts
Illustration: Stanley computes depreciation as follows:

Illustration 11-4
10-53 LO 3
Diminishing-Charge Methods
Illustration 11-2
Stanley Coal
Mines Facts
Sum-of-the-Years’-Digits. Each fraction uses the sum of the

years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The
numerator is the number of years of estimated life remaining
as of the beginning of the year.
Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
10-54 LO 3
Sum-of-the-Years’-Digits
Illustration 11-6
10-55
Diminishing-Charge Methods
Illustration 11-2
Stanley Coal
Mines Facts
Declining-Balance Method.
► Utilizes a depreciation rate (%) that is some multiple of the
straight-line method.
► Does not deduct the residual value in computing the
depreciation base.
10-56 LO 3
Declining-Balance Method
Illustration 11-7
10-57
Component Depreciation
IFRS requires that each part of an item of property,

plant, and equipment that is significant to the total cost of
the asset must be depreciated separately.
10-58
Component Depreciation
Illustration: EuroAsia Airlines purchases an airplane for
€100,000,000 on January 1, 2011. The airplane has a useful
life of 20 years and a residual value of €0. EuroAsia uses the
straight-line method of depreciation for all its airplanes.
EuroAsia identifies the following components, amounts, and
useful lives.
Illustration 11-8
10-59
Computation of depreciation expense for EuroAsia for 2011.

Illustration 11-9
Depreciation journal entry for 2011.
Depreciation Expense 8,600,000

Accumulated Depreciation—Airplane 8,600,000
10-60
Special Depreciation Issues

(1) How should companies compute depreciation for
partial periods?
(2) Does depreciation provide for the replacement of

assets?
(3) How should companies handle revisions in

depreciation rates?
10-61
E11-5 (Depreciation Computations—Four Methods): Maserati

Corporation purchased a new machine for its assembly process on
August 1, 2010. The cost of this machine was €150,000. The
company estimated that the machine would have a salvage value of
€24,000 at the end of its service life. Its life is estimated
at 5 years and its working hours are estimated at 21,000 hours. Year-
end is December 31.
Instructions: Compute the depreciation expense for 2010 under the

following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.
10-62
Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2010 $ 126,000 / 5 = $ 25,200 x 5/12 = $ 10,500 $ 10,500
2011 126,000 / 5 = 25,200 25,200 35,700
2012 126,000 / 5 = 25,200 25,200 60,900
2013 126,000 / 5 = 25,200 25,200 86,100
2014 126,000 / 5 = 25,200 25,200 111,300
2015 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
$ 126,000
Journal entry:
2010 Depreciation expense 10,500

Accumultated depreciation 10,500
LO 3 Compare activity, straight-line, and diminishing-

10-63 charge methods of depreciation.
Activity Method (Assume 800 hours used in 2010)

($126,000 / 21,000 hours = $6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2010 800 x $6 = $ 4,800 $ 4,800 $ 4,800
2011 x =
2012 x =
2013 x =
2014 x =
800 $ 4,800
Journal entry:
10-64 LO 3
5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2010 $ 126,000 x 5/15 = 42,000 x 5/12 $ 17,500 $ 17,500
2011 126,000 x 4.58/15 = 38,500 38,500 56,000

2012 126,000 x 3.58/15 = 30,100 30,100 86,100
2013 126,000 x 2.58/15 = 21,700 21,700 107,800
2014 126,000 x 1.58/15 = 13,300 13,300 121,100

2015 126,000 x .58/15 = 4,900 4,900 126,000
$ 126,000
Journal entry:
10-65 LO 3
Double-Declining Balance Method

Current
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense
2010 $ 150,000 x 40% = $ 60,000 x 5/12 = $ 25,000
2011 125,000 x 40% = 50,000 50,000
2012 75,000 x 40% = 30,000 30,000
2013 45,000 x 40% = 18,000 18,000
2014 27,000 x 40% = 10,800 Plug 3,000

$ 126,000
Journal entry:
10-66 LO 3
Depreciation and Replacement of PP&E
Depreciation
► Does not involve a current cash outflow.
► Funds for the replacement of the assets come from
the revenues.
10-67
Revision of Depreciation Rates
 Accounted for in the current and prospective periods.

 Not handled retrospectively
 Not considered errors or extraordinary items
10-68
Change in Estimate Example
Arcadia HS, purchased equipment for $510,000 which was

estimated to have a useful life of 10 years with a residual value
of $10,000 at the end of that time. Depreciation has been
recorded for 7 years on a straight-line basis. In 2010 (year 8), it
is determined that the total estimated life should be 15 years
with a residual value of $5,000 at the end of that time.
Questions:
 What is the journal entry to correct No Entry
the prior years’ depreciation? Required
 Calculate the depreciation expense
for 2010.
10-69
Change in Estimate Example After 7 years
Equipment cost $510,000 First, establish NBV

Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2009)

Equipment $510,000
Net book value (NBV) $160,000
10-70
Change in Estimate Example After 7 years
Net book value $160,000 Depreciation

Salvage value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2010.
Useful life remaining 8 years
Annual depreciation $ 19,375
Journal entry for 2010
Depreciation expense 19,375

10-71 LO 4 Explain component depreciation.

Impairments
Recognizing Impairments
A long-lived tangible asset is impaired when a company is not
able to recover the asset’s carrying amount either through
using it or by selling it.
On an annual basis, companies review the asset for indicators

of impairments—that is, a decline in the asset’s cash-
generating ability through use or sale.
10-72 LO 5 Explain the accounting issues related to asset impairment.

Impairments
Recognizing Impairments
If impairment indicators are present, then an impairment test
must be conducted.
Illustration 11-15
10-73 LO 5
Impairments
Example: Assume that Cruz Company performs an impairment

test for its equipment. The carrying amount of Cruz’s equipment is
$200,000, its fair value less costs to sell is $180,000, and its
value-in-use is $205,000.
Illustration 11-15
$200,000 $205,000
No
Impairment
$180,000 $205,000
10-74 LO 5
Impairments
Example: Assume the same information for Cruz Company

except that the value-in-use of Cruz’s equipment is $175,000
rather than $205,000.
$20,000 Impairment Loss
Illustration 11-15
$200,000 $180,000
$180,000 $175,000
10-75 LO 5
Impairments
Example: Assume the same information for Cruz Company

except that the value-in-use of Cruz’s equipment is $175,000
rather than $205,000.
Illustration 11-15
$200,000 $180,000
Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000
10-76 LO 5
Impairments
Impairments Illustrations Case 1

At December 31, 2011, Hanoi Company has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2011, is
VND14,000,000 (VND26,000,000 VND12,000,000).
2. Hanoi uses straight-line depreciation. Depreciation was VND6,000,000
for 2011 and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2011, is VND11,000,000.
4. The remaining useful life after December 31, 2011, is two years.
10-77 LO 5
Impairments
Case 1: Hanoi records the impairment on its equipment at

December 31, 2011, as follows.
VND3,000,000 Impairment Loss
Illustration 11-15
VND14,000,000 VND11,000,000
Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000
10-78 LO 5
Impairments
Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2011) VND 11,000,000
Hanoi Company determines that the equipment’s total useful life has
not changed (remaining useful life is still two years). However, the
estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the following
journal entry to record depreciation for 2012.
Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000
10-79 LO 5
Impairments
Impairments Illustrations Case 2

At the end of 2010, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated remaining
useful life of five years. Because there is little market-related information on
which to base a recoverable amount based on fair value, Verma determines
the machine’s recoverable amount should be based on value-in-use. Verma
uses a discount rate of 8 percent. Verma’s analysis indicates that its future
cash flows will be $40,000 each year for five years, and it will receive a
residual value of $10,000 at the end of the five years. It is assumed that all
cash flows occur at the end of the year.
Illustration 11-16
10-80 LO 5
Impairments
Case 2: Computation of the impairment loss on the machine at

the end of 2010.
Illustration 11-15
$200,000 $166,514
Unknown $166,514
10-81 LO 5
Impairments
Case 2: Computation of the impairment loss on the machine at

the end of 2010.
Illustration 11-15
$200,000 $166,514

Accumulated Depreciation—Machine 33,486
Unknown $166,514
10-82 LO 5
Impairments
Reversal of Impairment Loss

Illustration: Tan Company purchases equipment on January 1,
2010, for $300,000, useful life of three years, and no residual value.
At December 31, 2010, Tan records an impairment loss of $20,000.

10-83 LO 5
Impairments
Reversal of Impairment Loss

Depreciation expense and related carrying amount after the
impairment.
At the end of 2011, Tan determines that the recoverable amount of the
equipment is $96,000. Tan reverses the impairment loss.

Recovery of Impairment Loss 6,000
10-84 LO 5
Impairments
Cash-Generating Units
When it is not possible to assess a single asset for impairment
because the single asset generates cash flows only in combination
with other assets, companies identify the smallest group of assets that
can be identified that generate cash flows independently of the cash
flows from other assets.
10-85
Impairments
Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).
 No depreciation or amortization is taken on assets held for

disposal during the period they are held.
 Can write up or down an asset held for disposal in future

periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before the
impairment.
10-86
Impairments
Illustration 11-18
Graphic of Accounting
for Impairments
10-87 LO 5
Revaluations
Recognizing Revaluations
Companies may value long-lived tangible asset after
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for its
railroad network.
► Increased long-lived tangible assets by £4,289 million.
► Change in the fair value accounted for by adjusting the
asset account and establishing an unrealized gain.
► Unrealized gain is often referred to as revaluation surplus.
10-88
Revaluations
Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2010. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2010, the land’s fair value is €1,200,000. The
entry to record the land at fair value is as follows.
Land 200,000
Unrealized Gain on Revaluation - Land 200,000
Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.
10-89
Revaluations
Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2010. The equipment has a useful life
of five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the
equipment. Lenovo records depreciation expense of ¥100,000
(¥500,000 5) at December 31, 2010, as follows.
Depreciation Expense 100,000

10-90
Revaluations
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an
independent appraisal for the fair value of equipment at
December 31, 2010, which is ¥460,000.

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000
10-91
Revaluations
Illustration 11-22
Financial Statement
Presentation—Revaluations
Lenovo reports depreciation expense of ¥100,000. The Accumulated Other

Comprehensive Income account related to revaluations cannot have a negative
balance.
10-92
Revaluations
Revaluations Issues
Company can select to value only one class of assets, say buildings,
and not revalue other assets such as land or equipment.
Most companies do not use revaluation accounting.
► Substantial and continuing costs associated with appraisals.
► Gains associated with revaluations above historical cost are
not reported in net income but rather go directly to equity.
► Losses associated with revaluation below historical cost
decrease net income. In addition, the higher depreciation
charges related to the revalued assets also reduce net
income.
10-93
Presentation and Analysis
Presentation of Property, Plant, Equipment,

and Mineral Resources
Depreciating assets, use Accumulated Depreciation.

Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.
Disclosures Basis of valuation (usually cost)

Pledges, liens, and other commitments
10-94
Analysis of Property, Plant, and Equipment

Asset Turnover Ratio
Measure of a firm’s
ability to generate
sales from a particular
investment in assets.
Illustration 11-24
10-95 LO 8

Profit Margin on Sales
Measure of the ability to
generate operating
income from a particular
level of sales.
Illustration 11-25
10-96 LO 8

Rate of Return on Assets
Measures a firm’s
success in using assets
to generate earnings.
Illustration 11-26
10-97 LO 8
Analyst obtains further insight into the behavior of ROA by

disaggregating it into components of profit margin on sales and
asset turnover as follows:
Rate of Return Profit Margin on Asset Turnover

= x
on Assets Sales
Net Income Net Income Net Sales

= x
Average Total Assets Net Sales Average Total Assets
LO 8 Explain how to report and analyze property,

10-98
plant, equipment, and mineral resources.
Analyst obtains further insight into the behavior of ROA by

disaggregating it into components of profit margin on sales and
asset turnover as follows:
Rate of Return Profit Margin on Asset Turnover

= x
on Assets Sales
€644 €644 €10,799

= x
(€9,533 €8,325) / 2 €10,799 (€9,533 €8,325) / 2
7.2% = 5.96% x 1.21
LO 8 Explain how to report and analyze property,

10-99
plant, equipment, and mineral resources.
 Under both iGAAP and U.S. GAAP, interest costs incurred during
construction must be capitalized.
 The accounting for exchanges of non-monetary assets has recently
converged between IFRS and U.S. GAAP. U.S. GAAP now requires that
gains on exchanges of non-monetary assets be recognized if the
exchange has commercial substance. This is the same framework used
in IFRS.
 U.S. GAAP also views depreciation as allocation of cost over an asset’s
life. U.S. GAAP permits the same depreciation methods (straight-line,
diminishing-balance, units-of-production) as IFRS.
10-100
 IFRS requires component depreciation. Under U.S. GAAP, component
depreciation is permitted but is rarely used.
 Under IFRS, companies can use either the historical cost model or the
revaluation model. U.S. GAAP does not permit revaluations of property,
plant, and equipment or mineral resources.
 In testing for impairments of long-lived assets, U.S. GAAP uses a two-
step model to test for impairments. The IFRS impairment test is stricter.
However, unlike U.S. GAAP, reversals of impairment losses are
permitted.
10-101
The general rules for revaluation accounting are as follows.
1. When a company revalues its long-lived tangible assets above
historical cost, it reports an unrealized gain that increases other
comprehensive income. Thus, the unrealized gain bypasses net
income, increases other comprehensive income, and increases
accumulated other comprehensive income.
2. If a company experiences a loss on impairment (decrease of
value below historical cost), the loss reduces income and
retained earnings. Thus, gains on revaluation increase equity
but not net income, whereas losses decrease income and
retained earnings (and therefore equity).
10-102 LO 9 Explain revaluation accounting procedures.

3. If a revaluation increase reverses a decrease that was
previously reported as an impairment loss, a company credits
the revaluation increase to income using the account Recovery
of Impairment Loss up to the amount of the prior loss. Any
additional valuation increase above historical cost increases
other comprehensive income and is credited to Unrealized Gain
on Revaluation.
4. If a revaluation decrease reverses an increase that was
reported as an unrealized gain, a company first reduces other
comprehensive income by eliminating the unrealized gain. Any
additional valuation decrease reduces net income and is
reported as a loss on impairment.
10-103 LO 9 Explain revaluation accounting procedures.

Revaluation of Land
Revaluation—2010: Valuation Increase

Illustration: Unilever Group (GBR and NLD) purchased land on
January 1, 2010, that cost €400,000. Unilever decides to report the
land at fair value in subsequent periods. At December 31, 2010, an
appraisal of the land indicates that its fair value is €520,000. Unilever
makes the following entry to record the increase in fair value.
Land 120,000
Unrealized Gain on Revaluation—Land 120,000
Illustration 11A-1
10-104 LO 9
Revaluation of Land
Revaluation—2011: Decrease below Cost

Illustration: What happens if the land’s fair value at December
31, 2011, is €380,000, a decrease of €140,000 (€520,000 -
€380,000)?
Land 140,000
Illustration 11A-2
10-105 LO 9
Revaluation of Land
Revaluation—2012: Recovery of Loss

Illustration: At December 31, 2012, Unilever’s land value increases
to €415,000, an increase of €35,000 (€415,000 - €380,000).
Land 35,000
Recovery of Impairment Loss 20,000
Illustration 11A-3
10-106 LO 9
Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
10-107
The END
10-108

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PROPERTY, PLANT, AND EQUIPMENT

Percentages of plant assets

Areas with significant differences

Acquisition costs: Cash discounts Additions Sale

Property, plant, and equipment is defined as tangible assets

► “Used in operations” and not for Includes:

Historical cost measures the cash or cash equivalent price of

 Historical cost -- (the benchmark treatment) recognizes the asset at cost

(1) materials, labor, and overhead costs incurred during

(e) Premium on 6-month insurance policy during

Interest Costs During Construction

Companies should record property, plant, and equipment:

whichever is more clearly evident.

Cash Discounts — Whether taken or not — generally

Deferred-Payment Contracts — Assets, purchased through

Lump-Sum Purchases — Allocate the total cost among the

Issuance of Shares — The market value of the shares issued

Exchanges of Nonmonetary Assets

Companies should recognize immediately any gains or losses

Meaning of Commercial Substance

Exchanges - Loss Situation

Companies recognize a loss immediately whether the

Illustration: Information Processing, Inc. trades its used machine for a

Illustration: Information Processing records this transaction as

Exchanges - Gain Situation

Has Commercial Substance. Company usually records the

Illustration: Interstate Transportation Company exchanged a

Illustration: Interstate records the exchange transaction as follows:

Exchanges - Gain Situation

Lacks Commercial Substance.

Illustration: Interstate records the exchange transaction as

Summary of Gain and Loss Recognition

E10-19: Santana Company exchanged equipment used in its

Instructions: Prepare the journal entries to record the exchange on

Calculation of Gain or Loss

Santana (Has Commercial Substance):

Santana (LACKS Commercial Substance):

Delaware (Has Commercial Substance):

Delaware (LACKS Commercial Substance):

Example 1: Grant for Lab Equipment. AG Company received a

IFRS allows AG to record this grant in one of two ways:

1. Credit Deferred Grant Revenue for the subsidy and amortize

Example 1: Grant for Lab Equipment. If AG chooses to record

Example 1: Grant for Lab Equipment. If AG chooses to reduce

Contribution Expense 110,000

Recognize costs subsequent to acquisition as an asset when

Future economic benefit would include increases in

A company may retire plant assets voluntarily or dispose of

Record depreciation up to the date of disposal.

A company may retire plant assets voluntarily or dispose of

Depreciation must be taken up to the date of disposition.

Sale of Plant Assets

a) Depreciation for 2011

Depreciation expense ($2,400 x 8/12) 1,600

b) Record the sale

Factors Recognizing Establishing a Recognition Presentation

Depreciation is the accounting process of allocating the

Allocating costs of long-term assets:

Factors Involved in the Depreciation Process

(2) What is the asset’s useful life?

(3) What method of cost apportionment is best?

Factors Involved in the Depreciation Process

Factors Involved in the Depreciation Process