ACCT220 Chapter11Part2 Fall2022

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
11-1
Depreciation, CHAPTER 11
Impairments, and Depletion
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe depreciation concepts 4. Apply the accounting for
and methods of depreciation. revaluations.
2. Identify other depreciation 5. Demonstrate how to report and

issues. analyze property, plant,
equipment, and mineral
3. Explain the accounting issues resources.
related to asset impairment.
11-2
Revaluations
Recognizing Revaluations
Companies may value long-lived tangible asset subsequent
to acquisition at cost or fair value.
► 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.
11-3
Recognizing Revaluation
Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.
11-4
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
11-5
Analysis of Property, Plant, and Equipment

Asset Turnover
Siemens Group Measures how

efficiently a company
uses its assets to
generate sales.
ILLUSTRATION 11.24
Asset Turnover
11-6

Profit Margin on Sales
Siemens Group Measure of the ability

to generate operating
income from a
particular level of
sales.
ILLUSTRATION 11.25
11-7 Profit Margin on Sales

Return on Assets
Siemens Group Measures a firm’s

success in using
assets to generate
earnings.
ILLUSTRATION 11.26
11-8 Return on Assets
By relating the profit margin on sales to the asset turnover, we can

ascertain how profitably the company used assets during that period
of time in a measure of the return on assets.
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
11-9
By relating the profit margin on sales to the asset turnover, we can

ascertain how profitably the company used assets during that period
of time in a measure of the return on assets.
Rate of Return Profit Margin on Asset Turnover

= x
on Assets Sales
€5,584 €5,584 €79,644

= x
(€125,717 + €120.348) €79,644 (€125,717 + €120.348)
/2 /2
4.5% = 7.0% x .65
11-10
Revaluation of Property, Plant, and
APPENDIX 11A
Equipment
Illustrate revaluation accounting procedures.
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.
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.
11-11
Revaluation of Property, Plant, and
APPENDIX 11A
Equipment
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.
11-12
Revaluation of Land
Revaluation—2019: Valuation Increase

Assume that Unilever Group (GBR and NLD) purchased land on
January 1, 2019, that cost €400,000. Unilever decides to report
the land at fair value in subsequent periods. At December 31,
2019, 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 (€520,000
− €400,000)
11-13
ILLUSTRATION 11A.1
Summary of Revaluation—2019
 Land is now reported at its fair value of €520,000.

 The increase in the fair value of €120,000 is reported on the
statement of comprehensive income.
 The ending balance in Unrealized Gain on Revaluation—Land
is reported as accumulated other comprehensive income in
the statement of financial position in the equity section.
11-14
Revaluation—2020: Decrease below
Historical Cost
What happens if the land’s fair value at December 31, 2020, is

€380,000, a decrease of €140,000 (€520,000 − €380,000)? In this
case, the land’s fair value is below its historical cost. Unilever
makes the following entry on December 31, 2020 to record the
decrease in fair value of the land.
Unrealized Gain on Revaluation—Land 120,000

Loss on Impairment 20,000
Land (€520,000 − €380,000) 140,000
11-15
Revaluation—2020: Decrease below Cost
ILLUSTRATION 11A.2
 The debit to Unrealized Gain on Revaluation—Land of

€120,000 reduces other comprehensive income, which
reduces accumulated other comprehensive income.
 The debit to Loss on Impairment of €20,000 reduces net
income and retained earnings.
11-16
Revaluation—2021: Recovery of
Impairment Loss
At December 31, 2021, Unilever’s land value increases to

€415,000, an increase of €35,000 (€415,000 − €380,000). In this
case, the Loss on Impairment of €20,000 is reversed and the
remaining increase of €15,000 is reported in other comprehensive
income. Unilever makes the following entry to record this
transaction.
Land 35,000
Unrealized Gain on Revaluation—Land 15,000
Recovery of Impairment Loss 20,000
11-17
Impairment Loss
ILLUSTRATION 11A.3
On January 2, 2022, Unilever sells the land for €415,000. Unilever

makes the following entry to record this transaction.
Cash 415,000
Land 415,000
11-18
Impairment Loss
ILLUSTRATION 11A.3
Since the land is sold, Unilever has the option to transfer

Accumulated Other Comprehensive Income (AOCI) to Retained
Earnings.
Accumulated Other Comprehensive Income 15,000

Retained Earnings 15,000
11-19
Impairment Loss
 The purpose of this transfer is to eliminate the unrealized
gain on the land that was sold.
 Transfers from Accumulated Other Comprehensive Income
cannot increase net income.
 Even though the land has appreciated in value by €15,000,
Unilever is not able to recognize this gain in net income over
the periods that it held the land.
11-20
Revaluation of Depreciable Assets

Assume that Nokia (FIN) purchases equipment for €1,000,000 on
January 2, 2019. The equipment has a useful life of five years, is
depreciated using the straight-line method of depreciation, and its
residual value is zero. Nokia chooses to revalue its equipment to
fair value over the life of equipment. On December 31, 2019,
Nokia records depreciation expense of €200,000 (€1,000,000 ÷ 5)
as follows.
Depreciation Expense 200,000

Accumulated Depreciation—Equipment 200,000
11-21
After this entry, Nokia’s equipment has a carrying amount of

€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.
1. Reduces the Accumulated Depreciation—Equipment

account to zero.
2. Reduces the Equipment account by €50,000—it then is

reported at its fair value of €950,000.
11-22
After this entry, Nokia’s equipment has a carrying amount of

€800,000 (€1,000,000 − €200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.
3. Records an Unrealized Gain on Revaluation—Equipment for

the difference between the fair value and carrying amount of
the equipment, or €150,000 (€950,000 − €800,000). The
entry to record this revaluation at December 31, 2019, is:

Equipment 50,000
Unrealized Gain on Revaluation—Equipment 150,000
11-23
ILLUSTRATION 11A.4
 The carrying amount of the asset is now €950,000.

 Nokia reports depreciation expense of €200,000 in the income
statement and Unrealized Gain on Revaluation—Equipment of
€150,000 in other comprehensive income.
11-24
Revaluation—2020: Decrease below
Historical Cost
Assuming no change in the useful life of the equipment,

depreciation expense for Nokia in 2020 is €237,500 (€950,000 ÷ 4),
and the entry to record depreciation expense on December 31,
2020 as follows.

Under IFRS, Nokia may transfer from AOCI the difference between
depreciation based on the revalued carrying amount of the
equipment and depreciation based on the asset’s original cost to
retained earnings.
11-25
Depreciation based on the original cost was €200,000 (€1,000,000

÷ 5) and on fair value is €237,500, or a difference of €37,500
(€237,500 − €200,000). The entry to record this transfer at
December 31, 2020 is as follows.

Before revaluation in 2020, Nokia has the following amounts

related to its equipment.
11-26
Nokia determines through appraisal that the equipment now has a

fair value of €570,000. To report the equipment at fair value, Nokia
does the following.
1. Reduces the Accumulated Depreciation—Equipment account of
€237,500 to zero.
2. Reduces the Equipment account by €380,000 (€950,000 −

€570,000)—it then is reported at its fair value of €570,000.
11-27
3. Reduces Unrealized Gain on Revaluation—Equipment by

€112,500, to off set the balance in the unrealized gain account
(related to the revaluation in 2019).
4. Records a loss on impairment of €30,000.

Loss on Impairment 30,000
Equipment 380,000
11-28
ILLUSTRATION 11A.5
 The carrying amount of the equipment is now €570,000.

 Nokia reports depreciation expense of €237,500 and an
impairment loss of €30,000 in the income statement.
 Nokia reports the reversal of the previously recorded
unrealized gain by recording the transfer to retained earnings
of €37,500 and the entry to Unrealized Gain on Revaluation—
Equipment of €112,500.
11-29
Impairment Loss
Assuming no change in the useful life of the equipment,

depreciation expense for Nokia in 2021 is €190,000 (€570,000 ÷ 3),
and the entry to record depreciation expense on December 31,
2021 as follows.

11-30
Nokia transfers the difference between depreciation based on the
revalued carrying amount of the equipment and depreciation based
on the asset’s original cost from AOCI to retained earnings.
Depreciation based on the original cost was €200,000 (€1,000,000
÷ 5) and on fair value is €190,000.

Before revaluation in 2021, Nokia has the following amounts

related to its equipment.
11-31
Revaluation—2021: Recovery of Loss

does the following.
1. Reduces the Accumulated Depreciation—Equipment

account of €190,000 to zero.
2. Reduces the Equipment account by €120,000 (€570,000 −

€450,000)—it then is reported at its fair value of €450,000.
3. Records an Unrealized Gain on Revaluation—Equipment

for €40,000.
4. Records a Recovery of Loss on Impairment for €30,000.
11-32
Revaluation—2021: Recovery of Loss

does the following. The entry to record this transaction is as
follows.

Equipment 120,000
Recovery of Loss on Impairment 30,000
11-33
ILLUSTRATION 11A.6
On January 2, 2022, Nokia sells the equipment for €450,000. Nokia

makes the following entry to record this transaction.
Cash 450,000
Equipment 450,000
Nokia does not record a gain or loss because the carrying amount
of the equipment is the same as its fair value.
11-34
ILLUSTRATION 11A.6
Nokia transfers the remaining balance in Accumulated Other

Comprehensive Income to Retained Earnings.

Even though the equipment has appreciated in value by €50,000,

the company does not recognize this gain in net income.
11-35
Sale of revalued asset
Compare
 Carrying value
 Disposal Proceeds (sale value)
Difference is Gain or loss
If you have any balance in AOCI transfer that to

Retained Earnings
NOTE: Realize any unrealized gains
11-36
Comprehensive Income
Comprehensive income is defined as the change

in equity (net assets) of a business entity during
a period from transactions and other events and
circumstances from non-owner sources
Comprehensive Income = Net income + Items of Other

Comprehensive Income
Non owner changes in equity that

by-pass net income
e.g revaluation surplus
11-37
11-38
11-39
Statement of Changes in Equity
Reports the change in each equity account and in total

equity for the period. Includes the following:
1. Accumulated other comprehensive income for the
period.
2. Contributions (issuances of shares)
3. Distributions (dividends) to owners.
4. Reconciliation of the carrying amount of each

component of equity from the beginning to the end of
the period.
11-40
11-41
PP&E Reporting
11-42
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
11-43
PP&E at cost
PP&E freehold at fair value – revaluation
11-44
Depreciation method
11-45
Subsequent costs
Retirement of assets
11-46 Impairment of assets

LO8,9 & 10 – Investment Property
IAS 40
11-47
Investment property
Scope Recognition
Land and / or buildings held ► Future Economic Benefits
► To earn rentals ► Reliable Measurement
► For capital appreciation or
► Both
Measurement
► Initial – Cost NOTE
► Subsequent: • not owner-occupied;
• not used in production or supply of goods
Cost or Fair Value model
and services, or for administration; and
• not held for sale in the ordinary course of
business
11-48
Investment property Subsequent Measurement
Cost model Fair Value Model

► Same as for PPE ► NOT the same as the
so you need to charge depreciation revaluation model for PPE
and review for impairment ► Asset reported at fair value
at the reporting date
► No depreciation
► A gain or loss from re-
measurement to fair value
shall be recognized in profit
or loss.
11-49
Transfers-Change in use
Fair Value (FV)

Investment property
Cost model Model

► Simply change ► From PPE to Investment
classification at the same Property (IP)
carrying amount  difference between
Carrying Amount and FV at
the date of transfer treated
as a revaluation
 FV at date of transfer
deemed as cost for IP
► From IP to PPE
 FV deemed to be cost for
PPE
11-50

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Prepared by

2. Identify other depreciation 5. Demonstrate how to report and

► Change in the fair value accounted for by adjusting the asset

Disclosures  Basis of valuation (usually cost)

Analysis of Property, Plant, and Equipment

Siemens Group Measures how

Analysis of Property, Plant, and Equipment

Siemens Group Measure of the ability

Analysis of Property, Plant, and Equipment

Siemens Group Measures a firm’s

By relating the proﬁt margin on sales to the asset turnover, we can

Rate of Return Profit Margin on Asset Turnover

Net Income Net Income Net Sales

By relating the proﬁt margin on sales to the asset turnover, we can

Rate of Return Profit Margin on Asset Turnover

€5,584 €5,584 €79,644

4.5% = 7.0% x .65

Illustrate revaluation accounting procedures.

The general rules for revaluation accounting are as follows.

3. If a revaluation increase reverses a decrease that was

Revaluation—2019: Valuation Increase

 Land is now reported at its fair value of €520,000.

What happens if the land’s fair value at December 31, 2020, is

Unrealized Gain on Revaluation—Land 120,000

 The debit to Unrealized Gain on Revaluation—Land of

At December 31, 2021, Unilever’s land value increases to

On January 2, 2022, Unilever sells the land for €415,000. Unilever

Since the land is sold, Unilever has the option to transfer

Accumulated Other Comprehensive Income 15,000

Revaluation—2019: Valuation Increase

Depreciation Expense 200,000

After this entry, Nokia’s equipment has a carrying amount of

1. Reduces the Accumulated Depreciation—Equipment

2. Reduces the Equipment account by €50,000—it then is

After this entry, Nokia’s equipment has a carrying amount of

3. Records an Unrealized Gain on Revaluation—Equipment for

Accumulated Depreciation—Equipment 200,000

 The carrying amount of the asset is now €950,000.

Assuming no change in the useful life of the equipment,

Depreciation Expense 237,500

Depreciation based on the original cost was €200,000 (€1,000,000

Accumulated Other Comprehensive Income 37,500

Before revaluation in 2020, Nokia has the following amounts

Nokia determines through appraisal that the equipment now has a

2. Reduces the Equipment account by €380,000 (€950,000 −

3. Reduces Unrealized Gain on Revaluation—Equipment by

4. Records a loss on impairment of €30,000.

Accumulated Depreciation—Equipment 237,500

 The carrying amount of the equipment is now €570,000.

Assuming no change in the useful life of the equipment,

Depreciation Expense 190,000

Retained Earnings 10,000

Before revaluation in 2021, Nokia has the following amounts

Nokia determines through appraisal that the equipment now has a

1. Reduces the Accumulated Depreciation—Equipment

2. Reduces the Equipment account by €120,000 (€570,000 −

3. Records an Unrealized Gain on Revaluation—Equipment

4. Records a Recovery of Loss on Impairment for €30,000.

Nokia determines through appraisal that the equipment now has a

Accumulated Depreciation—Equipment 190,000

On January 2, 2022, Nokia sells the equipment for €450,000. Nokia

Nokia transfers the remaining balance in Accumulated Other