Topic 2 - Asset Revaluation Impairment Flashcards
What is included in the cost of property, plant and equipment?
- purchase price of the item
- costs directly attributable to bringing the item to the location and condition required for its use
- the present value of the cost of removal of the item, clean-up costs or site remediation costs
How must all PPE be initially valued?
At the historical cost.
How may subsequent valuations be based on PPE?
Cost Model
- valuation at cost minus accumulated depreciation/impairment
Revaluation Model
- valuation at fair value minus subsequently accumulated depreciation/impairment
What is required to change back to the cost model for the valuation of PPE?
What is the difference between revaluation decrements and impairments?
Define the carrying amount.
- the cost (or re-valued amount) minus accumulated depreciation and impairment (if any impairment exists)
Define the recoverable amount of an asset (or a cash-generating unit).
The formula for discounting of a one-off payment:
x / (1+k)<em>n</em>
x = future payment OR annuity
- k* = discount rate
- n* = number of years to payment OR number of years in which annuity is paid
The formula for discounting of an annuity:
x * (1-(1/(1+k)<em>n</em>)/k)
x = future payment OR annuity
- k* = discount rate
- n* = number of years to payment OR number of years in which annuity is paid
Discounting of a one-off payment:
example
We will receive a payment of $1,000 in 5 years (discount rate 8%).
What is the current value of this payment?
Solution:
x / (1+k)n
1000 / (1+0.08)5
= $680.58
Discounting of an annuity:
example
For the next five years, we will receive a payment of $1,000 at the end of each year (discount rate 8%).
What is the current value of these payments?
Solution:
x * (1-(1/(1+k)n)/k)
1000 * (1-(1/(1+0.08)5)/0.08)
= $3,992.71
Cost model evaluation example 1:
An entity purchased a boat for $1,500 on 1st July 2010 and uses straight-line depreciation over a period of 10 years.
On June 30, 2011, the recoverable amount of the boat is $900.
Make the necessary journal entry.
Solution:
- an impairment of $450 is required
Journal entry:
DR Impairment Loss 450
CR Acc. Impairment Boat 450
to record the impairment of the boat
Cost model evaluation example 2:
On June 30, 2012, the boat is valued at $1,100 due to a shortage of boats because many boats were destroyed in a recent cyclone in Queensland.
Make the necessary journal entry.
How are assets (or groups of assets) valued at their fair value?
What assumption is made?
When must valuations be kept up to date?
If changes in the value of assets are:
- frequent and material, then yearly revaluation is required
- infrequent and/or immaterial, then revaluations are required every 3-5 years
Revaluation Model Example 1
An entity purchased a boat for $1,500 on 1st July 2010 and uses straight-line depreciation over a period of 10 years.
On the 30th of June 2011, the boat has a fair value of $1,200 and the revaluation model is used.
Find the solution and make the journal entry.
Revaluation Model Example 2
On the 30th of June 2012, the boat is valued at $1,900 due to a shortage of boats because many boats were destroyed in a recent cyclone in Queensland.
Find the solution and make the journal entry.
Describe the difference between revaluation increments and revaluation decrements regarding increases and decreases in accounts.
Either the net method or gross method can be chosen for the revaluation of assets and the accumulated depreciation.
Differentiate between these two methods.
What are the two steps needed to calculate new depreciation after every revaluation or impairment of an asset?
Revaluation & Depreciation (Net Method) Example
A machine was purchased for $4,000, its accumulated depreciation is $1,500, its remaining useful life is 5 years, and it has a fair value of $4,500.
Write the relevant journal entries.
What IF a revaluation decrement had been necessary instead?
Revaluation increases (usually) result in CR increases in the revaluation surplus account.
What happens when the asset is disposed of or sold?
