IMPAIRMENT OF VALUE – A SUMMARY
Type of
Asset
When to Test
for Impairment
Impairment Test
To Be Held and Used:
Tangible and finite-
life intangible assets
When events or
circumstances indicate
Step 1 – An impairment loss is required only
when book value is not recoverable
Indefinite life
intangible assets
(other than goodwill)
At least annually, and
more frequently if
indicated. Option to
avoid annual testing by
making qualitative
evaluations of the
likelihood of asset
impairment.
If book value exceeds fair value, an
impairment loss is recognized for the
difference.
Goodwill
indicated. Option to
avoid annual testing by
making qualitative
evaluations of the
likelihood of goodwill
impairment to determine
if step one is necessary.
book value.
Step 2 – An impairment loss is measured as
At least annually, and
more frequently if
Step 1 – A loss is indicated when the fair
value of the reporting unit is less than its
Illustration 11-25
T11-21
11-38 Intermediate Accounting, 8/e
EXPENDITURES SUBSEQUENT TO ACQUISITION
➢ Any expenditure must be either capitalized or expensed.
➢ Expenditures that simply maintain a given level of benefits
are expensed in the period they are incurred.
➢ Expenditures related to long-lived, revenue-producing assets
can increase future benefits in the following ways:
2. An increase in the operating efficiency of the asset
3. An increase in the quality of the goods or services
produced by the asset.
➢ Theoretically, expenditures that cause any of these results
T11-22
IMPROVEMENTS
➢ Improvements involve the replacement of a major component
of an asset.
➢ The replacement can be a new component with the same
characteristics as the old component or a new component with
enhanced operating capabilities.
➢ Three methods are used to record the cost of improvements:
1. Substitution. The improvement can be recorded as both (1) a
disposition of the old component and (2) the acquisition of the new
2. Capitalization of new cost. Include the cost of the improvement
(net of any consideration received) as a debit to the related asset
3. Reduction of accumulated depreciation. Increase an asset’s book
value by leaving the asset account unaltered but decrease its related
T11-23
11-40 Intermediate Accounting, 8/e
IMPROVEMENTS
(continued)
The Palmer Corporation replaced the air conditioning system in one of its office
buildings that it leases to tenants. The cost of the old air conditioning system,
$200,000, is included in the cost of the building. However, the company has
separately depreciated the air conditioning system. Depreciation recorded up to the
date of replacement totaled $160,000. The old system was removed and the new
system installed at a cost of $230,000, which was paid in cash. Parts from the old
system were sold for $12,000.
SUBSTITUTION
Cash ……………………………………………………………….. 12,000
CAPITALIZATION OF NEW COST
REDUCTION OF ACCUMULATED DEPRECIATION
Illustration 11-26
REARRANGEMENTS
➢ Rearrangements are expenditures made to restructure an asset
without addition, replacement, or improvement.
T11-24
11-42 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
T11-25
COMPARISON WITH MACRS
➢ Tax rules allow taxpayers to compute depreciation for their tax
returns using the modified accelerated cost recovery system
(MACRS).
➢ Under MACRS, each asset is placed within a recovery period
category.
➢ According to the category, fixed percentage rates are applied to
the original cost of the asset. The rates for the five-year asset
category are as follows:
Year Rate
1 20.00%
T11-26
11-44 Intermediate Accounting, 8/e
RETIREMENT DEPRECIATION METHOD
➢ Records depreciation when assets are disposed of and
measures depreciation as the difference between the proceeds
received and cost.
▶ For example, the following entry records the purchase of
100 hand-held calculators at $50 each:
▶ If 20 new calculators are acquired at $45 each, the asset
account is increased.
▶ If 30 calculators are sold for $5 each, the following entry
reflects the sale:
T11-27
REPLACEMENT DEPRECIATION METHOD
➢ Depreciation is recorded when assets are replaced.
▶ For example, the following entry records the purchase of
100 hand-held calculators at $50 each:
▶ The acquisition of 20 new calculators at $45 each is
recorded as depreciation expense.
T11-28
11-46 Intermediate Accounting, 8/e
Suggestions for Class Activities
1. Research Activity
In the late 1990s, the stock prices of many companies were unusually high. These often-inflated
stock prices meant high purchase prices for many business acquisitions and, in many cases,
incredibly high values allocated to goodwill. When stock prices retreated in the new century, it
became obvious that the book value of goodwill for many companies would never be recovered.
2. Research Activity
A research activity in Chapter 10 suggested you require the class to investigate the property, plant,
and equipment and intangible assets reported by Toro Company in the company’s financial
statement for the 2013 fiscal year. Toro reported approximately $185 million in property, plant, and
equipment and another $120 million in intangible assets in its balance sheet. Continue that activity
by having your students investigate Toro’s depreciation and amortization methods as well as the
useful lives assigned to the various types of assets.
Suggestions:
Have the class access Toro’s 2013 financial statements using EDGAR at: www.sec.gov.
Ask them to answer the following questions:
1. What depreciation method(s) does Toro employ?
2. What estimated lives does Toro use for its plant and equipment?
3. What are the estimated useful lives of the intangible assets?
Points to Note:
Toro provides for depreciation of plant and equipment utilizing the straight-line method over the
estimated useful lives of the assets. Buildings, including leasehold improvements, are generally
3. Case Activity
The August 2004 issue of Issues in Accounting Education contains a case entitled “A & B
4. PetSmart Analysis
Have students, individually or in groups, go to the most recent PetSmart annual report using
EDGAR at: www.sec.gov. Ask them to:
Determine the company’s depreciation method and the amount of depreciation and
amortization recorded during the most recent year. Does the income statement report any asset
impairment losses? If so, describe the losses and the events or circumstances that triggered the
5. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 11-2, Judgment Case 11-4 can be
adapted to ask students to write a memo to Patrick Company’s controller. Communication
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
CPA Simulation. Students can test their knowledge of the concepts discussed in this chapter and
at the same time practice critical professional skills necessary for career success and
preparation for the computer-based CPA Exam. The simulation for this chapter, Fukisan Inc.,
11-48 Intermediate Accounting, 8/e
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
11-1
1
Depreciation, depletion, and amortization
11-2
1
Depreciation
11-3
1
Depreciation, depletion, and amortization
11-4
1
Estimation or service life
11-5
1
Depreciable base
11-6
2
Activity-based versus time-based methods
11-7
2
Straight-line versus accelerated methods
11-8
2
Straight-line versus accelerated methods
11-9
2
Motivation for straight-line depreciation
11-10
2
Group versus composite depreciation
11-11
3
Depletion
11-12
2,3,4
Amortization, depletion, and depreciation
11-13
2
Partial year depreciation
11-14
5
Change in service life
11-15
6
Change in depreciation method
11-16
7
Error correction
11-17
8
Impairment of value
11-18
9
Subsequent expenditures
11-19
10
IFRS; subsequent valuation
11-20
10
IFRS; measurement of impairment loss
11-21
10
IFRS; impairment loss for goodwill
11-22
10
IFRS; litigation costs to defend a right
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
11-1
1
Cost allocation
5
11-2
2
Depreciation methods
10
11-3
2
Depreciation methods; partial periods
10
11-4
2
Group depreciation
10
11-5
3
Depletion
10
11-6
4
Amortization
10
11-7
5
Change in estimate; useful life of equipment
15
11-8
6
Change in depreciation method
10
11-9
7
Error correction
10
11-10
8
Impairment; property, plant, and equipment
10
11-11
8
Impairment; property, plant, and equipment
10
11-12
8,10
IFRS; impairment; PP&E
10
11-13
8
Impairment; goodwill
10
11-14
8
Impairment; goodwill
10
11-15
10
IFRS; impairment; goodwill
10
11-16
9
Subsequent expenditures
5
11-50 Intermediate Accounting, 8/e
Learning Est. time
Exercises Objective(s) Topic (min.)
11-1
2
Depreciation methods
30
11-2
2
Depreciation methods
25
11-3
2
Depreciation methods; partial years
35
11-4
2,9
Depreciation methods; asset addition
15
11-5
2
Depreciation methods; solving for unknowns
30
11-6
2
Depreciation methods
20
11-7
2
Depreciation methods; partial years
15
11-8
2,10
IFRS; depreciation
15
11-9
10
IFRS; revaluation of machinery; depreciation
20
11-10
2
Group depreciation
20
11-11
2,6
Double-declining-balance method; switch to S-L
20
11-12
3
Depletion
10
11-13
2,3
Depletion and depreciation
15
11-14
2,3
Cost of a natural resource; depletion and
depreciation; Chapters 10 and 11
20
11-15
4,5
Amortization
20
11-16
4,9
Patent amortization; patent defense
15
11-17
4,5
Change in estimate; useful life of patent
10
11-18
10
IFRS; revaluation of patent; amortization
20
11-19
2,5
Change in estimate; useful life and residual value of
equipment
20
11-20
2,6
Change in principle; change in depreciation methods
15
11-21
2,6
Change in principle; change in depreciation methods
10
11-22
2,7
Error correction
15
11-23
8
Impairment; property, plant, and equipment
15
11-24
10
IFRS; impairment; property, plant, and equipment
10
11-25
8,10
IFRS; ; impairment; property, plant, and equipment
10
11-26
8
Impairment; property, plant, and equipment
20
11-27
8
Impairment; goodwill
15
11-28
10
IFRS; impairment; goodwill
15
11-29
8
Goodwill valuation and impairment; Chapters 10 and
11
20
11-30
8
FASB codification research
20
11-31
2,4,6,8
FASB codification research
20
11-32
9
Subsequent expenditures
15
11-33
4,9,10
IFRS; amortization; cost to defend a patent
15
11-34
2
Depreciation methods; disposal; Chapters 10 and 11
15
11-35
1,2,3,4,5,6,8
Concepts; terminology
15
11-36
B
Retirement and replacement depreciation [Based on
Appendix B]
15
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
2
Double-declining-balance method
3
CPA-2
2
Depreciation
3
CPA-3
3
Depletion
3
CPA-4
4
Amortization
3
CPA-5
4
Amortization
3
CPA-6
5
Change in estimate of useful life
3
CPA-7
8
Impairment
3
CPA-8
9
Subsequent expenditures
3
CPA-9
10
IFRS
3
CPA-10
10
IFRS
3
CPA-11
10
IFRS
3
CPA-12
10
IFRS
3
CPA-13
10
IFRS
3
CPA-14
10
IFRS
3
CMA-1
3
Depletion
3
CMA-2
4
Goodwill
3
CMA-3
9
Subsequent expenditures; patent
3
Learning Est. time
Problems Objective(s) Topic (min.)
11-1
2,6
Depreciation methods; change in methods
25
11-2
2,4
Comprehensive problem; chapters 10 and 11
60
11-3
2
Depreciation methods
40
11-4
2,5,9
Partial year depreciation; asset addition, increase
in useful life
20
11-5
2
Property, plant, and equipment and intangible
assets; comprehensive
60
11-6
2
Depreciation methods; partial year depreciation;
sale of assets
30
11-7
3,5
Depletion; change in estimate
40
11-8
4
Amortization
25
11-9
2,5
Straight-line depreciation; change in useful life
and residual value
35
11-10
2,5,6
Accounting changes; three accounting situations
30
11-11
2,6,7
Error correction; change in depreciation method
30
11-12
2,4,8
Depreciation and amortization; impairment
30
11-13
2,3,5
Chapters 10 and 11; depreciation and depletion;
change in useful life; asset retirement obligation
60
Star Problems
11-52 Intermediate Accounting, 8/e
Learning Est. time
Cases Objective(s) Topic (min.)
Analysis Case 11-1
1
Depreciation, depletion, and amortization
10
Communication Case 11-2
1
Depreciation
45
Judgment Case 11-3
1,2
Straight-line method; composite depreciation
15
Judgment Case 11-4
1,2
Depreciation
15
Judgment Case 11-5
9
Capitalize or expense; materiality
20
Communication Case 11-6
9
Capitalize or expense; materiality
20
Integrating Case 11-7
5,6,7
Errors; change in estimate; change in principle;
inventory, patent and equipment
30
Judgment Case 11-8
5,6
Accounting changes
25
Research Case 11-9
8
FASB codification research; impairment
45
Ethics Case 11-10
8
Asset impairment
35
Judgment Case 11-11
5,6,8
Earnings management and accounting changes;
impairment
20
Trueblood Accounting
Case 1-12
8
Accounting for impairment losses; property,
plant, and equipment
45
Judgment Case 11-13
9
Subsequent expenditures
15
Real World Case 11-14
1
Disposition and depreciation; Caterpillar
35
Real World Case 11-15
2,3,8,9
Depreciation and depletion method; asset
impairment; subsequent expenditures; Chevron
45
IFRS Case 11-16
10
IFRS; subsequent valuation of property, plant,
and equipment; comparison of U.S. GAAP and
IFRS; GlaxoSmithKline
25
Analysis Case 11-17
2,4
Depreciation and amortization; PetSmart
20
Air France-KLM Case
10
IFRS; property; plant, and equipment and
intangible assets; Air France-KLM
30
CPA Simulation 11-1 Depreciation methods; change in useful lives