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INTERNATIONAL FINANCIAL REPORTING STANDARDS
Valuation of Intangible Assets. IAS No. 38 allows a company to value an intangible asset
subsequent to initial valuation at (1) cost less accumulated amortization or (2) fair value, if fair value
can be determined by reference to an active market. If revaluation is chosen, all assets within that
class of intangibles must be revalued on a regular basis. Goodwill, however, cannot be revalued.
U.S. GAAP prohibits revaluation of any intangible asset.
Notice that the revaluation option is possible only if fair value can be determined by reference to
an active market, making the option relatively uncommon. However, the option possibly could be
revaluation surplus for that asset.
Consider the following illustration:
Amershan LTD. prepares its financial statements according to IFRS. At the beginning of its 2016
fiscal year, the company purchased a franchise for $500,000. The franchise has a 10-year
contractual life and no residual value, so amortization in 2016 is $50,000. The company does not
use an accumulated amortization account and credits the franchise account directly when
amortization is recorded. At the end of the year, Amershan chooses to revalue the franchise as
permitted by IAS No. 38. Assuming that the fair value of the franchise at year-end, determined by
reference to an active market, is $600,000, Amershan records amortization and the revaluation using
the following journal entries:
T11-11
11-22 Intermediate Accounting, 8/e
PARTIAL PERIODS
On April 1, 2016, the Hogan Manufacturing Company purchased a machine for
$250,000. The company expects the service life of the machine to be five years and
the anticipated residual value is $40,000. The machine was disposed of after five
Year
Straight line
Sum-of-the-Years’ Digits
Double-Declining Balance
2016
$42,000 x 3/4 = $31,500
$70,000 x 3/4 = $ 52,500
$100,000 x 3/4 = $75,000
2019
$ 42,000
$42,000 x 1/4 = $ 10,500
$ 36,000 x 1/4 = $ 9,000
Illustration 11-14B
CHANGES IN ESTIMATES
➢ Changes in estimates are accounted for prospectively.
➢ When a company revises a previous estimate, prior financial
On January 1, 2014, the Hogan Manufacturing Company purchased office furniture and fixtures
for $250,000. The company expects the service life of the office furniture and fixtures to be five
years and the anticipated residual value to be $40,000. The company’s fiscal year-end is December
31 and the straight-line depreciation method is used for all depreciable assets. During 2016, the
company revised its estimate of service life from five to eight years and also revised estimated
residual value to $22,000.
For 2014 and 2015, depreciation is $42,000 per year [($250,000 - 40,000) 5 years] or $84,000
for the two years. However, with the revised estimate, depreciation for 2016 and subsequent years
is determined by allocating the book value remaining at the beginning of 2016 less the revised
residual value equally over the remaining service life of six years (8 - 2). The remaining book
value at the beginning of 2016 is $166,000 ($250,000 - 84,000) and depreciation for 2016 and
subsequent years is recorded as follows:
Illustration 11-15
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11-24 Intermediate Accounting, 8/e
CHANGE IN DEPRECIATION,
AMORTIZATION, OR DEPLETION METHOD
➢ Changes in depreciation, amortization, or depletion method are
accounted for prospectively, in the same way as we account for
changes in estimates.
On January 1, 2014, the Hogan Manufacturing Company purchased office
equipment for $250,000. The company expects the service life of the office
equipment to be five years and its anticipated residual value to be $30,000. The
company’s fiscal year-end is December 31 and the double-declining balance (DDB)
depreciation method is used. During 2016, the company switched from the DDB to
the straight-line method. In 2016, the adjusting entry is:
Depreciation expense (below) .............. 20,000
Accumulated depreciation ............ 20,000
DDB depreciation:
*Double the straight-line rate for 5 years ([1/5 = 20%] x 2 = 40%)
$250,000 Cost
Illustration 11-17
T11-14
ERROR CORRECTIONS
➢ Any previous years’ financial statements that were incorrect
as a result of the error are retrospectively restated to reflect
the correction.
T11-15
11-26 Intermediate Accounting, 8/e
ERROR CORRECTIONS
(continued)
In 2016, the controller of the Hathaway Corporation discovered an error
in recording $300,000 in legal fees to successfully defend a patent
infringement suit in 2014. The $300,000 was charged to legal fee expense
but should have been capitalized and amortized over the five-year
remaining life of the patent. Straight-line amortization is used by
Hathaway for all intangibles.
Analysis:
($ in thousands)
Correct Incorrect
(Should have been recorded) (as recorded)
Patent is understated by $180 thousand.
To correct incorrect accounts ($ in thousands)
Illustration 11-19
IMPAIRMENT OF VALUE
➢ An asset should be written down if there has been a
significant impairment of value.
Property, Plant, and Equipment and Finite-Life
Intangible Assets
➢ An impairment loss is recognized when the undiscounted sum
of estimated future cash flows from an asset is less than the
asset’s book value.
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11-28 Intermediate Accounting, 8/e
IMPAIRMENT OF PROPERTY, PLANT, AND
EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS
(continued)
The Dakota Corporation operates several factories that manufacture medical
equipment. Near the end of the company’s 2016 fiscal year, a change in business
climate related to a competitor’s innovative products indicated to management that
the $170 million book value (original cost of $300 million less accumulated
depreciation of $130 million) of the assets of one of Dakota’s factories may not be
recoverable.
Management is able to identify cash flows from this factory and estimates that
future cash flows over the remaining useful life of the factory will be $150 million.
The fair value of the factory’s assets is not readily available but is estimated to be
$135 million.
Change in circumstances. –The change in business climate related to a
competitor’s innovative products requires Dakota to investigate for possible
impairment.
Step 1. Recoverability. Because book value of $170 million exceeds the $150
million undiscounted future cash flows, an impairment loss is indicated.
Step 2. Measurement of impairment loss. The impairment loss is $35 million,
determined as follows:
Illustration 11-20
IMPAIRMENT OF PROPERTY, PLANT, AND
EQUIPMENT AND FINITE-LIFE INTANGIBLE ASSETS
(continued)
Asset Impairment Disclosure – Sears Holding Corporation
Impairment of Long-lived Assets (in part)
In accordance with accounting standards governing the impairment or disposal of long-lived assets, the
carrying value of long-lived assets, including property and equipment and definite-lived intangible assets, is
evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred
relative to a given asset or assets. Factors that could result in an impairment review include, but are not
Note 13—Store Closing Charges, Severance Costs and Impairments (in part)
Long-Lived Assets
In accordance with accounting standards governing the impairment or disposal of long-lived assets, we
Illustration 11-21
T11-16 (continued)
11-30 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Impairment of Value: Property, Plant, and Equipment and Finite-Life Intangible Assets.
Highlighted below are some important differences in accounting for impairment of value for
property, plant, and equipment and finite-life intangible assets between U.S. GAAP and IAS No. 36.
U.S. GAAP IFRS
When to Test When events or changes in Assets must be assessed for indicators of
circumstances indicate that impairment at the end of each reporting
book value may not be period. Indicators of impairment are similar
recoverable. to U.S. GAAP.
Let’s look at an illustration highlighting the important differences described above.
The Jasmine Tea Company has a factory that has significantly decreased in value due to
technological innovations in the industry. Below are data related to the factory’s assets:
($ in millions)
Book value $18.5
What amount of impairment loss should Jasmine Tea recognize, if any, under U.S. GAAP? Under
IFRS?
U.S. GAAP There is no impairment loss. The sum of undiscounted estimated future cash flows
exceeds the book value.
IFRS Jasmine should recognize an impairment loss of $2.5 million. Indicators of
impairment are present and book value exceeds both value-in-use (present value of
Nokia, a Finnish company, prepares its financial statements according to IFRS. The following
disclosure note describes the company’s impairment policy:
Assessment of the recoverability of long-lived assets, and intangible assets, and goodwill (in part)
The carrying value of identifiable intangible assets and long-lived assets is assessed if events or
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11-32 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Impairment of Value: Indefinite-Life Intangible Assets Other than
Goodwill. Similar to U.S. GAAP, IFRS requires indefinite-life intangible
assets other than goodwill to be tested for impairment at least annually.
T11-18
IMPAIRMENT OF VALUE - GOODWILL
➢ A goodwill impairment loss is indicated when the fair value of the reporting unit is
less than its book value.
➢ A goodwill impairment loss is measured as the excess of the book value of the
Step 2. – Measurement of impairment loss. The impairment loss is $75 million, determined as
follows:
Determination of implied fair value of goodwill:
Fair value of Pharmacopia $360 million
T11-19
11-34 Intermediate Accounting, 8/e
IMPAIRMENT OF VALUE - GOODWILL
(continued)
Goodwill Impairment Disclosure – Alcoa Inc.
T11-19 (continued)
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Impairment of Value: Goodwill. Highlighted below are some important differences in accounting
1. Compare the fair value Compare the recoverable amount of the CGU
of the reporting unit with to book value. If the recoverable amount is
2. The impairment loss is (present value of estimated future cash flows).
the excess of book value
over implied fair value.
IAS No. 36 requires goodwill to be tested for impairment at least annually. U.S. GAAP allows a
company to avoid annual testing by making qualitative evaluations of the likelihood of goodwill
impairment to determine if step one is necessary. Both U.S. GAAP and IAS No. 36 prohibit the
reversal of goodwill impairment losses.
Let’s look at an illustration highlighting these differences.
Canterbury LTD. has $38 million of goodwill in its balance sheet from the 2014 acquisition of
Denton, Inc. At the end of 2016, Canterbury’s management provided the following information for
the year-end goodwill impairment test ($ in millions):
Fair value of Denton (determined by appraisal) $132
Fair value of Denton’s net assets (excluding goodwill) 120
Book value of Denton’s net assets (including goodwill) 150
Present value of Denton’s estimated future cash flows 135
Assume that Denton is considered a reporting unit under U.S. GAAP and a cash-generating unit
under IFRS, and that its fair value approximates fair value less costs to sell. Determine the amount of
goodwill impairment loss that Canterbury should recognize, if any, under U.S. GAAP? Under
IFRS?
11-36 Intermediate Accounting, 8/e
