PROFESSIONAL RESEARCH (Continued)
35–30 For example, valuation techniques consistent with the market
approach often use market multiples derived from a set of
35–31 Valuation techniques consistent with the market approach
include matrix pricing. Matrix pricing is a mathematical
technique used principally to value debt securities without
relying exclusively on quoted prices for the specific securities,
but rather by relying on the securities’ relationship to other
benchmark quoted securities.
35–32 The income approach is defined in this Subtopic as an
approach that uses valuation techniques to convert future
35–33 Those valuation techniques include the following:
a. Present value techniques
35–34 The cost approach is defined in this Subtopic as a valuation
technique based on the amount that currently would be
required to replace the service capacity of an asset (often
referred to as current replacement cost).
35–35 From the perspective of a market participant (seller), the price
PROFESSIONAL RESEARCH (Continued)
35–36 Valuation techniques used to measure fair value shall
maximize the use of observable inputs and minimize the use of
PROFESSIONAL SIMULATION
Note: This assignment is available on the Kieso website.
Explanation
(a) The purpose of depreciation is to allocate the cost (or other book
value) of tangible plant assets, less salvage, over their useful lives in a
(b) The factors relevant in determining the annual depreciation for a depre-
ciable asset are the initial recorded amount (cost), estimated salvage
value, estimated useful life, and depreciation method.
Assets are typically recorded at their acquisition cost, which is in most
The useful life is also based on judgment. It involves selecting the
“unit” of measure of service life and estimating the number of such
units embodied in the asset. Such units may be measured in terms of
PROFESSIONAL SIMULATION (Continued)
Measurement
(a) Compared to the use of an accelerated method, straight-line
depreciation would result in the lowest depreciation expense and the
highest income. For example, under straight-line, depreciation expense
in each year would be:
(b) Over the entire four-year period, all methods will produce the same
total depreciation expense. Use of alternative methods only results in
differences in timing of the depreciation charges.
(c) All methods used for financial reporting purposes results in the same
Journal Entry
Cash ……………………………………………………….
84,000
Accumulated Depreciation—Equipment …….
45,000*
Gain on Disposal of Equipment …………
Equipment ……………………………………….
IFRS CONCEPTS AND APPLICATION
IFRS11-1
To determine whether an asset is impaired, on an annual basis, companies
review the asset for indicators of impairment – that is, a decline in the
asset’s cash-generating ability through use or sale. If the recoverable
IFRS11-2
Under IFRS, impairment losses on plant assets may be restored as long as
the write-up is never greater than the carrying amount before impairment.
IFRS11-3
An impairment is deemed to have occurred if, in applying the impairment
IFRS11-4
Impairment losses are reported as part of operating income generally in the
“Other income and expense” section. Impairment losses (and recovery of
IFRS11-5
The land should be reported on the statement of financial position at
IFRS11-6
A major reason most companies do not use revaluation accounting is the
IFRS11-7
Component
Depreciation Expense
A
($70,000 – $7,000)/10 = $ 6,300
$21,800
IFRS11-8
Component
Building
IFRS11-9
(a) ($50,000 – 0) ÷ 10 = $5,000
(b)
Component
Depreciation Expense
Tires
($ 6,000 – 0) ÷ 2 = $3,000
Trucks
(c) A company would want to use component depreciation if it believed
this method produced more accurate results.
IFRS11–10
Impairment test:
Journal entry:
Loss on Impairment ………………………………………………..
20,000
Accumulated Depreciation—Machinery ……………
20,000
IFRS11–11
(a) December 31, 2014
Loss on Impairment ………………………………………………..
2,500,000
Accumulated Depreciation—Equipment …………..
IFRS11-11 (Continued)
(b) December 31, 2015
Depreciation Expense ……………………………………………..
687,500
Accumulated Depreciation—Equipment …………..
687,500
New carrying amount ………………………………………..
Useful life …………………………………………………………
÷ 8 years
Depreciation per year ………………………………………..
(c) December 31, 2015
Accumulated Depreciation—Equipment ……………………
1,237,500*
Recovery of Impairment Loss ………………………….
1,237,500
IFRS11–12
(a) December 31, 2014
Loss on Impairment ………………………………………………..
3,600,000
Accumulated Depreciation—Equipment …………..
3,600,000
Cost …………………………………………………………………
Less: Accumulated depreciation ………………………..
Carrying amount ……………………………………………….
8,000,000
Loss on impairment ………………………………………….
IFRS11-12 (Continued)
(c) December 31, 2015
Accumulated Depreciation—Equipment …………………..
680,000
Recovery of Impairment Loss ………………………….
680,000
Fair value ……………………………………………………………….
Less: Costs of disposal …………………………………………..
Less: Carrying amount ……………………………………………
Recovery of loss on impairment …………………………..
IFRS11–13
(a) January 1, 2013
Equipment………………………………………………………………
12,000
Cash ………………………………………………………………
12,000
December 31, 2013
Depreciation Expense ……………………………………………..
Accumulated Depreciation—Equipment …………..
Depreciation Expense ……………………………………………..
Accumulated Depreciation—Equipment …………..
Accumulated Depreciation—Equipment …………………..
Loss on Impairment ………………………………………………..
Equipment ($12,000 – $7,000) …………………………..
IFRS11–14
Liberty
Kimco
(a)
(1) Return on
£125
= 2.2%
$297
= 6.32%
Assets
£5,577
$4,696
(ROA)
(2) Profit
£125
$297
Liberty
Kimco
(b) Summary Entry
Investment Properties …………………………………….. 1,550
Unrealized Gain on Revaluation ………………. 1,550
(c) Relative to GAAP, an argument can be made that assets and equity
are overstated. Note that in the entry in (b) above, the revaluation
For example, after adjusting Liberty’s assets downward by the amount
of the revaluation reserve, Liberty’s ROA increases to:
IFRS11-14 (Continued)
IFRS11–15
(a) The authoritative guidance for asset impairments is IAS 36: Impairment
of Assets. This Standard shall be applied in accounting for the impair–
ment of all assets, other than:
a. inventories;
b. assets arising from construction contracts;
c. deferred tax assets;
d. assets arising from employee benefits;
This Standard applies to financial assets classified as:
a. subsidiaries, as defined in IAS 27 Consolidated and Separate
Financial Statements;
IFRS11-15 (Continued)
(b) In assessing whether there is any indication that an asset may be
impaired, an entity shall consider, as a minimum, the following
indications. (para. 12):
External sources of information
a. during the period, an asset’s fair value has declined significantly
more than would be expected as a result of the passage of time or
normal use.
Internal sources of information
e. evidence is available of obsolescence or physical damage of an
asset.
f. significant changes with an adverse effect on the entity have taken
place during the period, or are expected to take place in the near
future, in the extent to which, or manner in which, an asset is used
IFRS11-15 (Continued)
Dividend from a subsidiary, jointly controlled entity or associate
h. for an investment in a subsidiary, jointly controlled entity or
associate, the investor recognizes a dividend from the investment
and evidence is available that:
(i) the carrying amount of the investment in the separate financial
The list in paragraph 12 is not exhaustive. An entity may identify other
indications that an asset may be impaired and these would also require
the entity to determine the asset’s recoverable amount or, in the case
of goodwill, perform an impairment test in accordance with paragraphs
80–99 (para. 13).
Evidence from internal reporting that indicates that an asset may be
impaired includes the existence of:
a. cash flows for acquiring the asset, or subsequent cash needs for
operating or maintaining it, that are significantly higher than those
IFRS11-15 (Continued)
(c) Different situations may lead to the best evidence of fair value (i.e.
could be market value, revalued asset, etc.).
a. if the asset’s fair value is its market value, the only difference
between the asset’s fair value and its fair value less costs to sell is
the direct incremental costs to dispose of the asset:
(i) if the disposal costs are negligible, the recoverable amount of
the revalued asset is necessarily close to, or greater than, its
b. if the asset’s fair value is determined on a basis other than its
market value, its revalued amount (i.e., fair value) may be greater or
IFRS11-16
(a) M&S classifies its property, plant, and equipment under three descrip-
tions in its balance sheet: Property, Plant, and Equipment.
IFRS11-16 (Continued)
(d) M&S’s Note 3 reports depreciation expense of £404.8 million in 2012 and
£416.5 million in 2011, and amortization expense of £65.3 million in 2012