CHAPTER 33- REVALUATION - Price that would be received to sell an

Measurement of PPE: asset,

INITIALLY- cost 3) DEPRECIATED REPLACEMENT
AFTER RECOGNITION- cost model or COST:
revaluation model. - Replacement cost less acc. Dep’n. Also
called sound value.
COST MODEL: 4) REPLACEMENT COST:
- Cost less acc. Dep’n and acc. - Current purchase price of the PPE
Impairment loss. 5) CARRYING AMOUNT:
REVALUATION MODEL: - Historical cost less acc. Dep’n.
- FV at the date of revaluation less acc. 6) REVALUATION SURPLUS:
Dep’n and acc. Impairment loss. - FV or SV less carrying amount of PPE.
- Revaluation shall be made with Also called as revaluation increment.
sufficient regularity such that the 7) APPRECIATION OR REVALUATION
carrying amount does not differ INCREASE:
materially from the FV at the end of the - Excess of revalued amount over
reporting period. historical cost.

FREQUENCY OF REVALUATION COST REVALAUTION

- Depends upon the changes in FV of Machine xx FV or SV xx Inc. in asset
PPE being revalued. A/D (xx) A/D (xx) Inc. in A/D
o Revaluation is necessary if: CA xx SV/DRC xx Revaluation
 FV of revalued asset Surplus
differs materially from the ILLUSTRATION:
carrying amount. No Change In Useful Life:
COST REPLACEMEN
o Annual revaluation is
T
necessary if: Machinery 8 000 000 12 000 000
 PPE experience significant Acc. Dep’n 2 000 000 4 800 000
and volatile changes in FV. The machinery was revalued 5 years from the date
of acquisition.
REVALUATION OF ALL ITEMS OF THE Original useful life:
SAME CLASS: Acc. Dep’n-cost 2 000 000
- when PPE are revalued, the entire class Divide: Age of machinery 5 years
of PPE should also be revalued. Annual Dep’n 400 000

*Class of PPE- is a grouping of asset of similar Machinery Cost 8 000 000

nature and use. Divide Annual Dep’n 400 000
Original Useful Life 20 years
- Asset within a class of PPE are revalued
simultaneously. APPROACHES IN RECORDING REVALUATION:
a) Proportional Approach
BASIS OF REVALUATION o Acc. Dep’n at the date of revaluation is
1) FAIR VALUE- determined by appraisal restated proportionately with the change
in the gross carrying amount of the
normally undertaken by professional asset so that the carrying amount of the
qualified valuers asset after revaluation equals the
2) DEPRECIATED REPLACEMENT revalued amount.
COST- when market value is not Cost Replacemen Appreciatio
t n
available. Machinery 8 000 000 12 000 000 4 000 000
DEFINITION OF TERMS: Acc. Dep’n 2 000 000 3 000 000 1 000 000
CA/SV/RS 6 000 000 9 000 000 3 000 000
1) REVALUED AMOUNT:
- FV or depreciated replacement cost Machinery 4 000 000
2) FAIR VALUE: A/D 1 000 000
RS 3 000 000
 b) Elimination Approach *The new residual value is considered in determining
o The Acc. Dep’n is eliminated against the the depreciable amount but the old residual value is
gross carrying amount of the asset and used in computing the accumulated depreciation
the net amount restated to the revalued based on cost.
amount if the asset.
*the A/D is offset against the PPE JOURNAL ENTRIES:
A/D 2 000 000 1. Revaluation
Machinery 2 000 000 Machinery 3 900 000
*the machinery is adjusted to conform to the sound A/D 1 600 000
value. RS 2 300 000
Machinery 3 000 000
RS 3 000 000
2. Annual Dep’n
What is the treatment of the revaluation surplus? Dep’n 900 000
When an asset’s carrying amount is increased as a A/D 900 000
result of the revaluation, the increase shall be credited to 3. Piecemeal Realization
revaluation surplus as a component of OCI. RS 287 500
RE 287 500
The RS can be transferred directly to the RE when it is
realized. REVERSAL OF RS
The whole surplus may be realized on the retirement *a revaluation decrease ssla be charged directly
or disposal of the asset. againstany RS to the extent that the decrease is a
Non-depreciable Depreciable reversal of a previous revaluation and the balance is
Closed to RE when Piecemeal realization charged to expense.
SOLD ILLUSTRATION:
Equipment at cost 5 000 000
ANNUAL DEPRECIATION SUBSEQUENT TO REVAL. A/D 2 000 000
Dep’n 600 000 On the same date, the SV is 4 800 000
A/D 600 000 A/D (2 000 000/50 000 000) 40%
Gross replacement Cost (4 800 000/60%) 8 000 000
Dep’n on cost (6 000 000/15) 400 000 Cost Replacemen Appreciation
t
Dep’n on App. (3 000 000/15) 200 000
Machinery 5 000 000 8 000 000 3 000 000
Dep’n on Revalued Amount 600 000
A/D 2 000 000 3 200 000 1 200 000
CA/SV/RS 3 000 000 4 800 000 1 800 000
PIECEMEAL REALIZATION OF THE RS
RS 200 000
JOURNAL ENTRIES
RE 200 000
2019 Equipment 3 000 000
A/D 1 200 000
ILLUSTRATION:
RS 1 800 000
Cost Replacement
Machinery 8 500 000 12 400 000
Dep’n 800 000
Residual Value 500 000 400 000 A/D 800 000
A/D 3 200 000 RS 300 000
The original useful life is 10 years and the revaluation RE 300 000
shows a revised useful life of 12 years from the date of 2020 Dep’n 800 000
acquisition. A/D 800 000
Annual dep’n cost (8 500 000-500 000/10) 800 000 RS 300 000
Age of Machinery (3 200 000/800 000) 4 years RE 300 000
Percentage of A/D (4/10) 40% 2021 Dep’n 800 000
A/D 800 000
Cost Replacemen Appreciatio
RS 300 000
t n
RE 300 000
Machinery 8 500 12 400 000 3 900 000
On December 31, 2021 if the journal entries are properly
000
posted, the adjusted balances are:
Residual 400 000 400 000 -
Equipment 8 000 000
Depreciable 8 100 12 000 000 3 900 000
A/D(3.2M+2.4M) 5 600 000
000
Sound Value 2 400 000
A/D (40%) 3 200 4 800 000 1 600 000
000
RS(1 800 000-900 000) 900 000
Depreciable 4 900 7 200 000 2 300 000 On Jan 1, 2022 the FV is 1 050 000
000 Book Adjusted Decrease
 Replacement 8 000 3 500 000 4 500 000 b. Change in manner or extent in which the
000 asset is used with adverse effect on the
A/D 5 600 2 450 000 3 150 000
000
entity.
SV 2 400 1 050 000 1 350 000 c. Evidence of economic performance of an
000 asset will be worse than expected.
MEASUREMENT OF RECOVERABLE AMT.
A/D 3 150 000 FV less cost of disposal or value in use, whichever is
RS 900 000 higher.
Revaluation Loss 450 000 Cost of Disposal- incremental cost directly attributable
Equipment 4 500 000 to the disposal of an asset or cash generating unit,
excluding finance cost and income tax expense.
Example: legal cost, stamp duty and similar transaction
tax, cost of removing the asset, direct cost.
*FV less CoD is equal to the exit price or selling price of
SALE OF REVALUED ASSET an asset minus CoD
*the difference between the sale price and the carrying
amount of the revalued asset is recognized as gain or FAIR VALUE HEIRARCHY
loss on the sale. 1. Level 1 inputs are the quoted price in an active
market for identical assets.
Building 50 000 000 2. Level 2 inputs are observable either directly or
A/D 30 000 000 indirectly.
RS 4 000 000 3. Level 3 inputs are unobservable inputs for the asset
Sale Price 22 000 000
ACTIVE AND PRINCIPAL MARKET
*active market is a market in which transactions for the
JOURNAL ENTRIES
asset take place with sufficient regularity and volume to
1. Record Sale
provide pricing information on an ongoing basis.
Cash 22 000 000
A/D 30 000 000 *principal market is the market with the greatest volume
Building 50 000 000 and level of activity for the asset.
Gain on Sale 2 000 000 *market participants are the buyers and sellers in the
2. Revaluation Surplus principal market who are:
RS 4 000 000 a. Independent or unrelated parties.
RE 4 000 000 b.Knowledgeable or having a reasonable
understanding of the transaction.
CHAPTER 34- IMPAIRMENT c. Willing or motivated but not forced and
-fall in the market value of an asset so that the compelled.
Recoverable amount < CA VALUE IN USE
- An asset shall not be carried at above the -is measured as the present value or discounted value of
recoverable amount. future net cash flows expected to be derived from an
asset.
- the entity shall write down the CA of an asset to -the cash flows are pretax cash flows and pretax
the recoverable amount if the CA is not recoverable discount rate is applied in determining the present value.
in full. ILLUSTRATION:
At year-end, an entity has a machinery with the following
SOURCES OF IMPAIRMENT cost and acc. Dep’n.
External
a. Significant decrease in the market value of an Machinery 5 000 000
asset. Acc. Dep’n. 2 000 000
b. Significant change in the technological, market, CA 3 000 000
legal or economic environment. Due to the obsolescence and physical damage, the
c. An increase in the interest rate or market rate of machinery is found to be impaired.
return on investment which will likely affect the The entity has determined the following information with
discount rate used. respect to the machinery at year-end:
d. The CA of net assets of entity >the market FV less CoD 2 400 000
capitalization. Value in Use 2 200 000
Internal
a. Evidence of obsolescence Impairment Loss 600 000
Acc. Dep’n 600 000

Carrying Amount 3 000 000

FV less CoD 2 400 000 Acc. Dep’n 2 400 000
Impairment Loss 600 000 CA- no impairment 5 600 000
ANOTHER ILLUSTRATION:
On Dec 31, 2019 an entity has a machinery with the *the CA of the machinery cannot exceed 5 600 000
following cost and acc. Dep’n: Carrying Amount with impairment on dec 31,
Machinery 60 000 000 2020
Acc. Dep’n 20 000 000 Machinery 8 000 000
CA 40 000 000 A/D(1 600+1 200 000) 2 800
The FV in use less CoD of the machinery is 000
determined to be 31 000 000. Adjusted CA 5 200 000
The future cash flows from the continued use of the Dep’n(5 200 000/8) 650 000
machinery over the remaining 4 years are: CA 4 550 000

JOURNAL ENTRY
Revenue CA Cash flow 1. Depreciation for 2020
2020 24 000 000 10 000 000 14 000 000 Dep’n 650 000
2021 26 000 000 14 000 000 12 000 000 A/D 650 000
2022 25 000 000 16 000 000 9 000 000 2. Impairment on reversal
2023 15 000 000 11 000 000 4 000 000 A/D 1 050 000
90 000 000 51 000 000 39 000 000 Gain on Reversal 1 050 000
The value in use is calculated by discounting the net
CA-no impairment 5 600 000
cash flows at an appropriate discount rate of 10%
CA-with impairment 4 550 000
Cash flow PV of 1 CA
Gain on Reversal 1 050 000
2020 14 000 000 .909 12 726 000
2021 12 000 000 .826 9 912 000 CHAPTER 35- Cash Generating Unit
2022 9 000 000 .751 6 759 000 -Cash generating unit is the smallest identifiable
2023 4 000 000 .683 2 732 000 group of assets that generate cash inflows from
39 000 000 32 129 000 continuing use that are largely independent of the
cash inflows form other assets or group of assets.
Carrying Amount 40 000 000 -as a basic rule, the recoverable amount of an asset
Recoverable Amount 32 129 000 shall be determined for the asset individually.
Impairment Loss 7 871 000 -if it is not possible to estimate the recoverable
REVERSAL OF IMPAIRMENT amount of the individual asset, an entity shall
On December 31, 2019, the statement of FP shows determine the recoverable amount of the cash
the ff balances: generating unit to which the asset belongs.
Machinery 8 000 000
- CGU shall be the smallest aggregation of assets
Acc. Dep’n 1 600 000
for which cash flows can be identified and which
CA 6 400 000
are independent of cash flows from other assets.
On the same date, the recoverable amount of the
machinery is determined to be the fair value less -aggregation that is too high is prohibited.
cost of disposal of 5 200 000. ILLUSTRATION 1:
CA 6 400 000 An entity has determined that one of its cash
Recoverable Amount 5 200 000 generating units is impaired.
Impairment Loss 1 200 000 The Carrying amounts are:
Building 2 400
Impairment Loss 1 200 000 000
Acc. Dep’n 1 200 000 Land 1 800
000
On December 31, 2020, the recoverable amount of Equipment 1 500
the machinery is determined to be 6 000 000 000
indicating a reversal of impairment loss. Inventory 300
Machinery 8 000 000 000
CA of CGU 6 000 Equipment ( 3/10x 2 000 600 000
000 000)
Most often, the recoverable amount of CGU is equal Inventory (2/10x 2 00 000) 100 000
to the value in use because it is not to be disposed Total impairment loss 2 000 000
of.
The entity calculated the value in use of the CGU to Building Equipment Inventory
be 4 500 000. Allocated 1 000 000 600 000 400 000
Cost
Reallocated
(500
CA of CGU 6 000 Cost
0000)
000 3/5 x 500
300 000
Value in use 4 500 000
2/5 x 500
000 000 200 000
Impairment/ L
Impairment loss 1 500 500 000 900 000 600 000
000 Journal entries
Impairment Loss 2 000 000
A/D- bldg. 500 000
A/D-equip 900 000
Inventory 600 000
ALLOCATION OF IMPAIRMENT LOSS CGU with Goodwill
Since there is no goodwill, the impairment loss is Goodwill does not generate cashflows
allocated across the assets based on CA. independently from other assets or group of assets
CA Fraction Loss and therefore, the recoverable amount of goodwill
Building 2 400 000 24/60 600 000 as an individual asset cannot be determined.
Land 1 800 000 18/60 450 000 As a consequence, if there is an indication that
Equipment 1 500 000 15/60 375 000 goodwill may be impaired, recoverable amount is
Inventory 300 000 3/60 75 000 determined for the CGU to which goodwill
JOURNAL ENTRY: belongs.
Impairment Loss 1 500 000
A/D-bldg 600 000 ILLUSTRATION:
Land 450 000 The assets of a CGU @ carrying amount at year-end
A/D-equip 375 000 are as follows:
Inventory 75 000
ILLUSTRATION 2: PPE 3 000 000
An entity has determined that its fine china division Patent 2 000 000
is a cash generating unit. The entity calculated its Goodwill 1 000 000
value in use of the division to be 8 000 000. CA of CGU 6 000 000
The assets of the cash generating unit at carrying
amount are as follows: The annual impairment review is required as the
Building 5 000 000 CGU contains goodwill.
Equipment 3 000 000 The most recent review assesses the value in use of
Inventory 2 000 000 the CGU to be Php 4 500 000.
CA of CGU 10 000 000
CA of CGU 6 000 000
The entity has also determined the FV less CoD of Value in use 4 500 000
the building is 4 500 000. Impairment Loss 1 500 000
CA of CGU 10 000 000 ALLOCATION OF I/L
Value in use 8 000 I/L 1 500
000 000
Impairment Loss 2 000 000 Applicable of Goodwill 1 000
ALLOCATION BASED ON CA 000
Building (5/10x 2 000 000) 1 000 000 Excess I/L 500 000
The excess I/L is allocated to the other non-cash
assets prorate based on CA Journal Entry
CA Fraction Loss I/L 4 000 000
PPE 3 000 000 3/5 300 000 Goodwill 1 000 000
Patent 2 000 000 2/5 200 000 A/R 600 000
5 000 000 500 000 Inventory 900 000
Journal Entry Land 450 000
I/L 1 500 000 A/D 1 050 000
Goodwill 1 000 000
A/D 300 000 Reversal of I/L on Goodwill
Patent 200 000 CA of CGU
*Liabilities of CGU are ignored in determining the
ANOTHER ILLUSTRATION CA of CGU.
An entity has a CGU that has been experiencing
significant losses in prior years. There is an
objective indication that such CGU in impaired. Corporate Assets
At current year-end, the CGU is tested for - Are assets other than goodwill that
impairment with the ff assets/liabilities; contribute to the future cash flows of both
Cash 1 000 000 the CGU under review and other CGU.
A/R 2 000 000 - Are group or divisional assets such as head
Inventory 3 000 000 office building, EDP, equipment or a
Land 1 500 000 research center.
Plant and Equip 6 500 000 ILLUSTRATION:
A/D 3 000 000 An entity has two CGU, CGU One and CGU
Goodwill 1 000 000 Two. There is no goodwill allocated to the
A/P 2 500 000 CGU. The CA of the CGUs are:
Accrued Liab 500 000 CGU One 10 000 000
CGU Two 15 000 000
It is reliably determined that the value in use of the
CGU is 8 000 000 The entity has an office building that has not
ALLOCATION OF IMPAIRMENT been included in the CA of the CGU and can be
Cash 1 000 000 allocated to the units on the basis of CA. the
A/R 2 000 000 office building has a CA of 5 000 000.
Inventory 3 000 000 The entity calculated the value in use of the
Land 1 500 000 CGU as follows:
Plant and Equip 6 500 000 CGU One 9 000 000
A/D (3 000 000) CGU Two 19 000 000
Goodwill 1 000 000
CA of CGU 12 000 000 The CA of the units including an allocated
Value in Use 8 000 000 portion of the office building are determined as
I/L 4 000 000 follows:
Applicable to GW 1 000 000 CGU One CGU Two
Applicable to other 3 000 000 CA 10 000 000 15 000 000
Office bldg.
The remaining I/L of 3 000 000 is allocated to the 10/25 2 000 000
other noncash asset based on CA: 15/25 3 000 000
CA Fraction Loss Total CA 12 000 000 18 000 000
A/R 2 000 000 20/100 600 000 Value in Use 9 000 000 19 000 000
Inventory 3 000 000 30/100 900 000 I/L 3 000 000 -
Land 1 500 000 15/100 450 000
P and E 3 500 000 35/100 1 050 000
 CGU Two is not impaired because value in use
> CA. the impairment loss of CGU One is
allocated as follows:
CA Fraction Loss
Other Assets 10 000 000 10/12 2 500 000
Office Bldg 2 000 000 2/12 500 000
12 000 000 3 000 000