IMPAIRMENTS

Recognizing Impairments
A long-lived tangible asset is impaired when a company is not able to
recover the asset’s carrying amount either through using it or by
selling it.

On an annual basis, companies review the asset for indicators of

impairments—that is, a decline in the asset’s cash-generating ability
through use or sale.
If impairment indicators are present, then an impairment test must be
conducted.

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 Various events and changes in circumstances
might lead to an impairment. Examples are:

a. A significant decrease in the fair value of an asset.

b. A significant change in the extent or manner in which an
asset is used.
c. A significant adverse change in legal factors or in the
business climate that affects the value of an asset.
d. An accumulation of costs significantly in excess of the
amount originally expected to acquire or construct an
asset.
e. A projection or forecast that demonstrates continuing
losses associated with an asset.

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 Recognizing Impairments

If impairment indicators are present, then an impairment test must

be conducted.

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 Recognizing Impairments
Example: Assume that Cruz Company performs an impairment
test for its equipment. The carrying amount of Cruz’s equipment is
€200,000, its fair value less costs to sell is €180,000, and its
value-in-use is €205,000.

€200,000 €205,000
No
Impairment

€180,000 €205,000
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 Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss

€200,000 €180,000

€180,000 €175,000
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 Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss

€200,000 €180,000

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000

Accumulated Depreciation—Equipment 20,000

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 Impairment Illustrations
Case 1
At December 31, 2016, Hanoi Company has equipment with a cost of
TK26,000,000, and accumulated depreciation of TK12,000,000. The
equipment has a total useful life of four years with a residual value of
TK2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2016, is
TK14,000,000 (TK26,000,000 - TK12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
TK6,000,000 [(TK26,000,000 - TK2,000,000) ÷ 4] for 2016 and is
recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2016, is TK11,000,000.
4. The remaining useful life of the equipment after December 31,
2016, is two years.
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 Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2016, as follows.

TK3,000,000 Impairment Loss

TK14,000,000 TK11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000

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 Impairment Illustrations

Equipment TK 26,000,000
Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2016) TK 11,000,000

Hanoi Company determines that the equipment’s total useful life

has not changed (remaining useful life is still two years). However,
the estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2017.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000

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 Impairment Illustrations
Case 2
At the end of 2015, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated remaining
useful life of five years. Because there is little market-related information
on which to base a recoverable amount based on fair value, Verma
determines the machine’s recoverable amount should be based on value-
in-use. Verma uses a discount rate of 8 percent. Verma’s analysis
indicates that its future cash flows will be $40,000 each year for five years,
and it will receive a residual value of $10,000 at the end of the five years. It
is assumed that all cash flows occur at the end of the year.

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 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss

$200,000 $166,514

Unknown $166,514
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 Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2015.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514
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 Reversal of Impairment Loss
Illustration: Tan Company purchases equipment on January 1,
2015, for HK$300,000, useful life of three years, and no residual
value. Value in use of the equipment at the end of the year 2015
as 180,000.

At December 31, 2015, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
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 Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2016, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.

Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000

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 IMPAIRMENTS

General Rule
The general rule related to reversals of impairments is as follows.
• The amount of the recovery of the loss is limited to the carrying amount that
would result if the impairment had not occurred.
• For example, the carrying amount of Tan's equipment at the end of 2016 would
be HK$100,000, assuming no impairment. The HK$6,000 recovery is therefore
permitted because Tan's carrying amount on the equipment is now only
HK$96,000. However, any recovery above HK$10,000 is not permitted. The
reason is that any recovery above HK$10,000 results in Tan carrying the asset at
a value above its historical cost.

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  Cash-Generating Units
In some cases, it may not be possible to assess a
single asset for impairment because the single
asset generates cash flows only in combination
with other assets. In that case, companies should
identify the smallest group of assets that can be
identified that generates cash flows independently
of the cash flows from other assets. Such a group
is called a Cash Generating Unit (CGU).

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 IMPAIRMENTS

Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).

 No depreciation or amortization is taken on assets held

for disposal during the period they are held.

 Can write up or down an asset held for disposal in future

periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before
the impairment.

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 IMPAIRMENTS

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 REVALUATIONS

Recognizing Revaluations
Companies may value long-lived tangible asset subsequent to
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for its
railroad network.

► Increased long-lived tangible assets by £4,289 million.

► Change in the fair value accounted for by adjusting the asset

account and establishing an unrealized gain.

► Unrealized gain is often referred to as revaluation surplus.

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 Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for €1,000,000
on January 5, 2015. The company elects to use revaluation
accounting for the land in subsequent periods. At December 31,
2015, the land’s fair value is €1,200,000. The entry to record the
land at fair value is as follows.

Land 200,000
Unrealized Gain on Revaluation - Land 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

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 Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2015. The equipment has a useful life of
five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the equipment.
Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5)
at December 31, 2015, as follows.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000

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 Recognizing Revaluation

Revaluation—Depreciable Assets
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment at December 31, 2015,
which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000

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 Recognizing Revaluation

Revaluation—Depreciable Assets

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

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 Recognizing Revaluation

Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.

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 REVALUATION OF PROPERTY, PLANT, AND
APPENDIX 11A
EQUIPMENT

The general rules for revaluation accounting are as follows:

1. When a company revalues its long-lived tangible assets above

historical cost, it reports an unrealized gain that increases other
comprehensive income. Thus, the unrealized gain bypasses net
income, increases other comprehensive income, and increases
accumulated other comprehensive income.

2. If a company experiences a loss on impairment (decrease of

value below historical cost), the loss reduces income and
retained earnings. Thus, gains on revaluation increase equity
but not net income, whereas losses decrease income and
retained earnings (and therefore equity).

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 REVALUATION OF PROPERTY, PLANT, AND
APPENDIX 11A
EQUIPMENT

3. If a revaluation increase reverses a decrease that was

previously reported as an impairment loss, a company credits
the revaluation increase to income using the account Recovery
of Impairment Loss up to the amount of the prior loss. Any
additional valuation increase above historical cost increases
other comprehensive income and is credited to Unrealized Gain
on Revaluation.

4. If a revaluation decrease reverses an increase that was

reported as an unrealized gain, a company first reduces other
comprehensive income by eliminating the unrealized gain. Any
additional valuation decrease reduces net income and is
reported as a loss on impairment.
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 Revaluation—2019: Valuation Increase
 Unilever Group purchased land on January 1, 2019, that
cost €400,000. Unilever decides to report the land at fair
value in subsequent periods. At December 31, 2019, an
appraisal of the land indicates that its fair value is
€520,000.


Date Item FV RE Accumulated OCI

1/1/2019 BB 400,000 0 0
31/12/2019 Revaluation 120,000 0 120,000
31/12/2019 EB 520,000 0 120,000
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Revaluation—2020: Decrease below Historical Cost
What happens if the land's fair value at December 31, 2020, is
€380,000, a decrease of €140,000 (€520,000 - €380,000)?

Date Item FV RE Accumulated OCI

1/1/2019 BB 400,000 0 0
31/12/2019 Revaluation 120,000 0 120,000
31/12/2019 EB 520,000 0 120,000
1/1/2020 BB 520,000 0 120,000
31/12/2020 Revaluation (140,000) (20,000) (120,000)
31/12/2020 EB 380,000 (20,000) 0

Under no circumstances can the revaluation decrease reduce

11-28 accumulated other comprehensive income below zero.
Revaluation—2021: Recovery of Impairment Loss
 At December 31, 2021, Unilever's land value increases to
€415,000, an increase of €35,000 (€415,000 - €380,000).
31/12/2021
Land 35,000
Unrealized gain on revaluation –Land 15,000
Recovery of Impairment Loss 20,000
Date Item FV RE Accumulated OCI
1/1/2019 BB 400,000 0 0
31/12/2019 Revaluation 120,000 0 120,000
31/12/2019 EB 520,000 0 120,000
1/1/2020 BB 520,000 0 120,000
31/12/2020 Revaluation (140,000) (20,000) (120,000)
31/12/2020 EB 380,000 (20,000) 0
31/12/2021 Revaluation 35,000 20,000 15,000
31/12/2021 EB 415,000 0 15,000
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 Sale of Revalued Assets
 On January 2, 2022, Unilever sells the land for €415,000.
Journal Entries
Cash 415,000
Land 415,000

Accumulated Other Comprehensive Income 15,000

Retained Earnings 15,000

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 Revaluation of Depreciable Assets
Nokia (FIN) purchases equipment for €1,000,000 on January 2,
2019. The equipment has a useful life of five years, is
depreciated using the straight‐line method of depreciation, and
its residual value is zero.
Nokia chooses to revalue its equipment to fair value over the
life of equipment. Nokia records depreciation expense of
€200,000 (€1,000,000 ÷ 5).
After this entry, Nokia's equipment has a carrying amount of
€800,000 (€1,000,000-€200,000). Nokia employs an
independent appraiser, who determines that the fair value of
equipment at December 31, 2019, is €950,000. To report the
equipment at fair value, Nokia does the following.

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 1. Reduces the Accumulated Depreciation—Equipment
account to zero.
2. Reduces the Equipment account by €50,000—it then is
reported at its fair value of €950,000.
3. Records an Unrealized Gain on Revaluation—Equipment for
the difference between the fair value and carrying amount of
the equipment, or €150,000 (€950,000 - €800,000).
December 31, 2019
Accumulated Depreciation-Equipment 200,000
Equipment 50,000
Unrealized Gain of Revaluation-Equipment 150,000
Date Item FV Acc. Dep RE Accumulated OCI
1/1/2019 BB 1000,000 0 0 0
31/12/2019 Depreciation 200,000 (200,000) 0
31/12/2019 Revaluation (50,000) (200,000) 150,000
31/12/2019 EB 950,000 0 (200000) 150,000
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Revaluation—2020: Decrease below Historical Cost
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2020 is €237,500 (€950,000
÷ 4).
December 31, 2020
Depreciation Expenses 237,500
Accumulated Depreciation--Equipment 237,500

Under IFRS, Nokia may transfer from AOCI the difference between depreciation
based on the revalued carrying amount of the equipment and depreciation based on
the asset's original cost to retained earnings. Depreciation based on the original cost
was €200,000 (€1,000,000 ÷ 5) and on fair value is €237,500, or a difference of
€37,500 (€237,500 - € 200,000) .

December 31, 2020

Accumulated Other Comprehensive Income 37,500
Retained Earnings 37,500

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Revaluation—2020: Decrease below Historical Cost
Nokia determines through appraisal that the equipment now
has a fair value of €570,000. To report the equipment at fair
value, Nokia does the following:
1. Reduces the Accumulated Depreciation—Equipment
account of €237,500 to zero.
2. Reduces the Equipment account by €380,000 (€950,000 -
€570,000)—it then is reported at its fair value of €570,000.
3. Reduces Unrealized Gain on Revaluation—Equipment by
€112,500, to offset the balance in the unrealized gain account
(related to the revaluation in 2019).
4. Records a loss on impairment of €30,000.
December 31, 2020
Accumulated Depreciation-Equipment 237,500
Loss on Impairment 30,000
Unrealized Gain of Revaluation-Equipment 112,500
11-34 Equipment 380,000
 Revaluation Summary-2020

Date Item FV Acc. Dep RE Accumulated OCI

1/1/2019 BB 1000,000 0 0 0
31/12/2019 Depreciation 200,000 (200,000) 0
31/12/2019 Revaluation (50,000) (200,000) 150,000
31/12/2019 EB 950,000 0 (200,000) 150,000
31/12/2020 Depreciation 237,500 (237,500)
31/12/2020 Transfer 37,500 (37,500)
from AOCI
31/12/2020 Revaluation (380000) (237,500) (30,000) (112,500)
31/12/2020 EB 570,000 0 (430,000) 0

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 Revaluation—2021: Recovery of Impairment Loss
Assuming no change in the useful life of the equipment,
depreciation expense for Nokia in 2021 is €190,000 (€570,000
÷ 3).
December 31, 2021
Depreciation Expenses 190,000
Accumulated Depreciation--Equipment 190,000

Nokia transfers the difference between depreciation based on the revalued

carrying amount of the equipment and depreciation based on the asset's
original cost from AOCI to retained earnings. Depreciation based on the
original cost was €200,000 (€1,000,000 ÷ 5) and on fair value is €190,000,
or a difference of €10,000 (€200,000 - €190,000).
December 31, 2021
Retained Earnings 10,000
Accumulated Other Comprehensive Income 10,000

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 Revaluation—2021: Recovery of Impairment Loss
Nokia determines through appraisal that the equipment now
has a fair value of €450,000. To report the equipment at fair
value, Nokia does the following.
1. Reduces the Accumulated Depreciation—Equipment
account of €190,000 to zero.
2. Reduces the Equipment account by €120,000 (€570,000 - €
450,000)—it then is reported at its fair value of €450,000.
3. Records an Unrealized Gain on Revaluation—Equipment for
€40,000.
4. Records a Recovery of Loss on Impairment for €30,000.
December 31, 2021
Accumulated Depreciation-Equipment 190,000
Recovery of Loss on Impairment 30,000
Unrealized Gain of Revaluation-Equipment 40,000
Equipment 120,000

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 Revaluation Summary-2021

Date Item FV Acc. Dep RE Accumulated OCI

1/1/2019 BB 1000,000 0 0 0
31/12/2019 Depreciation 200,000 (200,000) 0
31/12/2019 Revaluation (50,000) (200,000) 150,000
31/12/2019 EB 950,000 0 (200,000) 150,000
31/12/2020 Depreciation 237,500 (237,500)
31/12/2020 Transfer 37,500 (37,500)
from AOCI
31/12/2020 Revaluation 570,000 0 (430,000) 0
31/12/2021 Depreciation 190,000 (190,000)
31/12/2021 Transfer (10,000) 10,000
from AOCI
31/12/2021 Revaluation (120000) (190,000) 30,000 40,000
31/12/2021 EB 450,000 0 (600,000) 50,000

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 Sale of Revalued Assets
On January 2, 2022, Nokia sells the equipment for €450,000.
January 2, 2022
Cash 450000
Equipment 450000

Nokia does not record a gain or loss because the carrying amount of the equipment is
the same as its fair value. Nokia transfers the remaining balance in Accumulated
Other Comprehensive Income to Retained Earnings because the equipment has been
sold.

January 2, 2022
Accumulated OCI 50000
Retained Earnings 50000

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