SUBSEQUENT MEASUREMENT OF PROPERTY PLANT AND EQUIPMENT
An entity shall choose either the cost model or the revaluation model as its accounting policy. It is to be applied to an entire
class of PPE and not to an individual asset (e.g. all land at revaluation model, all building at cost model)
Cost Model every year end at: Cost - Accumulated Depreciation - Accumulated Impairment Loss
Revaluation Model every year end at: Revalued Amount - Subsequent Accumulated Depreciation - Subsequent
Accumulated Impairment Loss
COST MODEL
Impairment of Asset
⁃ Assess every reporting period if there are indicators of impairment
(e.g. technological advancement , legal environment, physical damage, decline in performance (net cash flow))
⁃ If with indications of impairment , perform impairment test: carrying value > recoverable amount
⁃ Impairment loss: a non-continuous adjustment made as and when required. It is recognized in P&L in year incurred
Recoverable Amount
⁃ Benefit of the company for the use or sale of the asset
⁃ The higher between:
o fair value less cost of disposal (if asset is sold)
o value in use (if continue usage of asset)
Fair Value: A market-based measurement, not entity specific. it is a price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date (exit price)
Cost of disposal: are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax
expense. e.g. legal cost, cost of removing asset, doc stamp tax
Value in use: present value or discounted value of the future net cash flows expected to be derived from an asset
Recognition and Measurement of Impairment Loss
If carrying amount > recoverable amount, carrying amount should be reduced to its recoverable amount. That reduction is an
impairment loss.
Reversal of Impairment
⁃ a subsequent increase in the asset’s recoverable amount can be regarded as a reversal of previous impairment
⁃ with limit: since an asset can’t be carried at amount that exceeds its carrying value had there been no previous impairment
loss
⁃ Steps for Recovery (recorded in P&L):
1. Recoverable amount > Carrying value with impairment
2. Choose lower between:
o Recoverable amount
o Carrying value had no previous impairment
3. Recovery = higher in step 2 less: carrying value with impairment
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SAMPLE PROBLEM #1
At the beginning of 2016, Joyce company acquired an equipment costing P860,000. the equipment was believed to have an
estimated useful life of 9 years and a residual value of P50,000. The company uses straight-line depreciation for this type of
equipment.
At December 31, 2019 , because circumstances indicate that the economic performance of the asset is less than expected, the
equipment was tested for impairment. The asset’s selling price on this date was estimated to be P450,000, After incurring
P30,000 cost to sell. The asset is expected to provide annual net cash inflow of P100,000, during the remaining 5-year useful
life , at the end of which residual value is expected to be only P20,000. Based on current market assessments and risks specific
to the asset, a discount rate of 10% is considered appropriate.
Recognizing impairment of asset value is based on the principle that no asset shall be presented in the statement of financial
position beyond its recoverable amount.
a) What is the asset’s recoverable amount at December 31, 2019?
Recoverable amount is the higher between:
i.
Fair value less cost to sell
Fair Value
Cost to Sell
Total
ii.
P450,000
(30,000)
P420,000
Value in use (cash flows discounted at 10%)
Net Cash inflow
Residual Value
P100,000
P20,000
x
x
3.7908
0.6209
=
=
P379,080
12,418
P391,498
b) What amount of impairment loss should Joyce company recognize for the year ended December 31, 2019?
Cost
Accumulated Depreciation (860k-50k)/9 x 4 years
Carrying Amount
Recoverable amount
Impairment Loss
Impairment Loss
Accumulated Depreciation
P80,000
P860,000
(360,000)
500,000
(420,000)
P80,000
P80,000
c) How much depreciation expense should Joyce company recognize for the year and December 31, 2020?
(P420,000 - P20,000)/5 years = P80,000
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SAMPLE PROBLEM #2
On January 1, 2017 , Coco Company acquired a factory equipment at a cost of P300,000. The equipment is being depreciated
using the straight-line method over its projected useful life of 10 years. on December 31, 2018, a determination was made that
the assets recoverable amount was only P192,000. On December 31, 2019, the asset’s recoverable amount was determined to
be P222,000 and management believes that the impairment loss previously recognized should be reversed.
a) How much impairment loss should be recognized on December 31, 2018?
Cost
Accumulated Depreciation (300,000/10) x 2 years
Carrying Amount
Recoverable amount
Impairment Loss (CA > RA)
P300,000
(60,000)
240,000
(192,000)
P48,000
12/31/18 Impairment Loss
P48,000
Accumulated Depreciation
P48,000
Note: we have impairment loss of P48,000 to be recovered in the next 8 years. Recovery per year is P6,000.
b) What is the asset’s carrying value on December 31, 2019?
2018 Carrying amount (300k - 60k - 48k)
2019 Depreciation Expense (P192,000/8 years)
2019 Carrying Amount before recovery
P192,000
(24,000)
P168,000
12/31/19 Depreciation Expense
P24,000
Accumulated Depreciation
P24,000
c) How much impairment recovery should be reported in 2019?
Carrying amount
New recoverable amount
Recovery (CA < RA)
P168,000
(222,000)
(P54,000)
Test for Limit on Recovery:
Previous Impairment
Recovered in 2019 (P30,000 - P24,000)
Limit on Recovery
Impairment recovery to be recognized at 12/31/19
P48,000
(6,000)
P42,000
P42,000 (lower between 54k & 42k)
12/31/19 Accumulated Depreciation
P42,000
Recovery of Previous Impairment P42,000
2019 Carrying Amount before recovery
Recognized recovery with limit
2019 Carrying Amount after recovery
P168,000
42,000
P210,000
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REVALUATION MODEL
⁃
⁃
⁃
⁃
⁃
⁃
REVALUED AMOUNT = fair value = sound value = depreciated replacement cost
the carrying amount of an asset can be adjusted both upward and downward if there is an indication that it differs
materially from an asset’s fair value
The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalued. If the fair value
of a revalued asset differs materially from its carrying value, then a further revaluation is required
Allows carrying an item of property, plant, and equipment at its fair value or value in use, whichever is higher
Reversal of impairment loss is permitted and not limited by the amount of accumulated impairment losses in the past as in
the cost model
Revaluation is done per simultaneously class of PPE (e.g. building, land, equipment, etc.)
REVALUED AMOUNT > CARRYING VALUE
WITHOUT PREVIOUS LOSS: Excess as Revaluation Surplus (reported in OCI)
WITH PREVIOUS LOSS: Excess as 1st Recovery of previous loss (reported in P/L)
2nd Revaluation Surplus (reported in OCI)
REVALUED AMOUNT < CARRYING VALUE
WITHOUT PREVIOUS RS: Deficiency as Impairment loss (reported in P/L)
WITH PREVIOUS RS: Deficiency as 1st Reduction to previous RS (reported in OCI)
2nd Impairment loss (reported in P/L)
TREATMENT OF ACCUMULATED DEPRECIATION ON REVALUATION DATE
PROPORTIONATE METHOD. restated proportionately with the change in the gross carrying amount so that the carrying
amount of the asset equals its revalued amount
ELIMINATION METHOD. eliminated against the gross carrying amount and asset account is restated to its revalued amount
TRANSFER OF REVALUATION SURPLUS TO RETAINED EARNINGS
AS THE ASSET IS USE. allocate revaluation surplus to retained earnings over the useful life of
the asset
UPON DERECOGNITION OF ASSET. transfer the balance of the revaluation surplus to retained earnings when
the related asset is derecognized
Revaluation Surplus
Cancellation or Reversal
of Revaluation Surplus
BV
FV
Revaluation Surplus
Cancellation or Reversal
of Revaluation Surplus
Impairment Loss
Recovery
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Impairment Loss
SAMPLE ILLUSTRATION
On January 1, 2011, ABC Company purchased a building. On December 31, 2020, Fair Value of buding is P45M.
Cost
50M
Life
50 years
Age
10 years
12/31/20
Cost
Accumulated Depreciation
P50M/50 x 10 years
Book Value
P50,000,000
(10,000,000)
P40,000,000
Book Value isn’t always equal with FMV
Revaluation surplus is not an income.
Cost
Accumulated Depreciation
P50M/50 x 10 years
Book Value
New basis for subsequent depreciation/Revalued Amount
à
P45,000,000 Fair Market Value
P5,000,000
Revaluation Surplus
12/31/20
P50,000,000
(10,000,000)
100%
20%
Revaluation
P56,250,000
(11,250,000)
Difference
P6,250,000
1,250,000
P40,000,000
80%
P45,000,000
P5,000,000
A. Proportional Method
Building
P6,250,000
Accumulated Depreciation
Revaluation Surplus
P1,250,000
P5,000,000
B. Elimination Method
Accumulated Depreciation
Building
Revaluation Surplus
P10,000,000
Depreciation Expense
P1,125,000
Accumulated Depreciation
Revaluation Surplus
Retained Earnings
P125,000
P5,000,000
P5,000,000
P1,125,000
P125,000
P45,000,000 divided by 40 years = P1,125,000
P5,000,000 divided by 40 years = P125,000
Previous depreciation is P1,000,000. Depreciation now is P1,125,000. Difference is P125,000.
P5M Revaluation surplus divided by 40 years is P125,000. Revaluation surplus is treated as Piecemeal Realization.
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SAMPLE PROBLEM #1
On January 1, 2017 , an item of equipment with cost of P4,000,000 and accumulated depreciation of P1,600,000 was revalued
to have a fair market value of P3,600,000 and a remaining useful life of 6 years. the company adopts the policy of reporting this
item of property, plant, and equipment at revalued amount less any subsequent accumulated depreciation and subsequent
impairment losses.
The company restates its accumulated depreciation proportionately with the change in the gross carrying amount of the asset
and transfers a portion of the surplus as the asset is being used by the entity. On January 1, 2019, a second revaluation
indicates that the equipment had a fair value of P2,000,000.
Prepare the Journal Entries for:
a) The revaluation on January 1, 2017
Cost
Accumulated Depreciation
Book Value
12/31/17
P4,000,000
(1,600,000)
P2,400,000
1/1/17
Equipment
P2,000,000
Accumulated Depreciation
Revaluation Surplus
100%
40%
60%
Revaluation
P6,000,000
(2,400,000)
P3,600,000
Difference
P2,000,000
800,000
P1,200,000
P800,000
P1,200,000
b) Adjusting entries at December 31, 2017 and at December 31, 2018
12/31/17
Depreciation Expense
P600,000
Accumulated Depreciation
P600,000
Revaluation Surplus
Retained Earnings
P200,000
P200,000
12/31/18
Depreciation Expense
P600,000
Accumulated Depreciation
Revaluation Surplus
P200,000
Retained Earnings
P3,600,000 divided by 6 years = P600,000
P1,200,000 divided by 6 years = P200,000
P3,600,000 divided by 6 years = P600,000
P600,000
P1,200,000 divided by 6 years = P200,000
P200,000
c) The revaluation on January 1, 2019
Cost
Accumulated Depreciation
Book Value
12/31/17
P6,000,000
(3,600,000)
P2,400,000
100%
60%
40%
2nd Revaluation
P5,000,000
(3,000,000)
P2,000,000
Difference
(P1,000,000)
(600,000)
(P400,000)
Balance of Acc Dep: 2,400,000 + 600k + 600K = P3,600,000
Balance of Revaluation Surplus: 1,200,000 - 200k - 200k = P800,000
Revaluation Surplus
Accumulated Depreciation
Equipment
P400,000
P600,000
P1,000,000
d) Adjusting entries at December 31, 2019
12/31/19
Depreciation Expense
P500,000
Accumulated Depreciation
P500,000
Revaluation Surplus
Retained Earnings
P100,000
P100,000
P2,000,000 divided by 4 years = P500,000
P400,000 divided by 4 years = P100,000
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