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Hi Mike,
Can you please see if my below understanding of impairment is right.
Year end 31st December.
Suppose a co. bought a property for $100 in in 2010.
In 2011, the market price of the property is 300.
So company wishes to revalue their property based on the fair value,=> Carrying value of property is increased to $300 in SOFP and the increase of $200 is credited to SOOCI.
In 2012, if the fair value of the property goes down to $70, the company will now have to impair the asset. Therefore, the carrying value of the property in 2012 comes down to $70, and $230 is the impairment amount.
Of $230, $200 be debited to SOOCI (since we had revalued the asset by $200 in 2011), and balance $30 will be debited to SOPL.Is that right?
What about the depreciation in 2010? You appear to have ignored that! Wrongly!
Let’s have an idea of useful life, can we?
Let’s assume a ten year life with straight line depreciation
In addition, your figures are a nonsense! No asset is going, in 3 consecutive years, from cost 100, value 300, value 70 so let’s have something a bit more realistic
How about cost 200, after 2 years revalue to 248, after 3 more years impair to 140? And let’s make it interesting – let’s have an annual transfer tfrom revaluation reserve to retained earnings of the amount of the revaluation that can be treated as realised ie the excess depreciation caused by the revaluation
year 1 cost 200
year 1 depreciation 20
carrying value at end year 1 180year 2 depreciation 20
carrying value at end year 2 160year 2 revalue to 248
Dr accumulated depreciation 40
Dr asset 48
Cr revaluation reserve 88year 3 depreciation 31
carrying value at end year 3 217transfer from revaluation reserve to retained earnings 31-20
Dr revaluation reserve 11
Cr retained earnings 11year 4 depreciation 31
carrying value at end year 4 186transfer from revaluation reserve to retained earnings 31-20
Dr revaluation reserve 11
Cr retained earnings 11year 5 depreciation 31
carrying value at date of impairment review 155transfer from revaluation reserve to retained earnings 31-20
Dr revaluation reserve 11
Cr retained earnings 11year 5 impair down to 140
at end year 5 there is 88 – 3*11 still in revaluation reserve
we need to impair by 15
Dr revaluation reserve 15
Cr asset 15leaving a balance in revaluation reserve of 55
Now, IF the value after impairment had been, say, 90, these last few entries would have been:
year 5 impair down to 90
at end year 5 there is 88 – 3*11 still in revaluation reserve ie 55
we need to impair by 155 – 90 so an impairment of 65
Dr revaluation reserve 55
Dr statement of profit or loss 10
Cr asset 65leaving no balance in revaluation reserve
a balance of the asset account of 183
a balance on accumulated depreciation account of 93
and a net book value of 90OK?
Ok Brilliant. Thanks for the detailed illustration.
Now can you please help me with the following:
Suppose asset bought on 1st Jan 2010 Cost $100. Depreciate at10% straight line method. => Carrying value at year end $90.
Suppose in Dec’ 2011, the fair value of the asset is $120. We recognize the gain, gain on revaluation is $30 and the carrying value of the asset is $120.
Suppose in Dec’ 2012, the fair value goes further up to $150. Can we recognize the gain again?
The reason I am asking this question is because as per notes page page 77, “asset should be valued at lower of carrying amount and the recoverable amount, where recoverable amount is higher of Net selling price and value in use.”
If we go with this principle, then we shouldn’t be allowed to revalue the asset at a higher price, isn’t it?From what I understand, asset should be recognized at cost less accumulated depreciation value Subsequent to initial recognition, we can revalue the asset regardless of we have revaluation gain or loss. However, after revaluing for the 1st time, we have to then frequently keep testing for any impairment loss. Is that right?
Thanks.
‘If we go with this principle, then we shouldn’t be allowed to revalue the asset at a higher price, isn’t it?’
No. An entity can revalue as and when it wants
‘From what I understand, asset should be recognized at cost less accumulated depreciation value’
Unless they have adopted the valuation model
‘… we have to then frequently keep testing for any impairment loss. Is that right?’
Agreed
Alright.
Suppose asset has carrying value $100 and it has fair value of $120, and if company chooses to revaluate, It certainly can revaluate the asset to $120.
But then, when does this principle, “asset should be valued at lower of carrying amount and the recoverable amount, where recoverable amount is higher of Net selling price and value in use” apply? Is it just to calculate the impairment amount?
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