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Depletion of Natural Resources

Natural resources (wasting assets) are

consumed as the physical units

representing these resources are

removed and sold.

Depletion of Natural Resources

Land containing mineral deposits is purchased at a cost

of $5,500,000. The cost to restore the land to its original

state after removal of the resources is estimated to be

$200,000 (then it can be sold for $450,000). In 2005, 80,000 tons of the estimated 1,000,000

tons are removed.

Land containing mineral deposits is purchased at a cost

of $5,500,000. The cost to restore the land to its original

state after removal of the resources is estimated to be

$200,000 (then it can be sold for $450,000). In 2005, 80,000 tons of the estimated 1,000,000

tons are removed.

Depletion

Depletion charge per ton

$5,500,000 – $250,0001,000,000 tons

=

Depletion charge per ton

= $5.25

Depletion for 2005 = $5.25 x 80,000 tons

Depletion for 2005 = $420,000

$450,000 – $200,000

Depletion

The initial purchase:Mineral Deposits 5,500,000

Cash 5,500,000

Depletion for 2005:Depletion Expense 420,000

Accumulated Depletion (or Mineral Deposits) 420,000

Change in Estimated LifeChange in Estimated Life

A company purchased $50,000 of equipment and estimated a 10-year life. Using the straight-line method with no residual value, the annual depreciation

would be $5,000.

After four years, accumulated depreciation would amount to $20,000, and the remaining a

book value would be $30,000. At the beginning of the fifth year, it is determined that the

equipment will only last four more years.

Change in Estimated LifeChange in Estimated Life

Change in Estimated LifeChange in Estimated Life

First four years

1 $50,000/10 = $5,000 $ 5,0002 $50,000/10 = 5,000 10,0003 $50,000/10 = 5,000 15,0004 $50,000/10 = 5,000 20,000

Depreciation AccumulatedYear Computation Amount Depreciation

Change in Estimated LifeChange in Estimated Life

Depreciation AccumulatedYear Computation Amount Depreciation

1 $50,000/10 = $5,000 $ 5,0002 $50,000/10 = 5,000 10,0003 $50,000/10 = 5,000 15,0004 $50,000/10 = 5,000 20,0005 ($50,000 – $20,000)/4 = 7,500 27,5006 ($50,000 – $20,000)/4 = 7,500 35,0007 ($50,000 – $20,000)/4 = 7,500 42,5008 ($50,000 – $20,000)/4 = 7,500 50,000

$50,000

Impairment

Before the end of an asset’s useful life, events occur that impair its

value. This requires an immediate write-down of the asset.

Before the end of an asset’s useful life, events occur that impair its

value. This requires an immediate write-down of the asset.

Impairment

1. When should an asset be reviewed for possible impairment?

An impairment review should be conducted whenever there has been a material change in the way an asset is used or in the business environment.

An impairment review should be conducted whenever there has been a material change in the way an asset is used or in the business environment.

If management obtains information suggesting that the market value of the

asset has declined, an impairment review should be conducted.

Impairment

2. When is an asset impaired?

An asset is impaired when the undiscounted sum of estimated future cash flows from an asset is less than

the book value of the asset.

An asset is impaired when the undiscounted sum of estimated future cash flows from an asset is less than

the book value of the asset.

The sum of the undiscounted future cash flows will always be greater than

the fair value of the asset.

Impairment

3. How should an impairment loss be measured?

The impairment loss is the difference between the book value of the asset and

the asset’s fair value.

The impairment loss is the difference between the book value of the asset and

the asset’s fair value.

The fair value can be approximated using the present value of estimated

future cash flows from the asset.

Impairment

4. What information should be disclosed about an impairment?

Disclosure should include a description of the impaired asset, reasons for the

impairment, a description of the measurement assumptions, and the

business segment or segments affected.

Disclosure should include a description of the impaired asset, reasons for the

impairment, a description of the measurement assumptions, and the

business segment or segments affected.

Impairment

Guangzhou Company purchased a building five years ago for $600,000. With an expected life

of 20 years and using straight-line depreciation, the building has a book value of $450,000.

Guangzhou estimates that the net cash inflow from the building will be $375,000 for the

next 15 years. The fair value of the building at this time is $230,000.Book value is compared to the undiscounted Book value is compared to the undiscounted

sum of future cash inflows to determine sum of future cash inflows to determine whether or not the building is impaired.whether or not the building is impaired.

Impairment

Since the undiscounted future cash flows are less than the book value, the building is

impaired. The impairment loss would be recorded as follows:

Accumulated Depreciation— Building 150,000Loss on Impairment of Building 220,000

Building 370,000

$600,000 – $230,000

International Accounting for Asset Impairment

IFRS 36 requires that a company recognize an

impairment loss whenever the recoverable value of an asset is

less than its book value.

IFRS 36 requires that a company recognize an

impairment loss whenever the recoverable value of an asset is

less than its book value.recoverable value

The higher of the selling price of the asset or the discounted cash flows

associated with the asset’s use.

International Accounting for Asset Impairment

IFRS 36 allows for the reversal of an impairment loss if events in subsequent years suggest the

asset is no longer impaired.

IFRS 36 allows for the reversal of an impairment loss if events in subsequent years suggest the

asset is no longer impaired.

International Accounting for Asset Impairment

Under IFRS 16, if Guangzhou Company revalued their building to $540,000 (no earlier impairment

recorded) and sold it for that amount, the following entries would be necessary:

Cash 540,000 Building 540,000

Revaluation Equity Reserve 90,000Retained Earnings 90,000

Amortization and Impairment of Intangible

AssetsEthereal Company purchased a customer list

for $30,000 on January 1, 2005. It is expected to have economic value for four

years. The expected residual value is zero.

December 31, 2005

Amortization Expense 7,500 Accumulated Amortization—

Customer List 7,500

Amortization and Impairment of Intangible

AssetsOn December 31, 2006, before the amortization entry is made, a test for impairment is made. The future cash

flow of the list is expected to be $15,000—which is less than the book value ($30,000 – $7,500) and the fair

value of the list is $12,000.

December 31, 2006

Impairment Loss ($22,500 – $12,000) 10,500Accumulated Amortization— Customer List 7,500

Customer List ($30,000 – $12,000) 18,000

Impairment of Intangibles Not Subject to AmortizationSFAS No. 142 describe the following examples of intangibles with indefinite lives:

• Broadcast licenseBroadcast license often have a renewal period of ten years. Because renewal is virtually automatic, such license are

considered to have an indefinite life.

Broadcast license often have a renewal period of ten years. Because renewal is virtually automatic, such license are

considered to have an indefinite life.

Impairment of Intangibles Not Subject to AmortizationSFAS No. 142 describe the following examples of intangibles with indefinite lives:

• Trademark A trademark right is granted for a limited

time, but can be renewed almost

routinely. As long as the trademark is useful, it has an indefinite life.

A trademark right is granted for a limited

time, but can be renewed almost

routinely. As long as the trademark is useful, it has an indefinite life.

Impairment of Intangibles Not Subject to AmortizationImpalable Company has a broadcast license that has no foreseeable end to its useful life.

The license cost $60,000 and it was estimated that the license generated cash

flows of $7,000 per year. Recent events have convinced management that the cash flow will be reduced. The weighted

probability shows that the estimated fair value is $52,000.

Impairment of Intangibles Not Subject to Amortization

Because the estimated fair value is less than the book value, the

intangible asset is impaired.

Because the estimated fair value is less than the book value, the

intangible asset is impaired.

Impairment Loss 8,000 Broadcast license 8,000

$60,000 – $52,000

1. Compute the fair value of each reporting unit to which goodwill has been assigned.

2. If the fair value of the reporting unit exceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment is recognized.

Impairment of Goodwill

Procedures in Testing GoodwillProcedures in Testing GoodwillProcedures in Testing GoodwillProcedures in Testing Goodwill

ContinuedContinuedContinuedContinued

3. If the fair value of the reporting unit is less than the net book value of the assets and liabilities of the reporting unit, a new fair value of goodwill is computed.

4. If the implied amount of goodwill computed in (3) is less than the amount initially recorded, a goodwill impairment loss is recognized for the difference.

Impairment of Goodwill