Date post: | 09-Aug-2015 |
Category: |
Documents |
Upload: | milos-stojakovic |
View: | 17 times |
Download: | 6 times |
Depreciation &
Impairment under GAAP
and IFRS
William Davis
Nicole Lunt
Depreciation under GAAP
Current Authoritative Source? – Codification
topic 360-10-05 (Covers Depreciation &
Impairment).
Depreciation:
A Means of Cost Allocation
Depreciation under GAAP cont’d
Three Steps of the Depreciation Process:
Find depreciable base of the asset
Original Cost $XXXX
Less: Salvage Value XXXX
Depreciable Base $XXXX
Estimate asset’s useful life
Depreciation under GAAP cont’d
Choose a method of cost apportionment
that best matches revenue flow from the
asset
Activity (units of use or production)
Straight-line
Accelerated
- sum-of-the-years’-digits
- declining-balance (150% / 200%)
Depreciation under GAAP cont’d
Three Important Notes About Depreciation:
PP&E held for sale is not depreciated
PP&E is not written up by an enterprise to
reflect appraisal, market, or current values
which are above cost to the enterprise
Depreciation under GAAP cont’d
Estimates of useful life and residual value,
and the method of depreciation, are reviewed
only when events or changes indicate that the
current estimates or depreciation method no
longer are appropriate
Depreciation under IFRS
Current Authoritative Source – IAS 16
Same as GAAP except for two main
differences:
Depreciation under IFRS cont’d
Estimates of useful life and residual value,
and the method of depreciation, are reviewed
at least at each annual reporting date
For a company currently using GAAP a
change to IFRS could result in a greater
frequency of revisions in depreciation rates,
which in turn could mean less predictable
depreciation expense
Depreciation under IFRS cont’d
IFRS allows a company to choose between
two different models in order to value PP&E
after it has been recognized on the books:
Cost model – this model is like GAAP where
PP&E is carried at its cost less any
accumulated depreciation and any
accumulated impairment losses
Depreciation under IFRS cont’d
Revaluation model – this model allows a
company to revalue PP&E on its books to fair
value if fair value can be reliably measured
For a company currently using GAAP a change to
IFRS and the use of the revaluation model could
lead to a substantial increase in asset values on
the balance sheet as well as a corresponding
substantial increase in depreciation expense
Example
Facts: At the beginning of the year a company
has a building with a carrying value of
$100,000 and a remaining useful life of 10
years that was recently valued at $300,000
Under GAAP depreciation expense for the year
would be $10,000 (assuming straight-line)
Under IFRS depreciation expense for the year
could be either $30,000 or $10,000
Depreciation under IFRS cont’d
Three Important Notes About Depreciation:
If an item of PP&E is revalued, the entire
class of PP&E to which the asset belongs
has to be revalued
Examples of separate classes: land,
machinery, motor vehicles, office equipment
Items in a class of PP&E are revalued
simultaneously to avoid selective revaluation
of assets
Depreciation under IFRS cont’d
If an asset is revalued up, the increase is
credited directly to equity under the heading
of revaluation surplus
An increase is recognized in P&L to the extent
that it reverses a revaluation decrease of the
same asset previously recognized in P&L
When PP&E is revalued, any accumulated
depreciation can be treated in one of two
ways:
Example
Facts: A company using IFRS (revaluation
model) has a piece of equipment with a cost
of $10,000 and acc. depr. of $2,000. The
equipment is revalued to a FMV of $20,000
Balance Sheet Presentation:
Before After
Equipment $10,000 $25,000
Less: acc depr 2,000 5,000
Carrying value $8,000 $20,000
Impairment under GAAP
Current Authoritative Source – (SFAS No.
144supersedes SFAS No. 121)
For purpose of this discussion, impairment
does not include goodwill or intangible
assets that are not amortized, which are
covered in SFAS No. 142
Impairment under GAAP cont’d
Five central questions must be answered in
order to understand impairment under
GAAP:
Impairment under GAAP cont’d
What is impairment?
Impairment is the condition that exists when
the carrying amount of a long-lived asset
exceeds its fair value
When is an impairment loss recognized?
An impairment loss is recognized only if the
carrying amount of a long-lived asset is not
recoverable and exceeds its fair value
Impairment under GAAP cont’d
When is the carrying amount not
recoverable?
When the carrying amount exceeds the sum of
the undiscounted cash flows expected to
result from the use and eventual disposition of
the asset
Undiscounted cash flows = [ future cash
inflows (including sale of the asset) – future
cash outflows (including maintenance costs,
but not interest charges)]
Impairment under GAAP cont’d
How is an impairment loss measured?
An impairment loss is the amount by which the
carrying amount of a long-lived asset exceeds
its fair value
When is a long-lived asset tested for
recoverability?
Whenever events or changes in
circumstances indicate that its carrying
amount may not be recoverable
Impairment under GAAP cont’d
Important Note About Impairment:
Restoration of a previously impaired loss is
prohibited unless the long-lived asset is to
be disposed of by sale
Impairment under IFRS
Current Authoritative Source – IAS 36
Four central questions must be answered in
order to understand impairment under
IFRS:
Impairment under IFRS cont’d
What is impairment?
Impairment is the condition that exists when
the carrying amount of a long-lived asset
exceeds its recoverable amount
Recoverable amount of a long-lived asset is the
higher of its fair value and discounted cash
flows
Discounted cash flows are calculated the same
way as for GAAP except that a discount rate is
applied to the cash flows
Impairment under IFRS cont’d
When is an impairment loss recognized?
An impairment loss is recognized only if the
carrying amount of a long-lived asset is more
than its recoverable amount
How is an impairment loss measured?
An impairment loss is the amount by which the
carrying amount of a long-lived asset exceeds
its recoverable amount
Impairment under IFRS cont’d
When is a long-lived asset tested for
recoverability?
An entity must assess at the end of each
reporting period whether there is any
indication that a long-lived asset may be
impaired
For a company currently using GAAP a change to
IFRS could result in smaller, more frequent,
impairment charges
Impairment under IFRS cont’d
The one big difference between IFRS and
GAAP:
Impairments of long-lived assets that are not
being held for sale can be fully reversed !!!
For a company currently using GAAP a
change to IFRS could result in greater
fluctuations in net income and asset valuations
on the balance sheet
Example
Facts: A company owns a piece of machinery
that has a carrying value of $50,000 at year
end and recent developments in machine
technology have called into question the
recoverability of the machine’s carrying
amount.
Example cont’d
FMV = $42,000 / Discounted CF’s = $37,000
Undiscounted CF’s = $39,000 / Recoverable
Amount = $42,000
GAAP IFRS
CV $50,000 $50,000
- 42,000(FMV) - 42,000(R Amt)
Impairment $8,000 $8,000
Example cont’d
FMV = $36,000 / Discounted CF’s = $37,000
Undiscounted CF’s = $39,000 / Recoverable
Amount = $37,000
GAAP IFRS
CV $50,000 $50,000
- 36,000(FMV) - 37,000(R Amt)
Impairment $14,000 $13,000
Questions?