Long Term Asset

Only available on StudyMode
  • Download(s) : 33
  • Published : February 13, 2013
Open Document
Text Preview
P1 revaluation model

The revaluation model is an alternative to the cost model for the periodic valuation and reporting of long-lived assets. IFRS permit the use of either the revaluation model or the cost model, while under GAAP; only the cost model is permitted. Revaluation model changes the carrying amount to fair value. But the assumption is the fair value can be measured reliably.

P2 revaluation model& cost model

A key difference between the two models is that the cost model allows definitely decreases in the values of long-lived assets, but the revaluation model may result in increases in the values of long-lived assets.

IFRS allow a company to use the cost model for some classes of assets and the revaluation model for others, but the company must apply the same model to all assets within a particular class of assets and must revalue all items within a class to avoid selective revaluation.

P3 revelation model effect1

Let’s continue to talk about how an asset revaluation affects earnings. It depends on whether the revaluation initially increases or decreases an asset class’ carrying amount.

If a revaluation initially decreases the carrying amount of the asset class, the decrease is recognized in profit or loss. Later, if the carrying amount of the asset class increases, the increase is recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset class previously recognized in profit or loss. Any increase in excess of the reversal amount will not be recognized in the income statement but will be recorded directly to equity in a revaluation surplus account.

P4 revelation model effect2

If a revaluation initially increases the carrying amount of the asset class, the increase in the carrying amount of the asset class goes directly to equity under the heading of revaluation surplus. Any subsequent decrease in the asset’s value first decreases the revaluation surplus and then goes to income.

P5 example

B In this case, the value increase brought about by the revaluation should be recorded directly in equity. The reason is that under IFRS, an increase in value brought about by a revaluation can only be recognized as a profit to the extent that it reverses a revaluation decrease of the same asset previously recognized in the income statement."

P6 impairment of ppe

Accounting standards do not require that property, plant, and equipment be tested annually for impairment. So how can we make sure whether the assets should be tested for impairment? It depends on whether there’s an indication. If there is no indication of impairment, the asset is not tested for impairment. The indication includes evidence of obsolescence, decline in demand for products, or technological advancements etc.

The recoverable amount of the asset should be measured in order to test for impairment. For property, plant, and equip ment, impairment losses are recognized when the asset’s carrying amount is not recoverable

The amount of the impairment loss will affect the balance sheet and income statement. But it is a non-cash item and will not affect cash from operations.


IFRS and U.S. GAAP differ somewhat in the measurement of an impairment loss. Under IFRS, the higher of its fair value less costs to sell and its value in use is recoverable amount. Comparing recoverable amount and carrying value, if carrying amount exceeds the recoverable amount, an impairment loss is measured.


Under US. GAAP, when it exceeds the undiscounted expected future cash flows, an asset’s carrying amount is considered not recoverable. Then the impairment loss is measured as the difference between the asset’s fair value and carrying amount.

P9-11 example
P12 impairment of other assets

Intangible assets with a finite life are amortized, they are tested only when significant events suggest the need to test. Impairment accounting for intangible assets with a...
tracking img