ACCOUNTING
Chapter 22-24
Impairment- a fall in the market value of an asset so
that the recoverable amount is now less than the
carrying amount in the statement of financial
position
Carrying Amount- amount recognized after
deducting accumulated depreciation and
accumulated impairment loss
Relatively straightforward- basic principle
underlying impairment of asset
Main Accounting Issues
1. Indication of possible impairment
2. Measurement of recoverable amount
3. Recognition of impairment loss
Value in Use- present value or discounted value of
future net cash flows expected to be derived from an
asset
Current Pretax Rate- discount rate in estimating
future cash flows
Recoverable Amount- is the fair value less cost of
disposal of value in use, whichever is use
Fair Value- price that would be received to sell an
asset in an orderly transaction between market
participants at the measurement date
Cost of Disposal- incremental cost directly
attributable to the disposal of an asset, excluding
finance cost and income tax expense
Example of Cost of Disposal
1. Legal cost
2. Stamp duty and similar transaction tax
3. Cost of removing the asset
4. Direct cost in bringing the asset into
condition for sale
If the recoverable amount of an asset is less than the
carrying amount, an impairment loss has occurred.
If the recoverable amount of an asset that has
previously been impaired turns out to be higher than
the current carrying amount, the carrying amount of
the asset shall be increased to new recoverable
amount.
The reversal of the impairment loss shall be recognized
immediately in the income statement as gain on
reversal of impairment loss.
Any reversal of an impairment loss on a revalued asset
shall be credited to income.
Journal Entries
1. To record impairment loss
Impairment Loss xx
Accumulated Depreciation xx
2. To record depreciation
Depreciation xx
Accumulated Depreciation xx
3. To record impairment reversal
Accumulated Depreciation xx
Gain on Reversal of Impairment xx
Cash Generating Unit- smallest identifiable group of
assets that generate cash inflows from continuing use
that are largely independent of the cash inflows from
other assets or group of assets
- generates revenue and cash inflows
independently
As a basic rule, the recoverable amount of an asset
shall be determined for the asset individually.
The recoverable amount of a cash generating unit is
equal to the value in use because the unit is not to be
disposed of.
When an impairment loss is recognized for a CGU,
this loss shall be allocated to the assets of the unit in
the following order:
a. goodwill
b. noncash assets of the unit prorate
An impairment loss recognized for goodwill shall not
be reversed in a subsequent period.
Provision- existing liability of uncertain timing or
uncertain amount
- may be the equivalent of an estimated
liability or a loss contingency that is
accrued because it is both probable and
measurable
Legal Obligation- an obligation arising from a
contract legislation or other operation of law
Constructive Obligation- an obligation that is
derived from an entity’s actions
Constructive Obligation- exists when the entity
from an established pattern of practice or stated
policy has created a valid expectation that it will
accept certain responsibilities
Obligating Event- past event that leads to a present
obligation
- an event that creates a legal or constructive
obligation because the entity has no realistic
alternative but to settle the obligation created
by the event
An outflow of resources is regarded as probable if the
event is more likely than not to occur, meaning, the
probability that the event will occur is greater than the
probability that it will not occur.
Rule of Thumb
1. Probable- more than 50% likely to occur
2. Possible- 50% or less likely to occur
3. Remote- 10% or less likely to occur
Use of estimates- an essential part of the
preparation of financial statements and does not
undermine their reliability
Where no reliable estimate can be made, no liability is
recognized.
Best estimate- amount that an entity would
rationally pay to settle the obligation at the end of
reporting period to transfer it to a third party at that
time
Where there is a continuous range of possible
outcomes and each point in that range is as likely as
any other, the midpoint of the range is used.
Weighting- used to estimate the obligation where
the provision being measured involves a large
population of items
Measurement Considerations
1. Risks and uncertainties
Prudence- dictates that caution is needed in making
judgment under conditions of uncertainty so that
income and assets are not overstated, or expenses
and liabilities are not understated
2. Present value of obligation
The discount rate should be a pretax rate that reflects
the current market assessment of the time value of
money and the risk specific to the liability.
3. Future events
Future events that affect the amount required to settle
an obligation shall be reflected in the amount of a
provision where there is a sufficient evidence that
they will occur.
Such events include:
a. New legislation
b. Changes in technology
4. Expected disposal of assets
An entity shall recognize gain on disposal at the time of
the disposal of the assets.
5. Reimbursements
It shall be recognized when it is virtually certain that
reimbursement would be received if the entity settles
the obligation.
It is treated as a separate asset.
The amount of reimbursement shall not exceed the
amount of the provision.
6. Changes in provision
Provisions shall be reviewed at every end of the
reporting period and adjusted to reflect the current
best estimate. It shall be reversed if it is no longer
probable that an outflow of economic benefits would
be required to settle the obligation.
7. Use of provision
A provision shall be used only for expenditures for
which the provision was originally recognized.
8. Future operating losses
Provision shall not be recognized for future operating
losses.
9. Onerous contract
The present obligation under the contract shall be
recognized and measured as a provision.
Onerous Contract- the unavoidable costs of meeting Essential Criteria
the obligation under the contract exceed the
1. Identifiability- must be separable and arises
economic benefits expected to be received under it
from contractual or other legal rights
Examples of Provisions 2. Control- power of the entity to obtain the
future economic benefits flowing from the
1. Warranties
intangible asset and restrict the access of
2. Environmental contamination
others to those benefits
3. Decommissioning or abandonment costs
3. Future economic benefits- may include
4. Court case
revenue from the sale of products of services,
5. Guarantee
cost savings, or other benefits resulting from
Contingent Liability- a possible obligation that the use of the asset by the entity
arises from past event and whose existence will be
An intangible asset shall be measured initially at cost.
confirmed only by the occurrence or nonoccurrence
of one or more uncertain future events not wholly The cost of a separately acquired intangible asset
within the control of the entity compromises:
- a present obligation that arises from past a. Purchase price
event but is not recognized because it is not b. Import duties and nonrefundable purchase
probable that an outflow of resources tax
embodying economic benefits will be c. Directly attributable costs
required to settle the obligation or the
Examples of directly attributable costs:
amount of the obligation cannot be measured
reliably 1. Cost of services and materials used
2. Cost of employee benefit
The present obligation is either probable or
3. Fee to register a legal right
measurable but not both to be considered a
4. Amortization of patent
contingent liability.
Example of expenditure that are expensed when
A contingent liability shall not be recognized in the
incurred include:
financial statements but shall be disclosed only.
1. Start up costs
If a contingent liability is remote, no disclosure is
2. Training costs
necessary.
3. Advertising and promotional costs
Contingent asset- possible asset that arises from 4. Business relocation or reorganization costs
past event and whose existence will be confirmed
A subsequent expenditure on an intangible asset
only by the occurrence and nonoccurrence of one or
shall be recognized as expense.
more uncertain future events not wholly within the
control of the entity If the intangible asset is acquired through purchase,
there is a transfer of legal right that would make the
- shall not be recognized because this may
asset identifiable.
result to recognition of income that may
never be realized Examples of identifiable intangible assets are:
- only disclosed when it is probable
1. Patent
If a contingent asset is only possible or remote, no 2. Copyright
disclosure is required. 3. Franchise
4. Trademark
5. Customer list
Intangible Asset- identifiable nonmonetary asset
6. Computer software
without physical substance
7. Broadcasting license, airline right, and
finishing right
An intangible asset is unidentifiable if it cannot be Activities that relate to commercial production do
sold, transferred, licensed, rented, or exchanged not result to research and development cost.
separately.
Development cost may or may not be recognized as an
This unidentifiable intangible asset squarely describes intangible asset depending on very strict criteria.
a goodwill.
Criteria for recognition
Measurement after recognition
1. Technical feasibility of completing
1. Cost Model- carried at cost 2. Intention to complete
2. Revaluation Model- carried at a revalued 3. Ability to use
amount 4. Probable future economic benefits
5. Availability of resources
Intangible assets with limited or finite life are
6. Ability to measure reliably
amortized while those with indefinite life are not
amortized. Costs incurred for materials, equipment, and intangible
asset related to research and development activities
Intangible assets with indefinite useful life are tested
which have an alternative future use can be
for impairment atleast annually.
capitalized.
Amortization- systematic allocation of the
The following should be charged to research and
amortizable amount of an intangible asset over the
development expense:
useful life
1. Cost of materials used
The major problem for an intangible asset is
2. Depreciation of equipment used in research
determining the useful life.
and development
The method of amortization shall reflect the pattern in 3. Amortization of intangible asset used in
which the future economic benefits from the asset are research and development
expected to be consumed by the entity.
If such pattern cannot be determined reliably, the
straight line method of amortization shall be used.
The residual value of an intangible asset shall be
presumed to be zero.
A change in the residual value is accounted for as a
change in accounting estimate.
An entity classifies the generation of the asset into a
research phase and a development phase.
Research- original and planned investigation
undertaken with the prospect of gaining scientific or
technical knowledge and understanding
Research Activity- undertaken to discover new
knowledge that will be useful in developing new
product
Development- application of research findings or
other knowledge to a plan or design for the
production
Development Activity- involves the application of
research findings to develop a new product