Chapter 6

Property, Plant, and

Equipment, and Intangible
Assets

1
 Chapter 6’s Learning Objectives

1. Measure and account for the cost of property, plant, and

equipment
2. Measure and record depreciation on property, plant, and
equipment
3. Explain additional topics in accounting for long-lived
tangible assets.
4. Account for intangible assets
5. Analyze a company’s return on assets
6. Analyze the cash flow impact of long-lived asset
transactions

• .

2
Canadian Tire’s Balance Sheet

• .

3
Learning Objective One

Measure and account for the cost of

property, plant and equipment

4
 Long-Lived Assets

• Long-lived assets are actively used in operations to generate

future benefits beyond one year.
• They are classified into:
1. Tangible assets, and
2. Intangible assets

5
Long-Lived Assets – Expense Accounts
Asset Account Related Expense Account
(Balance Sheet) (Income Statement)
Tangible assets
Computers Depreciation
Buildings, Machinery, & Equipment Depreciation
Furniture and Fixtures Depreciation
Land None

Asset Account Related Expense Account

(Balance Sheet) (Income Statement)
Intangible assets
Copyrights Amortization
Patents Amortization
Goodwill-no depreciation Impairment losses

price payed to purchase a company 6

 Long-Lived Assets – Tangible Assets

• Tangible assets are resources with physical substance that are used in
the operations of a business and are not intended for sale to
customers.

 Also called PP&E; long-term assets; fixed assets; and capital

assets.

 E.g., buildings, equipment, land, fixtures, and etc.

• Long-lived assets do not last forever and their usefulness decreases

over time. Thus, the cost of these assets must be expensed over
their useful lives (called depreciation).

 Land is an exception  not depreciated because its usefulness

does NOT decrease.

 But, land improvements (e.g., parking lots, fence) are depreciable.

7
 Tangible Assets – Expense Accounts

Asset Account Related Expense Account

(Balance Sheet) (Income Statement)
Tangible assets
Computers Depreciation
Buildings, Machinery, & Equipment Depreciation

Furniture and Fixtures Depreciation

Land None

• When tangible assets are used the expense is referred to as

Depreciation expense.
• Land is not depreciated because its usefulness does not decrease.

8
 Measuring the Acquisition Cost of PP&E

• The basic working rule for determining the cost of an asset:

 The cost of any asset is the sum of all the costs incurred
to bring the asset to its location and intended use.
original price + Insurance + transportation and etc
• The cost of a PP&E asset includes purchase price, plus any
taxes, commissions, and other amounts paid to make the
asset ready for use.
• Since the specific costs differ for the various types of PP&E,
we will discuss the major groups separately in the next few
slides.

9
 Measuring the Acquisition Cost of Land

• The cost of land includes:

 Purchase price
 Real estate commissions
 Survey & legal fees
 Back property taxes paid
 Grading and removing unwanted buildings

• Note that the cost of land does NOT include the cost of
fencing, paving, security systems, and lighting.
 These are separate tangible assets—called land
improvements—and they are subject to depreciation.
so need to be tracked separately
10
Measuring the Acquisition Cost of Land - Example
• A business signs a $300,000 note payable to purchase land for a
new production facility.
• It pays $10,000 in real estate commission, $8,000 in back property
tax, $5,000 for removal of an old building, a $1,000 survey fee, and
$260,000 to pave the parking lot.
• What is the cost of the land?
• Purchase price of land $300,000
• Add related costs:
• Real estate commission $10,000
• Back property tax 8,000
• Removal of buildings 5,000
• Survey fees 1,000 24,000
• Total cost of land $324,000
24000 would be tracked
in an account called 11
 Measuring the Acquisition Cost of Buildings
• The cost of constructing a building includes:
 Architectural fees, building permits, and contractors’ charges
 Materials, labor, and overhead
 Interest on money borrowed to finance the construction

• The cost of purchasing an existing building (new or old)

includes:
 Purchase price
 Brokerage commission
 Sales and other taxes paid
 all expenditures to repair and renovate the building for its
intended purpose
12
 Measuring the Acquisition Cost of Equipment
• The cost of equipment includes:
 Purchase price (after discounts)
 Transportation
 Insurance in transit
 Non-refundable sales and other taxes
 Purchase commission
 Installation costs, and any expenditures to test the asset before it
is placed in service
 Special platform used to support the equipment
• Then after the asset is up and running, insurance, taxes, and
maintenance costs are recorded as expenses, not as part of the
asset’s cost.

13
 Lump-Sum (Basket) Purchases of Assets

• Businesses often purchase several assets as a group, or a “basket,”

for a single lump-sum amount.

• For example, a business may pay one price for land and a building.
The company must identify the cost of each asset.

 The total cost is divided among the assets according to their

relative fair values.

15
 Lump-Sum (Basket) Purchases of Assets - Example

• On January 1, WestJet purchased land and building for $300,000

cash (acquisition cost).
• The appraised market values for the building and land are $189,000
and $126,000, respectively.
• How much of the $300,000 purchase price will be charged to the
building and land accounts?
Fair market % of total Total Cost of each
value Total market market value acquisition asset
Asset (A) value (B) (C) = (A/B) cost (D) (C)X(D)
Land $126K $315K 40% $300K $120K
Building $189K $315K 60% $300K $180K
Total $315K 100% $300K

Land (+A) $120K

Building (+A) $180K
Cash (-A) $300K
16
 Capital Expenditures (Asset) vs.
Immediate Expenditures
• Long-lived assets usually require expenditures during their useful lives to
enhance or maintain their productive capacity.
• Most companies expense small costs, say, below $1,000.
• Other expenditures can be capitalized as an asset and depreciated or
immediately expensed based on the nature of the expense. This requires
some judgment.
Capital expenditure (asset) Immediate expenditure
Betterment Repairs & maintenance
Increases productivity Does not increase productivity
Extends useful life Does not extend useful life
Improvement, expansion Maintains normal operating
condition
Non-recurring Recurring
 Record as an increase in  Recorded as an expense in
asset (Dr. asset) the period (Dr. expense)
17
 Financial Statement Effect of Capital Expenditure and
Immediate Expense

Financial Statement Effect

Current Current
Treatment Statement Expense
Earnings Taxes
Capital Statement of
Expenditure financial position Deferred Higher Higher
account debited
Immediate Statement of earnings Currently
Lower Lower
Expense account debited recognized

• Distinction between the two requires judgment.

• If amounts are not material, most companies expense the item.

Example capitalization policy: “If less than $XX, then expense it.”

18
Learning Objective Two

Measure and record depreciation on

property, plant and equipment

19
 Depreciation
• Depreciation is the process of allocating long-lived assets’
acquisition cost to depreciation expense over their useful life due to
physical wear and tear and/or obsolescence as they are used to
generate revenue.

• Depreciation is a means of cost allocation, NOT a method of

valuation.

• Depreciation is a non-cash deferred expense (see Ch.3 AJE):

 Long-lived assets represent the prepaid cost of a bundle of

future services/benefits.

 They are used every period to generate revenue. A portion of a

tangible asset’s acquisition cost MUST be allocated to
depreciation expense every period in accordance to the
“matching principle” covered in Chapter 3.
20
Accumulated Depreciation and Book Value of PP&E

• Accumulated Depreciation account is a contra asset account that

accumulates the periodic depreciation expenses throughout the asset’s
useful life.

• Under the cost principle, the cost of PP&E is initially recorded on the balance
sheet at its original cost on the acquisition date, and then at its Book Value:

Book Value of PP&E = Acquisition Cost – Accumulated Depreciation

21
Long-Lived Assets Carrying Amount - Example

Acquisition Cost
Property and Equipment:
Aircraft $ 30,000,000
Less: Accumulated depreciation 1,500,000 $ 28,500,00

Carrying Amount
(Book Value)

Carrying Amount (Book Value) ≠ Market Value

Acquisition Cost not equal to market value

22
 Depreciation Expense Calculation
• To calculate depreciation, we must know the following:
1. Cost amount you pay
2. Estimated useful life
 Length of service expected from using the asset.
 May be expressed in years, units of output, kilometres, or some
other measure.
3. Estimated residual value (salvage or scrap value)
 Expected cash value of an asset at the end of its useful life.
 May be zero
• Useful life/salvage value are estimates  depreciation expense is an
estimate.
• The estimated residual value is not depreciated because the company
expects to receive this amount from selling the asset at the end of its useful
life.
23
 Depreciation Expense Calculation – Depreciable Cost

• An asset’s depreciable cost is the asset’s acquisition cost less its

estimated residual value:

Depreciable Cost = Acquisition Cost – Residual Value

• The residual value is not depreciated because the company expects to

receive this amount from selling the asset.
• So, if residual value is zero, the full acquisition cost of the asset is
depreciated.

24
 25

PP&E – Book Value and Residual Value

• As an asset is used in operations to generate revenue each period:

 Accumulated depreciation increases, and
 Book value of the asset decreases.
• At the end of its useful life, the asset is said to be fully depreciated
and its final book value should equal its residual value (refer to slide
28).
• So, for a fully depreciated PP&E:

Its final book value = Its residual value

 Depreciation Methods

• There are 3 main methods for computing depreciation:

1. Straight-line method  (fixed depreciation expense)
2. Units-of-production method  (variable depreciation expense)
3. Declining/diminishing balance(declining depreciation expense)
• These methods allocate different amounts of depreciation to each
period.
• However, they all result in the same total amount of depreciation
over the life of the asset, which is the asset’s depreciable cost.

26
 Straight-line (SL) Method

• SL method allocates the acquisition cost of an asset in equal

periodic amounts over its useful life.

• Depreciation is constant for each year of the asset's useful life.

Depreciable Cost

Depreciation Acquisition Cost – Residual Value

Expense per year =
Useful Life in Years

27
 Straight-Line Method – Example
• At the beginning of the year, WestJet purchased ground equipment
for $62,500 cash.
• The equipment has an estimated useful life of 3 years, and an
estimated residual value of $2,500.

Depreciation $62,500 – $2,500

= = $20K
Expense per Year 3 years

Depreciation Accumulated Accumulated Carrying

Expense Depreciation Depreciation Amount
Year (debit) (credit) Balance (net book value)
$ 62,500
1 $ 20,000 $ 20,000 $ 20,000 42,500
2 20,000 20,000 40,000 22,500
3 20,000 20,000 60,000 2,500
$ 60,000 $ 60,000
Residual Value
28
 Units of Production (UoP) Method

• UoP method assigns a fixed amount of depreciation to each unit of

output, or service, produced by the asset.
 Step 1: Compute depreciation rate per unit by dividing
depreciable amount by total units of production over life.
 Step 2: Compute depreciation by multiplying depreciation rate
by number of units produced in current period.

Step 1: Depreciation Cost – Residual Value

Rate per unit
=
Life in Units of Production

Number of
Step 2: Depreciation Depreciation
= × Units Produced
Expense Rate per Unit
for the Year
29
 Units of Production Method – Example
• At the beginning of the year, WestJet purchased ground equipment for
$62,500 cash.
• The equipment has a 100,000 kilometre useful life and an estimated
residual value of $2,500.
• Equipment was driven 30,000km in year 1, 50,000 km in year 2 , and
20,000 km in year 3.
• Step 1: Depreciation $62,500 – $2,500
= = $0.60 per km
Rate per unit 100,000 km
• Step 2: Depreciation
= $0.60 × 30,000 = $18,000
Expense (yr1)

Depreciation
= $0.60 × 50,000 = $30,000
Expense (yr2)

Depreciation
Expense (yr3)
= $0.60 × 20,000 = $12,000

30
Units of Production Method – Example (cont’d)

Accumulated Carrying
Depreciation Depreciation Amount
Year Kilometres Expense Balance (net book value)
$ 62,500
1 30,000 $ 18,000 $ 18,000 44,500
2 50,000 30,000 48,000 14,500
3 20,000 12,000 60,000 2,500
100,000 $ 60,000

Variable depreciation expense Residual Value

31
 Declining-Balance Method

• Allocates the acquisition cost of an asset over its useful life at

diminishing rate based on a multiple of the straight-line rate, such
that a larger amount of the asset is depreciated in the earlier part of
the asset life.
 Double diminishing balance (DDB) (i.e., straight-line rate times
2) is the most common approach.
• Idea:
 If the asset is more efficient/productive in its earliest years, then
 match higher depreciation expense with higher revenues in the
early years of an asset’s useful life when the asset is more
efficient (matching principle).

32
 Declining-Balance Method – Double Diminishing
Balance Approach
The DDB computes depreciation as follows:
1. Straight-line depreciation (SL) rate: SL rate = (1 / Useful life in years)

2. Double-diminishing balance (DDB) rate: DDB rate = SL rate x 2

3. Depreciation: Multiply the DDB rate by the beginning of period carrying

amount. In the first year of the asset’s life, this is the acquisition cost.
 Ignore the residual value of the asset in computing depreciation,
except during the final year.
Depreciation = beginning of period carrying amount x DDB rate

 In the final year, compute the depreciation amount as the amount

needed to reduce the asset’s carrying value to its residual value:
Depreciation = beginning of period carrying amount – residual value

33
 Declining-Balance Method – Double Diminishing
Balance Approach
All years except final year:

Acquisition Cost – Beg. of Period Double-declining-balance

Accumulated Depreciation (DDB) rate.

Annual Beg. of Period 2

Depreciation =
Expense
Carrying × ( Useful Life in Years
)
Amount

Note: this method ignores residual value until the asset’s last period.
Final year:(when the above equation gives a negative
result)
Annual
Beg. of Period - Residual Value
Depreciation =
Carrying Amount
Expense
34
 Double Declining-Balance Method – Example
• At the beginning of the year, WestJet purchased equipment for $62,500
cash.
• The equipment has an estimated useful life of 3 years and an estimated
residual value of $2,500.
• Calculate the depreciation expense for each of the three years using the
DDB method.
Depreciation in Year 1:

Yr 1 2
Depreciation
expense
= $62,500 × ( 3 years ) = $41,667

Depreciation in Year 2:

Yr 2
2
Depreciation = ($62,500 – 41,667) ×
expense
( 3 years ) = $13,889
Beg. Carrying value 35
Double Declining-Balance Method – Example (cont’d)
Depreciation in Year 3 (Final year):
Yr 3 Depreciation $6,944 - $2,500 = $4,444
expense
=
Beg. CV Residual
Value
• Note: Under this method, we have to force depreciation expense in the final
year so that End of Period Carrying Amount = Residual value.
Depreciation Accumulated Carrying
Expense Depreciation Amount
Year (debit) Balance (net book value)
$ 62,500
1 $ 41,667 $ 41,667 20,833
2 13,889 55,556 6,944
3 4,444 60,000 2,500
$ 60,000

36
 Comparing Depreciation Methods
• The amount of the depreciation expense per year varies depending
on the depreciation method used.
• But the total depreciation expense over the life of the asset is the
same for all three methods. This is because over the life of the
asset, the cost is depreciated down to the residual value under all
three methods.

Amount of Depreciation per Year

Year SL UoP DDB
1 $ 20,000 $18,000 $41,667
2 $ 20,000 $30,000 $13,889
3 $ 20,000 $12,000 $4,444
Total $ 60,000 $ 60,000 $ 60,000

37
 Comparing Depreciation Methods

IFRS directs a business to choose a depreciation method that

reflects the pattern in which the asset will be used.

Double-diminishing-
Straight-line Units-of production
balance
Best for assets that Best for assets that
Best for assets that
generate revenue wear out based on
generate greater revenue
evenly. physical use.
earlier in useful life.

38
Depreciation Patterns

39
 Mid-Chapter Summary Problem

• Carefully study the mid-chapter summary problem on page

291.
• Then, try to solve it on your own without looking at the
solution.

40
Learning Objective Three

Explain additional topics in accounting for

long-lived tangible assets

41
 Depreciation for Partial Years

• Companies purchase plant assets whenever they need them, not

just at the beginning of the year.
• Therefore, companies must compute depreciation for partial
years.
1. Compute depreciation for a full year.
2. Multiply full-year depreciation by the fraction of the year for
which the company held the asset.

Months from date of

purchase to year end
Partial Depreciation = Annual Depreciation X
12

42
 Depreciation for Partial Years - Example

• Suppose a calendar-year business purchases a building on April 1

for $500,000 with an estimated life of 20 years and an estimated
residual value of $80,000.

• What is the current year’s depreciation using the straight-line

method?

Full-year depreciation:
($500,000 – $80,000) ÷ 20 = $21,000

Partial-year depreciation:
$21,000 × 9/12 = $15,750

43
 Chang in Estimates – Useful Life and Residual
Value

After an asset is in use, managers may change the useful life and/or
residual value used to estimate the depreciation on the basis of
experience and new information. This is called a change in
accounting estimate.
 In these cases, depreciation is revised as follows:

Carrying amount at Residual value at

–
date of change date of change
Straight-line =
Remaining useful life at date of change

 Note: depreciation is changed on a going forward basis from the date

of change in estimate. It does not affect depreciation taken prior to this
change.
44
 Changing Useful Life – Example 1

• Estimate the depreciation for an asset with cost of $40,000, useful life of
8 years with no residual value using the straight-line method.

 $40,000 ÷ 8 = $5,000 depreciation per year

• What is the carrying amount after two years?

 $40,000 – $10,000 = $30,000

• At the end of the second year, management believes that the asset will
remain useful for 10 more years (as opposed to the 6 years remaining).

 $30,000 ÷ 10 = $3,000
(new depreciation per year)

45
 Changing Useful Life – Example 2
• WestJet purchased an aircraft for $60M. The aircraft is depreciated using
the straight-line method with a useful life of 20 years and residual value of
$3M.
• In year 5, WestJet changed the estimated useful life to 25 years and
lowered the residual value to $2.4M. Calculate depreciation expense for
the 5th year?

Acquisition cost $ 60,000,000

Accumulated depreciation (years 1-4)
($2,850,000 per year × 4 years) 11,400,000
Remaining carrying amount 48,600,000
Less: New residual value 2,400,000
New depreciable amount 46,200,000
Divide by remaining life (25 - 4) ÷ 21
Revised annual depreciation $ 2,200,000
46
 Fully Depreciated Assets

• A fully depreciated asset is an asset that has reached the end of its
estimated useful life.
 The carrying value of a fully depreciated asset is the residual value
or zero if the asset has no residual value.
• If the company continues using a fully depreciated asset, it will not
recognize any more depreciation expense for the asset but:
 Both the asset account and its accumulated depreciation
account remain in the ledger with no additional depreciation
entries.
• When the company disposes of the asset, both the asset account and
its accumulated depreciation account is removed from the books.
 We’ll cover accounting for the disposal of an asset in the next few
slides.

47
 Derecognition (disposal or sale) of PPE
• Eventually, a PPE asset wears out or becomes obsolete and, thus,
ceases to serve a company’s needs.
• Under IFRS, a business derecognizes PPE that is no longer useful or
has been sold (i.e., take the PPE and related accounts off books)
• To account for disposal or sale of an asset:
1. Update depreciation and record.
2. Calculate the asset’s final carrying amount:
 Carrying Amount = Acquisition Cost – Accum. Depreciation
3. Calculate the gain or loss, if any:
 Gain (Loss) = Proceeds – Carrying Amount
*Note that if the asset is disposed of, proceeds = 0.
4. Record the disposal or sale.
48
 Case 1: Disposing of a Fully Depreciated Asset
Suppose the final year’s depreciation expense has just been recorded to fully
depreciate a machine that cost $50,000 and is estimated to have zero
residual value. Thus, the machine’s accumulated depreciation totals
$50,000. Assuming that this asset is disposed of, record the disposal:
1. Update depreciation. Already recorded as per question.
2. Calculate carrying amount. Since cost = accumulated depreciation at
time of disposal, CV = 0
3. Calculate gain or loss. No gain or loss since proceeds = 0 and carrying
value=0  no effect on equity.
4. Record the disposal.

Accumulated depreciation (-XA) XXX

Equipment (-A) XXX

49
 Case 2: Disposing of an Asset Before Being Fully
Depreciated
Suppose M&M Meat Shops disposes of store fixtures that cost $4,000.
Assume accumulated depreciation up to date of disposal is $3,000, and
the carrying amount is $1,000. The asset is junked for no proceeds.
Record this disposal.
1. Update depreciation. Already recorded as per question.
2. Calculate carrying amount: Acquisition cost – Accumulated
depreciation = $4,000 - $3,000 = $1,000
3. Calculate gain or loss: The company incurs a loss on the disposal in
the amount of the asset’s net carrying amount ($1,000) 
decrease in equity. [proceeds – CV = $0 - $1,000 = ($1,000)]
4. Record the disposal.
Accumulated depreciation – Store Fixtures (-XA) 3,000
Loss on the Disposal of Store Fixtures (+Loss  -SE) 1,000
Store Fixtures (-A) 4,000

50
 Case 3: Selling PPE

• When a company sells a PPE asset for cash:

 The company incurs either a gain or loss:

Gain (Loss) = Proceeds – Carrying Amount

If cash received
is greater than Credit GAIN
carrying amount

If cash received
is less than Debit LOSS
carrying amount

51
 JE to record sale of PPE
 If loss on sale:
Date Accounts Debit Credit
Cash XXX
Accumulated depreciation – PPE (-XA) XXX
Loss on disposal of PPE (+Loss  -SE) XXX
PPE (-A) XXX

 If gain on sale:

Date Accounts Debit Credit

Cash XXX
Accumulated depreciation – PPE (-XA) XXX
Gain on disposal of PPE (+Gain  +SE) XXX
PPE (-A) XXX

52
 Case 3: Selling PPE – Example 1

• Assume that on January 1, 2014, a company purchased fixtures for $10,000

cash, with an estimated useful life of 10 years and no residual value.
• As of year-end 2016, the accumulated depreciation on the fixtures is $3,000
based on straight-line method.
• On September 30, 2017, the company sold the fixtures for $7,000 cash.
1. Update depreciation for the period from December 31, 2016 to September
30, 2017 (9 months).
 Annual depreciation: ($10,000 - $0)/10 = $1,000
 Partial depreciation: $1,000 x 9/12 = $750

Date Accounts Debit Credit

Sept. 30, Depreciation Expense (+A) 750
2017 Accumulated Depreciation - Fixtures (+XA) 750

53
 Case 3: Selling PPE – Example 1 (cont’d)

2. Calculate carrying amount:

Fixtures cost $10,000

Accumulated depreciation up to the date of sale ($3,000 + $750) $ 3,750
Carrying amount up to the date of sale $ 6,250
3. Calculate gain or loss:
 Gain (loss) = Proceeds – CV = $7,000 - $6,250 = $750
 Therefore, there is a gain on this sale of $750.

4. Record the sale of PPE:

Date Accounts Debit Credit
Sep. Cash (+A) 7,000
30, Accumulated Depreciation – Fixtures (-XA) 3,750
2017
Gain on Sale of Fixtures (+Gain  +SE) 750
Fixtures (-A) 10,000
54
 Case 3: Selling PPE – Example 2

• Air Canada sold aircraft for $11,000,000 cash at the end of its 17th
year of use.
• The aircraft originally cost $30,000,000 with useful life of 25 years,
and was depreciated using the straight-line method with zero
residual value.
• Prepare the journal entry for the sale of this aircraft.

55
 Case 3: Selling PPE – Example 2 (cont’d)

1. Update depreciation: Aircraft was sold at the end of the 17th year
 Full Depreciation
• Yr 17 depreciation expense (straight-line method):

 ($30M – $0) ÷ 25 years = $1.2M

Date Accounts Debit Credit

Depreciation expense (+E) $1.2M
Accumulated depreciation (+XA) $1.2M

2. Calculate carrying amount:

 Accumulated Depreciation = (17 years × $1.2M) = $20.4M
 CV = $30M (Acqn. Cost) – $20.4M (Accum. Dep) = $9.6M

56
 Selling PP&E – Example 2 (cont’d)
3. Calculate gain or loss on sale:
 Gain = Proceeds – Carrying Amount (book value)
= $11M – $9.6M
= $1.4M

4. Record the sale of aircraft:

Date Accounts Debit Credit

Cash (+A) $11M
Accumulated depreciation - aircraft (-XA) $20.4M
Gain on sale of aircraft (+Gain +SE) $1.4M
Aircraft (-A) $30M

57
 Special Issues in Accounting for Property, Plant,
and Equipment

• Long-lived assets are complex because:

 Depreciation affects income taxes

 Significant components of PPE should be depreciated separately

 Assets should be tested regularly for impairment

 Revaluation method could be used to measure PPE

58
 Depreciation for Tax Purposes

• Many businesses use the straight-line method for reporting

property, plant and equipment depreciation expense on the income
statement.

• However, the Income Tax Act requires taxpayers to use

accelerated depreciation (up to specified Capital Cost Allowance
maximums) for tax purposes.

• In other words, a taxpayer can use one method for accounting

purposes and another method for tax purposes.

• This topic is discussed in greater detail in an intermediate

accounting course.

59
 Depreciating Significant Components

• IFRS require that significant components of an item of property,

plant, and equipment be depreciated separately.

• For example, Air Canada buys aircraft for use in its operations.

 Air Canada depreciates their aircraft and engines over 20-25

years,

 while the cabin and interior equipment are depreciated over the
lesser of 5 years or the remaining useful life of the aircraft.

60
 Impairment
• At each reporting date, a company should review its property, plant,
and equipment to see if an asset is impaired.
 Impairment occurs when carrying amount > recoverable
amount

• Recoverable amount is determined to be the higher of an asset’s

• fair value (less costs to sell); and

• value in use - present value of estimated future cash flows

expected to be earned from the continued use of an asset and
from its disposal at the end of its useful life.

• Impairment may be caused by many factors including obsolescence,

physical damage, and loss in market value.

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 Impairment (cont’d)

• The JE to record impairment is:

Date Account Debit Credit
Loss on Impairment (+Loss  -SE) XXX
Accumulated Depreciation (+XA) XXX

• If the situation changes such that the new recoverable amount is

greater than the carrying amount, IFRS permits a company to
write-up the carrying value, but only by an amount equal to or less
than the amount of the impairment loss taken.

• The accounting standards for private enterprises (ASPE) require a

company to review its property, plant, and equipment only when
impairment is suspected. No reversal of the write-off is allowed.

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 Impairment Test - Example

Greater of

Step 1: Impairment test: Book value > recoverable amount; therefore,

asset is impaired.

Step 2: Calculate and record impairment:

 $15M (book value) - $14M (recov. Amount) = $1M

Loss on Impairment (+Loss  -SE) $1M

Asset (-A) $1M
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 Revaluation Model
• IFRS permit companies to value PP&E at historical cost (cost model) or to
revalue them to their fair value (revaluation model).
 Fair value is the price at which the asset could be sold. A professional
valuator would do this revaluation regularly.
• Under the revaluation model, the asset is recorded at cost when purchased
but then measured at its fair value less any accumulated depreciation and
any accumulated losses.
• Argument in favour of revaluation: Historical cost of an asset purchased 15
or 20 years ago is not meaningful because of inflation.
• Argument against revaluation: Lack of objectivity involved in estimating an
asset’s current cost.
• This topic is discussed in greater detail in an intermediate accounting course.

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 65

The remainder of the slides for

Chapter 6 will be posted on
Wednesday, November 8.