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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