Hi Trang, For some reason I can't post this as a reply to you - so here it is: That's right. If there hasn't been any previous impairments, then you can't increase the carrying value (it'd be questionable as to why an impairment test would be done in the first place, but these things happen). If there has been a previous impairment, you can reverse that impairment, but only to what would have been the case had no impairment happened previously (see AASB136.117). This is the ceiling. Hope that helps Cheers Dave
Hi Mr. Bond. I need to clarify something. My question is about the CA after reverse an impairment loss. On your last example, impairment recognised was 300k, and the reversal was 225k. I've understood that, but, my question is about the balance on Accumulated Impairment Account at balance sheet, that will be 75k. In the case that you've reversed the 225k, you can't reverse more, that was the limit. But after that, what would be the CA, will that be, (Cost-Acc. Depc- 75k?). The 75k, is understood as, accumulated impairment loss balance, and can be reversed in the future, but, you are unable the reverse the asset by that amount, right? So, will that amount be just part of that asset for the remaining life of the asset, and will be used to calculate the CA? Thanks.
Hi Fahim, that's correct. The accumulated impairment stays there. The rationale for this is that the accumulated depreciation account only holds $325,000 at the end of 4 years (100,000 + 100,000 + 62,500 + 62,500), whereas had there been no impairment, the account would be at $40,000 (4 * 100,000). That remaining accumulated impairment account of $75,000 is effectively making up for this.
@@drdavebond appreciate. So the bottom line here is, under the cost model, if you have ever booked an impairment for a PPE on the 1st Year of useful life, and reverse by the full amount that impairment on the 3rd Year of useful life (for example, anytime after that 1st year), there always be a credit amount sitting on the Accumulated Impairment Account (Balance Sheet), even if you reverse by the full amount of the ceiling (this is because IAS 36 says that, The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised.). This amount, is the difference between the impairment booked and the reversal. So, always there is a credit amount, and that credit amount can't be reversed ever, because the ceiling has been reached. That amount sitting on the Accumulated Impairment Account (Balance Sheet) will going to impact the CA of the asset, using the following formula, CA=Cost-Depreciation Acc. - Impairment Acc. Many thanks.
Thanks for the suggestion. I'm reviewing a content plan for the second half of the year, and will add that to the list. Investment property revaluations are actually relatively simple to account for. IAS 40.32A - the entity can choose the fair value of cost model (just like IAS 16). The main difference is that if they choose fair value, then all gains and losses go into profit for the period (IAS 40.35) as compared to using the revaluation surplus account.
Hi @drdavebond! I can understand the entries so well, but I have a confusion to know whether we use the Revaluation (downward) entries in IAS 16 or use the Impairment entries (Revaluation model) mentioned in IAS 36 in the case that the company using Revaluation model and the market value of the asset goes down enough. IAS 16: Db Revaluation Reserve Db Revaluation loss Cr Asset But IAS 36: If a revaluation model is applied, then the impairment loss is recognized as Revaluation surplus (Db) OR Loss on impairment (Db) Allowance for asset impairment (Cr) (we do not directly credit to the asset's account, but we use " Allowance for asset impairment" to reduce the net book value of the asset. Thank you so much!
Hi Ahmed, you always need to check for indicators of impairment. In what I've done here I've just focused on the revaluation model aspects, without adding in the impairment. Just to simplify the ideas.
Hi Kamal, you use the carrying value at the time with the remaining useful life. So in the example here, the ceiling is $600,000 with 6 years left. Residual is still $0. So depreciable amount is $600,000 ($600,000 - $0). SL = $100,000 per year ($600,000/6 = $100,000). Hope that helps.
amber M Hi Amber. The $500,000 was the Recoverable Amount for the initial impairment. This then gets treated as cost to work out any remaining depreciation.
drdavebond Would that be the only exception of being able to use something other than Historical Cost, under the Straight-line method of depreciation? i.e. when impairment has occurred, instead of using historical cost, you must use the carrying amount?
Hi Olebogeng - the $325,000 comes from the original $100,000 per year depreciation for two years plus the additional $62,500 per year depreciation for two years. $200,000 + $125,000 = $325,000. In an asset impairment, the accumulated depreciation isn't touched.
This video is really helpful. However, i just have one doubt. How did you calculate the depreciation amount after the impairment conditions were lifted. i.e. how did you get the depreciation amount as $62500. Please can you help me with the calculations
Hey I know two months have past ....If your still not sure here goes. You have to adjust the annual depreciatipn after the impairment...Thie means your Recoveravle amount becomes your Carry Amount...In the video the recoverable amount was R500' and the remaining useful life was 8 years... 500 ÷ 8 = 62.5 :)
I'm a first year college student in the Philippines and I am having difficulty in understanding impairment loss since we are having discussions through chat. Could there be any simple explanation for this 😔 thank youuu. Means alot
Hi Hana, The main idea of impairment losses are that the value of the asset in the books (i.e. the carrying value) cannot exceed the actual value (i.e. the recoverable amount - which is the higher value you'd get from using the asset or selling the asset) of the asset. Say I have an asset on my books at $10,000, but I could only get $8,000 from selling or using it - then it's impaired, and we'd have to write it down by $2,000. Does that help? Cheers Dave
1/ Reasons of Impairment Loss of Plant, Property and Equipment Why is there impairment loss happened for plant, property and equipment? 2/ Must the Impairment Loss be Calculated When the recoverable value is less than the book value of plant, property and equipment in yearend date, must the impairment loss be provided and calculated in accounting ledger? 3/ Must we measure the recoverable value of plant, property and equipment every year so as to make a decision for provision for impairment loss of plant, property and equipment in accounting book or not?
Hi +Gigi Gi, thanks for your questions. 1/ PPE can be impaired for many reasons. They could be that the item of PPE is damaged, has become obsolete (i.e. a machine making VHS tapes) or that the asset is performing worse than expected (i.e. a toll road with fewer cars than expected using it). See AASB 136 / IAS 36 paragraph 12 for more info. If an impairment test is done and the recoverable amount is less than the carrying amount, then this difference is the impairment loss. 2/ Yes it does - see AASB 136 / IAS 36 paragraph 59. 3/ No. Each year the entity assesses if there are indications the asset is impairment. (AASB 136 / IAS 36 paragraph 9). If no indication then don't do anything. If an indication of impairment, then calculate the recoverable amount. Hope that helps Cheers Dave
Hi Trang,
For some reason I can't post this as a reply to you - so here it is:
That's right. If there hasn't been any previous impairments, then you can't increase the carrying value (it'd be questionable as to why an impairment test would be done in the first place, but these things happen).
If there has been a previous impairment, you can reverse that impairment, but only to what would have been the case had no impairment happened previously (see AASB136.117). This is the ceiling.
Hope that helps
Cheers
Dave
very very helpful Dr Bond... You simplified everything.
Karabo Kenneth Glad I could help
Thank you! That s great. I have been looking for these videos
U explain better than my tutor...thanx
makelesi ragigia thank you 🙏
Why the adjusted depreciation after 4 years /RA - $ 500 000/ is divided by 8 ?
Hi Mr. Bond. I need to clarify something. My question is about the CA after reverse an impairment loss. On your last example, impairment recognised was 300k, and the reversal was 225k. I've understood that, but, my question is about the balance on Accumulated Impairment Account at balance sheet, that will be 75k. In the case that you've reversed the 225k, you can't reverse more, that was the limit. But after that, what would be the CA, will that be, (Cost-Acc. Depc- 75k?). The 75k, is understood as, accumulated impairment loss balance, and can be reversed in the future, but, you are unable the reverse the asset by that amount, right? So, will that amount be just part of that asset for the remaining life of the asset, and will be used to calculate the CA? Thanks.
Hi Fahim, that's correct. The accumulated impairment stays there. The rationale for this is that the accumulated depreciation account only holds $325,000 at the end of 4 years (100,000 + 100,000 + 62,500 + 62,500), whereas had there been no impairment, the account would be at $40,000 (4 * 100,000). That remaining accumulated impairment account of $75,000 is effectively making up for this.
@@drdavebond appreciate. So the bottom line here is, under the cost model, if you have ever booked an impairment for a PPE on the 1st Year of useful life, and reverse by the full amount that impairment on the 3rd Year of useful life (for example, anytime after that 1st year), there always be a credit amount sitting on the Accumulated Impairment Account (Balance Sheet), even if you reverse by the full amount of the ceiling (this is because IAS 36 says that, The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognised.). This amount, is the difference between the impairment booked and the reversal. So, always there is a credit amount, and that credit amount can't be reversed ever, because the ceiling has been reached. That amount sitting on the Accumulated Impairment Account (Balance Sheet) will going to impact the CA of the asset, using the following formula, CA=Cost-Depreciation Acc. - Impairment Acc. Many thanks.
@@fahimomarismael5591 that's right
@@drdavebond Many thanks and appreciate.
Sir can you do the video on revaluation of investment property
Thanks for the suggestion. I'm reviewing a content plan for the second half of the year, and will add that to the list. Investment property revaluations are actually relatively simple to account for. IAS 40.32A - the entity can choose the fair value of cost model (just like IAS 16). The main difference is that if they choose fair value, then all gains and losses go into profit for the period (IAS 40.35) as compared to using the revaluation surplus account.
Hi @drdavebond!
I can understand the entries so well, but I have a confusion to know whether we use the Revaluation (downward) entries in IAS 16 or use the Impairment entries (Revaluation model) mentioned in IAS 36 in the case that the company using Revaluation model and the market value of the asset goes down enough.
IAS 16:
Db Revaluation Reserve
Db Revaluation loss
Cr Asset
But IAS 36:
If a revaluation model is applied, then the impairment loss is recognized as
Revaluation surplus (Db) OR
Loss on impairment (Db)
Allowance for asset impairment (Cr) (we do not directly credit to the asset's account, but we use " Allowance for asset impairment" to reduce the net book value of the asset.
Thank you so much!
thanks, this is what I needed for my international accounting exam :)
You're welcome VBill - I hope your exam went well.
when using the revaluation model, there is no impairment test required?
Hi Ahmed, you always need to check for indicators of impairment. In what I've done here I've just focused on the revaluation model aspects, without adding in the impairment. Just to simplify the ideas.
tnx so much
Thank you very much for your amazing video! I really appreciate it.
Hi Dave, After reversal of impairment loss, how do we calculate depreciation for next year?
do we use the previous year impairment loss ?
Hi Kamal, you use the carrying value at the time with the remaining useful life. So in the example here, the ceiling is $600,000 with 6 years left. Residual is still $0. So depreciable amount is $600,000 ($600,000 - $0). SL = $100,000 per year ($600,000/6 = $100,000). Hope that helps.
so it means? if RA> CV: no previous impairment->do nothing
have previous impairment-> revaluation reversal to ceilling
While calculating the depreciation for reversal, How did you get 500,000 as cost after adjusting for impairement?
amber M Hi Amber. The $500,000 was the Recoverable Amount for the initial impairment. This then gets treated as cost to work out any remaining depreciation.
drdavebond Would that be the only exception of being able to use something other than Historical Cost, under the Straight-line method of depreciation? i.e. when impairment has occurred, instead of using historical cost, you must use the carrying amount?
This was really helpful, but can you please make another video but using the revaluation model. PLEASE!!!
Thanks sir! better than my tutor!!!
You're more than welcome RS L
can i have the financial statements of companies please.
the second accumulated depreciation of 32500 how was it done, because 62500*2 years is 125000??
Hi Olebogeng - the $325,000 comes from the original $100,000 per year depreciation for two years plus the additional $62,500 per year depreciation for two years. $200,000 + $125,000 = $325,000. In an asset impairment, the accumulated depreciation isn't touched.
Thank you soo much, wish i had found this video before!!
Thanks Jesus
This video is really helpful. However, i just have one doubt. How did you calculate the depreciation amount after the impairment conditions were lifted. i.e. how did you get the depreciation amount as $62500. Please can you help me with the calculations
Hey I know two months have past ....If your still not sure here goes. You have to adjust the annual depreciatipn after the impairment...Thie means your Recoveravle amount becomes your Carry Amount...In the video the recoverable amount was R500' and the remaining useful life was 8 years... 500 ÷ 8 = 62.5 :)
Thanks very much Dr...u are perfect
That is very kind of you Shafelao
I'm a first year college student in the Philippines and I am having difficulty in understanding impairment loss since we are having discussions through chat. Could there be any simple explanation for this 😔 thank youuu. Means alot
Hi Hana,
The main idea of impairment losses are that the value of the asset in the books (i.e. the carrying value) cannot exceed the actual value (i.e. the recoverable amount - which is the higher value you'd get from using the asset or selling the asset) of the asset.
Say I have an asset on my books at $10,000, but I could only get $8,000 from selling or using it - then it's impaired, and we'd have to write it down by $2,000.
Does that help?
Cheers
Dave
Thank you Mr Bond..
made on 2014 but still help in 2016
Thank you Dr Dave Bond
You're welcome Immanuel
Very helpful lecture . I haven't located your email . Could you scribble down in your profile?
Hi Hilal - if you google David Bond accounting, you'll find my staff profile and email
saraha ma fhemet l reversal ktir
Hi Mohamad, sorry, I'm not too sure what you're asking.
cheers mate
You're welcome Jimmy
Jimmy Vitali poooooh
Thank you
+Eric Mabasa You're more than welcome!
Thankyou so much sir
1/ Reasons of Impairment Loss of Plant, Property and Equipment
Why is there impairment loss happened for plant, property and equipment?
2/ Must the Impairment Loss be Calculated
When the recoverable value is less than the book value of plant, property and equipment in yearend date, must the impairment loss be provided and calculated in accounting ledger?
3/
Must we measure the recoverable value of plant, property and equipment every year so as to make a decision for provision for impairment loss of plant, property and equipment in accounting book or not?
Hi +Gigi Gi, thanks for your questions.
1/ PPE can be impaired for many reasons. They could be that the item of PPE is damaged, has become obsolete (i.e. a machine making VHS tapes) or that the asset is performing worse than expected (i.e. a toll road with fewer cars than expected using it). See AASB 136 / IAS 36 paragraph 12 for more info. If an impairment test is done and the recoverable amount is less than the carrying amount, then this difference is the impairment loss.
2/ Yes it does - see AASB 136 / IAS 36 paragraph 59.
3/ No. Each year the entity assesses if there are indications the asset is impairment. (AASB 136 / IAS 36 paragraph 9). If no indication then don't do anything. If an indication of impairment, then calculate the recoverable amount.
Hope that helps
Cheers
Dave
Thank you