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Revaluations and impairment testing of non-current assets
6.1 If an upward asset revaluation has been undertaken for a depreciable asset, then depreciation in subsequent periods will increase, as the depreciation will be based on the higher revalued amount. Profit on sale of the asset, before the completion of its useful life, will also be lower.
For example, to show how a revaluation can reduce any profit recorded on the ultimate sale of an asset, assume that a reporting entity has land recorded at a cost of $100 000 and then elects to revalue it to $300 000. The difference of $200 000 will be transferred to the revaluation surplus account, and is not treated as part of the periods profits (although the increase will be included as part of other comprehensive income). If in a subsequent period the entity sells the asset at a price of $350 000, then it will record a profit on sale of $50 000 which will be included in profit or loss. Had it not revalued the land it would have recorded a profit on sale of $250 000. While the related revaluation surplus balance of $200 000 will need to be transferred to retained earnings when the revalued asset is ultimately sold, this transfer will be directly to retained earnings and will not go via profit or loss. Hence the transfer will not impact reported profits in the year of transfer.
In summing up, upward asset revaluations will have an effect of decreasing profits in subsequent periods, either through increased depreciation and/or through decreased gains on sale.
6.2 In relation to revaluation increments, paragraph 39 of AASB 116 states:
If an assets carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of a revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a devaluation decrease of the same asset previously recognised in profit or loss.
In relation to revaluation decrements, paragraph 40 of AASB 116 states:
If an assets carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
As we know from the above, if an assets fair value goes up (and it does not represent a reversal of a decrement) then the increment does not go to profit or loss, rather, it goes directly to equity (to revaluation surplus) and is included as part of other comprehensive income. If it goes down, however, it is treated as an expense (to the extent it does not reverse a previous increment) and therefore does impact profit or loss. This seems to be a conservative approach and does seem somewhat conservatively biased. It certainly is not a symmetrical treatment and therefore does seem somewhat biased. Conceptually, financial statements should not be biased in one direction or another. Indeed, the IASB/AASB Conceptual Framework proposes that general purpose financial statements should be free from bias and represent faithfully the underlying transactions in a neutral and objective way. It is a little hard to believe that the treatment of revaluations as required by AASB 116 is totally neutral and unbiased. What do students think?
6.3 A revaluation increment will always go to the statement of comprehensive income, but it might be included either as part of profit or loss, or as part of other comprehensive income. A revaluation increment should be credited to the statement of comprehensive income as part of profit or loss when it reverses a previous devaluation to a particular class of assets. (The initial revaluation decrement would have been treated as an expense.), otherwise the increment goes to a revaluation surplus (and the increase in the revaluation surplus would be shown as part of other comprehensive income in the statement of comprehensive income). As paragraph 39 of AASB 116 states in relation to property, plant and equipment:
If an assets carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
6.4 Pursuant to AASB 136 Impairment of Assets, AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets, intangible assets and property, plant and equipment shall not be disclosed in the financial statements at an amount in excess of their recoverable amount. Recoverable amount is defined in AASB 116 as the higher of an assets fair value less costs of disposal and its value in use. This is consistent with the definition provided in AASB 136.
6.5 A cash-generating unit is defined in AASB 136 as:
the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
In some cases it will not be appropriate to consider the expected net cash inflows applicable to individual assets where a group of assets working together supports the generation of net cash flows relevant to the determination of recoverable amount. In such cases, AASB 136 states that, in order to identify whether there has been a decline in the future economic benefits represented by particular assets, it might be necessary to estimate the net cash inflows for the relevant group of assetswith the group typically being referred to as a cash-generating unitand compare that amount with the carrying amount of the combined group of assets.
6.6 Prior to the release of AASB 116 Property, Plant and Equipment, which became operative in 2005, our former Australian Accounting Standard AASB 1041 Revaluation of Non-current Assets required that revaluation increments and decrements be offset against one another within a class of non-current assets, but that they were not to be offset in respect of different classes of non-current assets. This requirement has now changed. Revaluation increments and decrements may be offset only to the extent that they pertain to a specific, individual asset. However, paragraphs Aus40.1 and 40.2 of AASB 116 allow not-for-profit entities to offset increments and decrements within a class of assetsthe treatment that was available to for-profit entities prior to 2005.
Students should be encouraged to think of logical arguments to support either the old or the new treatment. From a practical point of view, say if a building went up in fair value by $1 million whilst another went down by $800 000 then it is perhaps questionable whether profits should be reduced by $800 000 when in fact the fair value of buildings as a whole actually increased by $200 000. What do students think? Of course the increase in the revaluation surplus for the building of $1 million would be shown as part of other comprehensive incomebut it seems that the media and others still tend to focus on profit or loss rather than total comprehensive income.
6.7 It should be understood that within AASB 116 reporting entities have a choice between the cost model and the revaluation model. A similar choice is available for intangible assets pursuant to AASB 138 (although there is a prohibition on the revaluation of many intangible assets).
If the revaluation model is adopted then AASB 116 requires that after recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.
If the cost model is adopted then after recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. Determination of recoverable amount can often be based on a great deal of professional judgment.
AASB 116 requires that where property, plant and equipment are valued at cost, the carrying value of the asset is not to exceed the recoverable amount. If the recoverable amount (which is defined as the higher of an assets fair value less costs of disposal and its value in use) is less than cost then an impairment loss must be recognised. An impairment loss is defined in AASB 116 as the amount by which the carrying amount of an asset exceeds its recoverable amount.
6.8 Where a revaluation of a non-current asset is undertaken, that revaluation must be to fair value. As paragraph 31 of AASB 116 states:
After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
Fair value is defined in AASB 116 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
6.9 A reporting entity must elect to measure a class of assets at either cost or fair value. An entity can switch from the cost basis to the fair value basis and from the fair value basis to cost. However, the switch from the fair value basis of measurement back to the cost basis is an option only as long as there are justifiable reasons and as long as adequate disclosures of the change in accounting policy are made.
6.10 Paragraph 36 of AASB 116 states that if an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall be revalued. This requirement therefore relies upon the concept of class. According to paragraph 37:
A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entitys operations. The following are examples of separate classes:
(b) land and buildings;
(f) motor vehicles;
(g) furniture and fixtures; and
(h) office equipment.
For the purpose of disclosure in the financial statements, a class of assets would be shown as a single item without supplementary dissection. Arguably, residential land and farming land do not have a similar nature and use in an entitys operations. Hence, a case would be made that they are to be disclosed within different classes of assets.
6.11 It is common for a restriction to be imposed by lenders upon borrowers that restricts the level of debt that a borrowing company may attract. This limitation may be based on some proportion of total assets (see Whittred and Zimmer, 1986). Increasing the book value of assets through a revaluation will decrease the debt to asset ratio, thereby potentially loosening the effects of a debt restriction. Whittred and Zimmer (1986), however, point out that it is quite common that the debt contracts will restrict the ability of the firm to undertake revaluations for the purposes of the debt covenant. For example, it is quite common that only revaluations that are based on valuations given by valuers approved by the debt holders, or their trustee, may be included in the debt-to-asset ratio calculation.
6.12 Such a requirement would appear to be inconsistent with the AASB Conceptual Framework, particularly in relation to the expectation that financial statements be free from bias. Requiring that only decrements be part of the periods profit or loss (as expenses) introduces a conservative bias into the financial statements. Such notions of conservatism are not embodied within the AASB Conceptual Framework, or within the definition and recognition criteria for the elements of accounting as provided in the AASB Conceptual Framework. If decrements are to go to the statement of comprehensive income as an expense (and remember, pursuant to the AASB Conceptual Framework, expenses arise when there is a reduction in assets, other than those relating to distributions to owners, that results in a decrease in equity during the period), then consistent with the AASB Conceptual Framework, the increments would also be transferred to the statement of comprehensive income as income. (Income arises when there is an increase in assets, other than those relating to contributions by owners, that result in an increase in equity during the period.) Nevertheless, accounting standards take precedence over the AASB Conceptual Framework, and AASB 116 (and AASB 138 with respect to intangible assets) requires that, in the absence of reversals of previous increments or decrements, revaluation increments go to a revaluation surplus (and not be treated as part of profit or loss, but would be treated as part of other comprehensive income in the statement of comprehensive income), whilst decrements go to profit or loss within the statement of comprehensive income (and be treated as expenses).
6.13 The revaluation takes place 4 years after acquisition, therefore, assuming the straight-line method of depreciation is used, the accumulated depreciation at revaluation date would be equal to $120 000 x 10% x 4 = $48 000. The written-down book value would be $72 000.
1 July 2015
Dr Accumulated depreciation 48 000
Cr Machinery 48 000
Dr Machinery 38 000
Cr Revaluation surplus 38 000
6.14 AASB 136 Impairment of Assets requires that if the carrying amount of non-current assets is greater than their recoverable amount then they shall be written down to their recoverable amount. Specifically, paragraph 59 of AASB 136 states:
If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
Therefore impairment losses will be recognised when the carrying amount of an asset exceeds the recoverable amount of the asset. Pursuant to AASB 136, different approaches to accounting for an impairment loss of property, plant and equipment will be required depending upon whether the cost model or revaluation model has been adopted. As paragraph 60 of AASB 136 states:
An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in AASB 116). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.
Therefore, if an asset has previously been upwardly revalued, the impairment loss will be recognised by reducing (debiting) the balance of the revaluation surplus as it pertains to the previous revaluation, and crediting accumulated impairment losses. Otherwise, the impairment loss is recognised by recognising an expense directly. In this case, where the cost model is used, we would recognise an impairment loss by debiting an account such as impairment loss and crediting an account called accumulated impairment losses.
6.15 If a previous impairment loss is subsequently reversed then, assuming the asset was being accounted for using the cost model (and not the revaluation model), the reversal of the impairment would be accounted for by debiting the accumulated impairment loss account and recognising incomeperhaps referred to as reversal of previous impairment loss. If the revaluation model was previously adopted and a previous revaluation decrement is reversed then we would debit the asset account and credit an income account entitled gain from reversal of previous revaluation decrement (or similar).
6.16 The entry at the beginning of the year for the revaluation would be:
Dr Accumulated depreciation 20 000
Cr Asset X 20 000
Dr Asset X 40 000
Cr Revaluation surplus 40 000
The entry at the end of the year would be:
Dr Depreciation expense 15 000
Cr Accumulated depreciation 15 000
Depreciation is based on the revalued amount of the asset and the remaining expected life of the asset from the date of revaluation: $15 000 = $120 000 8. In terms of which equity accounts would be impacted by the revaluation, the revaluation surplus would obviously be increased. In the longer run, the revaluation would impact profits and therefore retained earnings. Profits will be impacted because depreciation would be based on the higher revalued amount (thereby reducing profits) and any profit on sale in the next years would be reduced because of the revaluation.
6.17 The act of reversing the revaluation would result in a debit to the revaluation surplus, a debit to accumulated depreciation and a credit to the asset account. As the debit entry will be to the existing revaluation surplus, no expense will be recognised at the time of recognising the revaluation decrement. The effect of this entry would be to reduce future depreciation charges and, therefore, to record higher profits in subsequent periods.
As the motivation for reversing the previous revaluation entry is to increase reported profits, this is hardly an objective approach to accounting, and hence is not consistent with the representational faithfulness recommendations embodied within the AASB Conceptual Framework. It would be a case of creative accounting. Being ethical, the accountant should resist the pressure to perform the adjusting entry.
6.18 No, this is not appropriate action. The cost of machinery acquired in a liquidation sale is not a fair reflection of the recoverable amount of the machinery acquired in 2013. The price paid might not be a true reflection of fair value. As we would know, far value is defined in AASB 13 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets acquired in a liquidation sale would not be acquired at the same cost as they would in an orderly transaction.
If the price paid was a fair reflection, then a write-down would be appropriate. An impairment loss is to be recognised when the carrying amount of the asset exceeds its recoverable amount and unless this is the case, no impairment loss should be recognised.
6.19 In relation to the buildings, the revaluation entries would be:
Dr Accumulated depreciation 100 000
Cr Buildings 100 000
Dr Buildings 200 000
Cr Revaluation surplus 200 000
The residential land, which has not previously been revalued, has increased in value by $100 000. Hence the accounting entry pertaining to the residential land is:
Dr Residential land 100 000
Cr Revaluation surplus 100 000
AASB 116 requires that where a decrement in value reverses a previous increment credited to and still included in the balance of the revaluation surplus in respect of that same asset, the decrement may be debited directly to the revaluation surplus (rather than be treated as an expense of the periodnevertheless the reduction would be recorded within other comprehensive income). Hence, the $200 000 decrement in the value of the factory land can be debited against the existing balance of the revaluation surplus ($300 000) created in respect of that same asset, and the entry would be:
Dr Revaluation surplus 200 000
Cr Factory land 200 000
6.20 Recoverable amount is defined as the higher of an assets fair value less costs of disposal and its value in use. This definition of recoverable amount in turn requires definitions of fair value less costs of disposal and value in use. Fair value is defined as in AASB 136 (and other accounting standards) as :
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
(See also AASB 13 Fair Value Measurement).
According to AASB 136:
the only difference between an assets fair value and its fair value less costs of disposal is the direct incremental costs attributable to the disposal of the asset.
Value in use is defined in AASB 136 as:
the present value of the future cash flows expected to be derived from an asset or cash-generating unit.
Therefore, recoverable amount might be the same as fair value if an asset can be sold and there are no related costs of disposal.
Where a revaluation of an item of property, plant and equipment is undertaken (which under AASB 116 is the allowed alternative treatment to the cost model), the revaluation must be to fair value rather than any other value. A revaluation can be defined as the act of recognising a reassessment of the carrying amount of a non-current asset to its fair value as at a particular date. Therefore, pursuant to AASB 116, a revaluation specifically requires the use of fair values and not value-in-use.
Cost Valuation Change
Block A 250 000 230 000 (20 000)
Block B 350 000 370 000 20 000
Net change 0
The above increments and decrements offset each other within a class of assets. Under our former accounting standard, as both assets would belong to the same class of assets, there would be no accounting entries as increases and decreases were allowed to be offset with a class of assets. However, pursuant to AASB 116 revaluations must be undertaken on an asset by asset basis and not offset within the class. Hence the accounting entries on 30 June 2013 would be:
Dr Loss on revaluation of land (included in profit or loss) 20 000
Cr LandBlock A 20 000
Dr LandBlock B 20 000
Cr Revaluation surplus (this increase in revaluation surpluswhich is part of equitywill be shown as a gain in other comprehensive income) 20 000
Carrying value Valuation Change
Block A 230 000 290 000 60 000
Block B 370 000 340 000 (30 000)
Net change 30 000
The accounting entries in 2015 would be:
Dr LandBlock A 60 000
Cr Gain on revaluation of land (included in profit or loss) 20 000
Cr Revaluation surplus 40 000
Dr Loss on revaluation of land (included in profit or loss) 10 000
Dr Revaluation surplus (this reduction in the revaluation surplus would also be shown as a loss within other comprehensive income) 20 000
Cr LandBlock B 30 000
6.22 To perform the revaluation on 1 July 2013 we need to know what the balance of the accumulated depreciation is in relation to the bus. At 1 July 2013 the bus had been used for 2 years, hence the accumulated depreciation can be calculated as:
$300 000 7 x 2 = $85 714
As the original cost of the asset was $300 000, the carrying amount as at 1 July 2013 was $214 286. The revaluation increment can be calculated as:
1 July 2013 valuation $250 000
Carrying amount $214 286
Revaluation increment $ 35 714
The accounting entries at 1 July 2013 would be:
Dr Accumulated depreciation 85 714
Cr Four-wheel drive bus 85 714
Dr Four-wheel drive bus 35 714
Cr Revaluation surplus 35 714
One year following the revaluation the accumulated depreciation would be calculated as $250 000 6 = $41 667. The accounting entry to record the sale on 1 July 2014 would be:
Dr Cash 220 000
Dr Accumulated depreciation 41 667
Cr Profit on sale of bus 11 667
Cr Four-wheel drive bus 250 000
We also have the issue about what to do with the balance in the revaluation surplus of $35 714 that was created from the previous revaluation undertaken in 2013. Paragraph 41 of AASB 116 states:
The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of.
Hence the following journal entry is also needed upon disposal:
Dr Revaluation surplus 35 714
Dr Retained earnings 35 714
6.23 (a) Working out the possible motivation for the approach adopted is not an easy exercise. The directors do provide one rationale, this being that the sale of the assets under different market conditions may result in a much lower amount than the valuations suggest. Also, they may believe that, for accountability purposes, retaining historical cost valuations is more efficient. Nevertheless, their approach does appear to be conservative. By electing not to take the revaluations, the assets will be understated relative to their current values. A result of this is that depreciation expenses will be lower (meaning higher reported profits) and any profit on sale will also be higher. Hence, a possible motivation (and we cannot really know whether this is the motivation of the management in question) may be that by electing not to undertake a revaluation, reported profits will be higher. Other performance indicators, such as return on assets, will be improved (as a result of the higher profits and the lower asset base). To the extent that management receives bonuses based on profits, an election not to undertake a revaluation could result in greater benefits for the managers.
(b) As noted above, assets will be understated, but profits, through reduced depreciation charges, will be higher.
(c) The answer to this question will, in part, be driven by how efficient we believe the capital market is. If we believe the market is not efficient then we may believe that the share prices will simply (or mechanistically) reflect the information provided in the financial statements. Lower assets, and consequently lower net asset backing per share, may be impounded in share prices. However, some of this reduction in share price may be offset by the higher reported profit (caused by the lower depreciation expenses).
However, if we believe the capital market is efficient then it does not really matter whether the statement of financial position reflects the assets current values, as long as there is some information that is publicly available about the current market value of the firms assets. As this information is available in the notes to the financial statements, those individuals that believe that the market is efficient would probably argue that the firms accounting treatment will have minimal or no implications for the share price.
6.24 An impairment loss is to be recognised when the recoverable amount of an asset is less than its carrying amount. The carrying amount of the machinery is its cost less accumulated depreciation. In this example, this equates to $1 000 000.
The recoverable amount is determined as the higher of the assets fair value less costs of disposal and its value in use. The fair value less costs of disposal is $710 000.
The value in use is determined by discounting the expected future net cash flows to be generated by the asset using a discount rate relevant to the asset. Utilising the tables provided in Appendix B, we find that the present value of an annuity of $1 for eight years discounted at 8 per cent is $5.7466. Hence, the value in use is determined as $105 000 multiplied by 5.7466, which gives us $603 393. According to AASB 136, recoverable amount is the higher of the value in use and the fair value less costs of disposal, which in this case is $710 000. Therefore the impairment loss is $1 000 000 less $710 000, which equals $290 000. The journal entry would be:
Dr Impairment lossmachinery 290 000
Cr Accumulated impairment lossesmachinery 290 000
6.25 (a) The recoverable amount is the higher of the net selling price and value in use.
Fair value less disposal costs Value in use Recoverable amount
30 June 2013 $900 000 < $1 050 000 $1 050 000 30 June 2014 $900 000 < $960 000 $960 000 30 June 2015 $920 000 > $900 000 $920 000
(b) Paragraph 30 of AASB 116 has the following requirement where the cost method is used:
After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. We must therefore undertake impairment testing for the respective years.
30 June 2013
The carrying amount of $1 000 000 is not greater than the recoverable amount of $1 050 000; therefore the land is not impaired. No adjustment is necessary.
30 June 2014
The carrying amount of $1 000 000 exceeds the recoverable amount of $960 000 so an impairment loss must be recognised:
30.06.14 Dr Impairment loss $40 000
Cr Accumulated impairmentland $40 000
Being recognition of impairment of land
30 June 2015
The carrying amount of $960 000 exceeds the recoverable amount of $920 000, so an impairment loss must be recognised:
30.06.15 Dr Impairment loss $40 000
Cr Accumulated impairmentland $40 000
Being recognition of impairment of land
Carrying amount is the fair value
30 June 2013 $950 000
30 June 2014 $950 000
30 June 2015 $970 000
30.06.13 Dr Loss on revaluation $50 000
Cr Land $50 000
Being revaluation of land to fair value, decrement taken to profit and loss
30.06.14 No entry
30.06.15 Dr Land $20 000
Cr Gain on revaluation $20 000
Being revaluation of land, the reversal of the prior downward revaluation is included in profit or loss. It should be noted that in this example no tax implications have been recognised in relation to the revaluations because of a lack of data about existing tax rates.
30.06.13 Dr Loss on revaluation $200 000
Cr LandBruce $200 000
Being revaluation of Bruce parcel, decrement included in profit or loss
Dr LandBrown $500 000
Cr Revaluation surplus $500 000
Being revaluation of Brown parcel, with the increment being included in other comprehensive income
30.06.14 Dr Loss on revaluation $200 000
Cr LandBruce $200 000
Being revaluation of Bruce Parcel, decrement taken to profit or loss
Dr Revaluation surplus $300 000
Cr LandBrown $300 000
Being revaluation of Brown parcel, partial reversal of prior revaluation. This would be included in other comprehensive income.
6.27 As we know, an impairment loss needs to be recognised when the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is defined in AASB 116 as the higher of an assets fair value less costs of disposal and its value in use.
Carrying amount Fair value less costs of disposal Value in use Recoverable
amount Impairment loss
30 June 2014 $1 600 000 $1 150 000 < $1 351 389 $1 351 389 248 611 The amount assigned to value in use is to be calculated as a present value. Paragraph 55 of AASB 136 Impairment of Assets requires: The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of: (a) the time value of money; and (b) the risks specific to the asset for which the future cash flow estimates have not been adjusted. Paragraph 56 of AASB 136 further explains the use of discount rates. It states: A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset. This rate is estimated from the rate implicit in current market transactions for similar assets or from the weighted average cost of capital of a listed entity that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. However, the discount rate(s) used to measure an assets value in use shall not reflect risks for which the future cash flow estimates have been adjusted. Otherwise, the effect of some assumptions will be double-counted. For this question we will use 6 per cent as the discount rate. Net cash flows of $390 000 per year for four years discounted at 6 per cent equals: $390 000 x 3.4651 = $1 351 389 30.06.14 Dr Impairment loss $248 611 Cr Accumulated impairment lossesmachinery $248 611 Being to recognise impairment loss incurred in 2014 30.06.15 Dr Depreciation expense $337 847 Cr Accumulated depreciationmachinery $337 847 Depreciation expense for the year, calculated as (2 000 000 400 000 248 611)/4
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