Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 11
Depreciation, Impairments, and Depletion
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Learning Objectives
After studying this chapter, you should be able to:
LO 1 Describe depreciation concepts and methods of depreciation.
LO 2 Identify other depreciation issues.
LO 3 Explain the accounting issues related to asset impairment.
LO 4 Discuss the accounting procedures for depletion of mineral
resources.
LO 5 Apply the accounting for revaluations.
LO 6 Demonstrate how to report and analyze property, plant,
equipment, and mineral resources.
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PREVIEW OF CHAPTER 11
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Learning Objective 4
Discuss the accounting procedures for
depletion of mineral resources.
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Depletion
Natural resources can be divided into two categories:
1. Biological assets (timberlands)
o Fair value approach (Chapter 9)
2. Mineral resources (oil, gas, and mineral mining).
o Complete removal (consumption) of the asset.
o Replacement of the asset only by an act of nature.
Depletion - process of allocating the cost of mineral resources.
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Establishing a Depletion Base
Computation of the depletion base involves:
1. Pre-exploratory costs.
2. Exploratory and evaluation costs.
3. Development costs.
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Write-off of Resource Cost
Normally, companies compute depletion on a units-of-
production method (activity approach). Depletion is a
function of the number of units extracted during the period.
In this approach, the total cost of the mineral resource less
residual value is divided by the number of units estimated to
be in the resource deposit, to obtain a cost per unit of
product. To compute depletion, the cost per unit is then
multiplied by the number of units extracted.
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Computation of Depletion Rate
Illustration: MaClede S A acquired the right to use 1,000 acres of
land in South Africa to mine for silver. The lease cost is €50,000,
and the related exploration costs on the property are €100,000.
Intangible development costs incurred in opening the mine are
€850,000. Total costs related to the mine before the first ounce of
silver is extracted are, therefore €1,000,000. MaClede estimates
that the mine will provide approximately 100,000 ounces of silver.
The computation of the depletion cost per unit (depletion rate) is:
ILLUSTRATION 11.19
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Statement of Financial Position
Presentation of Mineral Resource
If MaClede extracts 25,000 ounces in the first year, then the
depletion for the year is €250,000 (25,000 ounces x €10).
Inventory 250,000
Accumulated Depletion 250,000
MaClede’s statement of financial position:
ILLUSTRATION 11.20
Depletion cost related to inventory sold is part of cost of goods
sold.
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Estimating Recoverable Reserves
• Same as accounting for changes in estimates.
• Revise the depletion rate on a prospective basis.
• Divide the remaining cost by the new estimate of the
recoverable reserves.
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Presentation on the Financial Statements
Disclosures related to E&E expenditures should include:
1. Accounting policies for exploration and evaluation
expenditures, including the recognition of E&E assets.
2. Amounts of assets, liabilities, income and expense, and
operating cash flow arising from the exploration for and
evaluation of mineral resources.
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Learning Objective 5
Apply the accounting for revaluations.
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Recognizing Revaluations
Companies may value long-lived tangible asset subsequent to
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for
its railroad network.
• Increased long-lived tangible assets by £4,289 million.
• Change in the fair value accounted for by adjusting the
asset account and establishing an unrealized gain.
• Unrealized gain is often referred to as revaluation surplus.
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Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for
€1,000,000 on January 5, 2022. The company elects to use
revaluation accounting for the land in subsequent periods. At
December 31, 2022, the land’s fair value is €1,200,000. The
entry to record the land at fair value is as follows.
Land 200,000
Unrealized Gain on Revaluation 200,000
Unrealized Gain on Revaluation—Land increases other
comprehensive income in the statement of comprehensive
income.
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Revaluation—Depreciable Assets (1 of 2)
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2022. The equipment has a useful life
of five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses
to revalue its equipment to fair value over the life of the
equipment. Lenovo records depreciation expense of
¥100,000 (¥500,000 ÷ 5) at December 31, 2022, as follows.
Depreciation Expense 100,000
Accumulated Depreciation — Equipment 100,000
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Revaluation—Depreciable Assets (2 of 2)
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an
independent appraisal for the fair value of equipment at
December 31, 2022, which is ¥460,000. The entry to record this
revaluation at December 31, 2022, is as follows:
Accumulated Depreciation—Equipment 100,000
Equipment 40,000
Unrealized Gain on Revaluation — Equipment 60,000
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Financial Statement Presentation—
Revaluations
ILLUSTRATION 11.22
Under no circumstances can the Accumulated Other
Comprehensive Income account related to revaluations have
a negative balance.
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Revaluation Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or
equipment.
If a company selects only buildings,
• revaluation applies to all assets in that class of assets.
• A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
• Companies must also make every effort to keep the assets’
values up to date.
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Learning Objective 6
Demonstrate how to report and
analyze property, plant, equipment,
and mineral resources.
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Presentation of Property, Plant,
Equipment and Mineral Resources
Depreciating assets, use Accumulated Depreciation.
Depleting assets may include use of Accumulated Depletion
account, or the direct reduction of asset.
Disclosures
• Basis of valuation (usually cost)
• Pledges, liens, and other commitments
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Analysis of Property, Plant, and Equipment
Asset Turnover
Measures how efficiently
a company uses its assets
to generate sales.
ILLUSTRATION 11.24
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Analysis of Property, Plant, and Equipment
Profit Margin on Sales
Measure of the ability to
generate operating income
from a particular level of
sales.
ILLUSTRATION 11.25
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Analysis of Property, Plant, and Equipment
Return on Assets
Measures a firm’s success
in using assets to generate
earnings.
ILLUSTRATION 11.25
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Return on Assets
Rather than using the profit margin on sales, we can compute
return on assets directly by dividing net income by average
total assets. Using Siemens’ data, the calculation is as follows.
ILLUSTRATION 11.26
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Learning Objective 7
Illustrate revaluation accounting
procedures.
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Revaluation of Property, Plant, and
Equipment (1 of 2)
The general rules for revaluation accounting are as
follows.
1. When a company revalues its long-lived tangible
assets above historical cost, it reports an unrealized
gain that increases other comprehensive income.
2. If a company experiences a loss on impairment
(decrease of value below historical cost), the loss
reduces income and retained earnings. Thus, gains on
revaluation increase equity but not net income.
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Revaluation of Property, Plant, and
Equipment (2 of 2)
3. If a revaluation increase reverses a decrease that was
previously reported as an impairment loss, a company credits
the revaluation increase to income using the account Recovery
of Impairment Loss up to the amount of the prior loss. Any
additional valuation increase above historical cost increases
other comprehensive income and is credited to Unrealized Gain
on Revaluation.
4. If a revaluation decrease reverses an increase that was reported
as an unrealized gain, a company first reduces other
comprehensive income by eliminating the unrealized gain. Any
additional valuation decrease reduces net income and is
reported as a loss on impairment.
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Revaluation of Land
Revaluation—2022: Valuation Increase
Assume that Unilever Group (GBR and NLD) purchased land
on January 1, 2022, that cost €400,000. Unilever decides to
report the land at fair value in subsequent periods. At
December 31, 2022, an appraisal of the land indicates that
its fair value is €520,000. Unilever makes the following entry
to record the increase in fair value.
Land 120,000
Unrealized Gain on Revaluation — Land 120,000
(€520,000 − €400,000)
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Summary of Revaluation—2022
ILLUSTRATION 11A.1
• Land is now reported at its fair value of €520,000.
• The increase in the fair value of €120,000 is reported on the
statement of comprehensive income.
• The ending balance in Unrealized Gain on Revaluation—Land is
reported as accumulated other comprehensive income in the
statement of financial position in the equity section.
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Revaluation—2023: Decrease below
Historical Cost (1 of 4)
What happens if the land’s fair value at December 31, 2023, is
€380,000, a decrease of €140,000 (€520,000 − €380,000)? In
this case, the land’s fair value is below its historical cost.
Unilever makes the following entry on December 31, 2023 to
record the decrease in fair value of the land.
Unrealized Gain or Revaluation — Land 120,000
Land on Impairment 20,000
Land (€520,000 − €380,000) 140,000
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Summary of Revaluation—2023
ILLUSTRATION 11A.2
• The decrease to Unrealized Gain on Revaluation—Land of €120,000
reduces other comprehensive income, which reduces accumulated other
comprehensive income.
• The debit to Loss on Impairment of €20,000 reduces net income and
retained earnings.
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Revaluation—2024: Recovery of
Impairment Loss
At December 31, 2024, Unilever’s land value increases to
€415,000, an increase of €35,000 (€415,000 − €380,000). In
this case, the Loss on Impairment of €20,000 is reversed and
the remaining increase of €15,000 is reported in other
comprehensive income. Unilever makes the following entry to
record this transaction.
Land 35,000
Unrealized Gain on Revaluation — Land 15,000
Recovery of Impairment 20,000
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Summary of Revaluation—2024
ILLUSTRATION 11A.3
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Copyright
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