I’m stuck on a Accounting question and need an explanation.

Write a 260- to 350-word summary of this week’s readings.
Describe major concepts you learned.
Explain how you can apply what you learned to your current or future workplace.
Notable Results from: Annual US Goodwill Impairment Study
Roland, Gary;Nunes, Carla
Financial Executive; Dec 2013; 29, 10; ProQuest Central
pg. 52
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.
SIMILARITIES AND
DIFFERENCES
BETWEEN THE IFRS
This ar ticle will addres s the dif ferences between U.S . GAAP and IFRS repor ting for proper ty,
plant, and equipment and the res ulting cons equences on financial repor ting.
AND U.S. GAAP ON
PROPERTY, PLANT,
AND EQUIPMENT
PETER HARRIS AND MONA NASERELDDIN
I
This article will address the differences
between U.S. GAAP and IFRS reporting
for property, plant, and equipment and
the resulting consequences on financial
reporting. Given the large capital asset
requirements for the construction industr y, as well as its international operating
makeup (many companies operate in developing countries like China and India), a
strong knowledge of IFRS as they pertain
to property, plant, and equipment, as well
as to depreciation, became mandator y for
the professional in this field.
The pronouncements covered in this
case study for U.S. GAAP are:
• ASC 360, Proper t y, Plant, and
Equipment;
• ASC 410-20, Asset Retirement and
Env ironmental Obligations — Asset
Retirement Obligations; and
PETER HARRIS is a professor and chair of the accounting and finance department at the New York Institute of Technolog y.
Prev iously, he has worked for Ernst and Young LLP. He is an author of over 60 refereed journal articles and has over 150 intellectual contributions. He can be reached at pharris@ny it.edu.
MONA NASERELDDIN has finished her MBA in accounting w ith distinction at New York Institute of Technolog y (NYIT).
She has worked with Ernst & Young in delivering assurance and business advisory services. She can be reached at [email protected].
JULY/AUGUST 2014
CONSTRUCTION ACCOUNTING AND TAXATION
…………………………………………………………………………..
nternational Financial Repor ting
Standards (IFRS) have become the
norm worldwide as of 2013; more
than 100 countr ies have adopted
their use with more on the horizon
in the near future. Based on an SEC ruling
issued on July 13, 2012, the U.S. has no
intention of adopting IFRS and will continue the use of U.S. generally accepted
accounting principles (U.S. GAAP). This
came as a surprise to many who believed
that a sing le set of unifor m financial
reporting systems was a heartbeat away,
given the joint workings between the two
accounting regimes over the last 15 years.
Despite this, const r uc t ion companies
operating in international markets, where
IFRS are required, will need to account for
their financial repor t ing under the
umbrella of IFRS.
19
20
………………………………………………………………………………………………………………………………………………………..
BOTH U.S. GAAP
AND IFRS
DEFINE
PROPERTY,
PLANT, AND
EQUIPMENT
SIMILARLY.
THEY REQUIRE
THE ASSETS TO
BE TANGIBLE,
LONG-TERM IN
NATURE, AND
HELD FOR
SPECIFIC USES
WITHIN THE
ENTITY AND
NOT FOR
RESALE.
• ASC 835-20, Interest — Capitalization of Interest.
The pronouncements covered in this
case study for IFRS are:
• IAS 16, Proper t y, Plant, and Equipment;
• IAS 36, Impairment of Asset; and
• IAS 23, Borrow ing Costs.
Both U.S. GAAP and IFRS define prope r t y, pl a nt , a n d e qu ipm e nt s i m i l a r ly.
They require the assets to be tangible, longterm in nature, and held for specific uses
w ithin the entit y and not for resale. 1
A lt h ou g h t h e I ASB a n d FASB h ave
reduced the differences between these
sets of standards over the past decade,
several remain. 2
Definitions
Although U.S. GAAP do not have a comprehensive standard that addresses longlived assets, their definition of property,
plant, and equipment is similar to IAS 16,
Proper t y, Plant and Equipment, which
addresses t ang ible assets held for use
that are expected to be used for more
than one repor ting period.
Property, plant, and equipment (PP&E)
are tangible items that: (a) are held for use
in the production or supply of goods or
services, for rental to others, or for administrative purposes, and (b) are expected
to be used during more than one period. 3
The cost of an item of property, plant,
and equipment shall be recog nized as
an asset if, and only if: (a) it is probable
that future economic benefits associated
w ith the item w ill flow to the entit y, and
(b) the cost of the item can be measured
reliably. 4
Acquisition: Initial recognition and
measurement
Cost — General. Both accounting models
have similar recognition criteria, requiring that costs be included in the cost of
the asset if future economic benefits are
probable and can be reliably measured.
Both standards initially measure proper t y, plant, and equipment at cost. The
cost to acquire the asset includes all costs
incurred to bring the asset to the location and condition for its intended use.
CONSTRUCTION ACCOUNTING AND TAXATION
JULY/AUGUST 2014
Neither model allows the capitalization of star tup costs, general administrat ive and overhead costs, or regular
maintenance.
Both U.S. GAAP and IFRS require that
the costs of dismantling an asset and
restoring its site (i.e., the costs of asset
retirement under ASC 410-20 or IAS 37,
Prov isions, Contingent Liabilities, and
Contingent Assets) be included in the
cost of the asset when there is a legal
obligation, but IFRS require provision in
other circumstances. 5
An item of property, plant, and equipment that qualifies for recognition as an
asset shall be measured at its cost. The
cost of an item of proper t y, plant, and
equipment comprises its purchase price
and related taxes, directly attributable costs,
a n d t h e e s t i m ate of t h e co s t s of d i s mantling and remov ing upon the asset’s
retirement. Costs that are not directly
at t r ibut able s hou ld b e ex p e ns e d a s a
period cost.
Items of proper t y, plant, and equipment may be acquired for safety or environmental reasons. This expenditure is
charged under IFRS unless the acquisition
of such property, plant, and equipment
is necessar y for an entity to obtain the
future economic benefits from its other
assets. Such items of property, plant, and
equipment qualify for recognition as assets
because they enable an entity to derive
future economic benefits from related
assets in excess of what could be derived
had those items not been acquired. 6 Meanwhile, voluntar y investments in safety or
environmental equipment are always capitalized under U.S. GAAP.
Self-constructed assets. The cost of a
s e l f – c on s t r u c te d a s s e t i s d e te r m i n e d
using the same principles as those of an
acquired asset. 7
D i re c t co s t of m ate r i a l s a n d l ab or
should be capitalized and a por tion of
indirect costs can be included in capitalized costs.
However, given the nature and variety of costs incurred on self-constructed
assets, identif y ing whether an amount
is a par t of the cost of an item of PP&E
may require professional judgment.
Borrowing costs/capitalized interest. ASC
8 3 5 – 2 0 a n d I AS 2 3 re qu i re t h e c ap i PROPERTY, PLANT, AND EQUIPMENT
The commencement date for capitalizat ion i s t he d ate w he n t he e nt it y f i rs t
meets all of the follow ing conditions:
1. It incurs expenditures for the asset;
2. It incurs borrow ing costs; and
3. It under takes activ ities that are necessar y to prepare the asset for its
intended use or sale. 9
U.S. GAAP would use “interest costs”
for “b or row i ng co s t s .” C apit a l i z at ion
ends when the asset is substantially complete and the asset is ready for its intended
use.
U.S. GAAP require ent it ies to capitalize interest costs incurred only during construction as par t of the cost of a
qualif y ing asset.
B or row ing costs may include
exchange differences ar ising f rom foreig n cur renc y bor row ings to the extent
that they are regarded as an adjust ment
t o i n t e r e s t c o s t s 10 a n d , h e n c e , t h e s e
exchange r ate differences can b e capit alized under IFRS.
………………………………………………………………
talizat ion of bor row ing costs (e.g.,
interest cost s) dire c t ly at t r ibut able to
t he acquis it ion , const r uc t ion , or produc t ion of a qua l if y ing asset . Qua l if y ing assets are generally defined similarly
under b ot h account ing mo dels. However, there are differences between U.S.
G A A P a nd I F R S i n t he me a su re me nt
of el i g ible b or row i ng co s t s for c api t a l iz at ion .
Some bor row ing costs can be capitalized as par t of building costs. IAS 23
establishes criteria for the recognition
of interest as a component of the carr ying amount of a self-constructed item
of PP&E.
Borrowing costs that are directly attributable to the acquisition, construction,
or production of a qualif y ing asset form
par t of the cost of that asset. Other borrowing costs are recognized as expenses. 8
An entity shall begin capitalizing borrowing costs as part of the cost of a qualif y ing asset on the commencement date.
PAS, Inc. 4c paid ad
JULY/AUGUST 2014
CONSTRUCTION ACCOUNTING AND TAXATION
…………
PROPERTY, PLANT, AND EQUIPMENT
21
22
………………………………………………………………………………………………………………………………………………………..
WHILE REVALUATION
OF FIXED ASSETS IS
NOT ALLOWED UNDER
U.S. GAAP, UNDER IFRS
A COMPANY CAN
CHOOSE TO ACCOUNT
FOR PP&E AT FAIR
VALUE USING THE
REVALUATION
METHOD.
Un d e r I F R S , t h e a c t u a l b or row i n g
costs are capitalized and offset by investment income earned on those borrowings. When funds borrowed to finance the
acquisition of a qualified asset are temporarily invested, the interest cost should
be reduced by any invest ment income
ear ned on these funds. U.S. GAAP do
not include exchange rate differences in
bor row ing costs and generally do not
allow interest revenue ear ned on
b o r row i n g s t o b e of f s e t a g a i n s t
interest costs incurred during the
p e r i o d . Un d e r U. S . G A A P, t h e
amount of interest to capitalize is
limited to the lower of the actual
interest cost incur red during the
per iod or avoidable interest. For
borrow ings associated w ith a specific qualif y ing asset, bor row ing
costs equal to the weighted-average accumu l ate d ex p e nd it u re s t i me s t he b or row ing rate are capitalized.
R e p l a c e m e n t s v e r s u s r e p a i r s. Un d e r
IFRS, costs that represent a replacement
of a prev iously identified component of
an asset are capitalized if f uture economic benefits are probable and the costs
can b e reliably measured. Under U.S.
GAAP, multiple accounting models have
evolved in practice, including: expensing costs as incurred, capitalizing costs,
and amor tizing through the date of the
next overhaul.
Measurement after recognition
Subsequent valuation of PP&E. A m aj or
a re a of d i f fe re nce b e t we e n I F R S a n d
U.S. GAAP relates to reporting the value
of P P & E . Wh i l e re v a lu at i on of f i xe d
assets is not al lowed under U.S. GAAP,
under IFRS a comp any can cho ose to
accou nt for P P & E at f ai r v a lue u s i ng
t he re v a lu at ion me t ho d . C o s t or f a i r
value must be applied to an ent ire class
of PP&E, and different classes can have
different policies. Fair value is the
amount at w hich an asset could b e
exchanged in an ar m’s-leng th t r ansact ion b etween k now ledgeable and w i l ling parties, and a professional appraiser
m ay b e u s e d t o e s t a b l i s h f a i r v a lu e .
Revaluat ions must b e per for med per io dica l ly to ensure the car r y ing va lue
CONSTRUCTION ACCOUNTING AND TAXATION
JULY/AUGUST 2014
of that asset class is not mater ial ly different than its fair value.
C o s t m o d e l . Under I AS 1 6 , t he cos t
model carries an item of PP&E at its cost
less any accumulated depreciation and
any accumulated impairment losses.
Revaluation model. IFRS per mit an
accounting policy alternative to this cost
model, called the revaluation model. In
a ccord a n ce w it h I AS 1 6 , af te r i n it i a l
recognition, an item of PP&E, which has
a fair value that can be measured reliably,
may be car r ied at a revalued amount,
which is defined by its fair value at the
date of the revaluation less any subsequent
accumulated depreciat ion and subsequent accumulated impairment losses. If
an item is revalued, the entire class of PP&E
to w hich t he as s et b elong s shou ld b e
revalued. IFRS require that revaluations
should be made w ith sufficient regularit y to ensure that the carr y ing amount
is not materially different from fair value
at each repor ting date.
Reporting PP&E at cost is the benchmark treatment, but revaluation is a permitted alternative. This is a significant
departure from U.S. GAAP, which require
entities to use the cost model. Under U.S.
GAAP, revaluation is not permitted and
PP&E assets are required to be reported
at cost less accumulated depreciation.
Initial revaluation. The revaluation model
revalues PP&E to its fair value. PP&E is
carried on the balance sheet at its fair value
less accumulated depreciat ion (revalued) and any impairment losses. In order
to qualif y for the revaluation treatment,
a n e nt i re cl a s s ( e. g . , l a nd , bu i ld i ng s ,
vehicles, etc.) of PP&E must be revalued. Us ing t he re va luat ion mo del, an
increase in an asset’s carrying amount will
increase other comprehensive income
and w ill be accumulated in a revaluation surplus account within equity (unless
t h e i n c r e a s e r e ve r s e s a r e v a lu at i o n
decrease previously recognized in profit
or l o s s ) . A de c re a s e i s re co g n i z e d i n
profit or loss, except to the extent that
it reverses a prev ious revaluation surplus on the same asset, in which case it
is recog nized in other comprehensive
income (O CI).
Decreases in value should be expensed
unless they reverse a prev ious revaluaPROPERTY, PLANT, AND EQUIPMENT
Bulldozers: $10,000
Revaluation surplus — Building (OCI): $10,000
S u b s e q u e n t r e v a l u a t i o n . Sub s e quent
decreases in the value of an asset should
firs t b e charge d agains t any pre v iou s
revaluat ion sur plus in respec t to that
asset, and the excess should be expensed.
If prev ious revaluations resulted in an
expense, subsequent increases in value
should be charged to income to the extent
of the previous expense. The excess should
then be credited to equity. Once an asset
has been revalued, its value on the balance sheet must represent its current fair
value. At each year’s end, management
should consider whether the asset’s fair
value differs from its carr y ing value. The
PROPERTY, PLANT, AND EQUIPMENT
carr y ing value should not differ materially from the asset’s fair value.
In the following year, Piazza Company
determines that the fair value of the bulldozers is no longer $200,000. Assuming
the fair value has decreased to $160,000,
the follow ing entr y should be made:
Re v a lu at i on s u r p lu s — Bu l l d oz e r s ( O C I ) :
$10,000
Loss on Revaluation — Bulldozers (expense):
$30,000
Bulldozers: $40,000
Treatment of accumulated depreciation on
revaluation. If an asset is reva lued, an
entit y may account for the accumulated
depreciation at the date of revaluation
in two ways with the same reporting consequences:
1. Depreciation elimination method:
The accumulated depreciation can
be eliminated against the gross carr y ing amount of the asset itself and
then the net amount can be restated
to the revalued amount of the asset.
2. Propor tionate restatement method:
The accumulated depreciation can
be restated propor tionately w ith the
change in the gross carr y ing value
of the asset so that the net carr y ing
value of the asset after revaluation
equals its revalued amount.
Depreciation. According to U.S. GAAP
and IFRS, entities are required to depreciate PP&E on a systematic basis under
b o t h a c c o u nt i n g m o d e l s . A S C 2 5 0 ,
Accounting Changes and Error Correct ions and IAS 8, Account ing Policies,
Changes in Account ing Est imates and
Er rors b ot h t re at changes in res idua l
value and useful economic life as a change
in accounting estimate requiring prospective treatment. 11
IFRS do not require entities to use a
p a r t i c u l a r m e t h o d o f d e p r e c i at i o n .
According to IAS 16, the method of depreciation should reflect the expected patt e r n o f c o n s u mp t i o n o f t h e f u t u r e
economic benefits embodied in the asset.
U.S. GAAP similarly allow entities to
use a number of depreciation methods,
prov ided the method is systematic and
JULY/AUGUST 2014
CONSTRUCTION ACCOUNTING AND TAXATION
………………………………………………………………………………………………………………………………………………………..
tion surplus account relating to the same
asset. That portion can be debited through
O CI to the revaluation sur plus account
in equit y.
To account for a revaluation increase,
a credit is made to equit y as a revaluation sur plus and a debit is made to the
asset account. To account for a revaluat ion decrease, a credit is made to the
asset account and a debit is made to an
expense account.
If the revalued basis of an asset
exce e ds t he cos t b as is , t here w i l l b e a n
increase in annual depreciat ion. To the
ex te nt t he re i s a n i nc re a s e i n depre c i ation expense, per IAS 16.4-1, an entit y
may reverse the por t ion of reser ve surplu s rel ate d to t h i s i nc re a s e by debit ing the revaluat ion sur plus and
c re d it i ng re t a i ne d e a r n i ng s . A lte r n a t ively, t h i s t r a ns fe r m ay b e compute d
up on d i s p o s a l .
Wh e n a n a s s e t i s d i s p o s e d of , a ny
remaining related revaluat ion sur plus
account in equit y may be transferred to
retained earnings. The revaluation surplus can never be credited to income.
For example, during the current year,
P i a z z a C o mp a ny e l e c t e d t o m e a s u r e
PP&E at revalued amounts. Assume
Piazza ow ns a bulldozer w ith a cost of
$ 1 9 0 , 0 0 0 a n d a c u r re nt f a i r v a lu e of
$200,000. The jour nal entr y to increase
the car r y ing amount of the building to
its fair value follows:
IF AN ITEM IS
REVALUED, THE
ENTIRE CLASS
OF PP&E TO
WHICH THE
ASSET BELONGS
SHOULD BE
REVALUED.
23
24
………………………………………………………………………………………………………………………………………………………..
ACCORDING TO
U.S. GAAP AND
IFRS, ENTITIES
ARE REQUIRED
TO DEPRECIATE
PP&E ON A
SYSTEMATIC
BASIS UNDER
BOTH
ACCOUNTING
MODELS.
rational. Both standards require entities
to depreciate items of PP&E that are idle,
but do not depreciate items of PP&E held
for sale. IFRS require the estimates of
useful life, residual value, and the method
of depreciat ion to b e re v iewed on an
annual basis.
U.S. GAAP only require review when
events or changes in circumstances indicate that the current estimates and depreciation methods are not appropriate. Both
standards treat changes in depreciation
method, residual value, and useful life as
a change in accounting estimates.
U.S. GAAP and IFRS have different
policies regarding depreciation of asset components. Component depreciation specifies that any part or portion of PP&E that
can be separately identified as an asset
should be depreciated over its useful life.
IFRS require component depreciation if
components of an asset have differing
patterns of benefits. For example, if components of an asset have different useful
lives, the entity should identify the components and separately account for them.
U.S. GAAP permit component depreciation, but it is not common in practice
because it complicates the accounting.
Cost allocation issues. Under U.S. GAAP
and IFRS, if the cost basis is used, then
the depreciable base is the cost of the
asset minus the estimated salvage value,
but IFRS require each significant component of an asset to be identified and
its depreciable base to be determined. IAS
1 6 . 4 3 s t ates , “e ach p ar t of an item of
proper t y, plant, and equipment w ith a
cost that is significant in relation to the
total cost of the item shall be depreciated separately.” This process is know n
as component depreciation.
Fo r e x a mp l e , s u p p o s e t h a t a c o n struction company purchased a bulldozer
for $100,000. It s est imate d u sef u l l ife
is ei g ht ye ars and t here is no exp e c te d
s a lv a ge v a lu e . T h e comp a ny uses the
s t r a i g ht – l i n e m e t h o d t o a c c o u n t f o r
d e p r e c i at i o n e x p e n s e . T h e c o mp a ny
c an f ur t her bre a k dow n t he bu l ldoz er
into comp onent p ar t s as fol lows:
1. Engine: $20,000 (4-Year Life);
2. Tires: $8,000 (2-Year Life);
3. Other Interior Par ts: $35,000 (8Year Life);
CONSTRUCTION ACCOUNTING AND TAXATION
JULY/AUGUST 2014
4. Exterior Par ts: $37,000 (8-Year
Life); and
5. Results: Under U.S. GAAP, the
repor ted depreciation expense is
$12,500 ($100,000 div ided by 8
years).
IFRS, however, require a lot more judgment and are far more complex in the
appro ach of c a lc u lat i ng depre c i at ion
expense, which would be calculated as follows:
1. Engine: $20,000 div ided by 4 =
$5,000;
2. Tires: $8,000 div ided by 2 = $4,000;
3. Other Interior Par ts: $35,000
div ided by 8 = $4,375;
4. Exterior Par ts: $37,000 div ided by 8
= $4,625; and
5. Results: Total depreciation expense
under IFRS is $18,000.
Note the material difference in reporti n g d e pre c i at i on e x p e n s e u n d e r U. S .
GAAP of $12,500 and IFRS of $18,000.
Depletion. The straight-line and unitsof – p ro du c t i o n m e t h o d s a re a l l ow e d .
There are no significant differences if
the cost method is used. There may be
differences if the asset is revalued using
IFRS.
I m p a i r m e n t . Under b ot h U.S. GAAP
and IFRS, long-lived assets are not tested
annually, but rather when there are similarly defined indicators of impairment.
In addition, both U.S. GAAP and IFRS
require that the impaired asset be w ritten down and an impairment loss be reco g n i z e d . I mp a i r m e nt o r D i s p o s a l o f
Long-Lived Assets subsections of ASC 36010 and IAS 36 apply to most long-lived
assets, although some of the scope exceptions listed in the standards differ. Despite
the similarit y in overall objectives, differences exist in the way impairment is
tested, recognized, and measured. 12
An ent it y shall assess at the end of
each repor ting period whether there is
a ny i n d i c at i o n t h at a n a s s e t m ay b e
impaired. If any such indication exists,
the entit y shall estimate the recoverable
amount of the asset. 13
Imp air ment indic ators for an asset
include exter nal sources such as an
asset’s market value decline, a sig nificant change w ith an adverse effec t on
the ent it y, an increase in the discount
PROPERTY, PLANT, AND EQUIPMENT
Impairment indicators and recoverability
U. S . G A A P A S C 3 6 0 – 1 0 – 3 5 – 2 1
requires a rev iew for impairment indic at o r s i n P P & E “ w h e n e ve r e ve nt s o r
changes in circumstances indicate that
the carr y ing amount of an asset may not
be recoverable.”
A recoverabilit y test is required if the
carr y ing amount of the asset exceeds the
sum of the expected net future undiscounted cash flows. The asset w ill not be
recoverable and an impairment loss must
be calculated.
IFRS IAS 36 requires an entity to assess
annually whether there are any indicators of impairment. There is no recove r a b i l i t y t e s t . S i mp l y c a l c u l at e a n
impairment loss if impairment indicators are present.
test.
Calculating and recording the impairment
According to U.S. GAAP and IFRS,
a company must record a write-off when
the carr y ing amount of an asset is not
recoverable. Both standards refer to the
w rite-off as impairment.
U.S. GAAP rely on a recoverabi lit y
test to determine whether impairment
has o cc ur re d . If t he sum of ex p e c te d
future cash flows (undiscounted) is less
than the carr y ing amount of the asset,
the asset is considered impaired. The
impairment loss should be measured as
the difference between the car r y ing
amount of the asset and its fair value
(w ith fair value calculated according to
ASC 820-10-35). U.S. GAAP prohibit
entities from reversing impairments. The
i mp a i r m e nt l o s s i s a l w ay s r e p o r t e d
through net income.
Un d e r I F R S , w h e n d e t e r m i n i n g
whether an item of PP&E is impaired, an
entit y applies IAS 36 to ensure that such
assets are not carried at more than their
recoverable amounts. The impair ment
loss is the excess of the carr y ing value
of the asset over its recoverable amount.
The recoverable amount is the greater
of the fair value (sales value) minus disposal costs or the value-in-use (the discounted net present value of future cash
loss.
PROPERTY, PLANT, AND EQUIPMENT
flows expected over the remaining life of
the asset). The impairment loss (the difference between the asset’s carrying value
and its recoverable amount) is recognized in other comprehensive income to
t he ex tent t hat it is re vers i ng a pr ior
u p w a rd re v a lu at i o n . O t h e r w i s e , i t i s
included in net income.
Reversal of the impairment loss. Under
U.S. GAAP, a reversal of the impairment
loss is prohibited.
Under IFRS, the impairment loss can
be reversed up to the newly calculated
recoverable amount, but it cannot exceed
what the original carr ying amount, or net
of depreciation, would have been.
For assets using the revaluation model,
impairment is usually only recognized
if disposal costs are significant, causing
the recoverable amount (fair value minus
disposal costs) to be less than the carr ying amount (fair value). When an asset
i s c a r r i e d at a r e v a lu e d a m o u nt , t h e
i mp a i r m e nt l o s s i s t a ke n a g a i n s t t h e
revaluation sur plus and any remainder
is taken against income. According to
IFRS, w rite-ups for subsequent recoveries of impairment are permitted. For
the cost model, the w rite-up of the asset
cannot exceed what the carr y ing value
would have been if no impairment loss
had been recognized.
In general, an impairment loss can be
reversed under IFRS, contrar y to U.S.
GAAP (ASC 360-10), when there is an
increase in fair value, but this action is
limited to an increase to what the carr y ing amount of the asset would have
been, net of depreciation, if the impairment had not been recognized for the
asset in prior years. This limitation on
the reversal of impairment losses does
not apply if the asset is carried under
the revaluation model.
Nonmonetary transactions
O n e o r m o r e i t e m s o f P P & E m ay b e
acquired in exchange for a nonmonetar y asset or assets, or a combination of
monetar y and nonmonetar y assets.
The cost of such an item of PP&E is
measured at fair value unless:
1. The exchange transaction lacks
commercial substance or
JULY/AUGUST 2014
CONSTRUCTION ACCOUNTING AND TAXATION
………………………………………………………………………………………………………………………………………………………..
rate used due to an increase in market
interest rates or rates of return on investm e nt o r i nt e r n a l s o u rc e s s i g n i f i c a nt
change in its use, a projected loss related
to its use, etc. 1 4
UNDER BOTH
U.S. GAAP AND
IFRS, LONGLIVED ASSETS
ARE NOT TESTED
ANNUALLY, BUT
RATHER WHEN
THERE ARE
SIMILARLY
DEFINED
INDICATORS OF
IMPAIRMENT.
25
26
………………………………………………………………………………………………………………………………………………………..
IF THE
COMPANY’S
STOCK IS
ACTIVELY
TRADED, THE
VALUE OF THE
STOCK SHOULD
BE USED TO
DETERMINE THE
VALUE OF THE
ASSET
RECEIVED IN
THE EXCHANGE.
2. The fair value of neither the asset
received nor the asset given up is
reliably measurable.
If the acquired item is not measured
at fair value, its cost is measured at the
carr y ing amount of the asset given up. 15
In this case, this would result in gains
being deferred using IFRS.
Under U.S. GAAP, if the exchange lacks
commercial substance and some cash is
received, a por tion of the gain can be
recognized.
• The formula for recognizing gain is:
(cash received / (fair value of assets
+ cash received)) x total gain.
• When cash represents 25 percent or
more of the exchanged value, the
transaction should be accounted for
as a monetar y exchange. 16
If the transaction has commercial substance, any related gain or loss should be
recognized in income. If the exchange lacks
commercial substance, losses should be
recognized immediately and gains should
be deferred if no cash is received as par t
of the exchange. 17
Purchases paid for using company stock.
If the company’s stock is actively traded,
the value of the stock should be used to
determine the value of the asset received
in the exchange. If a company cannot
determine the market value of its stock,
it should determine the fair value of the
asset received in the exchange.
Presentation and disclosure
T h e f o l l ow i n g e l e m e nt s s h o u l d b e
included in the presentation of financial repor ts:
• the measurement basis used for each
class of PP&E
• the balance of each class of PP&E as
of the balance sheet date;
• a description of the depreciation
method, the useful lives of PP&E,
and the amount of accumulated
depreciation and depreciation
expense during the period; and
• the amount of impairment losses
recognized in income during the
year. 18
U.S. GAAP. The follow ing guidelines
apply to U.S. GAAP repor ting.
• Revaluing PP&E is not allowed.
CONSTRUCTION ACCOUNTING AND TAXATION
JULY/AUGUST 2014
• Reversal of impairment losses is not
allowed.
• Estimates of proven oil and gas
reser ves should be included.
I F R S. T he fol low i ng i nfor m at ion is
required for IFRS repor ting:
• for revalued assets, the effective
date of the revaluation;
• the methods and assumptions used
in estimating fair value;
• whether an independent appraiser
was utilized;
• (for revalued classes of assets) net
cost basis;
• the changes to and balance in the
revaluation sur plus; and
• the amount of impairment losses
reversed directly to equit y or
through net income.
Disposition — Sale. Gain or loss is calc u l ate d b a s e d on t h e a s s e t’s n e t co s t
minus the sales proceeds.
F o r U. S . G A A P, t h e r e v a l u a t i o n
method is not allowed. For IFRS, if the
revaluation method is used, the accounting for a sale may be slightly different,
as follows.
• If the revaluation resulted in a
w rite-dow n of the asset, then the
gain or loss on the sale is calculated
based on the sales proceeds minus
the net adjusted asset value.
• If the revaluation resulted in a
w rite-up of the asset, then the revaluation sur plus account can be
reversed to retained earnings.
D i s p o s i t i o n . Involunt ar y conversion
occurs when the use of an asset is terminated by forces outside of the company’s
control.
For U.S. GAAP, the difference between
the net book value and the recovered
amounts results in a gain or loss when
the recovered amounts are received. If the
nature of the disposition is unusual and
infrequent, these gains or losses may be
repor ted in the income statement as an
extraordinar y item.
For IFRS, IAS 16.65 states that “compensation from third par ties for PP&E
t h at i s i mp a i re d , l o s t , or g i ve n up i s
i n c lu d e d i n p r o f i t a n d l o s s w h e n i t
becomes receivable.” Disclosure of extraordinar y items in the income statement
is prohibited.
PROPERTY, PLANT, AND EQUIPMENT
NOTES
1
Fay, R.G., Brozovsk y, J.A., Edmonds, J.E., Lobinger,
P.G., and Hicks, S.A., Incorporating IFRS into Interm e d i a t e Ac c o u n t i n g . ( Vi r g i n i a Te ch a n d D e l o i tt e ,
20 09).
PROPERTY, PLANT, AND EQUIPMENT
2
Harris, P., Jermakowicz, E.K., and Epstein, B.J., Conve r t i n g f i n a n c i a l s t a t e m e n t s f r o m U. S. GA