PP&E depreciation and impairment

[Leo]

Hi,

Just wanted to confirm, if an asset accounted at cost in accordance with IAS 16, for 100 LC. Depreciated for 20LC, and impaired for 30LC, YTD. And a valuation recently performed indicated that the fair value of the asset is 100LC.

In that case, the impairment of 30LC could be reversed, and new depreciation schedule should be revised going forward (prospectively), as per IAS 8, is that correct? The carrying value of the asset is 80 LC after the reversal.

Thank you

[Ketan Marwah]

Hello Leo,

Firstly, I hope you are not referring to goodwill in your post as you might be aware that impairment losses on goodwill are not reversible (IAS 36.124-125 and IFRIC 10). Secondly, the answer also depends on how recent is the "recent" in your post as an asset’s book value increase due to an impairment loss reversal must not exceed what it would have been, accounting for depreciation, if no impairment loss had been recognized previously so just be mindful of the timing of the valuation. Let's me explain with an example:

Asset's original cost = 100 LC; Impairment Loss subsequent to the asset purchase = 50 LC; Residual Value = 0; Estimated Useful Life = 4 years; Depreciation Method = SLM; Carrying Amount at the end of 2 years = 25 LC (50% of 50 LC)

Now let's say that recoverable amount at the end of 2 years has increased to 60 LC. This would not mean that the entire impairment loss of 50 LC would be reversed. The impairment loss would at most be reversed by 25 LC because if no impairment loss would have been recognized previously then the carrying amount at the end of 2 years would have been 50 LC (50% of 100 LC).

I have attached a screenshot which might also help in understanding the concept.

On a completely different note: Prospective and Forward are sometimes used synonymous to one another. If we refer IAS 8.5(b) then the definition requires recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change which could mean a catch up adjustment for the full year in the period of estimate revision therefore it could have an element of looking back as well.

[Leo]

Thanks Ketan for this lengthy explanation! By prospective, I meant, if an asset is, let's say, depreciated from 100 LC down to 50 LC. and the fair value of the asset is now 60 LC. Then, from now, onwards, the company would stop depreciating the asset until the point in time when the fair value of the asset is below its carrying amount. Do you agree?

[Ketan Marwah]

You are welcome. Unfortunately I don't agree. You would adjust future depreciation to allocate the asset's revised carrying amount i.e. 50 LC over the remaining 2 years in my example.

[Leo]

what does that mean in practice?

[Ketan Marwah]

25 LC charged per year for the next 2 years continuing the SLM.

[Leo]

I think it depends on the materiality, if the company has noticed that the initial depreciation was overly pessimistic, then, they can readjust the depreciation rate, thus, extending the useful life, correct?

[Ketan Marwah]

Hi Leo,

I think you are digressing and also changing the facts of the case as we continue to speak so the answer is bound to evolve or be different. I assume you are clear in the logic of impairment reversal. Now if you would want to revise the estimate then obviously you are free to do that in the manner in which you plan to consume the asset’s service potential or the period for which the asset is available for use to you but the statement in your previous post is incorrect that you stop depreciating the asset until fair value reduces below the carrying amount.

[Marek Muc]

I agree with Ketan!