Question

P11.14  Roland Corporation uses special strapping equipment in its packaging business. The equipment was purchased in January 2019 for $10 million and had an estimated useful life of eight years with no residual value. In early April 2020, a part costing $875,000 and designed to increase the machinery's efficiency was added. The machine's estimated useful life did not change with this addition. By December 31, 2020, new technology had been introduced that would speed up the obsolescence of Roland's equipment. Roland's controller estimates that expected undiscounted future net cash flows on the equipment would be $6.3 million, and that expected discounted future net cash flows on the equipment would be $5.8 million. Fair value of the equipment at December 31, 2020, was estimated to be $5.6 million. Roland intends to continue using the equipment, but estimates that its remaining useful life is now four years. Roland uses straight-line depreciation. Assume that Roland is a private company that follows ASPE.

Instructions

a. Prepare the journal entry to record asset impairment at December 31, 2020, if any.

b. Fair value of the equipment at December 31, 2021, is estimated to be $5.9 million. Prepare any journal entries for the equipment at December 31, 2021.

c. Repeat part (b), assuming that on December 31, 2021, Roland's management decides to dispose of the equipment. As at December 31, 2021, the asset is still in use and not ready for sale in its current state. In February 2022, Roland's management will meet to outline an active program to find a buyer.

d. Repeat part (b), assuming that the equipment is designated as “held for sale” as of January 1, 2021, and that the equipment was not in use in 2021 but was still held by Roland on December 31, 2021.

e. For each situation in parts (b), (c), and (d), indicate where the equipment will be reported on the December 31, 2021 balance sheet.

f. Repeat parts (a) and (b), assuming instead that Roland is a public company that prepares financial statements in accordance with IFRS.

g.  From the perspective of a financial statement user, discuss the importance of frequent impairment testing in producing relevant and faithfully representative financial statements. Do IFRS and ASPE differ in the required frequency? Explain briefly.

Answer 1

Answer:

a.

Depreciation (2019) = $10,000,000 / 8 years = $1,250,000

Depreciation (Jan. – Mar. 2020) = $1,250,000 X 3/12 = $312,500

Depreciation (Apr. – Dec. 2020) = ($10,000,000 + $875,000– $1,562,500) / (96 – 15) = $114,969 per month

= $114,969 per month X 9 months = $1,034,721

Total depreciation (2020) = $312,500 + $1,034,721 = $1,347,221

Accumulated Depreciation at Dec. 31, 2020= $1,250,000 + $1,347,221 = $2,597,221

Carrying amount of equipment at Dec. 31, 2020 = $10,875,000 – $2,597,221 = $8,277,779.

Using the Cost Recovery Impairment Model under ASPE, undiscounted future net cash flows ($6,300,000)

Impairment entry:

Loss on Impairment 2,677,779¹

Accumulated Impairment Losses

- Equipment 2,677,779

  ¹$8,277,779 – $5,600,000

Depreciation Expense 1,400,000²

Accumulated Depreciation   

- Equipment 1,400,000

  ²($5,600,000 ÷ 4)

No recovery of impairment loss would be recorded since recovery of impairment losses is not permitted under ASPE.

c.

The answer to partb. would remain the same. As of December 31, 2021, the asset is still in use and not ready for sale in its current state, and there is no active program to find a buyer, therefore the held for sale criteria are not met. The equipment would continue to be classified as property, plant, and equipment and depreciated in 2021 and into 2022until the held for sale criteria are met.

d.

Assuming that the asset meets all criteria classification as held for sale as of January 1, 2021, the equipment would not be depreciated in 2021. It would be classified as “held for sale” in a separate section of the SFP. The increase in fair value during 2021 would not be recorded. Recovery of impairment losses is not permitted under ASPE. A gain could be recorded for increases in fair value (less cost to sell) that occur after the asset is classified as “held for sale”, but not in excess of the cumulative loss previously recognized while the asset was classified as “held for sale”.

e.

For parts b. and c. the equipment would be shown as part of property, plant and equipment. For part d., the equipment would be shown as a non-current “Asset held for sale” in a separate section of the SFP.

f.

Under IFRS, IAS 36 uses the Rational Entity Impairment Model and compares the asset’s recoverable amount of $5,800,000 (the higher of its value in use or discounted future net cash flows of $5,800,000, and its fair value less costs to sell of $5,600,000), with the asset’s carrying amount of $8,277,779 (as calculated in part a).

The impairment test indicates that impairment has occurred since the carrying amount exceeds the recoverable amount. The impairment loss is then calculated as follows:

Cost	$10,875,000
Accumulated depreciation	2,597,221
Carrying amount	8,277,779
Recoverable amount	5,800,000
Loss onimpairment	$2,477,779

	December 31, 2020
	Loss on Impairment............................	2,477,779
	Accumulated Impairment Losses—Equipment.............		2,477,779

	December 31, 2021
	Depreciation Expense.........................	1,450,000
	Accumulated Depreciation—Equipment..............................		1,450,000

New carrying amount	$5,800,000
Useful life	4 years
Depreciation per year	$1,450,000

Under IAS 36, the reversal of a previous impairment loss amount is limited. The specific asset cannot be increased in value to more than what its carrying amount would have been, net of depreciation, if the original impairment loss had never been recognized.

December 31, 2020pre-impairment loss carrying amount............................................................................	$8,277,779
2021 depreciation based on pre-impairment carrying amount ($8,277,779 ÷ 4 years)........................................	2,069,445
December 31, 2021pre-impairment carrying amount....	$6,208,334

The December 31, 2021 carrying amount would have been $6,208,334 if the impairment had not occurred; this is the maximum carrying amount that can be reflected for the equipment in the December 31, 2021 SFP.

Actual December 31, 2020carrying amount...................	$5,800,000
Actual 2021 depreciation (based on impairment)....... a.	1,450,000
Expected December 31, 2021 carrying amount............	4,350,000
December 31, 2021 fair value …………………………..	5,900,000
Recovery of previously recognized impairment.......... b.	$1,550,000

Thus, the net effect on the 2021 net income (loss) is a net increase of $100,000 [=a. – b.]. The asset can be restored to its indicated December 31, 2021 fair value of $5,900,000 as this does not exceed the carrying amount that wouldhave existed at this date had the impairment in 2020never been recognized.

	December 31, 2021
	Accumulated Impairment Losses— Equipment........................................	1,550,000
	Recovery of Loss from Impairment..............................		1,550,000

g.

For the information presented in financial statements to be relevant, faithfully represented, and useful to decision makers, each asset on the SFP must not be reported (valued) at an amount greater than its recoverable amount.

Under IFRS, at the end of each reporting period, assets must be assessed for internal or external indicators of impairment. Under ASPE, assets must be assessed for indicators of impairment only when events and changes in circumstances indicate that an asset’s carrying amount may not be recoverable. If one or more indicators of impairment exist, the entity should conduct an objective impairment or recoverability test. Frequent assessment for indicators of impairment helps to ensure that impairment or recoverability tests are conducted in a timely manner, and that asset values on the SFP are not overstated.