Question

he information that follows relates to equipment owned by Buffalo Limited at December 31, 2020: Cost $10,080,000 Accumulated depreciation to date 1,120,000 Expected future net cash flows (undiscounted) 7,840,000 Expected future net cash flows (discounted, value in use) 7,112,000 Fair value 6,944,000 Costs to sell (costs of disposal) 56,000 Assume that Buffalo will continue to use this asset in the future. As at December 31, 2020, the equipment has a remaining useful life of four years. Buffalo uses the straight-line method of depreciation.

Assume that Buffalo is a private company that follows ASPE. 1. Prepare the journal entry at December 31, 2020, to record asset impairment, if any. 2. Prepare the journal entry to record depreciation expense for 2021. 3. The equipment’s fair value at December 31, 2021 is $7.28 million. Prepare the journal entry, if any, to record the increase in fair value. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) No. Date Account Titles and Explanation Debit Credit (1) December 31, 2020 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount (2) December 31, 2021 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount (3) December 31, 2021 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount Show List of Accounts Link to Text

Repeat the requirements in (a) above assuming that Buffalo is a public company that follows IFRS. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) No. Date Account Titles and Explanation Debit Credit (1) December 31, 2020 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount (2) December 31, 2021 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount (3) December 31, 2021 enter an account title enter a debit amount enter a credit amount enter an account title enter a debit amount enter a credit amount

Answer 1

Answer (1) : Buffalo is a private company and follows ASPE.

Provisions for impairment under ASPE 3063 are as follows:

• An impairment loss shall be recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
• The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition.
• Therefore, from the above two points it is clear that if carrying value > undiscounted cash flows; Impairment loss = carrying value – fair value

Therefore, under present scenario,

Carrying Value = $ 10,080,000 - $ 1,120,000 = $ 8,960,000

Undiscounted Cashflow = $ 7,840,000

Fair value as on 31.12.2020 = $ 6,944,000

Here, both the conditions are matched i.e Carrying amount exceeds undiscounted cash flow and is also greater than the Fair Value of the asset.

Therefore, Impairment loss = Carrying value - Fair value

= $ 8,960,000 - $ 6,944,000

= $ 2,016,000

Depreciation for the year 2021 = (Carrying value as on 31.12.2020 - Impairment loss) / Remaining useful life

= ($ 8,960,000 - $ 2,016,000) / 4 years

= $ 6,944,000 / 4 years

= $ 1,736,000

As per AESP 3063, An impairment loss shall not be reversed if the fair value subsequently increases.

Accounting entries:

Date	Account Name	Dr Amount	Cr Amount
31.12.2020	Impairment loss A/c	2,016,000	-
	Equipment A/c	-	2,016,000
31.12.2021	Depreciation A/c	1,736,000	-
	Equipment A/c	-	1,736,000
31.12.2021	No entry	-	-

Answer (2): If Buffalo is public company that follows IFRS

Under IAS 36, an asset should be impaired if the Carrying value of an asset exceeds its Recoverable amount.

Where, Recoverable amount is higher of Fair value less cost of disposal and its value in use.  

Where, Value in use is present value of the future cashflows expected to be derived from an asset.  

Therefore, Carrying value = $ 8,960,000 (as calculated above)

Fair value less cost of disposal = $ 6,944,000 - $ 56,000 = $ 6,888,000

Value in use = $ 7,112,000 (as stated in the question)

Recoverable amount = Higher of $ 6,888,000 and $ 7,112,000 = $ 7,112,000

Impairment Loss = Carrying Value - Recoverable Amount

= $ 8,960,000 - $ 7,112,000

= $ 1,848,000

Depreciation for 31.12.2021 = (Carrying value as on 31.12.2020 - Impairment loss) / Remaining useful life

= ($ 8,960,000 - $ 1,848,000) / 4 years

= $ 1,778,000

Accounting entries:

Date	Account name	Dr Amount	Cr Amount
31.12.2020	Impairment loss A/c (P&L)	1,848,000	-
	Equipment A/c	-	1,848,000
31.12.2021	Depreciation A/c (P&L)	1,778,000	-
	Equipment A/c	-	1,778,000
31.12.2021	Equipment A/c	1,890,000	-
	Impairment gain A/c (P&L)		1,848,000
	Impairment gain A/c (OCI)		42,000

Note: Reversal of impairment loss is permissible under IFRS. The Recoverable amount is $ 7,224,000 and the Cattying value is $ 5,334,000. So Impairment gain will be $ 1,890,000. As per IAS 36, in case of revalued assets, impairment loss charged to P&L will first be utilized in case of subsequent revaluation and balance amount of impairment gain, if any, will be credited to Other Comprehensive Income.