Question

Bracy Company acquired a new piece of construction equipment on January 1, 2015, at a cost of $141,000. The equipment was expected to have a useful life of 14 years and a residual value of $22,000 and is being depreciated on a straight-line basis. On January 1, 2016, the equipment was appraised and determined to have a fair value of $153,690, a salvage value of $22,000, and a remaining useful life of thirteen years.

a.	Determine the amount of depreciation expense that Bracy should recognize in determining net income in 2015, 2016, and 2017 and the amount at which equipment should be carried on the December 31, 2015, 2016, and 2017 balance sheets using (1) U.S. GAAP and (2) IFRS. In measuring property, plant, and equipment subsequent to acquisition, Bracy uses the revaluation model in IAS 16.
Determine the adjustments that Bracy would make in 2015, 2016, and 2017 to reconcile net income and stockholders’ equity under U.S. GAAP to IFRS. (If there is no reconciliation adjustment select "No adjustment is required to". Input all values as positive numbers.

Answer 1

As per both US GAAP and IFRS depreciation in 2015 = (141,000-22,000)/14 = 8,500 and carrying value at the end of 2015 = 141,000-8,500 = 132,500.

Now in the beginning of 2016, fair value of the asset is calculated to be 153,690 which is 21,190 more than carrying amount as that date. We are considering that this fair value is recoverable amount (As per IFRS recoverable amount should be higher of present value of future cashflows from the asset and fair value less cost of disposal.) No let's see how the accounting is made for 2016 and 2017 as per different accounting standards.

1) As per US GAAP:

Upward revaluation is prohibited under US GAAP. This means the asset will be continued to be accounted as per current carrying value and depreciated on the same value as below.

So depreciation expense for 2016 and 2017 are = (132,500-22,000)/13 = 8,500 as per straight line method

Carrying value in 2016 = 132,500 - 8,500 = 124,000; in 2017 = 124,000 - 8,500 = 115,500.

2) As per IFRS:

Upward revaluation is allowed upto the amount of recoverable value of the assets (as discussed above). This incremental amount from carrying value will not flow through income statement as gain rather will be accounted as revaluation reseve directly in Equity side of balance sheet (through comprehensive income statement). Further depreciation will be calculated using current carrying value after revaluation as below.

Considering $153,690 to be the recoverable amount, Carrying value at the beginning of 2016 = 153,690 and revaluation reserve in equity = 153,690 - 132,500 = 21,190.

So depreciation as per straight line method in 2016 and 2017 = (153,690 - 8,500)/13 = 11,168. Carrying amount 2016 = 153690-11168 = 142,522; in 2017 = 142522 - 11168 = 131,354