CHAPTER 11 Depreciation, Impairments, and Depletion ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis Depreciation factors; meaning of depreciation; choice of depreciation methods 1, 2, 3, 4, 5, 6, 7, 10, 14, 20, 21, 22 1, 2, 3, 4, 5, 1, 2, 3, 4 6, 7, 8, 14, 15 1, 2, 3, 4, 5 Computation of depreciation 8, 9, 13, 15 1, 2, 3, 4 1, 2, 3, 4, 5, 6, 7, 10, 15 1, 2, 3, 4, 5, 7, 8, 10, 11, 12 1, 2, 3 Changes in estimate 13 11, 12, 13, 14 3, 4 Depreciation of partial periods 15 2, 3, 4 3, 4, 5, 6, 7, 8, 15 1, 2, 3, 4, 8, 10, 11 Composite/group methods 11, 12 Impairment of value 16, 17, 18, 19 16, 17, 18 Depletion 22, 23, 24, 25, 26, 27 19, 20, 21, 22, 23 5, 6, 7 Ratio analysis 28 10 24 20, 29 11 25, 26 *9 Tax depreciation (MACRS) 12 *This material is covered in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 111 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems Explain the concept of depreciation Identify the factors involved in the depreciation process 1, 2, 3, 4, 5 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15 1, 2, 3, 4, 8, 10, 11, 12 Compare activity, straightline and decreasing charge methods of depreciation 1, 2, 3, 4, 5 1, 2, 3, 4, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15 1, 2, 3, 4, 5, 7, 8, 10, 11, 12 Explain special depreciation methods 6, 7 8, 9, 11, 12, 13, 14, 15 1, 2, 3, 4, 8, 10, 11 Explain the accounting issues related to asset impairment 16, 17, 18 Explain the accounting procedures for depletion of natural resources 19, 20, 21, 22, 23 5, 6, 7 Explain how to report and analyze property, plant, equipment, and natural resources 10 24 Describe income tax methods of depreciation 11 25, 26 *8 12 112 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE Level of Difficulty Time (minutes) Simple Moderate Simple Simple Simple Moderate Simple Moderate 15–20 20–25 15–20 15–25 20–25 20–30 25–35 20–25 E119 E1110 E1111 E1112 E1113 E1114 E1115 E1116 E1117 E1118 E1119 E1120 E1121 E1122 E1123 E1124 *E1125 *E1126 Depreciation computations—SL, SYD, DDB Depreciation—conceptual understanding Depreciation computations—SYD, DDB—partial periods Depreciation computations—five methods Depreciation computations—four methods Depreciation computations—five methods, partial periods Different methods of depreciation Depreciation computation—replacement, nonmonetary exchange Composite depreciation Depreciation computations, SYD Depreciation—change in estimate Depreciation computation—addition, change in estimate Depreciation—replacement, change in estimate Error analysis and depreciation, SL and SYD Depreciation for fractional periods Impairment Impairment Impairment Depletion computations—timber Depletion computations—oil Depletion computations—timber Depletion computations—mining Depletion computations—minerals Ratio analysis Book vs. tax (MACRS) depreciation Book vs. tax (MACRS) depreciation Simple Simple Simple Simple Simple Moderate Moderate Simple Simple Simple Simple Simple Simple Simple Simple Moderate Moderate Moderate 15–20 10–15 10–15 20–25 15–20 20–25 25–35 10–15 15–20 15–20 15–20 10–15 15–20 15–20 15–20 15–20 20–25 15–20 P111 P112 P113 P114 P115 P116 P117 P118 P119 P1110 Depreciation for partial period—SL, SYD, and DDB Depreciation for partial periods—SL, Act., SYD, and DDB Depreciation—SYD, Act., SL, and DDB Depreciation and error analysis Depletion and depreciation—mining Depletion, timber, and extraordinary loss Natural resources—timber Comprehensive fixedasset problem Impairment Comprehensive depreciation computations Simple Simple Moderate Complex Moderate Moderate Moderate Moderate Moderate Complex 25–30 25–35 40–50 45–60 25–30 25–30 25–35 25–35 15–25 45–60 Item Description E111 E112 E113 E114 E115 E116 E117 E118 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 113 ASSIGNMENT CHARACTERISTICS TABLE (Continued) Level of Difficulty Time (minutes) Moderate 30–35 *P1112 Depreciation for partial periods—SL, Act., SYD, and DDB Depreciation—SL, DDB, SYD, Act., and MACRS Moderate 25–35 CA111 CA112 CA113 CA114 CA115 Depreciation basic concepts Unit, group, and composite depreciation Depreciation—strike, unitsofproduction, obsolescence Depreciation concepts Depreciation choice—ethics Moderate Simple Moderate Moderate Moderate 25–35 20–25 25–35 25–35 20–25 Item Description P1111 114 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) LEARNING OBJECTIVES *8 *9 Explain the concept of depreciation Identify the factors involved in the depreciation process Compare activity, straightline, and decreasingcharge methods of depreciation Explain special depreciation methods Explain the accounting issues related to asset impairment Explain the accounting procedures for depletion of natural resources Explain how to report and analyze property, plant, equipment, and natural resources Describe income tax methods of depreciation Compare the accounting for property, plant, and equipment under GAAP and IFRS *This material is covered in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 115 CHAPTER REVIEW *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter Chapter 11 presents a discussion of the factors involved in the accounting and recording of depreciation and depletion and the methods of allocating the cost of tangible assets and natural resources. Depreciation refers to a cost allocation of tangible plant assets. Depletion is the term used to describe the cost allocation related to natural resources, such as timber, oil, or coal. Amortization is the term used to describe the expiration of intangible assets. In addition to a thorough discussion of the accounting problems involved, the chapter presents a detailed analysis and explanation of the various depreciation and write off methods used in practice Depreciation Process (L.O. 1) Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset. The cost allocation approach is justified because it matches costs with revenues and because fluctuation in market values is difficult to determine (L.O. 2) To compute depreciation, an accountant must establish (a) the depreciable base to be used for the asset, (b) the asset’s useful life, and (c) the cost allocation (depreciation) method to be used. Determination of the first two factors requires the use of estimates The depreciable base is the difference between an asset’s cost and its salvage value Salvage value is the estimated amount that will be received at the time the asset is sold or removed from service The useful life (service life) of a plant asset refers to the number of years that asset is capable of economically providing the service it was purchased to perform. The service life of an asset should not be confused with its physical life. For example, a machine may no longer provide a useful service to an organization even though it remains physically functional. Thus, the estimate of an asset’s service life is dependent upon both the economic factors and the physical factors related to its use. Economic factors are characterized by inadequacy, supersession, and obsolescence Physical factors relate to wear and tear, decay, and casualties that prevent the asset from performing indefinitely Depreciation Methods The depreciation method selected for a particular asset should be systematic and rational Depreciation methods may be classified as: A Activity method (units of use or production) B Straightline method 116 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) C Decreasingcharge methods (accelerated): a Sumoftheyears’digits b Decliningbalance method D Special depreciation methods a Group and composite methods b Hybrid or combination methods The following information for a piece of machinery will be used to illustrate some of the depreciation methods discussed in the following paragraphs Cost of machine Estimated useful life Estimated salvage value Productive life in hours $260,000 10 years $20,000 60,000 hours (L.O. 3) When the activity method (unitsof–production approach) is used, depreciation is assumed to be a function of productivity rather than the passage of time. This method is most appropriate for assets such as machinery or automobiles where depreciation can be based on input and output measures such as units produced or miles driven. One problem associated with the use of this method concerns a beforethefact estimation of the total output the asset will achieve during its useful life Illustration Assume the machine was used for 6,800 hours in the first year of its useful life (Cost less salvage value) × Hours this year Total estimated hours ($260,000 – $20,000) × 6,800 60,000 = Depreciation charge = $27,200 The straightline method is a function of time and its use results in a uniform charge to depreciation expense during each year of an asset’s service life. This method is based upon the assumption that the decline in an asset’s usefulness is the same each year. Cost less salvage value Estimated service life Illustration = Depreciation charge ($260,000 �$20,000) = $24,000 10 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 117 10 The decreasingcharge (accelerated depreciation) methods result in a higher depreciation cost during the early years of an asset’s service life and lower charges in later years. This approach is justified on the basis that assets are more productive in earlier years, and as a result, depreciation should be higher 11 The sumoftheyears’digits method and the decliningbalance method are the two most often used decreasing charge methods The sumoftheyears’ digits method requires multiplying the depreciable base by a fraction that decreases during each year of an asset’s service life. The decliningbalance method requires use of a constant percentage applied to an asset’s book value (cost less accumulated depreciation) each year Salvage value is initially ignored under the decliningbalance method, as it is not part of the book value calculation Illustration SumofYears’ Digits (Cost – Salvage value) × Depreciation fraction = Depreciation charge Year 1: ($260,000 – $20,000) × 10/55* = $43,636 Year 2: ($260,000 – $20,000) × 9/55* = $39,273 *n(n + 1) , where n = estimated useful life DecliningBalance The decliningbalance method utilizes a depreciation rate that is some multiple of the straightline method One popular method is twice the straightline rate. In the example provided, the 10year asset life translates into a 20% declining rate: [1/10 × 2] = 20% Year 1 Year 2 Beginning of the Year Book Value $260,000 $208,000 × × × Rate on Declining Balance 20% 20% = = = Depreciation Charge $52,000 $41,600 12 (L.O. 4) Group and composite methods involve averaging the service life of many assets and applying depreciation as though a single unit existed. The composite approach refers to a collection of dissimilar assets, whereas the group approach refers to a collection of assets with similar characteristics. The method of computation for group or composite is essentially the same: find an average and depreciate on that basis. For example, the following assets would have the following composite rate and life Asset A B C Original Cost $ 65,000 148,000 95,000 $308,000 Salvage Value $ 5,000 18,000 11,000 $34,000 Depreciable Cost $ 60,000 130,000 84,000 $274,000 Composite Depreciation Rate: Useful Life 5 yrs 10 yrs 12 yrs Depreciation (StraightLine) $12,000 13,000 7,000 $32,000 $32,000ữ$308,000=10.39% 11ư8 Copyrightâ2013JohnWiley&Sons,Inc.Kieso,IntermediateAccounting,15/eInstructorsManual(ForInstructorUseOnly) CompositeLife: $274,000ữ$32,000=8.56years Theseassetswillbedepreciatedat$32,000peryearfor8.56years Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 119 13 Hybrid or combination methods are often used. GAAP requires only that the method used results in the allocation of an asset’s cost over the asset’s service life in a systematic and rational manner. 14 In general, depreciation should be based on the number of months an asset is used during an accounting period. If a decreasing charge depreciation method is used for assets purchased during an accounting period, a slight modification is appropriate. When this situation occurs, determine depreciation expense for the full year and prorate the expense between the two periods involved. This process continues throughout the service life of the asset. For example, assume an asset with a 5year useful life and a depreciable cost of $45,000 is purchased on October 1. At the end of the first full year, the depreciation charge under the sumoftheyears’digits method would be: 1st full year: 2nd full year: Year 1 expense (10/1 to 12/31): Year 2 expense: Total 12 months expense: $45,000 × 5/15 = $15,000 $45,000 × 4/15 = $12,000 $15,000 × 3/12 = $3,750 ($15,000 × 9/12) + ($12,000 × 3/12) $11,250 + $3,000 = $14,250 15 Depreciation expense reduces net income for the accounting period in which it is recorded even though a current cash outflow is not involved However, depreciation should not be considered a source of cash. Cash is generated by revenues, not accounting procedures 16 The estimates involved in the depreciation process are sometimes subject to revision as a result of unanticipated occurrences Such revisions are classified as changes in accounting estimates and should be handled in the current and prospective periods Impairments 17 (L.O. 5) The process to determine an impairment loss is: (a) review events for possible impairment, (b) if events indicate impairment, apply the recoverability test to determine if the sum of the expected future net cash flows is less than the carrying amount. 18 If deemed to be impaired and if the asset is held for use, then (c) recognize a loss for the amount by which the carrying amount of the asset is greater than the fair value of the asset (or if no active market exists, the present value of the expected future net cash flows). If an impaired asset is expected to be disposed of, then (c) it should be recorded at the lower of cost or net realizable value, and it is not depreciated. 19 If an impairment loss is recognized on an asset held for use, the reduced carrying amount is now considered its new cost basis and no writeup is allowed. If an impaired asset is held for disposal, it can be written up or down as long as the writeup is never greater than the carrying amount of the asset at the time of the original impairment 1110 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) a SumoftheYears’Digits Method. This method requires multiplying the asset’s depreciable cost by a fraction that decreases each year of the asset’s service life Each fraction uses the sum of the years’ digits as a denominator and number of years of estimated life as of the beginning of each respective year as a numerator b DecliningBalance Method. The decliningbalance rate remains constant and is applied to the remaining book value, which declines each year. Salvage value is ignored in computing periodic depreciation until the last year of life, as it is not part of the book value calculation. The asset is not depreciated below salvage value Illustration 111 displays a graphical example of the effects of different depreciation methods on book value D (L.O. 4) Special Depreciation Methods Group and Composite methods: The group method is used for similar assets The composite method is used for dissimilar assets. a The ‘composite’ depreciation rate is the same for group and composite depreciation and is equal to the group’s annual depreciation divided by its total cost b No gain or loss is recognized on the disposition of any asset The difference between the sales price and the asset’s cost is debited to Accumulated Depreciation c The composite life is the depreciable base divided by the annual depreciation expense and indicates the period of time over which the group of assets will be depreciated Hybrid or Combination methods. Companies may develop their own tailormade depreciation methods as long as the method allocates an asset’s cost over the asset’s estimated useful life in a systematic and rational manner E Special Depreciation Issues Depreciation for partial periods. Many methods are applied and are acceptable as long as they are used consistently a Conceptually it is necessary to determine the depreciation expense for the full year and then prorate it between the two fiscal (accounting) periods involved b As a practical matter, many companies use arbitrary fractionalyear depreciation policies (such as recognizing a full year’s depreciation in the year of acquisition and none in the year of disposal). These policies are acceptable as long as they are applied consistently 1114 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Depreciation as a source of asset replacement funds. Depreciation does not provide cash funds; revenues earned through the use of assets generates cash funds Depreciation retains cash by reducing taxable income which reduces tax payments, though it does not involve a current cash inflow or outflow Revision of estimates. Changes in estimates of salvage value or service life are shown in current and prospective (future) periods as required by GAAP a In a change of accounting estimate, no retroactive adjustment of opening balances is made and no journal entry is required b When the straightline method is used, depreciation expense for years subsequent to the date of estimated change is equal to Remaining book value – Estimated salvage value Remaining estimated life Illustration 112 provides a graphical example of a revision in estimated salvage value under the straightline method F (L.O. 5) Impairments Illustration 113 provides a flowchart of the accounting process for impairments. Discuss the various events which may result in an impairment and also the differences in accounting for assets held for sale and those held for disposal An impairment occurs when the expected future net cash flows (undiscounted) of an asset is less than the asset’s carrying amount a Review events for possible impairment b Apply the recoverability test to determine if impairment has occurred (1) Impairment occurs if the sum of expected future net cash flows is less than the asset’s carrying amount If impairment has occurred, recognize an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset a Fair value is the market price if an active market exists for the asset b If no active market exists, use present value of expected future net cash flows Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1115 If the impaired asset is held for use, the new cost basis of the asset is the reduced carrying amount. The cost basis is not written up, even if the fair value of the asset increases in future years a The new depreciation base becomes the new cost basis and is allocated over the asset’s remaining useful life If the impaired asset is intended to be disposed of, it is reported at the lowerof costornet realizable value. There is no depreciation expense for impaired assets being held for disposal because their costs will be recovered during the sale a Restoration of the impairment loss is possible, as long as the writeup does not exceed the carrying amount of the asset before impairment G (L.O. 6) Depletion: Used to account for natural resources which are physically consumed over the period of use, such as petroleum, minerals, and timber Establishment of depletion base. The costs of natural resources consist of the following components: a Acquisition cost. The price paid to obtain the property or to obtain property rights to search to find an undiscovered natural resource, or to acquire an already discovered resource b Exploration costs. Costs incurred in exploring in order to find resources. c Development costs. Intangible development costs such as drilling costs, tunnels, shafts, and wells. (1) Tangible equipment costs include all transportation and other heavy equipment needed to extract the resource and get it ready for market. These costs are not included in the depletion base d Restoration costs are necessary to restore the property to its natural state after the resources have been extracted. These costs are included in the depletion base Writeoff of resource cost: Normally the unitsofproduction method is used The depletion rate is established by dividing the total estimated units available into the depletion base (total cost—salvage value) Illustration 114 compares the flow of various asset costs to the income statement Emphasize that depletion costs are recognized in the period that units are extracted. The costs of extracted resources not sold, are considered product costs and are inventoried 1116 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Special problems in depletion accounting a Difficulty of estimating recoverable reserves Estimates of natural resource re serves are in large measure merely “knowledgeable guesses.” b Liquidating dividends. The major accounting problem is to distinguish between those dividends that are a return of capital and those that are not Controversy concerning oil and gas accounting The fullcost method and the successful efforts method are both historical cost methods allowed to account for oil and gas activities. Discuss intervention by the SEC and its unsuccessful attempt to develop Reserve Recognition Accounting H (L.O. 7) Presentation and Analysis of Property, Plant, Equipment, and Natural Resources Disclosures for Property, Plant, and Equipment: a The basis of valuation (usually historical cost) b Pledges, liens, and other commitments or liabilities related to the property c Depreciation expense for the period d The balances of major classes of depreciable assets, by nature and function e Accumulated depreciation, either by major classes of depreciable assets, or in total f A general description of the depreciation methods used in computing depreciation with respect to the major classes of depreciable assets Disclosures for Natural Resources: a The basis of valuation (usually historical cost) b Pledges, liens, and other commitments or liabilities related to the property c The accounting method used for oil and gas producing activities—fullcost or successfulefforts d The manner of disposing of costs relating to oil and gas producing activities (e.g., expensing immediately versus depreciation and depletion.) e Public companies must also supply supplemental information regarding reserve quantities, capitalized costs, acquisition, exploration, and development activities, and measures of discounted net cash flows related to proved oil and gas reserve quantities Analysis ratios: a The asset turnover ratio indicates how efficiently a company uses its assets to generate sales: Asset turnover ratio = Net sales Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1117 b c Average total assets Profit margin measures the ability of a company to generate profit on each sales dollar: Net income Profit margin ratio = Total sales Rate of return on assets measures how profitably assets were used to generate profit during a period: Net income Net sales Rate of return on assets = × Net sales Average total assets = Net income Average total assets Illustration 115 displays the rate of return on assets ratio, and its components I (L.O. 8) APPENDIX 11A. Income Tax Depreciation The objectives of tax laws and financial reporting are different, therefore, the process of allocating asset cost to the periods benefited are different for accounting reporting and income tax purposes a For assets acquired between 1981 and 1986, the Economic Recovery Tax Act of 1981 created the Accelerated Cost Recovery System (ACRS). The IRS prees tablished cost recovery periods for various classes of assets and eliminated salvage value as a factor in calculating the amount of cost recovery deducted each year b The Tax Reform Act of 1986 created a Modified Accelerated Cost Recovery System (MACRS) applicable to assets placed in service in 1987 and later The computation of depreciation under MACRS differs from the computation under GAAP in three ways: a A mandated tax life (recovery period), which is generally shorter than the economic life of the asset (1) Each item of depreciable property is assigned to one of eight different property classes (2) The recovery period of an asset depends on the property class. The MACRS property classes include a class for 3, 5, 7, 10, 15, 20, 27.5, and 39year property 1118 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Illustration 116 lists the eight MACRS property classes and provides examples of the type of assets that would be assigned to each class b Cost recovery is computed on an accelerated basis for six of the eight property classes (1) The 3, 5, 7, and 10year property classes employ the use of the double decliningbalance method (2) The 15 and 20year property classes employ the 150% decliningbalance method (3) The 27.5 and 39year property classes employ the use of the straightline method c An asset is depreciated to zero value so that there is no salvage value at the end of its MACRS life The application of the accelerated methods under MACRS is simplified by using IRS published tables reflecting the percentage of depreciable cost that can be recovered each year Illustration 117 displays a table of MACRS depreciation rates by class of property. The table automatically incorporates the switch to the straightline method and the halfyear convention a Cost recovery computations for income tax purposes must reflect a halfyear convention; that is, a half year of depreciation is allowed in the year of acquisition and in the year of disposition b When one of the accelerated methods is used, a change is made to the straight line method in the first year that straightline depreciation exceeds the accelerated depreciation As an alternative to MACRS, the straightline method of depreciation may be used based on IRS established recovery periods (life in years) GAAP requires that the cost of depreciable assets be allocated to expense over the expected useful life of the asset in a systematic and rational manner Methods of depreciation adopted for financial reporting should reflect this requirement. However, from a costbenefit perspective, some firms adopt tax depreciation methods for book purposes Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1119 *J. (L.O. 8) IFRS Insights GAAP adheres to many of the same principles of IFRS in the accounting for property, plant, and equipment Major differences relate to use of component depreciation, impairments, and revaluations Relevant facts a Similarities (1) The definition of property, plant, and equipment is essentially the same under GAAP and IFRS (2) Under both GAAP and IFRS, changes in depreciation method and changes in useful life are treated in the current and future periods. Prior periods are not affected. GAAP recently conformed to IFRS in this area (3) The accounting for plant asset disposals is the same under GAAP and IFRS (4) The accounting for the initial costs to acquire natural resources is similar under GAAP and IFRS. (5) Under both GAAP and IFRS, interest costs incurred during construction must be capitalized. Recently, IFRS converged to GAAP (6) The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. (7) GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance This is the same framework used in IFRS (8) GAAP also views depreciation as allocation of cost over an asset’s life. GAAP permits the same depreciation methods (straightline, diminishingbalance, unitsofproduction) as IFRS b Differences (1) IFRS requires component depreciation. Under GAAP, component depreciation is permitted but is rarely used (2) Under IFRS, companies can use either the historical cost model or the revaluation model. GAAP does not permit revaluations of property, plant, and equipment or mineral resources 1120 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) (3) In testing for impairments of longlived assets, GAAP uses a twostep model to test for impairments. As long as future undiscounted cash flows exceed the carrying amount of the asset, no impairment is recorded. The IFRS impairment test is stricter. Unlike GAAP, reversals of impairment losses are permitted ILLUSTRATION 111 PATTERNS OF BOOK VALUE OVER LIFE OF ASSET Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1121 1122 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 112 CHANGE IN ESTIMATE: STRAIGHTLINE METHOD Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1123 ILLUSTRATION 113 ACCOUNTING FOR IMPAIRMENTS 1124 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 114 FLOW OF ASSET COSTS Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1125 ILLUSTRATION 115 RATE OF RETURN ON ASSETS 1126 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ILLUSTRATION 116 MACRS PROPERTY CLASSES Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1127 ILLUSTRATION 117 MACRS DEPRECIATION RATES 1128 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) ... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) Special problems in depletion accounting a Difficulty of estimating... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1119 *J. (L.O. 8) IFRS Insights GAAP adheres to many of the same principles of IFRS in the accounting for property,... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e Instructor’s Manual (For Instructor Use Only) 1123 ILLUSTRATION 113 ACCOUNTING FOR IMPAIRMENTS