|PPE Case Study |
|D Hazelwood |
|Due 25JUN12 ...view middle of the document...
“Cost…is the preferred valuation method used to account for the acquisition of plant, property, and equipment because…cost is more reliable and verifiable than other valuation methods…” (Schroeder, pg. 285). Therefore, under GAAP, land has a valuation of $4M.
In accordance with IFRS, “an entity shall choose either the cost model…or the revaluation model” (IAS 16, para 29). Because Old Line is interested in increasing the amount of its net assets, we would choose the revaluation model, whereby “after recognition as an asset, an item of property, plant, and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment costs” (IAS 16, para 31). However, a word of caution – we would have to apply the same model to all in this same grouping of assets – in this case, land. Since this is the only entry for land, it is a moot issue. Therefore, under IFRS, this land would be valued at $5M.
2. Building B – Acquired 10 years ago at a cost of $60M, with a 30 year life and a fair value of $40M at the end of 2012.
IAW ASC 360-10-30-1, the initial recognition of the building would be at $60M, with annual depreciation of $2M per year; therefore, accumulated depreciation today equals $20M ($2M x 10 years), resulting in a carrying value of $40M.
IAW IFRS, we have the choice to use either the cost or revaluation model. According to the cost model, “after recognition as an asset, an item of property, plan, and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment costs” (IAS 16, para 30). Using the cost model, the valuation of the building would be $40M ($60M – ($2M x 10 years)). When we use the revaluation model described, earlier, the valuation would be $20M ($40M fair value - $20M accumulated depreciation). Since this is the only type of asset within the class, and IFRS allows a choice for the class of asset, Old Line would use the cost model with a valuation of $40M.
3. Equipment C – Purchased in JAN08 at $10M with a 10 year service life and no salvage value. Current fair value is $1M (due to technology), with future undiscounted cash flows at $5M and discounted net present value of cash flows at $3M.
IAW GAAP, “an impairment loss shall be recognized only if 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 it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset” (ASC 360-10-35-17). Based on the end of 2012, the carrying value of Equipment C is $5M ($10M - 5 years of accumulated depreciation at $1M per year). Because it does not exceed the sum of the undiscounted cash flows of $5M, no impairment is measured. Therefore, the valuation of...