Company Accounting: IAS 16, Fair Value, Depreciation, Impairment, and Revaluation

This article covers topics like IAS 16 compliance, fair value accounting, depreciation, impairment, and revaluation in company accounting. It includes solved examples, journal entries, and calculations. The content is relevant for accounting courses in universities and colleges.

Running head: COMPANY ACCOUNTING
Company Accounting
Name of the Student:
Name of the University:
Author’s Note:

1COMPANY ACCOUNTING
Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................2
Answer to Question 3:.....................................................................................................................2
Calculations:................................................................................................................................2
Answer to Question 4:.....................................................................................................................4
Requirement a:.............................................................................................................................4
Journal Entries:........................................................................................................................4
Calculation:..............................................................................................................................4
Requirement b:.............................................................................................................................5
Journal Entries:........................................................................................................................5
Calculation:..............................................................................................................................6
Answer to Question 5:.....................................................................................................................6
Requirement a:.............................................................................................................................6
Calculations:................................................................................................................................6
Requirement b:.............................................................................................................................7
Journal Entries:........................................................................................................................7
Calculation:..............................................................................................................................7
Requirement c:.............................................................................................................................7
Journal Entries:........................................................................................................................7
Calculation:..............................................................................................................................8
Answer to Question 6:.....................................................................................................................8
Journal Entries:........................................................................................................................8
Calculation:..............................................................................................................................9
Reference.......................................................................................................................................10

2COMPANY ACCOUNTING
Answer to Question 1:
The determination of carrying amount of Property, Plant and Equipment needs to be in
compliance with IAS 16 which deals with Property, Plants and Equipment. As per the provisions
which are stated in IAS 16.43, in case the business uses cost model, each part of the property,
plant and equipment with a cost which is considered to be significant in relation to the total cost
of the asset must be depreciated in a separate manner (André, Filip and Paugam 2015). The
carrying amount of an item of property, plant and equipment will be including the cost of
replacement for parts of the item depending on the recognition criteria. In addition to this, the
standard also provides cost of major inspections should also be recognised in the carrying
amount of the item of property, plant and equipment (Trifan and Anton 2014).
Answer to Question 2:
Fair Value can be described as the sale price at the buyers are willing to purchase the
asset and the sellers are also willing to sell the assets and it is assumed that the buyers and sellers
for the asset have adequate knowledge of the market conditions of the business (Blankespoor et
al. 2013). Fair value also represents the value of the assets and liabilities of a business in case of
consolidation of financial statements of the company. In accounting practice and principle, fair
value accounting is considered to be a valuation concept and the same is implemented by FASB
(Magnan, Menini and Parbonetti 2015). In accounting terms, fair value is used as a certainty of
the market value of an asset. As per US GAAP, fair value is the price at which the assets are
purchased or sold in an orderly fashion between participants of the transaction. When a business
is measuring fair value of an asset, assumption is made that the pricing of the asset and liabilities
are under current market conditions and also considers the risks which is associated with the
asset. As per the provision which is provided by IFRS 13, an entity is required to consider the
effects of credit risk while determining fair value measurement. The concept of fair value
measurement is very important in accounting process and measuring the value of the assets and
liabilities of the business.
Answer to Question 3:
Calculations:
a) Depreciation p.a. on Equipment:

3COMPANY ACCOUNTING
[Cost of Equipment – Residual Value] / Estimated Life
= [ $55,000 - $5,000] / 5 yrs.
= $ 10,000
b) Accumulated Depreciation from 1 July 2015 to 1 July 2018:
Depreciation p.a. on Equipment x Nos. of Useful Years
= $ 10,000 x 3 yrs.
= $ 30,000
c) Gain / (Loss) on Impairment:
Revalued Cost of Equipment - [ Cost of Equipment – Accumulated Depreciation]
= $ 16,000 – [$ 55,000 - $ 30,000]
= $ 16.000 - $ 25,000
= - $ 9,000 (Loss on Impairment)
The accounting treatment for computation of depreciable amount for the equipment is
wrongly treated by the accountant of the business. The first journal entry shows that equipment
account is debited and accumulated depreciation account is credited. Firstly, the amount which is
shown is wrong which is shown to be $ 33,000. The accountant has just divided the value of the
equipment with the estimated useful life of the asset. The accountant has not considered the
residual value of the asset which is to be deducted from the original value of the asset in order to
compute depreciation of the about. As shown in the above the accurate computation of
depreciation is shown to be $ 10,000. The accountant had computed the same to be $ 11,000 as
shown in the question. In addition to this, the entry for charging depreciation in a business has
also been passed wrongly (Sooriyakumaran and Thirunavukkarasu 2013). The accountant has
debited Equipment account and credited Accumulated depreciation which is wrong as
depreciation is a charge on the asset and therefore, the equipment account should be credited in
order to reduce the value of the asset (Barbe, Didelot and Ashta 2014).

4COMPANY ACCOUNTING
The entry which is passed for recording the revaluation decrement or impairment of
assets is also wrong both in terms of figure and the passing of journal entry. The accountant has
computed the loss from impairments of asset to be $ 6000 which is not the correct figure. The
accurate calculation of revaluation decrement is shown in the above para where the loss from
impairment is computed to be $ 9,000. The accountant has wrongly merged depreciation charge
with impairment loss for the equipment. Depreciation is annual charge on the value of the asset
due to wear and tear or other factors (Jaijairam 2013(. Whereas impairment of an asset takes
place when the market value of the asset is less than the value at which the asset is shown in the
financial statements of the business (Capalbo 2013). The impairment loss of the business should
be recorded separately from the depreciation loss of the business.
Answer to Question 4:
Requirement a:
Journal Entries:
Date Particulars Debit Credit
1/7/2019 Accumulated Depreciation A/c. $8,000
Equipment A/c. $8,000
(Being accumulated depreciation written off)
Equipment A/c. $ 5,000
Gain on Revaluation A/c. $ 5,000
(Being value of equipment increased and gain on
revaluation recorded)
Calculation:
a) Depreciation & Accumulated Depreciation for 1 July 2018 to 30 June 2019:
[Revalued Cost of Equipment – Residual Value] / Estimated Life
= [ $ 16,000 - $ 0] / 2 yrs.

5COMPANY ACCOUNTING
= $ 8,000
a) Gain / (Loss) on Revaluation:
Revalued Cost of Equipment - [ Cost of Equipment – Accumulated Depreciation]
= $ 13,000 – [$ 16,000 - $ 8,000]
= $ 13.000 - $ 8,000
= $ 5,000 (Profit on Revaluation)
Requirement b:
Journal Entries:
Date Particulars Debit Credit
30/6/2020 Depreciation A/c. $10,000
Accumulated Depreciation A/c. $10,000
(Being depreciation charged on equipment)
P/L Summary A/c. $ 10,000
Depreciation A/c. $ 10,000
(Being depreciation transferred to P/L Statement)
Gain on Revaluation A/c. $ 5,000
Other Comprehensive Income A/c. $5,000
(Being gain on revaluation transferred to other
comprehensive income)
Other Comprehensive Income A/c. $ 5,000
Asset Revaluation Reserve A/c. $ 5,000
(Being other comprehensive income from revaluation
gain transferred to equity fund)

6COMPANY ACCOUNTING
Calculation:
a) Depreciation & Accumulated Depreciation for 1 July 2018 to 30 June 2019:
[Revalued Cost of Equipment – Residual Value] / Estimated Life
= [ $ 13,000 - $ 3,000] / 1 yrs.
= $ 10,000
Answer to Question 5:
Requirement a:
The accountant has wrongly passed the journal entry regarding impairment of assets of
the business. The accountant has debited impairment loss and credited accumulated depreciation.
The accountant has wrongly mixed up the impairment loss on the equipment with the charges of
depreciation which is clearly shown in the journal entry which is passed by the accountant. The
amount for the impairment loss which is computed by the accountant is shown to be $ 30,000
which is incorrect as well (Kulikova, Gubaidullina and Elsukova 2016). The accurate
calculations for the impairment loss which the business incurs on the equipment is shown below
and the same is shown by deducting the carrying cost of the plant from the revalued cost of the
plan and the same is shown to be $ 15,000. Therefore, the management needs to pass adjustment
entries for improving both the journal entry and also the amount which is shown as impairment
loss of the business (Amiraslani, Iatridis and Pope 2013). The revalued cost of the plant is shown
to be $ 225,000 and the carrying cost of the plant is shown to be $ 2,40,000. Therefore, the
provisions for impairments needs to be applied for which necessary adjustment entries regarding
impairments needs to be passed by the management.
Calculations:
a) Gain /(Loss) on Impairment:
Revalued Cost of Plant (Higher of Value in use & Fair Value, less, disposal) – Carrying Cost
of Plant
= $ 225,000 - $240, 000

7COMPANY ACCOUNTING
= - $15,000 (Loss on Impairment)
Requirement b:
Journal Entries:
Date Particulars Debit Credit
1/7/2017 Accumulated Depreciation A/c. $60,000
Plant A/c. $60,000
(Being accumulated depreciation written off)
Impairment Loss A/c. $ 15,000
Plant A/c. $ 15,000
(Being value of equipment decreased and loss on
impairment recorded)
Calculation:
a) Accumulated Depreciation of Plant:
Actual Cost of Plant – Carrying Cost of Plant
= $300,000 - $240,000
= $ 60,000
Requirement c:
Journal Entries:
Date Particulars Debit Credit
30/6/2018 Depreciation A/c. $22,500
Accumulated Depreciation A/c. $ 22,500
(Being depreciation charged on plant)

8COMPANY ACCOUNTING
P/L Summary A/c. $ 22,500
Depreciation A/c. $ 22,500
(Being depreciation and impairment loss transferred
to P/L Statement)
Other Comprehensive Income A/c. $ 15,000
Impairment Loss A/c. $ 15,000
(Being impairment loss transferred to other
comprehensive income)
Asset Revaluation Reserve A/c. $ 15,000
Other Comprehensive Income A/c. $ 15,000
(Being other comprehensive loss due to impairment
transferred to equity fund)
Calculation:
a) Depreciation from 1 July 2017 to 30 June 2018:
Revalued Cost of Equipment x Rate of Depreciation p.a.
= $ 225,000 x 10%
= $ 22,500
Answer to Question 6:
Journal Entries:
Date Particulars Debit Credit
1/7/2018 Accumulated Depreciation A/c. $ 22,500
Plant A/c. $ 22,500
(Being accumulated depreciation written off)

9COMPANY ACCOUNTING
Plant A/c. $ 37,500
Gain on Revaluation A/c. $ 37,500
(Being value of equipment increased and gain on
revaluation recorded)
Calculation:
a) Gain/(Loss) on Revaluation of Plant:
Revalued Cost of Plant – [Cost of Plant – Accumulated Depreciation]
= $ 240,000 – [$ 225,000 - $ 22,500]
= $ 240,000 - $ 202,500
= $ 37,500

10COMPANY ACCOUNTING
Reference
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for
IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research
(CeFARR).
André, P., Filip, A. and Paugam, L., 2015. The effect of mandatory IFRS adoption on conditional
conservatism in Europe. Journal of Business Finance & Accounting, 42(3-4), pp.482-514.
Barbe, O., Didelot, L. and Ashta, A., 2014. From Disconnected to Integrated tax and financial
systems A post-IFRS evaluation of evolution of Tax and Financial Reporting relationships based
on the French case. Research in Accounting Regulation, 26(2), pp.242-256.
Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C., 2013. Fair value accounting
for financial instruments: Does it improve the association between bank leverage and credit
risk?. The Accounting Review, 88(4), pp.1143-1177.
Capalbo, F., 2013. Impairment of Assets.
Jaijairam, P., 2013. Fair value accounting vs. historical cost accounting. The Review of Business
Information Systems (Online), 17(1), p.1.
Kulikova, L.I., Gubaidullina, A.R. and Elsukova, T.V., 2016. Disclosure of the risks of the
organization influencing decision making by users of financial reporting. International Business
Management, 10(22), pp.5280-5285.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Sooriyakumaran, L. and Thirunavukkarasu, V., 2013. Disclosures and impacts of impairment of
non-current assets in the financial statements: A study on listed manufacturing companies in
Colombo Stock Exchange (CSE) in Sri Lanka.
Trifan, A. and Anton, C., 2014. ACCOUNTING TREATMENT FOR PROPERTY, PLANT
AND EQUIPMENT REVALUATIONS. Management & Marketing, 9(2).