Revaluation and Impairment

Impairment: The general accounting standard of lower of cost or net realizable value for inventories does not apply to PPE. Even when PPE has suffered partial obsolescence, accountants have been reluctant to reduce assets carrying amount. Because, unlike inventories, its difficult to arrive at a fair value for PPE that is not somewhat subjective and arbitrary. Recognizing Impairment Credit crisis in late 2008 makes many companies considering to write off their LONG LIVED ASSETs. These refers to impairment. A long lived assets is impaired when a company is not able to recover the assets carrying amount either through using it or selling it. To determine an asset is impaired, on annual basis, companies review the asset for indicators of impairments. If the indicators is present, the impairment test must be conducted. This test compares the assets recoverable amount with its carrying amount. If carrying amount is higher than Recoverable amount, the different is impairment loss. If carrying amount is less than recoverable amount, no impairment is recorded. Recoverable amount is defined as the higher of fair value less cost to sell or value in use. Carrying amount Compared to Recoverable amount

Higher of

FV Cost to Sell Impairment of Asset to be disposed of

Value in use

If the Company intends to dispose of impaired asset, company reclassifies the PPE to be Held for sale. And at the time, no depreciation recorded. The rationale is that depreciation is inconsistent with the notion of assets to be disposed of and with the use of the Lower of cost or net realizable value. In other hand, asset on Held for sale is like inventory. Company revalues them because it will recover asset held for disposal through sale rather than through operation. Company should report losses or gains related to these impaired assets as part of operating income in Other Income and expense.

Revaluation: Company have a choice, they value the tangible long lived assets at cost or fair value. If the use fair value, they need to revalue them. Recognizing Revaluation When a company choose to fair value their long lived tangible assets subsequent to acquisition, they account for the change in the fair value by adjusting the appropriate asset account and establishing an unrealized gain on the revalued long lived tangible asset. This unrealized gain is often referred to as revaluation surplus. Revaluation- Depreciable asset To report equipment at fair value, company does the following: 1. Reduce the Acc. Depreciation-Equipment account to zero 2. Reduce equipment account (report as fair value) 3. Record unrealized gain on revaluation if theres excess between Fair value- carrying amount. Revaluation increase generally goes to equity. A revaluation decrease is reported as an expense (as an impairment loss). Unless it offsets previously recorded revaluation increases. If revaluation increase offsets a revaluation decrease that went to expense, then the increase is reported in income. Under no circumstances can the Acc. OCI account related to revaluations have negative balance. Revaluation issues The use of revaluation accounting is not an all or nothing proposition. A company can select to value only one class of assets and nor revaluated other asset. Such as, PT X use revaluation on Land. So, for Building and Equipment, PT X may not revaluate them. But, for the same class, it need to use same way. So, every asset which is grouped on Land should revaluate. Companies using revaluation accounting must also make every effort to keep the assets value up to date. But, most companies do not use revaluation because substantial and continuing costs associated with appraisals to determine fair value. In other hand, gain of revaluation is not recorded in net income. But theres still company use it. They use it because they stay on highly inflationary environment where historical cost numbers are badly out of date. In addition, some companies select this approach because they wish to increase their equity base.