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TOPICONE: Briefoverviewoftheregulatoryreportingand conceptualframeworks conceptual frameworks Accounting for Asset Acquisitions AccountingforAssetAcquisitions Measurement of Property Plant & Equipment post MeasurementofProperty,Plant&Equipmentpost acquisition
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OVERVIEWOFTHEREGULATORYREPORTING FRAMEWORK
EntitiesOtherthanPrivateEntitieshavelegislative responsibilities(CompaniesAct1965,FinancialReportingAct responsibilities (Companies Act 1965 Financial Reporting Act 1997)toprepareexternalfinancialreports Theneedsofexternalusersareprotectedbyminimum reportingrequirementswhichincludethecontentsof reporting requirements which include the contents of financialstatements FinancialReportingFoundation(FRF)
O OversightroleovertheMASB i ht l th MASB
TheMalaysianAccountingStandardsBoard(MASB)
Developsandissuesaccountingandfinancialreporting standardsinMalaysia(complianceismandatoryunders26Dof d d i l i ( li i d d f FinRepAct) Implementedaplanforconvergence(i.e.fullcompliance)with IFRStobecompletedby1January2012 IFRS to be completed by 1 January 2012 Rationaleistoprovideworldwideconsistencyinthepreparation offinancialstatements
The focus of this subject: to consider particular FRS that are Thefocusofthissubject:toconsiderparticularFRSthatare mostrelevanttothepreparationofGeneralPurposeFinancial Statements
CORPORATEREPORTING
PARTONE: AccountingforAssetAcquisitions f
FRS116:Property,Plant&Equipment FRS3:BusinessCombinations FRS138:IntangibleAssets
Deegan references
Ch4&Ch8pp250253,268279
OBJECTIVES
Bytheendofthissessionyoushouldbeableto: ExplainthenatureofPPEandtherecognitionand measurementcriteriaforPPE RecordtheacquisitionofPPE Explainthenatureofabusinesscombination Recognise andmeasurethenetassetsacquiredunder theacquisitionmethodforabusinesscombination Recordtheacquisitionofabusinesscombination Explainthenatureofgoodwillacquiredinabusiness combinationandhowitfitsintheframeworkof intangibleassets intangible assets
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ASSETACQUISITIONS
Businesses generally acquire PPE to capacity BusinessesgenerallyacquirePPEtocapacity Note: PPE vs Inventory / Receivables Note:PPEvs Inventory/Receivables Types of acquisitions: Typesofacquisitions: IndividualPPEitem(s) A business combination Abusinesscombination Controlofanotherentity
Costvs value evenifFVcanbemeasured,ifcostcannot thenanassetshallnotberecognised(someexceptions) then an asset shall not be recognised (some exceptions)
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DefinitionofCost (para6)
theamountofcashorcashequivalentspaidor thefairvalueoftheotherconsiderationgivento acquireanassetatthetimeofitsacquisitionor construction t ti
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Examplesofconsideration
C h Cash Agreementtopayoutortakeoveraloan/other debt Credit(debtfinance) Iss e of shares (eq it finance) Issueofshares(equityfinance) Anycombinationofthese
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FRS116:Property,PlantandEquipment
LectureExample:DeterminethecostofPPE(assumesalestax of10%applies) of 10% applies) KLLtdpurchases2ndhandequipment Vendorsoriginalcost=RM100,CA=RM60 Vendor soriginalcost RM100,CA RM60 MarketvalueofequivalentequipmentRM55 KLLtdpaysvendorRM30,000andissues4,000ordinary sharescurrentlytradingatRM6.25 KLLtdincursadditionalsalestaxexclusive costsasfollows: delivery RM1,500 Installation RM1,000 transitinsurance i i RM500 00 annualinsurance RM1,200
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FRS116:Acquiringagroupofassets
Whereanentitymakesasinglepurchaseofagroupof q assetsnotdeemedabusinesscombination theacquirer: measuresthecostaccordingtotheFVofthe consideration allocatesthiscosttothenonmonetaryassetsonthe basisoftheirrelativeFVsatthedateofpurchase Lectureexample:KLLtdacquireslandandfarm machineryforRM450,000(GSTexcl).Thefairvaluesof theseitemsareasfollows: h i f ll Land RM350,000 Tractor RM120,000 Accessories RM30,000
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FRS116:Acquiringagroupofassets
TheFVoftheconsiderationisRM450,000 The FV of the assets acquired is RM500 000 TheFVoftheassetsacquiredisRM500,000 Aseachassetneedstoberecordedseparatelyweneedto determineacostforeachbasedontheirrelativefair determine a cost for each based on their relative fair values Item FV@acq q Relativecost Land 350,000 Tractor 120,000 , Accessories 30,000 500,000 ,
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FRS3:BusinessCombinations
LectureExample YLtdsbooksdisclosethefollowing: GrossAssets=RM45m(excludingcash) Liabilities=RM20m XLtdagreestoacquirethenetassetsofYLtdforRM27m cash h DirectorsofXLtdplaceafairvalueonYLtdsnet assetsofRM22m assets of RM22m XLtdincursadditionalcosts(e.g.legalandvaluation fees)directlyattributabletotheacquisitionofRM1m DirectorsofXbelievetheseassetsandliabilities satisfythedefinitionofabusiness
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FRS3:BusinessCombinations
X LTD - GENERAL JOURNAL Date Details Asset # 1 Asset # 2 Asset # 3 Liabilities Acquisition of net assets DR 42m CR
20m
Acquisition-related costs
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FRS3:BusinessCombinations
Issueswhenrecognising assetsacquiredatFV: ReceivablesofRM150,WDV=RM145,FV=RM140 Recognise bookvalueofgrossreceivables,raise provisionfordifferenceb/wGA&FV
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FRS3:BusinessCombinations
SamescenarioaspreviouslyexceptXLtdagreestoacquire thesharecapitalofYLtdforRM27m the share capital of Y Ltd for RM27m XLtdnowcontrolsYLtdandrecognises sharesacquiredas anasset an asset
FRS3:BusinessCombinations
OriginalexamplewithconsiderationofRM18m
X LTD - GENERAL JOURNAL Date Details DR CR
42m 20m
Closing entry
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FRS3:BusinessCombinations
Disclosures The acquirer shall disclose information that enables Theacquirershalldiscloseinformationthatenables userstoevaluatethenatureandfinancialeffectof abusinesscombinationthatoccursduringthecurrent period AppendixBprovidesanextensivelistofspecificitems fordisclosure(foreachacquisition)asguidanceto for disclosure (for each acquisition) as guidance to preparers
Detailsofacquiree q Dateofacquisition Mgtsreasonforacquisition Natureofconsideration Detailsofnetassetsacquired Goodwillorgainonpurchase Goodwill or gain on purchase
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FRS138:IntangibleAssets
Definitionofintangibleassets (para 8) Anidentifiable,nonmonetary assetwithout p y physicalsubstance Monetaryassets moneyheldandassetsto bereceivedinfixedordeterminableamounts be received in fixed or determinable amounts ofmoney(e.g.cash,receivables)
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ExamplesofIntangibleAssets p g
Patents(protectinganinvention) Trademarks(distinctivenameorsymbole.g.Coke,golden arches) Registerednames(McDonalds) i d ( ld ) Copyrights(intellectualproperty) Mastheads(typicalinmedia NewIdea,WomensDay) Research&development(R&D) Theseareallidentifiable Theycanbeseparatedfromtheentityandsold,or Theyarisefromcontractualorotherlegalrights
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FRS138:IntangibleAssets
Wheredoesgoodwillfitintothisframework? FRS 3 definition of goodwill FRS3definitionofgoodwill Anassetrepresentingfutureeconomicbenefitsthatare notcapableofbeingindividuallyidentifiedand p f g y f separatelyrecognised Futureeconomicbenefitsofgoodwill Para11:(Goodwill)representsapaymentmadebythe acquirerinanticipationoffutureeconomicbenefits Product name and reputation Productnameandreputation Relationshipswithsuppliers,staff,customers Location of business & markets Locationofbusiness&markets Distributionchannels
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FRS138:IntangibleAssets
Control Acquirerhasthepowertoobtainthefuturebenefits andrestricttheaccessofotherstothosebenefits Reliablemeasurement Theacquirerhaspaidforit(musthaveabeliefthat somefuturebenefitwillflowfrompayinganamount inexcessofFVNA)inanarmslengthtransaction betweenawillingbuyerandseller b t illi b d ll
GoodwillexhibitsFB,C&RMbutisaspecialcase
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SUMMARY
PPErecognised onacquisitionatcost Cost includes purchase price non refundable taxes and Costincludespurchaseprice,nonrefundabletaxesand costsdirectlyattributabletogettingassettothelocation andconditionnecessaryforittobecapableofoperating and condition necessary for it to be capable of operating inthemannerintendedbymgt Businesscombinationsrecognised onacquisitionat g q acquisitiondatefairvalues(purchasecostsrecognised as expenses) Goodwillonacquisitionrecognised asassetat consideration>fairvalueofnetassets Gainonacquisitionrecognised asrevenueat consideration<FVNAandtakentoP&L
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CORPORATEREPORTING
PARTTWO: MeasurementofPPEpostacquisition f
FRS116:Property,Plant&Equipment FRS136: ImpairmentofAssets
Deegan reference
Chapter6
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OBJECTIVES
Attheendofthissessionyoushouldbeableto: explainthealternativewaysinwhichPPEcanbe measuredafterinitialrecognition d f l recordincrementsanddecrementsunderthe revaluationmodel l ti d l explain,calculateandrecordanimpairmentloss explainandapplythereportingimplicationsof l i d l th ti i li ti f revaluationsandimpairmentadjustments
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FRS136:ImpairmentofAssets p
Identification,recognitionandmeasurement AsitrelatestoPPE
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FRS116:Property,PlantandEquipment p y, q p
Para6definition:Property,plantandequipmentare tangibleitemsthat: (a)areheldforuseintheproductionorsupplyof goodsorservices,forrentaltoothers,orfor d i f l h f administrativepurposes;and (b) (b)areexpectedtobeusedduringmorethanone t dt b dd i th period. Para15:(atrecognition)shallbemeasuredatcost But values of PPE are likely to change over time => how ButvaluesofPPEarelikelytochangeovertime=>how relevantarecarryingamountsbasedoncost?
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MEASUREMENTAFTERRECOGNITION
Para29:Anentityshallchooseeitherthecostmodelor therevaluationmodelasitsaccountingpolicyandshall applythatpolicytoanentireclassofPPE l h li i l f PPE Mgtchoiceb/wcostandrevaluationmodel g / Isappliedonaclassbyclassbasis Chosen method must be applied to all assets in that class Chosenmethodmustbeappliedtoallassetsinthatclass Ensuresconsistencyacrosssimilarassets,limits opportunisticmeasurement pp Canchoosedifferentmethodfromclasstoclass
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THECOSTMODEL
P Para30 30 Afterrecognitionasanasset,anitemofPPEshallbe carried at its cost less any accumulated depreciation atitscost lessanyaccumulateddepreciation andanyaccumulatedimpairmentlosses Mgtmakesconsciouschoicenotto revaluePPE Depreciation applied based on cost Depreciationappliedbasedoncost AssetssubjecttoimpairmenttestunderFRS136
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FREQUENCYOFREVALUATION
P Para31(contd) 31 ( td) Revaluationsshallbemadewithsufficientregularity toensurethatthecarryingamountdoesnotdiffer to ensure that the carrying amount does not differ materiallyfromthatwhichwouldbedetermined usingfairvalueattheendofthereportingperiod. gf f p gp Para 34 suggests every 3 to 5 years unless frequency of Para34suggestsevery3to5yearsunlessfrequencyof significantchangesisthoughttowarrantmoreoftenor whenevercircumstancesarisewhereFVisthoughttobe materiallydifferenttoCA
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TYPESOFREVALUATIONS
Revaluation > CA => Incremental i.e. upwards Revaluation < CA =>Decremental i e downwards i.e. After revaluation, new CA is the revalued amount
REVALUED AMOUNT
REVALUEDAM OUNT
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THENETMETHOD
Para35anyaccumulateddepreciationatthedateof revaluationis (b)eliminatedagainstthegrosscarryingamountofthe assetandthenetamountrestatedtotherevalued d h d h l d amountoftheasset. Afterthisprocess: A Accum d =zero depn Asseta/cbalance=revaluedamount S b Subsequentdepn calculationsbasedonnew d l l i b d revaluationamount
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LECTUREILLUSTRATION1.1:Incremental revaluation
D il f Detailsofanasseton31December2011: 31 D b 2011 EQUIPMENT(grossamount) ACCUMULATEDDEPRECIATION CARRYINGAMOUNT 625,000 250,000 375,000
Thedirectorshaveadoptedtherevaluationmodelforthisclass ofasset.Ithasbeendeterminedthatthefairvalueofthis f t It h b d t i d th t th f i l f thi equipment,obtainedbyindependentvaluation,isRM450,000. Therehavebeennopriorrevaluations. There have been no prior revaluations
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GROSSMETHOD
Para35anyaccumulateddepreciationatthedateofthe revaluationis revaluation is (a)restatedproportionatelywiththechangeinthegross carryingamountoftheassetsothatthecarryingamount carrying amount of the asset so that the carrying amount oftheassetafterrevaluationequalsitsrevalued amount. Afterthisprocess: GA and AD = proportionately re stated GAandAD=proportionatelyrestated CA=revaluedamount Subsequent depn calculations based on new Subsequentdepn calculationsbasedonnew revaluationamount(intheassetaccount)
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LECTUREILLUSTRATION1.2:Decremental revaluation
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT 625,000 250,000 375,000
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ACCOUNTINGFORANINCREMENTAFTERPRIOR REVALUATIONDOWNWARDS
If FV > CA => Increment IfFV>CA=>Increment Adjustment=FVlessCApriortorevaluation(notapplicable undercostmodel) under cost model) Para39(continued): Ifanassetscarryingamountisincreasedasaresultofa revaluation,theincreaseshallbecrediteddirectlyto equityundertheheadingofrevaluationreserve. it d th h di f l ti However,theincreaseshallberecognised inprofitor losstotheextentthatitreversesarevaluationdecrease loss to the extent that it reverses a revaluation decrease ofthesameassetpreviouslyrecognised inprofitorloss.
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LECTUREILLUSTRATION1.3:Incremental revaluationafterpriorrevaluationdownwards
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT CARRYING AMOUNT
Thedirectorshavedeterminedthatthefairvalueofthis equipment,obtainedbyindependentvaluation,isRM450,000. Thisassetwassubjecttoapriorrevaluationdownwardsof RM20,000. RM20 000 So,firstRM20,000ofrevaluationmustoffsetprior So, first RM20,000 of revaluation must offset prior ExpensebeforeCRtoreserve
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ACCOUNTINGFORADECREMENTAFTERPRIOR REVALUATIONSUPWARDS
If FV < CA => Decrement IfFV<CA=>Decrement Adjustment=CApriortorevaluationlessFV(notapplicable undercostmodel) Para40(continued): If an assets carrying amount is decreased as a result of a Ifanasset scarryingamountisdecreasedasaresultofa revaluation,thedecreaseshallberecognised inprofitor loss.However,thedecreaseshallberecognised inother comprehensiveincometotheextentofanycredit balanceexistingintherevaluationsurplusinrespectof thatasset.Thedecreaserecognised inother that asset. The decrease recognised in other comprehensiveincomereducestheamountaccumulated inequityundertheheadingofrevaluationsurplus.
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LECTUREILLUSTRATION1.4:Decremental revaluationafterpriorrevaluationupwards
Detailsofanasseton31December2011: EQUIPMENT ACCUMULATEDDEPRECIATION CARRYINGAMOUNT
The directors have determined that the fair value of this Thedirectorshavedeterminedthatthefairvalueofthis equipment,obtainedbyindependentvaluation,isRM330,000. Thisassetwassubjecttoapriorrevaluationupwardsof j p p RM15,000. So,firstRM15,000ofrevaluationdownwardsmustoffset So, first RM15,000 of revaluation downwards must offset priorCRtothereservebeforerecognised asanexpense
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Rev&Exp toP&L
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DERECOGNITIONOFAREVALUEDASSET
Anypartofthebalanceintherevaluationreserveinrespectof y g thatassetistransferreddirectlytoretainedearningsatthe timeofderecognition Example 1: Land with CA of RM400 is sold for RM650 Example1:LandwithCAofRM400issoldforRM650
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IMPACTSOFFRS116REVALUATIONSON FINANCIALSTATEMENTRATIOS
Incrementalrevaluation=>NCAandEquityand=> affectsanyratiothatincludeseitherinitselements i OA d O inROAandROE=>deteriorationinprofitability d i i i fi bili inTL/TA(debtratio)andTL/Equity(debttoequity ratio)=>improvedleverage ratio) > improved leverage Reverseappliesforanydecremental revaluation IfpreparersofFShavechoiceovermethods(costvs revaluation), timingofrevaluations(3to5years)andvaluationamounts timing of revaluations (3 to 5 years) and valuation amounts (couldtheyshoparound?)=>scopeforearnings management g
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FRS136ImpairmentofAssets
Impairment test applies equally to PPE whether ImpairmenttestappliesequallytoPPEwhether carriedunderthecostmodelortherevaluationmodel ( (effectivelyadownwardrevaluationinaccordwithFRS y 116)
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CARRYINGAMOUNTOFANASSET
para 6: theamountatwhichanassetisrecognisedafter deductinganyaccumulateddepreciation(amortisation) andaccumulatedimpairmentlossesthereon. d l di i l h CA=Carryingcost,Bookvalue,Writtendownvalue(WDV) Thepointfromwhichanyrevaluation(adjustment)ismade Equipment 500,000 AccumulatedDepreciation andImpairmentLosses (200,000) 300,000
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FVlesscostsofdisposali.e.incrementalcosts directlyattributabletothedisposal excludingfinancecostsandincometax excluding finance costs and income tax expense
para 6:Valueinuse
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Yr 2 (RM) 400
Yr 3 (RM) 500
Yr 4 (RM) 90
300
110
110
(50) 250
DCF1 +
(70) 330
DCF2 +
(100) 400
DCF3 +
(100) 100
DCF4 =
RECOGNISINGANIMPAIRMENTLOSS
para 60 Animpairmentlossshallberecognised immediately inprofitorloss,unlesstheassetiscarriedata i fit l l th ti i d t revaluedamount...Anyimpairmentlossofa revaluedassetshallbetreatedasarevaluation decrease... Journalentry costmethod: Journal entry cost method: DRImpairmentLoss CR Accum depreciation&impairment p p Journalentry revalution method: DRRevaluationsurplus/RevaluationexpenseCR DR Revaluation surplus / Revaluation expense CR PPE
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CGU RM540
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CurrentCA ofCGU
Goodwill RM100 AssetsRM50
Previous impairments i i t
REVERSALOFIMPAIRMENTLOSSES S O OSS S
Example
A AssetwithCAofRM500on30June2011isdeemedto i h CA f RM500 30 J 2011 i d d havebeenimpairedbyRM100. Depreciation will continue to be charged on a straight Depreciationwillcontinuetobechargedonastraight linebasisassumingaremainingestimatedusefullifeof 10years 10 years On30June2014thesameassetisdeemedtohavea recoverableamountofRM360.
30/6/11 CA = RM500
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DISCLOSUREANDREVALUATION
FRS 116 FRS116
paras 73&74 assetdetails(e.g.GA,CA,depn / , ) methods/rates,valuationmethods) para 77 revaluationdetails(e.g.when,bywhom, movementsinreserves)
FRS136
para 126 losses/reversalsbyclassofassets para 130 each material impairment loss 130 eachmaterialimpairmentloss para 131 aggregateofimpairmentlossesand g circumstancesleadingtothese
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FVandRA Revaluationmodel
RM 730 1 FV 2 FV 3 ViU FV FV FV ViU FV CA FV CA FV CA ViU CA FV CA FV CA FV CA ViU FV 4 5 6 7 8 9 10 11 12
710 ViU FV* FV* FV* ViU 700 CA 690 680 670 CA CA CA CA
FVandRA Costmodel
RM 730 720 FV* ViU 710 ViU FV* FV* FV* ViU 700 CA 690 680 670 NOTE:FV*=FVlesscoststosell,ViU=Valueinuse CA CA CA CA CA CA CA 1 2 3 ViU ViU ViU CA CA CA CA ViU 4 5 6 7 8 9 10 11 12
ViU FV* FV* FV* ViU ViU FV* FV* FV* ViU FV FV FV
SUMMARY
PostacquisitionPPEcarriedundereithercostor revaluationmodel revaluation model Underrevaluationmodel:
Increments taken to reserves (after offsetting prior decrements Incrementstakentoreserves(afteroffsettingpriordecrements inP&L) DecrementstakentoP&L(afteroffsettingpriorincrements againstreserves) i t )
Impairmentrecognised whenRA(thehigherofvaluein useandfairvaluelesscoststosell)<CA use and fair value less costs to sell) < CA Impairmenttestappliestocostandrevaluationmodels
An expense under cost model Anexpenseundercostmodel Treatedasadecrementunderrevaluationmodel
Canreverseimpairmentloss(exceptforgoodwill) p ( p g )
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