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CHAPTER 11 - Handout - Mervat Saleh CA CHAPTER 11...

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Unformatted text preview: Mervat Saleh, CA CHAPTER 11 DEPRECIATIONI IMPAIRMENTSI AND DISPOSITION | - Depreciation: 1. Depreciation is a process of cost allocation in a systematic and rational manner. 2. Factors to be considered in the depreciation process: a) The asset components to be depreciated separately b) The asset’s depreciable amount 0) The period over which the asset will be depreciated d) The pattern that best reflects how the asset’s economic benefits are used. Determination of these factors requires the use of estimates. 3. Fixed asset components: 3. Depreciable Base: — Original cost - Residual (salvage) value. Mervat Saleh, CA 4. Useful Life: a. Physical factors b. Economic factors c. Asset’s legal life ll. Methods of Cost Apportionment. 1. Activity Methods: . The output it provides . The input available 2. Straight-line Method: 0 Simple o Constant amount each period. 3. Declining Balance Method: 0 The declining rate remains constant . Declining book value. . Residual value 4. Selection of a depreciation method. a. The method that most fairly reflects net income should be chosen b. The method chosen may be the one that satisfies management’s purposes. Mervat Saleh, CA lll. Depletion: oUsed for natural resources those are physically consumed over the period of use 1. The costs of natural resources are: a. Acquisition costs. b. Exploration costs: 0. Development costs: 2. Write—off of Resource Cost. 3 Status of oil and gas industry: - Successful efforts method - Full-cost method 4. Special Problems in depletion accounting. a. Estimating recoverable reserves. b. Future removal and site restoration costs. 0. Liquidating dividends. Mervat Saleh, CA IV. Special Depreciation Problems. 1. Partial Periods: 2. Depreciation and Replacement: 3. Revision of estimates: - Changes in estimates of residual value or useful life. - They are treated as changes in estimates. V. Impairment of value: c Usefulness of the asset is significantly reduced, . Recognizes the loss in net income. Two models for measuring impairment losses: 1. The cost recovery impairment model (GAAP) - Impaired only if an entity cannot recover the asset’s carrying amount from using the asset. - The loss is charged to income - Once an asset has been written down, no reversal is allowed Mervat Saleh, CA 2. The rational entity impairment model (IFRS) - The company is likely to continue to use the asset if its use and later disposal generates a higher return than it would if it were currently disposed of. - The loss is recognized in net income. - However, under the revaluation model, the loss is charged first to comprehensive income to any revaluation surplus that exists for that asset and only the excess recognized in net income. . A portion of the impairment loss may be reversed in the future, but not to an amount more than its book value Vl. Other issues a) Derecognition and Held for Sale Assets a. Derecogntion of Asset: oDepreciation should be recorded on the assets up to the date of derecognition, and any resulting gains or losses should be reported. 0 Plant assets may be retired voluntarily or disposed of by sale, exchange, involuntary conversion, or abandonment. b. Held for Sale Assets: oWhen a long-lived asset is to be disposed of by sale, it is first classified as held for sale . Remeasured to its net realizable value, which is the lower of its carrying amount and fair value less cost to sell. oAssets held for sale are not depreciated during the period in which they are held. 5 Mervat Saleh, CA ' c. Donated asset: . The gift is measured at the asset’s fair value b) Presentation & Disclosure: — extensive under IFRS, less so under private entity GAAP 0) Analysis: —— Discuss the efficiency of asset use and return on investment VII. IFRS and GAAP Comparison - Illustration 11-22 summarizes the differences in page 708 ...
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