Microsoft PowerPoint - HKICPA-20071210-(Presented) [Compatibility
Mode]© 2005-07 Nelson 1
Nelson LamNelson Lam MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) FCCA
FCPA(Practising) MSCA
Property, Plant and Equipment (HKAS 16)
Today’s Agenda Simple but
Comprehensive
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2
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DefinitionDefinition 1 Objecti e and
ScopeDefinitionDefinition
RecognitionRecognition
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5. Measurement After Recognition
11 Objective and ScopeObjective and Scope1.1. Objective and
ScopeObjective and Scope
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1. Objective and Scope
• The objective of HKAS 16 is – to prescribe the accounting
treatment for
property plant and equipment (PPE) Definitionsproperty, plant and
equipment (PPE) – so that users of the financial statements
can
discern information about an entity’s investment in its PPE and the
changes in such investment.
• The principal issues in accounting for property, plant and
equipment (PPE) are: a) the recognition of the assets,
Recognition
What are PPE?
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a) the recognition of the assets, b) the determination of their
carrying amounts and c) the depreciation charges and impairment
losses
to be recognised in relation to them. Measurement
Recognition
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1. Objective and Scope
• HKAS 16 shall be applied in accounting for PPE – except when
another standard requires or permits a
different accounting treatment.g
• HKAS 16 does not apply to: a) property, plant and equipment
classified as held for sale in
accordance with HKFRS 5 Non-current Assets Held for Sale and
Discontinued Operations;
b) biological assets related to agricultural activity (see HKAS 41
Agriculture);
) th iti d t f l ti d
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c) the recognition and measurement of exploration and evaluation
assets (see HKFRS 6 Exploration for and Evaluation of Mineral
Resources); or
d) mineral rights and mineral reserves such as oil, natural gas and
similar non-regenerative resources.
However, HKAS 16 applies to PPE used to develop or maintain the
assets described in (a) and (d).
• Building acquired under an
1. Objective and Scope
What are PPE? Are the following PPE?What are PPE? Are the following
PPE?
Example
• Freehold property used for rental purpose
• Investment property under re-development
from the leasehold building
1. Objective and Scope – Implication Exemption for not-for-profit
entities eliminated
• The exemption in SSAP 17 for Implies that all such entities are
charitable, government subvented and not-for-profit organisations
was eliminated in HKAS 16
required to depreciate its PPE from the financial period beginning
from 1 Jan. 2005
• Specific transitional provisions for this elimination
additionally introduced in Nov. 2005
Those entities that have previously taken advantage of the
exemption under SSAP 17 are permitted
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are permitted to deem the carrying amount of an item of PPE
immediately before applying HKAS 16 on its effective date (or
earlier) as the cost of that item
Charities, not-for-profit entities must follow
Agenda on Property, Plant & Equipment
DefinitionDefinition 1 Objecti e and ScopeDefinitionDefinition 1.
Objective and Scope
2.2. DefinitionsDefinitions What are PPE?
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2. Definitions
• Property, plant and equipment (PPE) are tangible items that: a)
are held for use in the production or supply of goods or
services,
for rental to others, or for administrative purposes; andfor rental
to others, or for administrative purposes; and b) are expected to
be used during more than one period.
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2. Definitions
Cost • is the amount of cash or cash equivalents paid or the fair
value of other consideration given to acquire an asset at the time
of its acquisition or construction, orq ,
• where applicable, the amount attributed to that asset when
initially recognised in accordance with the specific requirements
of other HKFRSs e.g. HKAS 39, HKFRS 2
Residual value
2. Definitions Example
• Entity GV buys a machine by granting share options to the
supplier, who can subscribe 100 shares of Entity GV.
• The cash price of the machine is $200The cash price of the
machine is $200. • The fair value of the options at the grant date
is $300. • How much should be recognised as the cost of
machine?
• Per HKAS 16, the amount attributed to the machine should refer to
the specific requirements of HKFRS 2 Share-based Payments.
• Under HKFRS 2, GV shall recognise an increase in equity if the
machine is received in an equity-settled share-based payment
transaction.
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q y p y • While the transaction is with a party other than
employees and other
providing similar services, there is a rebuttable presumption that
the fair value of goods received can be estimated reliably (i.e.
$200 in this case).
• In rare case (if presumption rebutted), the transaction is
measured by reference to the fair value of the equity instruments
(i.e. share options) granted.
Agenda on Property, Plant & Equipment
Definition 1 Objecti e and ScopeDefinition
RecognitionRecognition
3. Recognition
• The cost of an item of PPE shall be recognised as an asset if,
and only if: a) it is probable that future economic benefits
associated with the itema) it is probable that future economic
benefits associated with the item
will flow to the entity; and b) the cost of the item can be
measured reliably.
• Major spare parts, servicing equipment, replacement and
inspection can also be qualified as PPE.
Recognition CriteriaRecognition Criteria
• If the recognition criteria is met such cost is recognised; the
carrying
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• If the recognition criteria is met, such cost is recognised; the
carrying amount of the replaced parts or previous inspection is
derecognised.
3. Recognition – Principle Updated
Expenditure
ImprovementImprovement is no is no longer a thresholdlonger a
threshold
Improvement
Now Same
• Probable that future economic benefit of the asset will flow to
the enterprise
• Cost measured reliably
• Probable that future economic benefits in excess of the
originally assessed standard of performance of the existing asset
will flow to the entity
• Probable that future economic benefit of the asset
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Now Same criteria
• Probable that future economic benefit of the asset will flow to
the entity
• Cost measured reliably Same criteria applied to both costs
Clearer approach on so-called Component Accounting
Expenditure not fulfilling the recognition criteria – will be
charged to income statement
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Hong Kong Aircraft Engineering Company Limited Annual Report 2005
states:
Case
Capitalise
– Property, plant and equipment are carried at cost less
accumulated depreciation and accumulated impairment losses.
– Cost includes expenditure that is directly attributable to the
acquisition of the items.
– Subsequent costs are included in the asset’s carrying amount or
recognised as a separate asset, as appropriate, only when
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• it is probable that future economic benefits associated with the
item will flow to the Group and
• the cost of the item can be measured reliably. – All other
repairs and maintenance are expensed in the
profit and loss account during the financial period in which they
are incurred.
Expense
3. Recognition – Principle Updated Galaxy Entertainment Group
Limited (2005 Annual Report) – Major costs incurred in restoring
assets to their normal
Case
working condition • are charged to the profit and loss
statement.
– Improvements • are capitalised and depreciated over their
expected
useful lives to the Group.
Denway Motors Limited (2005 Annual Report) – Major costs incurred
in restoring the plant components
to their normal working condition to allow continued use
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to their normal working condition to allow continued use of the
overall asset are capitalised and depreciated over the period to
the
next overhaul. – Improvements
are capitalised and depreciated over their expected useful lives to
the Group.
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Definition 1 Objecti e and ScopeDefinition
Recognition
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MeasurementMeasurement
4. Measurement at Recognition • An item of PPE that qualifies for
recognition as an
asset shall be measured at its costcost. • The costcost of an item
of PPE comprises:
a) its purchase price, including import duties and non- refundable
purchase taxes, after deducting trade discounts and rebates;
b) any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating
in the manner intended by management.
c) the initial estimate of the costs of dismantling and removing
the item and restoring the site
Purchase Price
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g g on which it is located, the obligation for which an entity
incurs either – when the item is acquired or – as a consequence of
having used the item
during a particular period for purposes other than to produce
inventories during that period.
Dismantling Cost
4. Measurement at Recognition
• Entity A leased an office for a lease term of 5 years in 2005 and
i d $500 000 illi i
The cost of the decoration:
Example
Cost of decoration: incurred $500,000 million in decorating the
office.
• The lease requires Entity A to restore the office to its original
status when the lease expires.
• Entity A estimates that the cost of restoration will be around
$60,000 at that time
$500,000
Present value of $60 000
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decoration.
Present value of $60,000
Assuming discount rate is 6%, • PV of $60,000 is $ 44,835 • Total
initial cost is $ 544,835
IFRIC Interpretation 1 Changes in Existing Decommissioning,
Restoration and Similar Liabilities set out how to account for the
change of this estimate
4. Measurement at Recognition
• Several same air-condition plants have been installed by GV in
several leasehold properties. When the properties are returned to
the landlord in 4 years, the plants should be removed.
Example
• The properties include factory (3 plants installed), show room (1
plant installed) and head office (2 plants installed).
• The purchase cost of each plant is $1,000. The installation cost
is $1,000 for each plant. Present value of removal costs of the
plant include $400 resulted from installation only and $400 from
the usage during the 4 years.
• What is the cost of each plant to be recognised?
In accordance with HKAS 16 th t f h l t i t ll d i th f t h ld b $2
400 (th h
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• the cost of each plant installed in the factory should be $2,400
(the purchase cost, installation cost and present value of removal
cost from installation).
• the cost of each plant installed in the show room and head office
should be $2,800 (including the present value of all removal
costs)
• Since the removal costs of such plants are incurred as a
consequence of having used the machine during a particular period
for purposes, other than to produce inventories during that
period
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4. Measurement at Recognition Case
A-Max Holding Limited () – Notes to the financial statements for
year ended 31.3.2006
• The cost of self-constructed items of property, plant and
equipment includes – the cost of materials, – direct labour,
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– the initial estimate, where relevant, of the costs of dismantling
and removing the items and restoring the site on which they are
located, and
– an appropriate proportion of production overheads and borrowing
costs
4. Measurement at Recognition
Same amendment in Same amendment in HKAS 38 and
HKAS 40 Element of cost extended
Commercial
Rule on Exchange of Assets Revised
Cost of PPE acquired in exchange is measured at fair value
But not required if:
In SSAP 17 – it is an exchange for similar assets
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If the acquired item is not measured at fair value, its cost is
measured at the carrying amount of the asset given up.
Commercial Substance
the exchange transaction lack of Commercial Substance, or
– the Fair Value is not reliably measurable (both asset received
and given up)
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Definition 1 Objecti e and ScopeDefinition
Recognition
Cost ModelCost Model
Revaluation Model
• as its accounting policy and • the entity shall apply that policy
to
an entire class of PPE.
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Cost Model
After recognition as an asset, an item of PPE shall be carried
at
Its costCost Model
• any accumulated depreciation and • any accumulated impairment
losses
After recognition as an asset, an item of PPE shall be carried at –
a revalued amount, being its fair value at
th d t f th l ti
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• any subsequent accumulated depreciation and
• subsequent accumulated impairment losses.
5. Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair value?What is fair value?
All HKFRS/HKAS have same definition on fair value now.
• Fair value is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm’s length
transaction.
• The fair value of – land and buildings ⇒ is usually determined
from market-based
evidence by appraisal that is normally undertaken by professionally
qualified valuers.
– items of PPE ⇒ is usually their market value determined by
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y y appraisal.
• If there is no market-based evidence of fair value because of the
specialised nature of the item of PPE and the item is rarely sold,
⇒ an entity may need to estimate fair value using
• an income or • a depreciated replacement cost approach.
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5. Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient
regularity – to ensure that the carrying amount does notto ensure
that the carrying amount does not
differ materially from the fair value at the balance sheet
date.
• When an item of PPE is revalued, any accumulated depreciation at
the date of the revaluation is treated in one of the following
ways: a) restated proportionately with the change in the gross
carrying
amount of the asset so that the carrying amount of the asset after
revaluation equals its revalued amount
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revaluation equals its revalued amount. This method is often used
when an asset is revalued by means of applying an index to its
depreciated replacement cost.
b) eliminated against the gross carrying amount of the asset and
the net amount restated to the revalued amount of the asset. This
method is often used for buildings.
5. Measurement after Recognition
$
Example
– Revalued amount of that class of motor vehicles is $90,000 • Show
the revaluation effect
• Accumulated depreciation restated proportionately with the change
in the gross carrying amount of the asset so that the carrying
amount of the asset after revaluation equals its revalued amount. –
Cost restated ($100,000 x 90,000 / 60,000) $ 150,000
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( , , , ) , – Accumulated depreciation restated ($40,000 x 90,000 /
60,000) ($ 60,000 )
• Accumulated depreciation eliminated against the gross carrying
amount of the asset and the net amount restated to the revalued
amount – Cost $ 100,000 – Accumulated depreciation eliminated
($40,000 - $30,000) ($ 10,000 )
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Revaluation Model
• If an item of property, plant and equipment is revalued, Entirep
p y p q p – the entire class of PPE to which that asset belongs
shall
be revalued • If an asset’s carrying amount is increased as a
result of
a revaluation, the increase shall be credited directly to equity
under the heading of revaluation surplus. – However, the increase
shall be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the
same asset previously recognised in profit or loss.
Class Entire class
To Equity directly
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• If an asset’s carrying amount is decreased as a result of a
revaluation, the decrease shall be recognised in profit or loss. –
However, the decrease shall be debited directly to equity
under the heading of revaluation surplus to the extent of any
credit balance existing in the revaluation surplus in respect of
that asset.
Negative to P/L
Example
Revaluation Model
• In 2005, an entity buys a PPE at $1,000 and adopts revaluation
model.
• At year end of 2005, – PPE’s fair value rises to
$1,500.
Dr PPE (1,500 – 1,000) 500 Cr Revaluation reserves 500
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• At year end of 2006, – PPE’s fair value falls to $800.
• Ignore the depreciation, prepare journal for each situation
above.
Dr Revaluation reserves 500 Profit and loss 200
Cr PPE (1,500 – 800) 700
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Revaluation Model
• The revaluation surplus included in equity in respect of an item
of PPE may be transferred directly to retained earnings when the
asset is derecognised.
• However, some of the surplus may be transferred as the asset is
used by an entity. – In such a case, the amount of the surplus
transferred would be the
difference between depreciation based on the revalued carrying
amount of the asset and depreciation based on the asset’s original
cost.
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• Transfers from revaluation surplus to retained earnings are not
made through profit or loss.
Dr Revaluation surplus (depreciation based on the revalued carrying
amount less depreciation based on the asset’s historical cost) Cr
Retained earnings
5. Measurement after Recognition
Example
Revaluation Model Year ended 31.12.2005Year ended 31.12.2005
g with a cost of $50,000 on 1 Jan. 2005 and adopted the revaluation
model.
• The estimated useful life of the car is 5 years.
• On 1 Jan. 2006, the car was revalued with a fair
Dr PPE 50,000 Cr Cash 50,000
Dr P/L ($50K ÷ 5 years) 10,000 Cr Accumulated depreciation
10,000
Dr Accumulated depreciation (48K – (50K – 10K)) 8,000
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value of $48,000 at that date.
• Prepare the journal entries for the year ended 31 December 2005
and 31 December 2006.
Cr Revaluation reserves 8,000
Dr P/L ($48K ÷ 4 years) 12,000 Cr Accumulated depreciation 12,000
Dr Revaluation reserves 2,000 Cr Retained earnings 2,000
Year ended 31.12.2006Year ended 31.12.2006
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Revaluation Model
• Depreciation is the systematic allocation of the depreciable
amount of an asset over its useful life.
• Depreciable amount is the cost of an asset, or other amount
substituted for cost, less its residual value.
• Useful life is: a) the period over which an asset is expected to
be available for use by an entity; or
Revaluation Model
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a) the period over which an asset is expected to be available for
use by an entity; or b) the number of production or similar units
expected to be obtained from the asset by
an entity.
• The residual value of an asset is the estimated amount that an
entity would currently obtain from disposal of the asset, after
deducting the estimated costs of disposal, if the asset were
already of the age and in the condition expected at the end of its
useful life.
5. Measurement after Recognition
Depreciation
Each significant component• Each part of an item of PPE with a cost
that is significant in relation to the total cost of the item shall
be depreciated separately. – e.g. it may be appropriate to
depreciate separately the airframe and engines of an aircraft
• The depreciation charge for each
Each significant component shall be depreciated separately (not
clearly required in the past)
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p g period shall be recognised in profit or loss unless it is
included in the carrying amount of another asset.
Clearer approach on so-called Component Accounting
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• Cost of each part is significant in l i h l f h
5. Measurement after Recognition
Example
Depreciation
relation to the total cost of the parts • Each part should be
depreciated
separately
printing machine of HK$50 million • The machine will be used
for
5 years (maximum useful life) and then dispose of at zero
value
• The machine’s laser head can operate 500 hours, after that
Laser machine other than laser head is depreciated over 5
years
Laser head is depreciated over 500 hours
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replacement of a new laser head is needed
• The cost of a new laser head was HK$10 million at that time and
its residual value is zero.
Under usage methods of depreciation, the depreciation charges can
be zero while there is no production
5. Measurement after Recognition
Example
• Assume the laser head can operate 500 hours or 5 years which
is
Depreciation
Depreciation for 2nd year
printing machine of HK$50 million • The machine will be used
for
5 years (maximum useful life) and then dispose of at zero
value
• The machine’s laser head can operate 500 hours, after that
500 hours or 5 years, which is shorter.
• If the machine has not been used in the 2nd year, calculate
depreciation on the laser head under different depreciation
methods
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for 2nd year If the laser head is depreciated • over 500
hours
(unit of production) • 5 years on
a straight-line basis
replacement of a new laser head is needed
• The cost of a new laser head was HK$10 million at that time and
its residual value is zero.
zero
Depreciable amount
• The depreciable amount of an asset shall be allocated on a
systematic basis over its useful life.
• The residual value and the useful life of an asset shall be
reviewed at least at each financial year-end
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– if expectations differ from previous estimates, the change shall
be accounted for as a change in an accounting estimate in
accordance with HKAS 8
5. Measurement after Recognition Depreciation
Depreciable amountResidual Value
• Residual Value is revised as
the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of
disposal, if the asset – were already of the age and – in the
condition expected at the end of its useful life
Inflation may be incorporated in residual value
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Implication: • If estimated residual value > carrying amount ⇒
no depreciation is required • But feasible only if the management
clearly intends to dispose of the PPE
before the end of its physical usage life – otherwise, the
estimated residual value is minimal or even zero
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Example
Same laser machine example as before
• At 31 Dec. 2005, the price of a printing machine of HK$50 million
• The machine will be used for
5 years (maximum useful life) and then dispose of at zero
value
• The machine’s laser head can operate 500 hours, after that
new laser machine increases to HK$75 million
• No change in cost of a new laser head and estimated maximum
useful life
• Shall AX revise the residual value at 31 Dec. 2005?
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replacement of a new laser head is needed
• The cost of a new laser head was HK$10 million at that time and
its residual value is zero.
No! • AX has not changed its usage
plan and the residual value after the estimated useful live would
still be zero
5. Measurement after Recognition
Another one • At 1 Jan. 1985, Entity A bought a flat in Tai Koo
Shing at HK$ 500,000.
• Entity A aimed to use it for 50 years until the end of its
estimated useful life
Example
Entity A aimed to use it for 50 years until the end of its
estimated useful life • The original estimated residual value is
zero • Depreciation is calculated on a straight-line basis • At 31
Dec. 2004, the depreciated historical cost (and carrying amount)
of
the property was HK$0.3 million
• Now, the price of a similar flat in Tai Koo is about HK$ 3M
• Shall A revise the residual value?
No! A has not changed its usage plan and the residual value after
the estimated useful live would still be around zero
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Shall A revise the residual value?
• If A changes its intention and aims to dispose of the flat in 10
years (i.e. 2015)
• Shall A revise the residual value?
live would still be around zero
Yes! If A can demonstrate that it has an intention to dispose of it
before the end of its economic life
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5. Measurement after Recognition Case
Annual Report 2005Annual Report 2005 • Where an item of property
and equipment comprises
major components having different useful lives, – they are
accounted for as separate items of property
and equipment. • Depreciation
is calculated to write off the cost or deemed cost less
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– is calculated to write off the cost or deemed cost, less residual
value if applicable, of property and equipment and
– is charged to the income statement on a straight-line basis over
the estimated useful lives of each part of an item of property and
equipment.
5. Measurement after Recognition
Depreciation
Depreciable amountDepreciation of an asset begins when it is
available for use – i.e. when it is in the location and
condition
necessary for it to be capable of operating in the manner intended
by management.
• Depreciation of an asset ceases at the earlier of the date that –
the asset is classified as held for sale (or
included in a disposal group that is
Implied that depreciation still required even PPE – becomes idle
or
is retired from active use
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p g p classified as held for sale) in accordance with HKFRS 5
and
– the date that the asset is derecognised • Land and buildings are
separable assets
and are accounted for separately, even when they are acquired
together.
– is retired from active use
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5. Measurement after Recognition
• The depreciation method used – shall reflect the pattern in which
the
asset’s future economic benefits are
Depreciation
Depreciable amount asset s future economic benefits are expected to
be consumed by the entity
– shall be reviewed at least at each financial year-end and
– such a change shall be accounted for as a change in an accounting
estimate in accordance with HKAS 8
• Other than the above that method is
Depreciation method
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Other than the above, that method is applied consistently from
period to period • unless there is a change in the expected
pattern of consumption of those future economic benefits.
5. Measurement after Recognition
can be used to allocate the
Depreciation
Depreciable amount can be used to allocate the depreciable amount
of an asset on a systematic basis over its useful life.
• These methods include:
Straight Line results in a constant charge over the useful life if
the asset’s residual value does not change
Depreciation method
results in a decreasing charge over the useful life
results in a charge based on the expected use or output
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5. Measurement after Recognition
• To determine whether an item of PPE is impaired, an entity
applies HKAS 36
• Compensation from third parties for items of
Depreciation
Depreciable amount • Compensation from third parties for items
of
property, plant and equipment that were impaired, lost or given up
shall be included in profit or loss when the compensation becomes
receivable
Depreciation method
DefinitionDefinition 1 Objecti e and
ScopeDefinitionDefinition
RecognitionRecognition
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6.6. DerecognitionDerecognition
6. Derecognition
• The carrying amount of an item of PPE shall be derecognised: a)
on disposal; or b) h f t i b fit t d f itb) when no future economic
benefits are expected from its use or
disposal. • The gain or loss arising from the derecognition of an
item of PPE shall
be included in profit or loss when the item is derecognised (unless
HKAS 17 requires otherwise on a sale and leaseback).
• Gains shall not be classified as revenue.
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6. Derecognition
• Derecognition on disposal – The disposal of an item of PPE may
occur in a variety of
ways (e.g. by sale, by entering into a finance lease or byways
(e.g. by sale, by entering into a finance lease or by
donation).
– In determining the date of disposal of an item, an entity applies
the criteria in HKAS 18 Revenue for recognising revenue from the
sale of goods.
– HKAS 17 Leases applies to disposal by a sale and leaseback.
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• Derecognition on replacement – If, under the initial recognition
principle,
• an entity recognises in the carrying amount of an item of PPE the
cost• an entity recognises in the carrying amount of an item of PPE
the cost of a replacement for part of the item,
• then it derecognises the carrying amount of the replaced part
regardless of whether the replaced part had been depreciated
separately.
• The gain or loss arising from the derecognition of an item of PPE
shall be determined as the difference between
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– the net disposal proceeds, if any, and – the carrying amount of
the item.
• At 31 Dec. 2006, replacement • At 31 Dec. 2006, replacement
6. Derecognition Example
Same laser machine example as before
of the laser head is needed after 400 hours of operation • The
carrying amount of the
laser head alone would be HK$ 2 million at that date [$10M – ($10M
÷ 500 x 400)]
• The cost of a new laser head is HK$ 8 million.
of the laser head is needed after 400 hours of operation • The
carrying amount of the
laser head alone would be HK$ 2 million at that date [$10M – ($10M
÷ 500 x 400)]
• The cost of a new laser head is HK$ 8 million.
printing machine of HK$50 million • The machine will be used
for
5 years (maximum useful life) and then dispose of at zero
value
• The machine’s laser head can operate 500 hours, after that
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$$
• If the laser head is replaced • Replaced laser head with HK$
2
million shall be derecognised • New laser head of HK$ 8
million
shall be recognised
• If the laser head is replaced • Replaced laser head with HK$
2
million shall be derecognised • New laser head of HK$ 8
million
shall be recognised
replacement of a new laser head is needed
• The cost of a new laser head was HK$10 million at that time and
its residual value is zero.
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Definition 1 Objecti e and ScopeDefinition
Recognition
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5. Measurement After Recognition
6. Derecognition
7.7. DisclosureDisclosure
7. Disclosure
• The financial statements shall disclose, for each class of PPE:
a) the measurement bases used for determining the gross
carrying amount; b) the depreciation methods used; c) the useful
lives or the depreciation rates used; d) the gross carrying amount
and the accumulated
depreciation (aggregated with accumulated impairment losses) at the
beginning and end of the period; and ……
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7. Disclosure
• Detailed information and reconciliation of the carrying amount of
PPE are required
• The reconciliation of the carrying amount of PPE for prior
period, i.e. comparative reconciliation is now required
© 2005-07 Nelson 55
The carrying amount of the PPE net book value of PPE • In HK SSAP
17, the requirement is
“a reconciliation of the gross carrying amount and the accumulated
depreciation at the beginning and end of the period ……”
7. Disclosure
• Information include: i) additions; ii) disposals; iii)
acquisitions through business combinations; iv) increases or
decreases resulting from revaluations and from impairment
losses recognised or reversed directly in equity in accordance with
HKAS 36;
v) impairment losses recognised in profit or loss in accordance
with HKAS 36; vi) impairment losses reversed in profit or loss in
accordance with HKAS 36; vii) depreciation;
© 2005-07 Nelson 56
vii) depreciation; viii) the net exchange differences arising on
the translation of the financial
statements from the functional currency into a different
presentation currency, including the translation of a foreign
operation into the presentation currency of the reporting entity;
and
ix) other changes.
Case
7. Disclosure
• The financial statements shall also disclose: a) the existence
and amounts of restrictions on title, and
PPE l d d it f li bilitiPPE pledged as security for liabilities; b)
the amount of expenditures recognised in the carrying
amount of an item of PPE in the course of its construction;
c) the amount of contractual commitments for the acquisition of
PPE; and
d) if it is not disclosed separately on the face of the income
statement, the amount of compensation from third parties
© 2005-07 Nelson 58
for items of PPE that were impaired, lost or given up that is
included in profit or loss.
• Similar disclosures are required on the PPE measured by using
Revaluation Model.
• Other disclosures
© 2005-07 Nelson 59
Impairment of Assets – Summary
Triggering events At each reporting date, an entity shall assess
whether there is any indication that an asset may
It is the higher of an asset’s
Triggering events
Recoverable Amount
whether there is any indication that an asset may be impaired. If
any such indication exists, the entity shall estimate the
recoverable amount of the asset.
andFair Value Less Costs to Sell Value in Use
© 2005-07 Nelson 60
Impairment Loss
If, and only if, the recoverable amount of an asset is less than
its carrying amount • The carrying amount of the asset shall
be
reduced to its recoverable amount. • That reduction is an
impairment loss.
31
1. Objective D fi itiD fi iti
j
4. Measuring Recoverable Amount
6 C h ti U it d G d ill
DefinitionDefinition
RecognitionRecognition
MeasurementMeasurement
7. Impairment Loss
9. Disclosures
1. Objective
• HKAS 36 Impairment of Assets – is to prescribe the procedures
that an entity applies
to ensure that its assets are carried at no more thanto ensure that
its assets are carried at no more than their recoverable
amount
– The recoverable amount of an asset or a cash- generating unit is
the higher of its fair value less costs to sell and its value in
use
© 2005-07 Nelson 62
1. Objective
• HKAS 36 Impairment of Assets – An asset is carried at more than
its recoverable
amountamount • if its carrying amount exceeds the amount to
be
recovered through use or sale of the asset. – If this is the
case,
• the asset is described as impaired and • HKAS 36 requires the
entity to recognise an
impairment loss.
Carrying amount is the amount at which an asset is
© 2005-07 Nelson 63
• Carrying amount is the amount at which an asset is recognised
after deducting any accumulated depreciation (amortisation) and
accumulated impairment losses thereon.
• An impairment loss is the amount by which the carrying amount of
an asset (or a cash-generating unit) exceeds its recoverable
amount.
Agenda for Impairment of Assets
1. Objectivej
2. Scope
2. Scope
HKAS 36 shall be applied in accounting for the impairment of all
assets, other than: a) inventories (see HKAS 2)a) inventories (see
HKAS 2) b) assets arising from construction contracts (see HKAS 11)
c) deferred tax assets (see HKAS 12) d) assets arising from
employee benefits (see HKAS 19) e) financial assets that are within
the scope of HKAS 39
Financial Instruments: Recognition and Measurement (see HKAS 39) f)
investment property that is measured at fair value (see HKAS 40) g)
biological assets related to agricultural activity that are
d f i l l i d i f l ( HKAS 41)
© 2005-07 Nelson 65
measured at fair value less estimated point-of-sale costs (see HKAS
41) h) deferred acquisition costs, and intangible assets, arising
from
an insurer’s contractual rights under insurance contracts within
the scope of HKFRS 4 Insurance Contracts (see HKFRS 4)
i) non-current assets (or disposal groups) classified as held for
sale in accordance with HKFRS 5 Non-current Assets Held for Sale
and Discontinued Operations (see HKFRS 5)
2. Scope
HKAS 36 applies to financial assets classified as: a) subsidiaries,
as defined in HKAS 27 Consolidated and Separate Financial
Statements;; b) associates, as defined in HKAS 28 Investments in
Associates; and c) joint ventures, as defined in HKAS 31 Interests
in Joint Ventures.
For impairment of other financial assets, refer to HKAS 39.
© 2005-07 Nelson 66
1. Objectivej
2. Scope
© 2005-07 Nelson 67
3. Identify An Asset That May Be Impaired
• An entity shall assess at each reporting date whether there is
any indication that an assetTriggering events whether there is any
indication that an asset may be impaired.
• If any such indication exists,
– the entity shall estimate the recoverable amount of the
asset.
Triggering events
© 2005-07 Nelson 68
For all assets within the For all assets within the scope of HKAS
36, scope of HKAS 36,
except for ……except for ……
Triggering events • Irrespective of whether there is any indication
of
impairment an entity shall also:Triggering events impairment, an
entity shall also: a) test
• an intangible asset with an indefinite useful life, or
• an intangible asset not yet available for use
for impairment annually by comparing its carrying amount with its
recoverable
Intangible AssetsIntangible Assets
© 2005-07 Nelson 69
b) test • goodwill acquired in a business
combination for impairment annually
Intangible AssetsIntangible Assets
2006 Annual Report states: • Assets that have an indefinite useful
life
– are not subject to amortisation, – but are tested at least
annually for impairment
and also reviewed for impairment whenever e ents or changes in circ
mstances indicate
© 2005-07 Nelson 70
events or changes in circumstances indicate that the carrying
amount may not be recoverable.
• Goodwill – is tested annually for impairment and carried
at cost less accumulated impairment losses.
GoodwillGoodwill
36
Galaxy Entertainment Group Limited (2005 Annual Report) Accounting
policy on impairment of assets – Assets that have an indefinite
useful life
• are not subject to amortisation, which are at least tested
annually for impairment and
• are reviewed for impairment whenever events or changes
© 2005-07 Nelson 71
in circumstances indicate that the carrying amount may not be
recoverable.
– Assets that are subject to amortisation • are reviewed for
impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable.
Timing of impairment test on intangible assets • This impairment
test may be performed at any time
d i l i d
3. Identify An Asset That May Be Impaired
during an annual period – provided it is performed at the same time
every
year. • Different intangible assets may be tested for
impairment at different times. • However, if such an intangible
asset was initially
recognised during the current annual period – that intangible asset
shall be tested for
Intangible AssetsIntangible Assets
© 2005-07 Nelson 72
g impairment before the end of the current annual period.
GoodwillGoodwill Timing of impairment test on goodwill • To be
discussed later ……
37
3. Identify An Asset That May Be Impaired
• In assessing whether there is any indication that an asset may be
impaired, an entity shall consider, as a minimum, the following
indications: External sources of information a) an asset’s market
value declined significantly more than would be expected b)
significant changes with an adverse effect on the entity in the
technological,
market, economic or legal environment c) market interest rates or
other rates increased that likely affects the discount
rate used in calculating an asset’s value in use d) the carrying
amount of the net assets of the entity is more than its
market
capitalisation
© 2005-07 Nelson 73
capitalisation Internal sources of information e) evidence is
available of obsolescence or physical damage of an asset f)
significant changes with an adverse effect on the entity in which,
an asset is
used or is expected to be used. g) evidence is available from
internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.
Agenda for Impairment of Assets
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
Triggering eventsTriggering events
It is the higher of an asset’sRecoverable Amount & Fair value
less
costs to sell Value in Use
© 2005-07 Nelson 75
4. Measuring Recoverable Amount
• HKAS 36 defines recoverable amount as the higher of an asset’s or
cash-generating unit’s
F i V l L C t t S ll V l i UdFair Value Less Costs to Sell Value in
Useand
• Recoverable amount is determined for an individual asset – unless
the asset does not generate cash
inflows that are largely independent of those from other assets or
groups of assets.
If thi i th bl t i
© 2005-07 Nelson 76
• If this is the case, recoverable amount is determined for the
cash-generating unit to which the asset belongs
39
4. Measuring Recoverable Amount
• It is the amount obtainable from the sale of an asset or
cash-generating
Fair Value Less Costs to Sell
unit in an arm’s length transaction between knowledgeable, willing
parties, less the costs of disposal.
The best evidence ⇒ is a price in a binding sale agreement in an
arm’s length transaction,
adjusted for incremental costs to the disposal
If no binding sale agreement but an asset is traded in an active
market ⇒ the asset’s market price less the costs of disposal
© 2005-07 Nelson 77
⇒ the asset s market price less the costs of disposal
If there is no binding sale agreement or active market for an asset
⇒ based on the best information available to reflect the amount
that an
entity could obtain, at the balance sheet date, from the disposal
of the asset in an arm’s length transaction between knowledgeable,
willing parties, after deducting the costs of disposal
4. Measuring Recoverable Amount
• Value in use is the present value of the future cash fl t d t b d
i d f t h
Value in Use
flows expected to be derived from an asset or cash- generating
unit. – The following elements shall be reflected in the
calculation of an asset’s value in use: a) an estimate of the
future cash flows the entity
expects to derive from the asset; b) expectations about possible
variations in the
amount or timing of those future cash flows; c) time value of money
represented by the current
(b), (d) and (e) can be reflected as dj t t t
© 2005-07 Nelson 78
c) time value of money, represented by the current market risk-free
rate of interest;
d) price for bearing the uncertainty inherent in the asset;
and
e) other factors, such as illiquidity, that market participants
would reflect in pricing the future cash flows the entity expects
to derive from the asset.
Not precisely stated before!
flows or • discount rate
40
4. Measuring Recoverable Amount • Estimating the value in use of an
asset
involves the following steps: a) estimating the future cash inflows
and
Value in Use Basis for Estimates of
Future Cash Flows) g outflows to be derived • from continuing use
of the asset, and • from its ultimate disposal; and
b) applying the appropriate discount rate to those future cash
flows.
Future Cash Flows Composition of Estimates
of Future Cash Flows Foreign Currency Future
Cash Flows
Discount Rates
© 2005-07 Nelson 79
4. Measuring Recoverable Amount In measuring value in use an entity
shall: a) base cash flow projections on reasonable
and supportable assumptions that represent
Value in Use Basis for Estimates of
Future Cash Flows management’s best estimate of the range of
economic conditions that will exist over the remaining useful life
of the asset. Greater weight shall be given to external
evidence.
b) base cash flow projections on the most recent financial
budgets/forecasts approved by management, but shall exclude any
estimated future cash inflows or outflows expected to arise from
future restructurings or from improving or enhancing the asset’s
performance. Projections based on these budgets/forecasts shall
cover a maximum period of five years unless a longer period can be
justified
Future Cash Flows
© 2005-07 Nelson 80
of five years, unless a longer period can be justified. c) estimate
cash flow projections beyond the period covered by the most
recent
budgets/forecasts by extrapolating the projections based on the
budgets/forecasts using a steady or declining growth rate for
subsequent years, unless an increasing rate can be justified. This
growth rate shall not exceed the long-term average growth rate for
the products, industries, or country or countries in which the
entity operates, or for the market in which the asset is used,
unless a higher rate can be justified.
41
4. Measuring Recoverable Amount Value in Use
Estimates of future cash flows shall include: a) projections of
cash inflows from the continuing use of the asset; b) projections
of cash outflows that are necessarily incurred to generate
the cash inflows from continuing use of the asset (including
cash
Composition of Estimates of Future Cash Flows
© 2005-07 Nelson 81
outflows to prepare the asset for use) and can be directly
attributed, or allocated on a reasonable and consistent basis, to
the asset; and
c) net cash flows, if any, to be received (or paid) for the
disposal of the asset at the end of its useful life.
4. Measuring Recoverable Amount
• Future cash flows are estimated in the currency in which they
will be generated
Value in Use
currency in which they will be generated and then discounted using
a discount rate appropriate for that currency.
• An entity translates the present value using the spot exchange
rate at the date of the value in use calculation.
• The discount rate(s) shall be a pre-tax rate(s) that reflect
current market
Foreign Currency Future Cash Flows
Discount Rates
© 2005-07 Nelson 82
( ) assessments of: a) the time value of money; and b) the risks
specific to the asset for which the
future cash flow estimates have not been adjusted.
42
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
© 2005-07 Nelson 83
5. Recognising an Impairment Loss
• If, and only if, the recoverable amount of an asset is less than
its carrying amountTriggering events
Recoverable Amount
asset is less than its carrying amount – the carrying amount of the
asset shall be
reduced to its recoverable amount – That reduction is an impairment
loss.
• An impairment loss shall be recognised immediately in profit or
loss, – unless the asset is carried at revalued amount
in accordance with another Standard
© 2005-07 Nelson 84
Impairment Loss
– for example, in accordance with the revaluation model in HKAS 16
Property, Plant and Equipment
– any impairment loss of a revalued asset shall be treated as a
revaluation decrease in accordance with that other Standard.
43
5. Recognising an Impairment Loss
• When the amount estimated for an impairment loss is greater than
the carrying amount of the asset to which it relates,, – an entity
shall recognise a liability if, and only
if, that is required by another Standard (for example, HKAS
37)
• After the recognition of an impairment loss, – the depreciation
(amortisation) charge for the
asset shall be adjusted in future periods to allocate the asset’s
revised carrying amount,
© 2005-07 Nelson 85
less its residual value (if any), on a systematic basis over its
remaining useful life.
Impairment Loss
Galaxy Entertainment Group Limited (2005 Annual Report) Accounting
policy on impairment of assets – An impairment loss is recognised
for the amount
• by which the carrying amount of the asset exceeds its recoverable
amount.
– The recoverable amount is the higher of
© 2005-07 Nelson 86
The recoverable amount is the higher of • the fair value of an
asset less costs to sell and • value in use.
– For the purposes of assessing impairment, • assets are grouped at
the lowest levels for which there
are separately identifiable cash flows.
CashCash-- generating generating
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
© 2005-07 Nelson 87
6. Cash-Generating Unit & Goodwill
• If it is not possible to estimate the recoverable amount of the
individual assetamount of the individual asset – an entity shall
determine the recoverable
amount of the cash-generating unit to which the asset belongs (the
asset’s cash-generating unit).
• Intangible assets may be such individual asset.
• Goodwill is definitely such individual asset.
Intangible AssetsIntangible Assets
© 2005-07 Nelson 88
y
GoodwillGoodwill Amendments of HKAS 36 are mainly for the
requirements on cash-generating unit and goodwill
45
6. Cash-Generating Unit & Goodwill
• A cash-generating unit (CGU) – is the smallest identifiable group
of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or
groups of g y p g p assets.
• Discussion points on CGU and goodwill include:
Allocating Goodwill to CGUAllocating Goodwill to CGU
Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill
for Impairment
Minority InterestMinority Interest
© 2005-07 Nelson 89
Minority InterestMinority Interest
6. Cash-Generating Unit & Goodwill
• For the purpose of impairment testing, goodwill acquired in a
business
Allocating Goodwill to CGUAllocating Goodwill to CGU Initial
allocation
p p p g, g q combination shall – from the acquisition date, be
allocated to each of the acquirer’s CGUs (or
groups of CGUs) that are expected to benefit from the synergies of
the combination
– irrespective of whether other assets or liabilities of the
acquiree are assigned to those units or groups of units.
© 2005-07 Nelson 90
Goodwill
46
6. Cash-Generating Unit & Goodwill
• Each unit or group of units to which the goodwill is so allocated
shall:
Allocating Goodwill to CGUAllocating Goodwill to CGU Initial
allocation
g p g a) represent the lowest level within the entity at which the
goodwill is
monitored for internal management purposes; and b) not be larger
than a segment based on either
the entity’s primary or the entity’s secondary reporting format
determined in accordance with HKAS 14 Segment Reporting.
As amended by HKFRS 8: “not be larger than an operating segment
determined in accordance with HKFRS 8 O i S ”
© 2005-07 Nelson 91
Goodwill
6. Cash-Generating Unit & Goodwill
• If the initial allocation of goodwill cannot be completed as
required
Allocating Goodwill to CGUAllocating Goodwill to CGU Initial
allocation
g p q – that initial allocation shall be completed before the end
of the first annual
period beginning after the acquisition date (i.e. within 12
months).
• In accordance with HKFRS 3 – if the initial accounting for a
business
combination can be determined only provisionally, the acquirer: a)
accounts for the combination using those
© 2005-07 Nelson 92
Goodwill
) g provisional values; and
b) recognises any adjustments to those provisional values as a
result of completing the initial accounting within 12 months of the
acquisition date.
47
Case
• Goodwill is allocated to cash-generating units for the purposes
of impairment testing.
• Goodwill is tested for impairment at the lowest level at which
goodwill is monitored for internal management purposes.
• This is not at a higher level than a segment based on either the
primary or secondary
© 2005-07 Nelson 93
Goodwill
p y y reporting format (as determined in accordance with HKAS 14
‘Segment reporting’).
6. Cash-Generating Unit & Goodwill
• If goodwill has been allocated to a CGU and the entity disposes
of an
Allocating Goodwill to CGUAllocating Goodwill to CGU Disposal
g y p operation within that CGU – the goodwill associated with the
operation disposed of shall be:
a) included in the carrying amount of the operation • when
determining the gain or loss on disposal; and
b) measured on the basis of the relative values of • the operation
disposed of, and • the portion of the CGU retained
What kind of value?
© 2005-07 Nelson 94
the portion of the CGU retained, unless the entity can demonstrate
that some other method better reflects the goodwill associated with
the operation disposed of.
48
6. Cash-Generating Unit & Goodwill
• An entity sells for $100 an operation that was part of a CGU to
which
Example
Allocating Goodwill to CGUAllocating Goodwill to CGU Disposal
$100goodwill has been allocated. • The goodwill allocated to the
unit cannot be identified or associated
with an asset group at a level lower than that unit, except
arbitrarily. • The recoverable amount of the portion of the CGU
retained is $300.
• Because the goodwill allocated to the CGU cannot be
non-arbitrarily identified or associated with an asset group at a
level lower than that
$100
$300
© 2005-07 Nelson 95
unit, the goodwill associated with the operation disposed of is
measured on the basis of the relative values of • the operation
disposed of, and • the portion of the unit retained.
• Therefore, 25% of the goodwill ($100 / $400) allocated to the CGU
is included in the carrying amount of the operation that is
sold.
6. Cash-Generating Unit & Goodwill
Case
• At the date of disposal of a business – attributable goodwill is
included in the
Group’s share of net assets in the calculation of the gain or loss
on disposal.
• In its 2006 Annual Report, full set f HKFRS d t d
© 2005-07 Nelson 96
Any improvement?
of HKFRS was adopted: – Separately recognized goodwill is tested
annually for
impairment and carried at cost less accumulated impairment
losses.
– Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
49
Subsidiary S at $3,500 by cash.
6. Cash-Generating Unit & Goodwill
Property $ 0 $ 6,000
y y • Fair value of the property of S was
$8,000. During 2005 • Parent P reported nil profit and profit
of S was HK$6,000 (became cash). • Fair value of S is HK$30,000
at
year-end. P t d f S h ld f
Property $ 0 $ 6,000 Investment 0 0 Cash at bank 30,000 2,000
30,000 8,000
(30,000) (8,000)
• P accounted for S as held for trading.
On 1.1.2006 • P acquired additional 60% interest in
S at $22,000 by cash. • Fair value of the property of S was
$11,000.
Example
J#1 J#2 Consolidated 5,000 $ 11,000
Goodwill 0 0 Investment 28,000 0 Cash at bank 4,500 8,000
32,500 14,000
12,100 12,100 (2,500) (25,500) 0
12,500 35,600
© 2005-07 Nelson 98
(32,500) (14,000)
6. Cash-Generating Unit & Goodwill Example
• Assume S mainly involved in holding investment property to derive
rental and had 2 properties managed independently. On 2 1 2006 S
disposed of one property at $8 000 (cost $3 000) and the• On
2.1.2006, S disposed of one property at $8,000 (cost $3,000) and
the remaining property’s recoverable amount was $14,000 (cost
$3,000).
On company level of S: Sales proceed of property $ 8,000 Cost of
property (3,000) Gain on disposal $ 5 000
© 2005-07 Nelson 99
Gain on disposal $ 5,000 On consolidated level: Sales proceed of
property $ 8,000 Cost of property to the group ($11,000 ÷ 22,000 x
8,000) (4,000) Gain on disposal at group level $ 4,000
That’s all? Goodwill written off in accordance with HKAS 36
($12,100 ÷ 22,000 x 8,000) $ 4,400
6. Cash-Generating Unit & Goodwill
Original consolidation journals: Example
Cr Investment 2,500 To restate the initial 20% investment in
Subsidiary S to cost
Dr Property – fair value adjustment ($11,000 - $6,000) 5,000 Issued
equity – subsidiary (given) 5,000 Retained earnings – subsidiary
(given) 9,000 Goodwill (as calculated in last slide) 12,100
C I t t t f bi ti (t i ) 25 500
© 2005-07 Nelson 100
Cr Investment – cost of combinations (twice) 25,500 Minority
interest (19,000 x 20%) 3,800 Retaining earnings recognised (to the
extent that they relate to the previously held ownership interests)
1,200 Revaluation reserves 600
To recognise the goodwill and eliminate the investments with the
equity shares
51
Additional consolidation journals: Example
Cr Property 1,000 To adjust the gain recognised in S as fair value
had been taken up at group level before
Dr Retained earnings 800 Cr Minority interest (4,000 x 20%) 800 To
allocate the gain on disposal of property to minority
interest
© 2005-07 Nelson 101
Dr Income statement (Retained earnings) 4,400 Cr Goodwill 4,400 To
write off the goodwill allocated to the “business” in accordance
with HKAS 36
6. Cash-Generating Unit & Goodwill
Property $ 0 $ 3,000
J#1 J#2 J#3 Consolidated
5,000 (1,000) $ 7,000Property $ 0 $ 3,000 Goodwill 0 0 Investment
28,000 0 Cash at bank 4,500 16,000
32,500 19,000
Issued equity $ (30,000) $ (5,000) Retained earnings (2 500) (14
000)
5,000 (1,000) $ 7,000 12,100 (4,400) 7,700
(2,500) (25,500) 0 20,500 35,200
5,000 $ (30,000) 2 500 7 800 6 200 0
© 2005-07 Nelson 102
Retained earnings (2,500) (14,000) Revaluation reserves 0 0
Minority interest 0 0
(32,500) (19,000)
(3,800) (800) (4,600) (35,200)
A portion of the fair value changes from 1st to 2nd acquisition
relating to the 2 properties should also be realised when one of
them was disposed of, $600 ÷ 22,000 x 8,000 = $218. Please suggest
journal!
52
Allocating Goodwill to CGUAllocating Goodwill to CGU
Reorganise
• If an entity reorganises its reporting structure in a way that
changes the composition of one or more CGUs to which goodwill has
been allocated – the goodwill shall be reallocated to the
CGUs affected.
Example
p y
• The goodwill allocated to CGU A cannot be identified or
associated with an asset group at a level lower than CGU A, except
arbitrarily.
• A is to be divided and integrated into 3 other CGUs, namely B, C
and D.
• Because the goodwill allocated to CGU A cannot be non-arbitrarily
identified or associated with an asset group at a level lower than
CGU
© 2005-07 Nelson 104
g p A
• Goodwill is reallocated to CGU B, C and D on the basis of the
relative values of the 3 portions of CGU A before those portions
are integrated with CGU B, C and D.
53
• When goodwill relates to a CGU but has not been
Testing CGU with Goodwill for ImpairmentTesting CGU with Goodwill
for Impairment
Goodwill g allocated to that unit – the unit shall be tested for
impairment, whenever
there is an indication that the CGU may be impaired – any
impairment loss shall be recognised
Goodwill Unallocated
© 2005-07 Nelson 105
Allocated – shall be tested for impairment • annually, and •
whenever there is an indication that the unit may
be impaired – If the carrying amount of the CGU exceeds its
recoverable amount, the entity shall recognise any impairment
loss
6. Cash-Generating Unit & Goodwill
Minority InterestMinority Interest
• In accordance with HKFRS 3 – goodwill recognised in a business
combination represents
• the goodwill acquired by a parent based on the parent’s ownership
interest,
• rather than the amount of goodwill controlled by the parent as a
result of the business combination.
– Thus, goodwill attributable to a minority interest is not
recognised in the parent’s consolidated financial statements.
© 2005-07 Nelson 106
New requirement ……
• For the purpose of impairment testing a non-wholly-owned CGU
with
Minority InterestMinority Interest
• For the purpose of impairment testing a non-wholly-owned CGU with
goodwill – the carrying amount of that CGU is notionally adjusted,
before being
compared with its recoverable amount • Notional adjustment
– accomplished by grossing up the carrying amount of goodwill
allocated to the CGU to include the goodwill attributable to the
minority interest.
– this notionally adjusted carrying amount is then compared with
the
© 2005-07 Nelson 107
y j y g p recoverable amount of the unit to determine whether the
CGU is impaired.
– If it is impaired, the entity allocates the impairment loss first
to reduce the carrying amount of goodwill allocated to the
CGU.
6. Cash-Generating Unit & Goodwill
• Entity A acquires 80% interest in GV at $1 600 on 1 Jan
2005
Minority InterestMinority Interest
Example
• Entity A acquires 80% interest in GV at $1,600 on 1 Jan. 2005 •
It implies that 100% interest of GV to Entity A would be $2,000. •
Subsidiary GV has identifiable net assets at a fair value of
$1,500
80% 100% Cost of combination $1,600 $2,000 Fair value of GV 1,200
1,500 Goodwill 400 500
© 2005-07 Nelson 108
• Goodwill recognised in the consolidation is $400. • Assume at 30
Jun. 2005, the carrying amount of all the balances are the
same but the recoverable amount of GV (a single CGU) is $1,900. •
Compare the calculation with or without notional adjustment on
goodwill
attributable to minority interest
Example
Without Notional AdjustmentWithout Notional Adjustment Carrying
amount of GV in A’s consolidation $ 1,500 Goodwill recognised
(attributable to A) 400 Total carrying amount $ 1,900 Recoverable
amount of GV $ 1,900
With Notional Adjustment
No impairment observed
© 2005-07 Nelson 109
j Total carrying amount (as above) $ 1,900 Notional adjustment •
Goodwill attributable to minority interest 100 Notionally adjusted
carrying amount $ 2,000 Recoverable amount of GV $ 1,900
Impairment loss of $100
6. Cash-Generating Unit & Goodwill
• Annual impairment test for a CGU to which goodwill has been
allocated
Timing of Impairment TestsTiming of Impairment Tests
• Annual impairment test for a CGU to which goodwill has been
allocated – may be performed at any time during an annual period,
provided the test is
performed at the same time every year. • Different CGUs may be
tested for impairment at different times. • However, if some or all
of the goodwill allocated to a CGU was acquired
in a business combination during the current annual period, – that
unit shall be tested for impairment before the end of the current
annual
period
56
6. Cash-Generating Unit & Goodwill
• The most recent detailed calculation made in a preceding period
of the
Timing of Impairment TestsTiming of Impairment Tests
• The most recent detailed calculation made in a preceding period
of the recoverable amount of a CGU to which goodwill has been
allocated – may be used in the impairment test of that CGU in the
current period
provided all of the following criteria are met: a) the assets and
liabilities making up the CGU have not changed
significantly b) the most recent recoverable amount calculation
resulted in an
amount that exceeded the carrying amount of the CGU by a
© 2005-07 Nelson 111
substantial margin; and c) the likelihood that a current
recoverable amount determination would
be less than the current carrying amount of the CGU is
remote.
6. Cash-Generating Unit & Goodwill
Corporate AssetsCorporate Assets are assets other than goodwill
that contribute to the future cash flows of both • the CGU under
review andthe CGU under review and • other CGUs.
• In testing a CGU for impairment
Examples include: • Building of a headquarter • EDP Equipment •
Research centre
© 2005-07 Nelson 112
assets that relate to the CGU under review.
– The allocation approach of the corporate assets is also amended
……
57
6. Cash-Generating Unit & Goodwill
such portion shall be included as part of the carrying amount of
the CGU for impairment test
Corporate AssetsCorporate Assets
Can be allocated on bl d amount of the CGU for impairment testa
reasonable and
consistent basis
Cannot be allocated on a reasonable and consistent basis
The entity shall: 1) compare the carrying amount of the CGU
(excluding the
corporate asset) with its recoverable amount • recognise any
impairment loss first
Firstly, test 2) identify the smallest group of CGUs that includes
the CGU
under review and to which a portion of the carrying amount
© 2005-07 Nelson 113
Then, test larger CGU containing the goodwill
of the corporate asset can be allocated on a reasonable and
consistent basis; and
3) compare the carrying amount of that group of CGUs, including the
portion of the carrying amount of the corporate asset allocated to
that group of CGUs, with the recoverable amount of the group of
CGUs.
• Any impairment loss shall be recognised.
Agenda for Impairment of Assets
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
6 C h ti U it d G d ill
© 2005-07 Nelson 114
7. Impairment Loss
• An impairment loss – shall be recognised for a CGU
• if and only if the recoverable amount of the CGU• if, and only
if, the recoverable amount of the CGU (group of CGUs) is less than
the carrying amount of the CGU (group of CGUs).
– shall be allocated to reduce the carrying amount of the assets of
the CGU (group of CGUs) in the following order: a) first, to reduce
the carrying amount of any goodwill
allocated to the CGU (group of CGUs); and Goodwill
first
© 2005-07 Nelson 115
b) then, to the other assets of the CGU (group of CGUs) pro rata on
the basis of the carrying amount of each asset in the CGU (group of
CGUs).
These reductions in carrying amounts shall be treated as impairment
losses on individual assets
Other on pro rata
7. Impairment loss for CGU
• In allocating an impairment loss for a CGU, an entity shall not
reduce the carrying amount of an asset below the highest of: a) its
fair value less costs to sell (if determinable);a) its fair value
less costs to sell (if determinable); b) its value in use (if
determinable); and c) zero.
• The amount of the impairment loss that would otherwise have been
allocated to the asset shall be allocated pro rata to the other
assets of the CGU (group of CGUs).
• A liability shall be recognised for any remaining amount of an i
i t l f CGU
© 2005-07 Nelson 116
impairment loss for a CGU – if, and only if, that is required by
another HKAS/HKFRS.
59
7. Impairment loss for CGU Example
Entity A performed an impairment review on the CGU X, which has the
following assets on hand:
Carrying amountCarrying amount Goodwill $ 1,500 Property, plant and
equipment
(carried at revalued amounts) 4,000 Property, plant and
equipment
(carried at cost) 5,700 Inventory, at net realisable value 2,400
AFS financial assets, at recoverable amount 1,300
© 2005-07 Nelson 117
Total 14,900
• After an impairment review, Entity A found that the recoverable
amount of CGU X is $12,000.
• Calculate the impairment loss and allocate to the individual
asset.
7. Impairment loss for CGU Example
Carrying Carrying amount after Allocated amount after
impairment loss impairment loss impairment lossimpairment loss
impairment loss impairment loss
Goodwill $ 1,500 $ (1,500) $ 0 Property, plant and equipment
(carried at revalued amounts) 4,000 (577) 3,423 Property, plant and
equipment
(carried at cost) 5,700 (823) 4,877 Inventory 2,400 - 2,400 AFS
financial assets 1,300 - 1,300
© 2005-07 Nelson 118
• Then, the residual loss is allocated to other non-current assets
pro rata based on the carrying amounts of those non-current
asset.
Total 14,900 (2,900) 12,000
60
Melco Development Limited (2005 Annual Report)
Case
Accounting policy on goodwillg p y g – When the recoverable amount
of the cash-generating unit is
less than the carrying amount of the unit, the impairment loss is
allocated • to reduce the carrying amount of any goodwill allocated
to
the unit first, and • then to the other assets of the unit pro rata
on the basis of
the carrying amount of each asset in the unit. A i i t l f d
ill
© 2005-07 Nelson 119
– Any impairment loss for goodwill • is recognised directly in the
income statement.
Agenda for Impairment of Assets
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
6 C h ti U it d G d ill
© 2005-07 Nelson 120
7. Impairment Loss
61
8. Reversing an Impairment Loss
• Annual Assessment on Any Indication
• An entity shall assess at each reporting date h th th i i di ti
th t i i t l– whether there is any indication that an impairment
loss
recognised in prior periods for an asset other than goodwill may no
longer exist or may have decreased.
• If any such indication exists, – the entity shall estimate the
recoverable amount of that
asset. • In assessing whether there is any indication that an
impairment loss recognised in prior periods for an asset
© 2005-07 Nelson 121
other than goodwill may no longer exist or may have decreased, an
entity shall consider, as a minimum, the following indications: –
External sources of information – Internal sources of
information
8. Reversing an Impairment Loss
• Recognition of reversal on recognised impairment loss
• An impairment loss recognised in prior periods for an asset other
than goodwill shall be reversed if and only if there hasother than
goodwill shall be reversed if, and only if, there has been a change
in the estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognised.
• If this is the case, the carrying amount of the asset shall be
increased to its recoverable amount.
• That increase is a reversal of an impairment loss.
© 2005-07 Nelson 122
• Reversing an impairment loss for an individual asset
• The increased carrying amount of an asset (other than goodwill)
attributable to a reversal of an impairment loss shall not exceed
the carrying amount thatto a reversal of an impairment loss shall
not exceed the carrying amount that would have been determined (net
of amortisation or depreciation) had no impairment loss been
recognised for the asset in prior years.
• A reversal of an impairment loss for an asset (other than
goodwill) shall be recognised immediately in profit or loss, –
unless the asset is carried at revalued amount in accordance with
another
Standard (for example, the revaluation model in HKAS 16 Property,
Plant and Equipment).
A l f i i t l f l d t h ll b t t d
© 2005-07 Nelson 123
• Any reversal of an impairment loss of a revalued asset shall be
treated as a revaluation increase in accordance with that other
Standard.
• After a reversal of an impairment loss is recognised, the
depreciation (amortisation) charge for the asset shall be adjusted
in future periods to allocate the asset’s revised carrying amount,
less its residual value (if any), on a systematic basis over its
remaining useful life.
8. Reversing an Impairment Loss
• Reversing an impairment loss for a CGU
• A reversal of an impairment loss for a CGU shall be allocated to
the assets of the unit except for goodwill pro rata with the
carrying amounts of thosethe unit, except for goodwill, pro rata
with the carrying amounts of those assets.
• These increases in carrying amounts shall be treated as reversals
of impairment losses for individual assets and recognised.
• In allocating a reversal of an impairment loss for a CGU in
accordance with the above paragraph, the carrying amount of an
asset shall not be increased above the lower of: a) its recoverable
amount (if determinable); and
© 2005-07 Nelson 124
b) the carrying amount that would have been determined (net of
amortisation or depreciation) had no impairment loss been
recognised for the asset in prior periods.
• The amount of the reversal of the impairment loss that would
otherwise have been allocated to the asset shall be allocated pro
rata to the other assets of the unit, except for goodwill.
63
• Reversing an impairment loss for goodwill
• An impairment loss recognised for goodwill shall not be reversed
in a subsequent periodsubsequent period.
• HKAS 38 Intangible Assets prohibits the recognition of internally
generated goodwill.
• Any increase in the recoverable amount of goodwill subsequent to
the recognition of an impairment loss for that goodwill is likely
to be an increase in internally generated goodwill, rather than a
reversal of the impairment loss recognised for the acquired
goodwill.
© 2005-07 Nelson 125
Melco Development Limited (2005 Annual Report)
Case
Accounting policy on goodwillg p y g – An impairment loss for
goodwill
• is not reversed in subsequent periods.
Accounting policy on impairment – When an impairment loss
subsequently reverses,
• the carrying amount of the asset is increased to the revised
estimate of its recoverable amount,
© 2005-07 Nelson 126
• but so that the increased carrying amount does not exceed the
carrying amount that would have been determined had no impairment
loss been recognised for the asset in prior years.
64
1. Objectivej
2. Scope
4. Measuring Recoverable Amount
6 C h ti U it d G d ill
© 2005-07 Nelson 127
7. Impairment Loss
9. Disclosures
9. Disclosure • More extensive disclosure required now • Main
additional disclosure requirements include:
– Extensive information for each CGU (or group of CGUs) for which
the ( g p ) carrying amount of goodwill or intangible assets with
indefinite useful lives allocated, including • Key assumptions used
and the management approach to measure the
recoverable amounts (aligned with revised HKAS 1) • Period for cash
flow projection, growth rate, discount rate …… • Certain other
information when a reasonably possible change in a keey
assumption would cause the carrying amount of CGUs to exceed its
recoverable amount
ti f th d ill i d i b i bi ti d i th
© 2005-07 Nelson 128
– any portion of the goodwill acquired in a business combination
during the period has not been allocated to a CGU (group of CGUs)
at the reporting date • the amount of the unallocated goodwill
shall be disclosed together with
the reasons why that amount remains unallocated.
65
its annual impairment test for Esprit trademarks by comparing
their
Case
its annual impairment test for Esprit trademarks by comparing their
recoverable amount to their carrying amount as at June 30,
2007.
• The Group has conducted a valuation of the Esprit trademarks as
one corporate asset based on a value-in-use calculation.
• The resulting value of the Esprit trademarks as at June 30, 2007
was significantly higher than their carrying amount.
• This valuation uses cash flow projections based on financial
estimates covering a three-year period,
© 2005-07 Nelson 129
g y p expected royalty rates deriving from the Esprit trademarks in
the
range of 3% to 6% and a discount rate of 10%.
• The cash flows beyond the three-year period are extrapolated
using a steady 3% growth rate. This growth rate does not exceed the
long-term average growth rate for apparel markets in which the
Group operates.
9. Disclosure
Annual report 2006 • For the purposes of impairment tests, the
recoverable amount of goodwill is
determined based on value in use calculations.
Case
• The value in use calculations primarily use cash flow projections
based on five year financial budgets approved by management and
estimated terminal value at the end of the five year period.
• There are a number of assumptions and estimates involved for the
preparation of cash flow projections for the period covered by the
approved budget and the estimated terminal value.
• Key assumptions include the expected growth in revenues and gross
margin, timing of future capital expenditures growth rates and
selection of discount
© 2005-07 Nelson 130
timing of future capital expenditures, growth rates and selection
of discount rates and the earnings multiple that can be realised
for the estimated terminal value.
• Management prepared the financial budgets reflecting actual and
prior year performance and market development expectations.
• The discount rates for the test were based on country specific
pre-tax risk adjusted discount rate and ranged from 8% to 10%
……
66
HKAS 16 and 36 10 December 2007
Full set of slides in PDF can be found in N l CPA
hkwww.NelsonCPA.com.hk
© 2005-07 Nelson 131
HKAS 16 and 36 10 December 2007
Full set of slides in PDF can be found in N l CPA hk
Q&A SessionQ&A SessionQ&A SessionQ&A Session
www.NelsonCPA.com.hk
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