Question

IAS 16, Property, Plant, and Equipment, requires assets to be initially measured at cost. Subsequently, assets may be carried at cost less accumulated depreciation, or they can be periodically revalued upward to current value and carried at the revalued amount less accumulated depreciation. If revalued, the adjustment is reported in other comprehensive income. Subsequent depreciation is based on the revalued amount. ASPE does not allow assets to be revalued at an amount exceeding historical cost less accumulated depreciation. ABC Ltd., a private company, can report in accordance with either ASPE or IFRS. On January 1, Year 1, it acquired an asset at a cost of $10 million, which will be amortized on a straight-line basis over an estimated useful life of 20 years. On January 1, Year 3, the company hired an appraiser, who determined the fair value of the asset (net of accumulated depreciation) to be $12 million. The estimated useful life of the asset did not change. (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in dollars and not in millions of dollars. Answers must be numerical. Round your intermediate computations and final answers to nearest whole dollar value.) Required: (a) Determine the depreciation expense recognized in Year 2. Year 3, and Year 4 under (i) the revaluation treatment allowed under IAS 16, and

Answer 1

Answer:

Historical                    Current

                                                                        Cost                              Value

                                                                        (U.S. GAAP)              (IAS 16)

Jan 1 /1     Asset cost                                      10,000,000                  10,000,000

Year 1       Depreciation                                     500,000                        500,000

Dec  31/1  Balance                                            9,500,000                    9,500,000

Year 2      Depreciation                                        500,000                       500,000

Dec 31/2   Balance                                            9,000,000                    9,000,000

Jan 2/3      Appraisal                                                                            12,000,000

Year 3      Depreciation                                       500,000                      666,667

Dec 31/3   Balance                                            8,500,000                  11,333,333

Year 4       Depreciation                                       500,000                      666,667

Dec 31/4   Balance                                            8,000,000                  10,666,666

(a)                                                                    Year 2             Year 3             Year 4

      1.  IAS 16                                           500,000            666,667          666,667

            2.  U.S. GAAP                                    500,000            500,000          500,000

(b)                                                       Jan 2/3                        Dec 31/3            Dec 31/4

1.  IAS 16                               12,000,000                  11,333,333       10,666,666

2.  U.S. GAAP                        9,000,000                     8,500,000         8,000,000

(c)    IAS 16                 Total depreciation over 20 years       

                                     Years 1 & 2                 1,000,000                  

                                     Next 18 years           12,000,000       13,000,000

         U.S. GAAP         Total depreciation over 20 years        10,000,000

         Profit         U.S. GAAP > IAS 16                                   3,000,000

        There would be no difference in shareholders’ equity at the end of 20 years

         During the first two years the reduction in shareholders’ equity is the same under the two alternatives   (2 x 500,000 = 1,000,000)  

        During the last 18 years

           depreciation IAS 16 > U.S. GAAP                 (18 x 166,667)       3,000,000

           Offset by appraisal surplus through OCI                                                                

                                                                                                                   3,000,000

           Difference in shareholders’ equity                                                        0