3/2/2018

Teori dan Praktik Akuntansi Keuangan

“Assets: Masalah-Masalah Khusus”

Zuni Barokah
FEB UGM
2018

Special Issues
1. Interest costs during construction
2. Exchanges of Non-Monetary Assets
3. Impairment
4. Revaluations

Interest Costs
During Construction

Three approaches have been suggested to account for the

interest incurred in financing the construction.

$0
Increase to Cost of Asset $?

Capitalize no Capitalize
interest during Capitalize actual all costs of
construction costs incurred during funds
construction

ILLUSTRATION 10.1
Capitalization of Interest Costs
IFRS

LO 2

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Interest Costs During Construction

 IFRS requires — capitalizing actual interest (with

modification).

 Consistent with historical cost.

 Capitalization considers three items:

1. Qualifying assets.

2. Capitalization period.

3. Amount to capitalize.

LO 2

Interest Costs During Construction

Qualifying Assets
Require a substantial period of time to get them ready for
their intended use or sale.

Two types of assets:

 Assets under construction for a company’s own use.

 Assets intended for sale or lease that are constructed or

produced as discrete projects.

LO 2

Interest Costs During Construction

Capitalization Period
Begins when:
1. Expenditures for the assets are being incurred.

2. Activities for readying the asset for use or sale are

in progress .

3. Interest costs are being incurred.

Ends when:
The asset is substantially complete and ready for use.

LO 2

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Interest Costs During Construction

Amount to Capitalize
Capitalize the lesser of:
1. Actual interest cost incurred.

2. Avoidable interest - the amount of interest cost during

the period that a company could theoretically avoid if it
had not made expenditures for the asset.

LO 2

Amount to Capitalize

Weighted-Average Accumulated Expenditures

In computing the weighted-average accumulated expenditures,
a company weights the construction expenditures by the
amount of time (fraction of a year or accounting period) that it
can incur interest cost on the expenditure.

LO 2

Weighted-Average Accumulated Expenditures

To illustrate, assume that Han Ren Group decides to build a

warehouse, which is estimated to take 17 months to complete,
starting in 2019. The company makes the following payments to the
contractor in 2019: $240,000 on March 1, $480,000 on July 1, and
$360,000 on November 1. The company computes the weighted-
average accumulated expenditures for the year ended December 31,
2019, as shown.
ILLUSTRATION 10.2

LO 2

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Amount to Capitalize

Interest Rates
Selecting Appropriate Interest Rate:
1. For the portion of weighted-average accumulated expenditures that
is less than or equal to any amounts borrowed specifically to
finance construction of the assets, use the interest rate incurred on
the specific borrowings.

2. For the portion of weighted-average accumulated expenditures that

is greater than any debt incurred specifically to finance construction
of the assets, use a weighted average of interest rates incurred on
all other outstanding debt during the period.

LO 2

Amount to Capitalize

Interest Rates
Shown is the computation of a capitalization rate (weighted-
average interest rate) for debt greater than the amount incurred
specifically to finance construction of the assets.

ILLUSTRATION 10.3
LO 2

Comprehensive Example

On November 1, 2018, Shalla Company contracted Pfeifer

Construction Co. to construct a building for $1,400,000 on land
costing $100,000 (purchased from the contractor and included in the
first payment). Shalla made the following payments to the
construction company during 2019.

LO 2

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Comprehensive Example

Pfeifer Construction completed the building, ready for occupancy, on

December 31, 2019. Shalla had the following debt outstanding at
December 31, 2019.
Specific Construction Debt
1. 15%, 3-year note to finance purchase of land and
construction of the building, dated December 31, 2018, with
interest payable annually on December 31 $750,000
Other Debt
2. 10%, 5-year note payable, dated December 31, 2015, with
interest payable annually on December 31 $550,000
3. 12%, 10-year bonds issued December 31, 2014, with
interest payable annually on December 31 $600,000

Compute weighted-average accumulated expenditures for 2019.

LO 2

Comprehensive Example

Compute weighted-average accumulated expenditures for 2019.

ILLUSTRATION 10.4
Computation of Weighted-Average Accumulated Expenditures

LO 2

Comprehensive Example
ILLUSTRATION 10.5
Compute the avoidable interest. Computation of
Avoidable Interest

LO 2

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Comprehensive Example

Compute the actual interest cost, which represents the maximum

amount of interest that it may capitalize during 2019.

ILLUSTRATION 10.6
Computation of Actual
Interest Cost
The interest cost that Shalla capitalizes is the
lesser of $120,228 (avoidable interest) and
$239,500 (actual interest), or $120,228.

LO 2

Comprehensive Example

Shalla records the following journal entries during 2019:

January 1 Land 100,000

Buildings (or CIP) 110,000
Cash 210,000
March 1 Buildings 300,000
Cash 300,000
May 1 Buildings 540,000
Cash 540,000
December 31 Buildings 450,000
Cash 450,000
Buildings (Capitalized Interest) 120,228
Interest Expense 119,272
Cash 239,500

LO 2

Comprehensive Example

At December 31, 2019, Shalla discloses the amount of interest

capitalized either as part of the income statement or in the notes
accompanying the financial statements.

ILLUSTRATION 10.7
Capitalized Interest
Reported in the Income
Statement

ILLUSTRATION 10.8
Capitalized Interest
Disclosed in a Note

LO 2

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Interest Costs During Construction

Special Issues Related to Interest Capitalization

1. Expenditures for Land
 If land is purchased as a site for a structure, interest
costs capitalized during the period of construction are
part of the cost of the plant, not the land.

 Conversely, if the company develops land for lot sales,

it includes any capitalized interest cost as part of the
acquisition cost of the developed land.

2. Interest Revenue
 In general, companies should not offset interest revenue
against interest cost unless earned on specific borrowings.
LO 2

Valuation of PP&E

Exchanges of Non-Monetary Assets

Ordinarily accounted for on the basis of:
 the fair value of the asset given up or

 the fair value of the asset received,

whichever is clearly more evident.

Companies should recognize immediately any gains or losses on

the exchange when the transaction has commercial substance.

LO 3

Exchanges of Non-Monetary Assets

Meaning of Commercial Substance

Exchange has commercial substance if the future cash flows
change as a result of the transaction. That is, if the two parties’
economic positions change, the transaction has commercial
substance.

ILLUSTRATION 10.10
Accounting for Exchanges
LO 3

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Exchanges of Non-Monetary Assets

Loss Situation (Has Commercial Substance)

Companies recognize a loss if the exchange has commercial
substance.

Rationale: Companies should not value assets at more than their

cash equivalent price. If the loss were deferred, assets would be
overstated.

LO 3

Loss Situation (Has Commercial Substance)

Illustration: Information Processing PA trades its used machine for a

new model at Jerrod Business Solutions NV. The exchange has
commercial substance. The used machine has a book value of €8,000
(original cost €12,000 less €4,000 accumulated depreciation) and a fair
value of €6,000. The new model lists for €16,000. Jerrod gives
Information Processing a trade-in allowance of €9,000 for the used
machine. Information Processing computes the cost of the new asset
as follows.

ILLUSTRATION 10.11
Computation of Cost of
New Machine

LO 3

Loss Situation (Has Commercial Substance)

Illustration: Information Processing records this transaction as follows:

Equipment 13,000
Accumulated Depreciation—Equipment 4,000
Loss on Disposal of Equipment 2,000
Equipment 12,000
Cash 7,000

ILLUSTRATION 10.12
Loss on Computation of Loss
on Disposal of Used
Disposal Machine

LO 3

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Exchanges of Non-Monetary Assets

Gain Situation (Has Commercial Substance)

Company usually records the cost of a non-monetary asset
acquired in exchange for another non-monetary asset at the
fair value of the asset given up, and immediately recognizes
a gain.

LO 3

Gain Situation (Has Commercial Substance)

Illustration: Interstate Transportation Company exchanged a number

of used trucks plus cash for a semi-truck. The used trucks have a
combined book value of $42,000 (cost $64,000 less $22,000
accumulated depreciation). Interstate’s purchasing agent,
experienced in the secondhand market, indicates that the used
trucks have a fair market value of $49,000. In addition to the trucks,
Interstate must pay $11,000 cash for the semi-truck. Interstate
computes the cost of the semi-truck as follows.

ILLUSTRATION 10.13
Computation of Semi-
Truck Cost

LO 3

Gain Situation (Has Commercial Substance)

Illustration: Interstate records the exchange transaction as follows:

Truck (semi) 60,000

Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Gain on Disposal of Trucks 7,000
Cash 11,000

ILLUSTRATION 10.14
Computation of Gain
Gain on on Disposal of Used
Trucks
Disposal

LO 3

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Exchanges of Non-Monetary Assets

Lacks Commercial Substance

Now assume that Interstate Transportation Company
exchange lacks commercial substance.

Interstate defers the gain of $7,000 and reduces the basis of

the semi-truck.

LO 3

Exchanges of Non-Monetary Assets

Illustration: Interstate records the exchange transaction as

follows:

Trucks (semi) 53,000

Accumulated Depreciation—Trucks 22,000
Trucks (used) 64,000
Cash 11,000

ILLUSTRATION 10.15
Basis of Semi-Truck—Fair Value vs. Book Value

LO 3

Exchanges of Non-Monetary Assets

Summary of Gain and Loss Recognition on Exchanges of

Non-Monetary Assets ILLUSTRATION 10.16

Compute the total gain or loss on the transaction. This amount is equal to the
difference between the fair value of the asset given up and the book value of
the asset given up.
(a) If the exchange has commercial substance, recognize the entire gain or
loss.
(b) If the exchange lacks commercial substance, no gain or loss is
recognized.

Disclosure include
 nature of the transaction(s),
 method of accounting for the assets exchanged, and
 gains or losses recognized on the exchanges.
LO 3

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LEARNING OBJECTIVE 3
Impairments Explain the accounting
issues related to asset
impairment.

Recognizing Impairments
A long-lived tangible asset is impaired when a company is not
able to recover the asset’s carrying amount either through
using it or by selling it.

On an annual basis, companies review the asset for indicators

of impairments—that is, a decline in the asset’s cash-
generating ability through use or sale.

LO 3

Recognizing Impairments

If impairment indicators are present, then an impairment test

must be conducted.

ILLUSTRATION 11.15
Impairment Test

LO 3

Recognizing Impairments
Example: Assume that Cruz SA performs an impairment test for
its equipment. The carrying amount of Cruz’s equipment is
€200,000, its fair value less costs to sell is €180,000, and its
value-in-use is €205,000.
ILLUSTRATION 11.15

€200,000 €205,000
No
Impairment

€180,000 €205,000
LO 3

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Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11.15

€200,000 €180,000

€180,000 €175,000
LO 3

Recognizing Impairments
Example: Assume the same information for Cruz Company
except that the value-in-use of Cruz’s equipment is €175,000
rather than €205,000.
€20,000 Impairment Loss
ILLUSTRATION 11.15

€200,000 €180,000

Cruz makes the following entry to record the impairment loss.

Loss on Impairment 20,000

Accumulated Depreciation—Equipment 20,000

LO 3

Impairment Illustrations
Case 1
At December 31, 2020, Hanoi Ltd. has equipment with a cost of
VND26,000,000, and accumulated depreciation of VND12,000,000. The
equipment has a total useful life of four years with a residual value of
VND2,000,000. The following information relates to this equipment.
1. The equipment’s carrying amount at December 31, 2020, is
VND14,000,000 (VND26,000,000 - VND12,000,000).
2. Hanoi uses straight-line depreciation. Hanoi’s depreciation was
VND6,000,000 [(VND26,000,000 - VND2,000,000) ÷ 4] for 2020
and is recorded.
3. Hanoi has determined that the recoverable amount for this asset at
December 31, 2020, is VND11,000,000.
4. The remaining useful life of the equipment after December 31,
2020, is two years.
LO 3

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Impairment Illustrations

Case 1: Hanoi records the impairment on its equipment at

December 31, 2020, as follows.

VND3,000,000 Impairment Loss

ILLUSTRATION 11.15
VND14,000,000 VND11,000,000

Loss on Impairment 3,000,000

Accumulated Depreciation—Equipment 3,000,000

LO 3

Impairment Illustrations

Equipment VND 26,000,000

Less: Accumulated Depreciation-Equipment 15,000,000
Carrying value (Dec. 31, 2020) VND 11,000,000

Hanoi Ltd. determines that the equipment’s total useful life has not
changed (remaining useful life is still two years). However, the
estimated residual value of the equipment is now zero. Hanoi
continues to use straight-line depreciation and makes the
following journal entry to record depreciation for 2021.

Depreciation Expense 5,500,000

Accumulated Depreciation—Equipment 5,500,000

LO 3

Impairment Illustrations
Case 2
At the end of 2019, Verma Company tests a machine for impairment. The
machine has a carrying amount of $200,000. It has an estimated remaining
useful life of five years. Because there is little market-related information
on which to base a recoverable amount based on fair value, Verma
determines the machine’s recoverable amount should be based on value-
in-use. Verma uses a discount rate of 8 percent. Verma’s analysis
indicates that its future cash flows will be $40,000 each year for five years,
and it will receive a residual value of $10,000 at the end of the five years. It
is assumed that all cash flows occur at the end of the year.

ILLUSTRATION 11.16
Value-in-Use Computation
LO 3

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Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2019.
$33,486 Impairment Loss
ILLUSTRATION 11.15

$200,000 $166,514

Unknown $166,514
LO 3

Impairment Illustrations
Case 2: Computation of the impairment loss on the machine at
the end of 2019.
$33,486 Impairment Loss

$200,000 $166,514

Loss on Impairment 33,486

Accumulated Depreciation—Machinery 33,486

Unknown $166,514
LO 3

Reversal of Impairment Loss

Illustration: Tan Group purchases equipment on January 1,

2019, for HK$300,000, useful life of three years, and no
residual value.

At December 31, 2019, Tan records an impairment loss of

HK$20,000.
Loss on Impairment 20,000
Accumulated Depreciation—Equipment 20,000
LO 3

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Reversal of Impairment Loss

Depreciation expense and related carrying amount after the

impairment.

At the end of 2020, Tan determines that the recoverable amount of

the equipment is HK$96,000. Tan reverses the impairment loss.

Accumulated Depreciation—Equipment 6,000

Recovery of Impairment Loss 6,000

LO 3

Impairments

Cash-Generating Units
When it is not possible to assess a single asset for impairment
because the single asset generates cash flows only in
combination with other assets, companies identify the smallest
group of assets that can be identified that generate cash flows
independently of the cash flows from other assets.

LO 3

Impairments

Impairment of Assets to Be Disposed Of

 Report the impaired asset at the lower-of-cost-or-net
realizable value (fair value less costs to sell).

 No depreciation or amortization is taken on assets held

for disposal during the period they are held.

 Can write up or down an asset held for disposal in future

periods, as long as the carrying amount after the write up
never exceeds the carrying amount of the asset before
the impairment.

LO 3

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ILLUSTRATION 11.18
Graphic of Accounting for
Impairments

LO 3

LEARNING OBJECTIVE 5
Revaluations Apply the accounting for
revaluations.

Recognizing Revaluations
Companies may value long-lived tangible asset subsequent to
acquisition at cost or fair value.
Network Rail (GBR) elected to use fair values to account for its
railroad network.

► Increased long-lived tangible assets by £4,289 million.

► Change in the fair value accounted for by adjusting the asset

account and establishing an unrealized gain.

► Unrealized gain is often referred to as revaluation surplus.

LO 5

Recognizing Revaluation

Revaluation—Land
Illustration: Siemens Group (DEU) purchased land for €1,000,000
on January 5, 2019. The company elects to use revaluation
accounting for the land in subsequent periods. At December 31,
2019, the land’s fair value is €1,200,000. The entry to record the
land at fair value is as follows.

Land 200,000
Unrealized Gain on Revaluation - Land 200,000

Unrealized Gain on Revaluation—Land increases other comprehensive

income in the statement of comprehensive income.

LO 5

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Recognizing Revaluation

Revaluation—Depreciable Assets
Illustration: Lenovo Group (CHN) purchases equipment for
¥500,000 on January 2, 2019. The equipment has a useful life of
five years, is depreciated using the straight-line method of
depreciation, and its residual value is zero. Lenovo chooses to
revalue its equipment to fair value over the life of the equipment.
Lenovo records depreciation expense of ¥100,000 (¥500,000 ÷ 5)
at December 31, 2019, as follows.

Depreciation Expense 100,000

Accumulated Depreciation—Equipment 100,000

LO 5

Recognizing Revaluation

Revaluation—Depreciable Assets
After this entry, Lenovo’s equipment has a carrying amount of
¥400,000 (¥500,000 - ¥100,000). Lenovo receives an independent
appraisal for the fair value of equipment at December 31, 2019,
which is ¥460,000.

Accumulated Depreciation—Equipment 100,000

Equipment 40,000
Unrealized Gain on Revaluation—Equipment 60,000

LO 5

Recognizing Revaluation

Revaluation—Depreciable Assets
ILLUSTRATION 11.22
Financial Statement
Presentation—Revaluations

Under no circumstances can the Accumulated Other Comprehensive Income

account related to revaluations have a negative balance.

LO 5

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Recognizing Revaluation

Revaluations Issues
Company can select to value only one class of assets, say
buildings, and not revalue other assets such as land or equipment.
If a company selects only buildings,
► revaluation applies to all assets in that class of assets.
► A class of assets is a grouping of items that have a similar
nature and use in a company’s operations.
► Companies must also make every effort to keep the assets’
values up to date.

LO 5

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