Question

QUESTION 9 What is depreciation? The textbook states that "Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset." Where is this guidance found in the Codification? QUESTION 10 How much impairment should be recognized for PP8E? The textbook states that impairment loss is the amount by which the carrying amount of the asset exceeds the fair value of the asset (Ch. 11). Where is this guidance found in the Codification?

Answer 1

Answer to Question 9:

IAS 16 Property, Plant and Equipment (PPE) is the relevant codification or the international accounting standard issued by the International Accounting Standards Board (IASB) for

• Initial and subsequent recognition of property, plant and equipment in the books
• Measurement of their carrying amount or the amount at which they should be presented in the financial statements
• Measurement of depreciation or their wear and tear charges
• Impairment testing for PPE- Reference to IAS 36 Impairment of Assets
• Derecognition or retirements and disposals
• Related disclosures

Depreciation as defined in IAS 16, "is the systematic allocation of the depreciable amount of an asset over its useful life."

Analysis of the definition and meaning of Depreciation:

• Depreciation is the application of the matching principle of revenue vs cost principle in accounts, i.e. revenue earned is matched against corresponding costs which include the wear and tear of the asset.
• Depreciable Amount is the cost of the asset or other substituted amount, less residual value. It is the total amount available for depreciation. There are 2 methods to ascertain the depreciable method, which is done at subsequent measurement - The cost model and the revaluation model.
• Useful life-  Expected available period for use or the number of production or similar units expected to be obtained from the asset by an entity.

Answer to Question 10:

• IAS 16 Property, Plant and Equipment requires impairment testing for PPE but refers to IAS 36 Impairment of Assets for further guidance.
• Any excess amount in the books above the recoverable amount should be recognized as impairment (expense) in the statement of profit or loss.
• Recoverable amount is the amount by which the carrying amount of an asset exceeds its recoverable amount [IAS 36.6].
• Carrying amount: the amount at which an asset is recognized in the balance sheet after deducting accumulated depreciation and accumulated impairment losses[IAS 36.6].