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. U.S. GAAP does not allow assets to be revalued at an amount exceeding historical cost less accumulated depreciation.
ABC Ltd. lists its shares on an exchange that allows it to report either in accordance with U.S. GAAP or by using IFRSs. 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.
(a) Determine the depreciation expense recognized in Year 2, Year 3, and Year 4 under
(i) The revaluation treatment allowed under IAS 16, and
(ii) U.S. GAAP.
(b) Determine the carrying amount of the asset under the two different sets of accounting requirements at January 2, Year 3; December 31, Year 3; and December 31, Year 4.
(c) Summarize the differences in profit and shareholders' equity over the 20-year life of the asset using the two different sets of accounting requirements.
Assume that future appraisals indicated that the fair value of the asset was equal to carrying amount.

  • CreatedJune 08, 2015
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