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Depletion of Natural Resources Natural resources (wasting assets) are consumed as the physical units representing these resources are removed and sold.

Depletion of Natural Resources Land containing mineral deposits is purchased at a cost of $5,500,000. The cost to restore the land to its original state after removal of the resources is estimated to be $200,000 (then it can be sold for $450,000). In 2005, 80,000 tons of the estimated 1,000,000 tons are removed.

Depletion Depletion charge per ton $5,500,000 – $250,000 1,000,000 tons = Depletion charge per ton = $5.25 Depletion for 2005 = $5.25 x 80,000 tons Depletion for 2005 = $420,000 $450,000 – $200,000

Depletion The initial purchase: Mineral Deposits5,500,000 Cash5,500,000 Depletion for 2005: Depletion Expense420,000 Accumulated Depletion (or Mineral Deposits)420,000

Change in Estimated Life A company purchased $50,000 of equipment and estimated a 10-year life. Using the straight-line method with no residual value, the annual depreciation would be $5,000.

After four years, accumulated depreciation would amount to $20,000, and the remaining a book value would be $30,000. At the beginning of the fifth year, it is determined that the equipment will only last four more years. Change in Estimated Life

First four years 1$50,000/10=$5,000$ 5,000 2$50,000/10=5,00010,000 3$50,000/10=5,00015,000 4$50,000/10=5,00020,000 Depreciation Accumulated Year Computation Amount Depreciation

Change in Estimated Life Depreciation Accumulated Year Computation Amount Depreciation 1$50,000/10=$5,000$ 5,000 2$50,000/10=5,00010,000 3$50,000/10=5,00015,000 4$50,000/10=5,00020,000 5($50,000 – $20,000)/4=7,50027,500 6($50,000 – $20,000)/4=7,50035,000 7($50,000 – $20,000)/4=7,50042,500 8($50,000 – $20,000)/4=7,50050,000 $50,000

Impairment Before the end of an asset’s useful life, events occur that impair its value. This requires an immediate write-down of the asset.

Impairment 1. When should an asset be reviewed for possible impairment? An impairment review should be conducted whenever there has been a material change in the way an asset is used or in the business environment. If management obtains information suggesting that the market value of the asset has declined, an impairment review should be conducted.

Impairment 2. When is an asset impaired? An asset is impaired when the undiscounted sum of estimated future cash flows from an asset is less than the book value of the asset. The sum of the undiscounted future cash flows will always be greater than the fair value of the asset.

Impairment 3. How should an impairment loss be measured? The impairment loss is the difference between the book value of the asset and the asset’s fair value. The fair value can be approximated using the present value of estimated future cash flows from the asset.

Impairment 4. What information should be disclosed about an impairment? Disclosure should include a description of the impaired asset, reasons for the impairment, a description of the measurement assumptions, and the business segment or segments affected.

Impairment Guangzhou Company purchased a building five years ago for $600,000. With an expected life of 20 years and using straight-line depreciation, the building has a book value of $450,000. Guangzhou estimates that the net cash inflow from the building will be $375,000 for the next 15 years. The fair value of the building at this time is $230,000. Book value is compared to the undiscounted sum of future cash inflows to determine whether or not the building is impaired.

Impairment Since the undiscounted future cash flows are less than the book value, the building is impaired. The impairment loss would be recorded as follows: Accumulated Depreciation— Building150,000 Loss on Impairment of Building220,000 Building370,000 $600,000 – $230,000

International Accounting for Asset Impairment IFRS 36 requires that a company recognize an impairment loss whenever the recoverable value of an asset is less than its book value. recoverable value The higher of the selling price of the asset or the discounted cash flows associated with the asset’s use.

International Accounting for Asset Impairment IFRS 36 allows for the reversal of an impairment loss if events in subsequent years suggest the asset is no longer impaired.

International Accounting for Asset Impairment Under IFRS 16, if Guangzhou Company revalued their building to $540,000 (no earlier impairment recorded) and sold it for that amount, the following entries would be necessary: Cash540,000 Building540,000 Revaluation Equity Reserve90,000 Retained Earnings90,000

Amortization and Impairment of Intangible Assets Ethereal Company purchased a customer list for $30,000 on January 1, It is expected to have economic value for four years. The expected residual value is zero. December 31, 2005 Amortization Expense7,500 Accumulated Amortization— Customer List7,500

Amortization and Impairment of Intangible Assets On December 31, 2006, before the amortization entry is made, a test for impairment is made. The future cash flow of the list is expected to be $15,000—which is less than the book value ($30,000 – $7,500) and the fair value of the list is $12,000. December 31, 2006 Impairment Loss ($22,500 – $12,000)10,500 Accumulated Amortization— Customer List7,500 Customer List ($30,000 – $12,000)18,000

Impairment of Intangibles Not Subject to Amortization SFAS No. 142 describe the following examples of intangibles with indefinite lives: Broadcast license Broadcast license often have a renewal period of ten years. Because renewal is virtually automatic, such license are considered to have an indefinite life.

Impairment of Intangibles Not Subject to Amortization SFAS No. 142 describe the following examples of intangibles with indefinite lives: Trademark A trademark right is granted for a limited time, but can be renewed almost routinely. As long as the trademark is useful, it has an indefinite life.

Impairment of Intangibles Not Subject to Amortization Impalable Company has a broadcast license that has no foreseeable end to its useful life. The license cost $60,000 and it was estimated that the license generated cash flows of $7,000 per year. Recent events have convinced management that the cash flow will be reduced. The weighted probability shows that the estimated fair value is $52,000.

Impairment of Intangibles Not Subject to Amortization Because the estimated fair value is less than the book value, the intangible asset is impaired. Impairment Loss 8,000 Broadcast license8,000 $60,000 – $52,000

1.Compute the fair value of each reporting unit to which goodwill has been assigned. 2.If the fair value of the reporting unit exceeds the net book value of the assets and liabilities of the reporting unit, the goodwill is assumed to not be impaired and no impairment is recognized. Impairment of Goodwill Procedures in Testing Goodwill ContinuedContinued

3.If the fair value of the reporting unit is less than the net book value of the assets and liabilities of the reporting unit, a new fair value of goodwill is computed. 4.If the implied amount of goodwill computed in (3) is less than the amount initially recorded, a goodwill impairment loss is recognized for the difference. Impairment of Goodwill