1. Intermediate Accounting II Chapter 11
Accounting for Property, Plant and Equipment and Intangible Assets Utilization and Impairment – Part 2
Intermediate Accounting II
Chapter 11

2. Book Value = Cost – Accumulated Depreciation
CHANGE IN ESTIMATE
The figures for salvage value and useful life used in calculating depreciation are estimated amounts. Sometimes these estimates must be updated.
Changes in estimates are accounted for prospectively (going forward).
When a company revises a previous estimate, prior financial statements are not restated.
Depreciation is based on the book value of the asset at the time of the change in estimate.
An asset’s cost can never change.
 A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for the current period.
Book Value = Cost – Accumulated Depreciation

3. Example Problem
On January 1, 2015, the Hogan Manufacturing Company purchased a machine for $250,000. The company expects the service life of the machine to be five years and its anticipated residual value to be $40,000. The company’s fiscal year-end is December 31 and the straight-line depreciation method is used for all depreciable assets. During 2017, the company revised its estimate of service life from five to eight years and also revised estimated residual value to $22,000.
Step 1 – Calculate book value at the time of the change in estimate
($250, ,000)/5 = $42,000 depreciation per year
$42,000 X 2 years = $84,000 accumulated depreciation
$250, $84,000 = $166,000 book value
Step 2 – Calculate revised depreciation using book value as the asset cost
* The revised life of the asset is 8 total years. However, the asset has already been in service for 2 years leaving 6 years as its remaining life.
($166, ,000)/6* = $24,000 depreciation per year

4. CHANGE IN DEPRECIATION, AMORTIZATION, OR DEPLETION METHOD
Changes in depreciation, amortization, or depletion method are accounted for prospectively, in the same way as we account for changes in estimates.
A disclosure note is required to provide justification for the change and to report the effect of the change on current year’s income.
Depreciation is based on the book value of the asset at the time of the change in method.

5. GROUP AND COMPOSITE DEPRECIATION
Group and composite depreciation methods aggregate assets in order to reduce the recordkeeping costs of determining periodic depreciation.
The group depreciation method defines the collection of assets as depreciable assets that share similar service lives and other attributes.
The group depreciation rate is determined by dividing the total group straight-line depreciation per year by the total cost of the group.
The group's average service life is calculated by dividing the total group depreciable base by the total group depreciation per year.
The depreciation rate is applied to the total cost of the group.
The composite depreciation method is used when assets are physically dissimilar but are aggregated anyway to gain the convenience of group depreciation.
Composite depreciation is calculated in the same way as group depreciation.

6. GROUP AND COMPOSITE DEPRECIATION Changes in Assets
No gain or loss is recorded when a group asset is retired or sold; accumulated depreciation is plugged for the difference between the disposed of asset’s cost and sale proceeds.
After the group rate has been set, it is used to compute depreciation for all assets subsequently added to the group. It is assumed that retired assets are replaced with similar assets having service lives similar to the assets they replace.
The group rate is normally left the same unless there are significant changes in the lives of assets included in the group.
The group rate should be evaluated periodically to ensure that it is still appropriate for the assets in the group.

7. Exercise 11–13 Requirement 1, page 626
(h)
Exercise 11–13 Requirement 1, page 626
Asset
Cost
Residual Value
Depreciable Base
Est Life
Depreciation /Year
Stoves
$15,000
$3,000
$12,000 6
$2,000
Refrigerators
10,000
1,000
9,000 5
1,800
Dishwashers
8,000
500
7,500 4
1,875
Group Totals
$33,000
$4,500
$28,500
$5,675
Group depreciation rate $5,675 = 17.2% (rounded)
(total depreciation/total cost) $33,000
Group life $28,500 = years (rounded)
(total base/total depreciation) $5,675
If there are no changes in the assets in the group, depreciation of $5,675 will be recorded for 5.02 years.
The group depreciation rate and life generally do not change with the addition or disposition of group assets.

8. Exercise 11–13 Requirement 2, page 626
(h)
Exercise 11–13 Requirement 2, page 626
2019
Refrigerators (new)
2,700
Cash
To record the purchase of new refrigerators
200
Accumulated Depreciation
1,300
Refrigerators (old)
1,500
To record disposition of old refrigerators
Recall that no gain or loss is recorded when a group asset is retired or sold; accumulated depreciation is plugged for the difference between the disposed of asset’s cost and sale proceeds.

9. Exercise 11–13 Additional Requirement
Calculate and journalize depreciation for 2019.
Asset
Cost
Stoves
$15,000
Refrigerators
11,200
Dishwashers
8,000
Totals
$34,200
Group depreciation rate = % (rounded)
2016 Depreciation = $34,200 X .172 = $5,882 (rounded)
Depreciation Expense
5,882
Accumulated Depreciation
Once the group depreciation rate and average service life are determined, they generally are continued despite the addition or disposition of group assets.

10. AMORTIZATION OF INTANGIBLE ASSETS
The cost of an intangible asset with a finite useful life is amortized.
▶ Intangibles typically have no residual value, so the amortization base is simply cost.
▶ The cost of an intangible asset usually is amortized by the straight-line method.
 The cost of an intangible asset with an indefinite useful life is not amortized.
▶ Goodwill is the most common intangible asset with an indefinite useful life.

11. AMORTIZATION OF INTANGIBLE ASSETS – SPECIAL NOTE
The Spiceland text indicates that the credit for amortization expense should be recorded in the asset (i.e. Patent) account citing that this is the recommended treatment for thi entry.
Many other sources credit Accumulated Amortization.
GAAP supports either account as appropriate when recording amortization.

12. IMPAIRMENT OF VALUE
An impairment involves a significant decline in usefulness or diminished value of an asset beyond normal expectations. An asset held for use should be written down if there has been a significant impairment of value.

13. Property, Plant, and Equipment and Finite-Life Intangible Assets
IMPAIRMENT OF VALUE:
Property, Plant, and Equipment and Finite-Life Intangible Assets
An asset should be written down if there has been a significant impairment of value.
An impairment loss is recognized when the undiscounted sum of estimated future cash flows from an asset is less than the asset’s book value.
The loss recorded is the amount by which book value exceeds the fair value of the asset or group of assets when those fair values are readily determinable.
If fair values are not determinable, they must be estimated. Fair value can be estimated as the present value of future cash flows from the asset or group of assets.
A disclosure note should include a description of the impaired asset or asset group, the facts and circumstances leading to the impairment, the amount of the loss if not separately disclosed on the face of the income statement and the method used to determine fair value.
Later recovery of an impairment loss is not permitted.

14. Exercise 11–26 Requirement 1, page 628
Asset
Est FCF
Book Value
Fair Value
Impairment Loss
Asset
Est FCF
Book Value
Fair Value
Impairment Loss
Plant Assets
$4.0 mill
$6.5 mill
$3.5 mill
<
$3.0 mill
Recognize an impairment loss when the undiscounted sum of estimated future cash flows is less than the asset’s book value.
The impairment loss is the amount by which book value exceeds the fair value of the asset.
Additional Requirement
Journalize the entry to recognize the impairment loss. Assume the original cost of the assets is $12 million.
Loss on Impairment
3,000,000
Accumulated Depreciation
5,500,000
Plant Assets
8,500,000
The written-down book value of the plant assets will be the cost basis for future cost allocation (depreciation).

15. Exercise 11–26 Requirement 2, page 628
Asset
Est FCF
Book Value
Fair Value
Impairment Loss
Plant Assets
$6.8 mill
$6.5 mill
$5 mill
Asset
Est FCF
Book Value
Fair Value
Impairment Loss
>
N/A
Recognize an impairment loss when the undiscounted sum of estimated future cash flows is less than the asset’s book value.
If the sum of estimated future cash flows is greater than book value, no impairment loss recognized.

16. IMPAIRMENT OF VALUE - GOODWILL
A goodwill impairment loss is indicated when the fair value of the reporting unit is less than its book value.
A goodwill impairment loss is measured as the excess of the book value of the goodwill over its “implied” fair value.
The implied fair value of goodwill is calculated in the same way that goodwill is determined in a business combination. It is a residual amount measured by subtracting the fair value of all identifiable net assets from the consideration exchanged (purchase price) using the unit’s previously determined fair value as the consideration exchanged.

17. Exercise 11–30, page 629 Test for Goodwill Impairment
Fair Value Reporting Unit
Book Value Reporting Unit
Goodwill Impaired?
$220 m
$250 m
Yes: FV < BV
Calculate Implied Fair Value of Goodwill
Fair Value Reporting Unit
Fair Value Net Assets (ex Goodwill)
Implied Value of Goodwill
$220 m
$200 m
$20 m
Calculate Impairment Loss
Book Value of Goodwill
Implied Value of Goodwill
Impairment Loss
$50 m
$20 m
$30 m

18. Calculate Impairment Loss
Exercise 11–30, page 629
Additional Requirement
Journalize the entry to recognize the impairment loss on goodwill.
Calculate Impairment Loss
Book Value of Goodwill
Implied Value of Goodwill
Impairment Loss
$50 m
$20 m
$30 m
Loss on Impairment of Goodwill
30,000,000
Goodwill

19. Intermediate Accounting II – Chapter 11 END OF PRESENTATION
Accounting for Property, Plant and Equipment and Intangible Assets Utilization and Impairment – Part II
Intermediate Accounting II – Chapter 11
END OF PRESENTATION