Chapter 10: Applications of Fair Value to Non-Current Assets

Comprehensive Study Guide (with instructor-style commentary, since you have no PBL/lecture notes for this chapter)

Learning Objectives Map

Relevant CPA competencies named in your text: 1.1.2 (methods of measurement), 1.2.1 (accounting policies, ethical judgment), 1.2.2 (routine transactions, Level A: PPE; depreciation/amortization/impairment/derecognition), 1.2.3 (non-routine transactions, Level B, uncommon capital assets: investment properties, biological assets; and assets held for sale/discontinued operations), 1.3.2 (routine disclosure), 1.4.1 (complex disclosure analysis, Level C), and three valuation-specific competencies at Level C: 5.4.1 (determining the value of a tangible asset), 5.4.2 (applying methods to estimate the value of a business), 5.4.3 (estimating the value of an intangible asset).

Decision Flowcharts & Logic Trees

Exhibit 10-7 reconstructed: The impairment flowchart

Exhibit number and full three-stage content preserved exactly; ASCII flowchart redrawn as Mermaid. [Visual upgrade, substitution]

flowchart TD
    subgraph STAGE1["STAGE 1 — Preliminary steps"]
        A["Determine the<br/>CASH GENERATING UNIT"]
        A --> B{"Intangible with indefinite life,<br/>or goodwill?"}
        B -->|"YES"| C["Test for impairment<br/>ANNUALLY, regardless<br/>of indications"]
        B -->|"NO"| D{"Are there INDICATIONS<br/>the asset may be impaired?<br/>See Exhibit 10-8"}
        D -->|"NO"| STOPA["STOP.<br/>No test required."]
    end

    subgraph STAGE2["STAGE 2 — The impairment test"]
        E["RECOVERABLE AMOUNT =<br/>the HIGHER of:<br/>1. Fair value less cost to sell<br/>2. Value in use"]
        E --> F{"Is CARRYING VALUE greater than<br/>RECOVERABLE AMOUNT?"}
        F -->|"NO"| STOPB["STOP.<br/>Not impaired."]
        F -->|"YES"| G["Allocate the impairment loss<br/>to assets within the CGU.<br/>Goodwill absorbs the loss FIRST.<br/>Respect the IAS 36.105 floor."]
    end

    subgraph STAGE3["STAGE 3 — Recognition"]
        H{"Which measurement<br/>model applies?"}
        H -->|"COST MODEL"| I["Write asset down to recoverable<br/>amount. Record loss to the<br/>INCOME STATEMENT."]
        H -->|"REVALUATION MODEL"| J["Apply revaluation rules.<br/>Loss first reduces any existing<br/>revaluation surplus via OCI,<br/>remainder to profit or loss."]
    end

    C --> E
    D -->|"YES"| E
    G --> H

Exhibit 10-24 reconstructed: Scope of IAS 41 Agriculture

Exhibit number and full content preserved exactly; ASCII diagram redrawn as Mermaid. [Visual upgrade, substitution]

flowchart LR
    subgraph IAS41["IAS 41 Agriculture — agricultural activities"]
        REP["Reproduction"]
        ACQ["Acquire<br/>biological asset"]
        GROW["Growth /<br/>Degeneration"]
        HARV["HARVEST<br/>Scope boundary"]
        REP --> GROW
        ACQ --> GROW
        GROW --> HARV
    end

    subgraph OTHER["Other standards — e.g. IAS 2 — non-agricultural activities"]
        PROC["Post-harvest<br/>processing"]
        END["End of processing"]
        PROC --> END
    end

    HARV --> PROC

    BA["BIOLOGICAL ASSETS<br/>Vines, dairy cattle, trees<br/>A LIVING animal or plant"]
    AP["AGRICULTURAL PRODUCE<br/>Grapes, milk, logs<br/>The HARVESTED product"]
    PP["PROCESSED PRODUCTS<br/>Juice, jelly, wine, yogurt,<br/>cheese, lumber, paper"]

    BA --> AP --> PP

Part 0: Foundations Refresher

(My addition, since this chapter builds on a lot of earlier material. Skim if you're already comfortable with the cost model, OCI, and the prudence/conservatism concept.)

Where this chapter sits in your course

Chapters 8 and 9 covered PPE and intangible assets using the historical cost model exclusively, an asset's carrying value is (cost) − (accumulated depreciation/amortization) − (accumulated impairment). This chapter introduces the alternative: measuring non-current assets at fair value instead. Three different "flavours" of fair-value-based accounting appear in this one chapter, and it's easy to blur them together, so here's the map before you dive in:

Quick refresher: cost vs. fair value, and why both exist

Historical cost: what you actually paid. Reliable (it's a fact, not an estimate) but can become irrelevant if market conditions have shifted a lot since purchase. Fair value: what the asset is worth today. More relevant to current decision-making, but requires estimation, introducing measurement uncertainty.

This is the same relevance vs. reliability tension you've seen since Chapter 2's Conceptual Framework material, this chapter is really just that tension playing out concretely for long-lived assets.

Quick refresher: OCI and equity components

Recall from Chapter 3: other comprehensive income (OCI) captures value changes that haven't yet been "realized" through an ordinary transaction, they get parked in a reserve within equity rather than hitting net income directly. This chapter's revaluation surplus (Part A) is a specific, named example of an OCI-fed equity reserve, following exactly the same logic as the FVOCI-securities example from Chapter 3.

Quick refresher: prudence / conservatism

Prudence (IFRS) / conservatism (ASPE): don't overstate assets or income; when in doubt, lean toward the more cautious figure.

This concept is why impairment (Part B) is mandatory while revaluation (Part A) is optional, impairment only ever pushes carrying values down (never up beyond original cost basis in one specific sense you'll see below), which is squarely a prudence-driven, one-directional rule. Revaluation, by contrast, can go either up or down, which is why it's optional and requires reliable fair values before it's even allowed.

Part A: The Revaluation Model of Measuring Carrying Values Subsequent to Initial Acquisition

(LO 10-1)

Opening context: LVMH

Your textbook opens this chapter with LVMH Moët Hennessy–Louis Vuitton (Paris Stock Exchange: MC), a €79 billion-sales luxury conglomerate (Moët & Chandon, Dior perfume, TAG Heuer, Louis Vuitton). In its 2023 financial statements, LVMH reported €1,156 million in "revaluation reserves" for vineyard land (up €31 million from the prior year), €20,030 million gross goodwill with €1,690 million of impairment, leaving €18,340 million net goodwill, and €316 million of investment property carried at cost. This one real company touches every major topic in this chapter (revaluation, impairment, and investment property) which is exactly why the textbook opens with it.

The core choice: cost model vs. revaluation model

IAS 16 governs this for PPE:

¶29 An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant, and equipment. ¶30 After recognition as an asset, an item of PPE shall be carried at cost less any accumulated depreciation and any accumulated impairment losses. ¶31 After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluation shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

Frequency: revaluation doesn't need to happen every year, frequency depends on how quickly fair values are likely to deviate materially from carrying value (faster/larger changes → more frequent revaluation needed).

There are three accounting issues to work through once fair value is established: (1) how to adjust the asset value itself, (2) how the offsetting equity effect is treated, (3) how future depreciation is affected.

1. Adjusting asset values for revaluation

Non-depreciable assets (land, indefinite-life intangibles): straightforward, just adjust to fair value. Example: Quesnel Company carries land at $80,000; a professional appraisal values it at $100,000:

Dr. Land                                          20,000
    Cr. [Profit/loss account or OCI]                      20,000

Depreciable assets: the net effect is the same ($20,000 increase), but now you must decide how to split that increase between the gross carrying amount and accumulated depreciation. Two methods exist.

a. Proportional method

Restates both gross carrying value and accumulated depreciation by the same percentage, so the ratio between them is preserved.

Quesnel's equipment: net carrying amount $80,000 (gross $120,000 − accumulated depreciation $40,000). Fair value revalued to $100,000. Fair value exceeds net carrying amount by 25% (($100,000 ÷ $80,000) − 1). So both gross carrying value and accumulated depreciation increase by 25%.

Exhibit 10-1: Proportional method for Quesnel Company

b. Elimination method

Resets accumulated depreciation to zero on the revaluation date, so gross carrying amount = net carrying amount. Revaluing the net carrying amount then just means directly adjusting the gross carrying amount.

Exhibit 10-2: Elimination method for Quesnel Company

c. Comparing the two methods

Both produce the same net carrying amount ($100,000 fair value), only the split between gross value and accumulated depreciation differs.

Exhibit 10-3: Journal entries for both methods

Interpretation: the proportional method preserves the character of the original purchase, the ratio of accumulated depreciation to cost is unchanged before/after revaluation. The elimination method makes the numbers look like a fresh purchase at the revaluation date (zero accumulated depreciation), which hides the asset's true age from a reader relying purely on the accumulated-depreciation figure. Neither method is "correct", the proportional method's implied "as if these prices existed at original purchase" framing is purely hypothetical, and the elimination method's implied "as if newly purchased" framing understates the asset's age. Choosing between them is a matter of professional judgment.

2. Accounting for the effect of revaluation on equity

The offsetting side of the journal entry (the credit in the examples above) depends on whether the revaluation is upward or downward, and what past revaluations occurred for that same specific asset. IAS 16:

¶39 If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. ¶40 If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in OCI reduces the amount accumulated in equity under the heading of revaluation surplus.

These two paragraphs are genuinely hard to parse as prose, your textbook itself says so, and provides a graph to make the logic concrete.

Exhibit 10-4 reconstructed: Treatment of revaluation adjustments

Cumulative
revaluation
adjustment
    +  │           Asset A (dotted line)
       │          ╱‾‾‾‾╲
       │         ╱      ╲___________________
       │        ╱                            ╲___________  } To OCI
       │       ╱                                          } (revaluation
    0  ┼──────╱────────────────────────────────╲──────────  surplus)
       │                                         ╲________
       │      ╲___                                        } To profit
       │           ╲___          ___________________     }  or loss
    −  │               ╲________╱          Asset B (solid line)
       └──────────────────────────────────────────────▶ Time

The asymmetric rule, explained plainly: - Cumulative revaluation increases (dotted line, Asset A) → OCI, into the revaluation surplus equity account. - Cumulative revaluation decreases (solid line, Asset B) → profit or loss (net income). Your textbook calls assets in this state "under water", cumulative adjustments below zero. - In a single year, if an adjustment crosses from below zero to above zero (or vice versa), it can be split: part goes through profit or loss, part through OCI.

Worked example, three scenarios for Quesnel's equipment, each with a $20,000 current-year revaluation increase, but different opening cumulative revaluation balances: (i) $30,000; (ii) −$30,000; (iii) −$15,000.

Exhibit 10-5: Journal entries for the three scenarios (proportional method)

Reading scenario (iii) carefully, this is the "crossing zero" case: the asset was $15,000 "under water." The $20,000 increase first eliminates that $15,000 cumulative loss (recognized as a gain through net income, since it's literally reversing prior net-income losses), and only the remaining $5,000 (the portion that pushes the asset above the original water line) goes to OCI/revaluation surplus.

3. Adjusting depreciation in periods subsequent to revaluation

A revaluation is a change in estimate (new information about asset value) → accounted for prospectively (Chapter 3's classification framework, applied here).

Quesnel's equipment: 6-year useful life, zero residual value, revaluation at end of Year 2/start of Year 3. Pre-revaluation: gross $120,000, so depreciation = $120,000 ÷ 6 = $20,000/year. Revaluation increases net carrying amount from $80,000 to $100,000 at the start of Year 3, with 4 years remaining → new depreciation = $100,000 ÷ 4 = $25,000/year.

Exhibit 10-6: Full depreciation schedule reflecting the revaluation

*RA = revaluation adjustment (occurred end of Year 2, so depreciation changes begin Year 3; figures assume the proportional method).

Formula: Depreciation = Remaining depreciable amount ÷ Remaining useful life. If further revaluations happen in later years, the schedule gets revised again, prospectively, each time.

Part B: Impairment

(LO 10-2, LO 10-3)

Unlike revaluation, impairment is not optional. Representational faithfulness requires that reported asset values not overstate what can be recovered through sale or use. If a non-current asset's carrying value can't be recovered, it must be written down. (Same underlying logic as Chapter 6's lower-of-cost-and-net-realizable-value rule for inventory, this section is IAS 36's version of that idea, applied to non-current assets.)

Impairment accounting has three stages: (1) preliminary steps, what to test, (2) the impairment test itself, (3) recognition in the financial statements.

Exhibit 10-7 reconstructed: The impairment flowchart

STAGE 1: Preliminary steps          STAGE 2: Impairment test         STAGE 3: Recognition
─────────────────────────           ────────────────────────         ─────────────────────

Determine cash                      Recoverable amount =
generating unit                     higher of:
     │                              (1) Fair value less
     ▼                                  cost to sell
Intangible with indefinite          (2) Value in use
life or goodwill?                          │
  │YES        │NO                          ▼
  ▼            ▼                     Is Carrying Value >                          Cost model?
Test for      Indications asset      Recoverable Amount?                              │
impairment    may be impaired?         │YES        │NO                                ▼
annually        │YES     │NO           ▼            ▼                          Write down asset to
  │              │        ▼      Allocate impairment  Stop                     recoverable amount,
  │              │      STOP     loss to assets within                        record loss to income
  │              │                cash generating unit                             statement
  └──────────────┴───────────────────────┬──────────────────────────────────────────┤
                                          │                                          │
                                          └──────────────────────────────────► Revaluation model?
                                                                                       │
                                                                                       ▼
                                                                              Apply revaluation rules
                                                                              (record loss, or reduce
                                                                               revaluation surplus)

1. Preliminary steps: what to test for impairment

The core problem: where's the boundary between "one asset" and "another" for impairment purposes? Your text poses this via two contrasting examples: a wholesaler's delivery truck likely generates cash flows independently, but a subway car does not, because it only works as part of an integrated system (tracks, other cars, transfer points to other lines/buses), you can't isolate "this one subway car's" cash inflows.

Cash generating unit (CGU): the smallest identifiable group of assets that generates cash inflows largely independent of other assets/groups.

Another example directly from your text: an assembly line with many machines, no single machine produces output independently, so the whole line is one CGU.

Not every asset gets tested every year. IAS 36 requires testing only if there are "indications that the asset may be impaired." Examples straight from your text: - A company licenses a patented production process that becomes technologically inferior after a competing process emerges. - Market demand for steel plummets due to contracting car sales/production. - Government changes legislation on tobacco product distribution. - A company shifts its focus from forestry to telecommunications.

Why an annual search is mandated (not left to management's discretion): if testing were only triggered by management's own voluntary recognition of "indications," there'd be an obvious incentive to simply not look very hard. So IFRS requires an annual minimum search using at least these sources (IAS 36 ¶12):

Exhibit 10-8: Minimum sources for indications of impairment

Example straight from your text: a restaurant chain in 2020 would have needed to evaluate equipment/buildings for impairment due to COVID-19 restrictions.

ESG Highlight (from your text). Tightening environmental regulations and shifting customer demand can render production equipment/intangibles obsolete if they can't adapt. Climate change (more severe storms, rising sea levels) can substantially affect property values in storm-surge/flood-prone areas, both are legitimate "indications of impairment" sources to watch for.

The exception to "only test if there's an indication": goodwill and indefinite-life intangible assets are tested every year, automatically, regardless of any specific indication, because, unlike finite-life assets, there's no gradual amortization eroding their carrying value over time, so there's no natural mechanism catching an overvaluation before it becomes large and stale.

2. The impairment test

Test annually for goodwill/indefinite-life intangibles, or whenever there's an indication for everything else. The test: compare carrying value to the recoverable amount. If carrying value exceeds recoverable amount → impaired, write down to recoverable amount. Otherwise → no adjustment.

Recoverable amount = the higher of (1) fair value less cost to sell, and (2) value in use.

Why "higher of"? Economically sensible: an enterprise can either sell the asset or keep using it, rationally, it picks whichever option generates more net benefit. Practical shortcut: you don't always need both numbers, if fair value less cost to sell alone already exceeds carrying value, the asset isn't impaired, full stop (no need to also compute value in use), and vice versa.

a. Fair value less cost to sell

Fair value less cost to sell: price receivable to sell an asset (or payable to transfer a liability) in an orderly transaction between market participants at the measurement date, less costs of disposal. Costs of disposal (IAS 36): incremental costs directly attributable to disposal, excluding finance costs and income tax expense. Examples: removal/transportation costs (if seller-paid), cleaning/refurbishment costs.

b. Value in use

Value in use: the present value of future cash flows expected from the asset (or CGU). This is exactly why defining the CGU matters so much, you can't run a discounted cash flow analysis without first defining what unit produces those cash flows. (Standard DCF technique, your textbook notes Appendix C covers the general mechanics, and IAS 36 ¶30-57 has additional technical detail beyond this text's scope.)

c. Full worked example: Red Rocket Racers

Setup: hypothetical performance-bicycle builder ($3,000–$10,000 retail). Sales had been rising, but a recession starting Year 3 caused a 45% sales drop by Dec. 31, Year 4 (year-end) vs. the same month a year prior; by June Year 4, production was curtailed and half the production staff laid off. Red Rocket rents its facilities but owns several pieces of manufacturing equipment.

Exhibit 10-9: Facts

1. Accounting records at Dec. 31, Year 4 (all 3 machines purchased 4 years ago, straight-line depreciated over 10 years):

2. Recent auction results for similar equipment (from bankrupt competitors, liquidation sales):

3. Overall industry sales declined only modestly (value-conscious consumers downshifted to lower-priced bikes), management estimates an orderly sale would fetch $170,000 (A), $450,000 (B), $50,000 (C).

4. Transport/moving costs negligible; all three machines have negligible residual value.

5. Forecasted cash flows for the machines' remaining 6-year useful life (one combined forecast, since all three machines serve the same production process):

6. Cost of capital for discounting: 12%.

Analysis (directly from your text)

• Cash generating unit(s): the three machines form one CGU, their cash inflows result from concurrent, joint use, so impairment must be assessed together.
• Need for impairment test: yes, recessionary conditions and the severe sales drop are clear indications.
• Carrying amount: $216,000 + $432,000 + $72,000 = $720,000.
• Fair value less cost to sell: the auction prices are not valid fair values, they're liquidation prices from bankruptcy, and forced-sale prices aren't fair values. The only valid evidence is management's own estimate: $170,000 + $450,000 + $50,000 = $670,000.
• Value in use: discount the Year 5–Year 10 net incremental cash flows at 12% (Years 3–4 are already past, sunk, and irrelevant to a forward-looking valuation as of the Dec. 31, Year 4 test date):

Total present value = $595,325 (rounded to $595,000).

• Recoverable amount: higher of $670,000 (FV less cost to sell) and $595,000 (value in use) = $670,000.
• Result: carrying value $720,000 > recoverable amount $670,000 → impaired by $50,000.

3. Recognition of impairment

If only one asset is involved, it bears the whole loss. If a CGU has multiple assets (like Red Rocket), the loss must first be allocated among them.

a. Allocating impairment loss within a CGU

General rule (IAS 36): allocate in proportion to net carrying amounts (since, by definition, individual fair values usually aren't separately available within a CGU, if they were, the assets wouldn't need to be grouped together in the first place).

Two exceptions: 1. If the CGU includes goodwill, the loss hits goodwill first, before any allocation to identifiable assets, reflecting the idea that impairment more likely originated in goodwill than in specific identifiable (tangible/intangible) assets. 2. If an individual asset within the CGU can be shown to be unimpaired (i.e., its own recoverable amount, where identifiable, still exceeds its carrying amount), no loss is allocated to it, the loss that would have gone to it gets reallocated to the other assets instead.

Exhibit 10-10: Red Rocket's CGU summary

Exhibit 10-11: Initial (general-rule) allocation, in proportion to carrying amounts

But wait, check Machine B against the exception: Machine B's own recoverable-amount-relevant figure (fair value less cost to sell = $450,000) is already above its post-allocation carrying amount of $402,000, in fact, it was already above its pre-allocation carrying amount of $432,000 too. Machine B was never actually impaired on its own. So the $30,000 initially allocated to it must be reallocated to Machines A and C.

Exhibit 10-12: Corrected allocation, accounting for Machine B being unimpaired

*Nil because carrying amount should never be written down below the asset's own recoverable amount ($450,000).

b. Journal entries to record the loss

Cost model (writedown = loss through income statement, hits retained earnings):

Exhibit 10-13: Red Rocket's impairment entries, cost model

Dr. Impairment loss—Machine A                37,500
    Cr. Accumulated depreciation—Machine A            37,500
Dr. Impairment loss—Machine C                12,500
    Cr. Accumulated depreciation—Machine C            12,500

Revaluation model: treated the same as a revaluation decrease, loss goes through profit or loss unless the asset has an existing revaluation surplus, in which case the loss first eliminates that surplus (through OCI), and only the remainder hits net income. (This is conceptually consistent: impairment is literally "the downward half" of revaluation.)

Illustration: suppose Machine A has a $20,000 revaluation surplus, Machine C does not.

Exhibit 10-14: Red Rocket's impairment entries, revaluation model (differences from Exhibit 10-13 in bold)

Dr. OCI—revaluation surplus—Machine A        20,000
Dr. Impairment loss—Machine A                17,500
    Cr. Accumulated depreciation—Machine A            37,500
Dr. Impairment loss—Machine C                12,500
    Cr. Accumulated depreciation—Machine C            12,500

For Machine A: the $37,500 impairment first eliminates the $20,000 surplus (OCI), with the remaining $17,500 flowing through net income, the exact same "split at zero" logic from Part A's Exhibit 10-5, scenario (iii).

c. Adjusting depreciation after impairment

Impairment lowers carrying value → lowers the remaining depreciable amount → prospective adjustment to future depreciation (same mechanics as Chapter 8's depreciation-estimate-change treatment).

d. Reversals of impairment

IFRS allows reversing a prior impairment if the asset's value recovers later, but the reversal is capped: the carrying amount after reversal can never exceed what the carrying amount would have been had no impairment ever occurred (accounting for the depreciation that would have continued in the meantime). This is subtly different from simply "capped at the original loss amount", because depreciation itself changed between the impairment and any later reversal.

Illustration: Machine C: cost $120,000, zero residual, 10-year useful life, straight-line ($12,000/year pre-impairment). Impaired at the end of Year 4.

Exhibit 10-15: Recomputing Machine C's post-impairment depreciation

Exhibit 10-16: Full comparison: with vs. without impairment, and maximum reversal each year

*See Exhibit 10-13 for the impairment loss calculation.

Reading the "maximum reversal" column: in Year 5, the gap between "would've been worth $60,000 without impairment" and "actually worth $49,583 with impairment" is $10,417, that's the absolute ceiling on how much could be reversed that specific year, even if fair value fully recovered. The gap shrinks over time (down to $0 by Year 10) simply because both paths converge to $0 net carrying value at the end of the asset's useful life regardless.

Exhibit 10-17 reconstructed: Maximum impairment reversal, graphically

Net carrying
amount
$120,000 ┤●
         │ ╲___
 $96,000 ┤     ╲___              ┄┄┄┄ Without impairment (dashed, higher line)
         │         ╲___      ┄┄┄┄
 $72,000 ┤             ╲__ ┄┄┄
         │            ┄┄┄╲________            ▲
 $48,000 ┤         ┄┄┄        ╲________        │ Maximum reversal =
         │      ┄┄┄                    ╲______  │ vertical gap between
 $24,000 ┤   ┄┄┄  With impairment (solid,        │ the two lines
         │┄┄┄      lower line)                ╲__▼_
      $0 ┼──────────────────────────────────────────●
         0   1   2   3   4   5   6   7   8   9  10  Year

The key visual takeaway: the solid ("with impairment") line can never cross above the dashed ("without impairment") line, that's the reversal cap, made visual.

4. Differences between impairment and revaluation

Conceptually, impairment = "the downward half" of revaluation. Does that mean following the revaluation model automatically satisfies impairment requirements? No, not automatically. The implementation details genuinely differ:

Practical implication: enterprises using the revaluation model still generally need a separate impairment assessment. Only when the differences are immaterial for the specific enterprise/assets can revalued assets skip separate impairment testing.

5. Impairment standards in ASPE

Four significant IFRS/ASPE differences: 1. ASPE also uses "indications of impairment" as a trigger, but does not require an annual search for such indications. 2. ASPE's recoverable amount (for finite-life assets) = undiscounted cash flows from use, impaired if carrying amount exceeds this. But the impairment loss amount is based on carrying amount vs. fair value (which does reflect discounted cash flows), a slightly inconsistent-feeling two-step test, worth noting carefully. 3. ASPE does not permit reversing impairments, ever. 4. Since ASPE doesn't permit the revaluation model at all, impairment losses always flow through profit or loss, never OCI.

6. Economic roles of impairment

a. Communicating information to users. Alerts readers to declining asset values/adverse conditions. But this alone doesn't fully explain the asymmetry (why no upward revaluations for cost-model assets), full information conveyance would actually be better served by allowing both directions (i.e., the revaluation model), so this can't be the only justification.

b. Supporting efficient contracting / reducing earnings management. Debt contracts/covenants often reference asset values (e.g., debt-to-assets ratios); creditors bear the downside of asset declines but don't share the upside, so they prefer a one-sided (impairment-only) standard. Executive compensation tied to reported income creates an incentive to inflate asset values if gains were freely recognized, which is exactly why even upward revaluations (Part A) flow through OCI, not net income.

c. Facilitating rational decision-making. People (including managers) have a well-documented aversion to recognizing losses, whether real or merely on paper. Overstated (un-impaired) carrying values can make management reluctant to dispose of assets, purely to avoid booking an accounting loss, even when disposal is the economically correct choice.

Worked example: Salmo Company: old machine, carrying value (no impairment recorded) $200,000, fair value $160,000, negligible disposal cost. Replacing it with a newer machine has a positive NPV of $20,000. Should Salmo replace it? Selling the old machine yields $160,000 (its fair value) against a $200,000 carrying amount → an accounting loss of $40,000 on disposal, which exceeds the $20,000 NPV benefit, tempting management to skip the replacement purely to avoid booking that loss.

But this accounting loss is irrelevant to the actual capital-budgeting decision, the $20,000 NPV already incorporates all relevant cash flows. Salmo should proceed. If Salmo had first written the machine down to $160,000 via impairment, the replacement decision would trigger no significant accounting loss at all, removing the psychological/reporting barrier to making the economically correct call.

Part C: Investment Property

(LO 10-4, first half)

Why a special standard (IAS 40)? "Investment property" suggests assets held to earn profit directly, like a financial investment (interest/dividends plus price appreciation). Investment property earns rental income and capital appreciation directly, in contrast to ordinary PPE (which earns profit indirectly, through producing goods/services) and inventory (which earns profit only on sale, not while held).

1. Definition and scope

Investment property: land or buildings held to earn rental income or for capital appreciation. Excludes: property used in supplying goods/services or for admin purposes (→ PPE, per IAS 16) and property held for sale in the ordinary course of business (→ inventory, per IAS 2).

2. Subsequent measurement

Initial recognition is at cost (including transaction costs, legal fees, etc.), same as PPE. Subsequent measurement offers a choice:

The fair value model here is similar to, but distinct from, Part A's revaluation model:

1. Gains/losses always flow through profit or loss, never OCI (recall Part 0's map: this is the specialized-standard pattern, no OCI option at all).
2. No depreciation is recorded under the fair value model, the fair value estimate already reflects any decline in quality/useful life, and value changes hit income directly, so a separate depreciation charge would effectively double-count the decline.
3. Fair values must reflect actual market conditions at the balance sheet date (IAS 40 ¶40), implying investment property under the fair value model needs annual fair value updates, unlike PPE revaluation, which can be less frequent if fair values move gradually.

Exhibit 10-18: IAS 40 (Investment Property) vs. IAS 16 (PPE)

Worked example: Arbutus Homes' Laurel Street property

Arbutus Homes (operates communal senior housing, incl. food/cleaning/paramedical services) acquires an apartment building for $20 million ($8M land, $12M building) at the start of 20X1. Building useful life: 20 years. Year-end appraisals: building: $11.78M (20X1), $10.98M (20X2), $13M (20X3); land: $9M (20X1), $9.5M (20X2), $10M (20X3).

Scenario 1, held for use (management intends the property for actual seniors-housing operations) → treated as PPE under IAS 16:

Exhibit 10-19: Arbutus Homes' Laurel Street property as PPE

*Depreciation = beginning-of-year depreciable amount ÷ remaining useful life: 20X1: $12,000,000 ÷ 20 = $600,000; 20X2: $11,780,000 ÷ 19 = $620,000; 20X3: $10,980,000 ÷ 18 = $610,000.

**Revaluation reserve = beginning reserve + current-year adjustment. 20X1: $0 + ($11,780,000 − ($12,000,000 − $600,000)) = $0 + $380,000 = $380,000. 20X2: $380,000 + ($10,980,000 − ($11,780,000 − $620,000)) = $380,000 − $180,000 = $200,000. 20X3: $200,000 + ($13,000,000 − ($10,980,000 − $610,000)) = $200,000 + $2,630,000 = $2,830,000.

Scenario 2, held for capital appreciation (management could sell if the price is right; could continue providing housing by renting the space back from a buyer) → treated as investment property under IAS 40:

Exhibit 10-20: Arbutus Homes' Laurel Street property as investment property

The punchline, compare the "net effect on equity" row across both exhibits: it's identical ($780,000 / $480,000 / $3,000,000) whether you use the PPE revaluation model or the investment property fair value model! Only the composition differs: the PPE revaluation model splits the effect into a revaluation surplus (OCI-fed) partly offset by retained-earnings reduction (from depreciation); the investment property fair value model routes the entire fair value change through retained earnings via profit or loss (with no depreciation at all).

3. Transfers into and out of investment property

a. Change-in-use requirement. IAS 40 ¶57 requires an actual change in use to justify any transfer, e.g., switching from renting out a property to occupying it yourself, or vice versa. You can't just "decide to reclassify" without a genuine change in how the property is actually used.

b. Transfers under the cost model: simplest case, carry over the pre-transfer cost/carrying amount (and any accumulated depreciation) unchanged into the new classification. (Not reset to a fresh "as-if-purchased-today" basis.)

c. Transfers under the fair value model (direction matters): - Out of investment property → PPE or inventory: revalue to fair value at the transfer date (change in value through profit or loss); that fair value becomes the new cost basis going forward. - From inventory → into investment property: revalue inventory to fair value at transfer date, change in value through profit or loss. - From PPE → into investment property: apply IAS 16 up to the transfer date (record depreciation/impairment as usual through that date), then revalue per IAS 16's revaluation model, regardless of whether the enterprise had been using the cost or revaluation model for that property beforehand. The revalued amount becomes the new investment-property cost basis.

The common thread: all transfers end up recorded at fair value on the transfer date, the interesting part is how the pre-transfer gain/loss is treated, which depends on the direction and the prior accounting policy.

Illustration 1, transfer OUT of investment property (fair value model) into PPE. Continuing Arbutus Homes: suppose the property was initially classified as investment property (fair value model), and at the start of 20X3 management decides it'll now be used operationally (reclassify to PPE):

Exhibit 10-21: Transfer out of investment property into PPE

Dr. PPE—Laurel Street building              10,980,000
    Cr. Investment property—building                 10,980,000
Dr. PPE—Laurel Street land                   9,500,000
    Cr. Investment property—land                      9,500,000

Straightforward, just relabel at the existing (already fair-value-based) carrying amount, since no revaluation trigger applies to an outward transfer beyond what fair-value-model accounting had already captured.

Illustration 2, transfer INTO investment property, property was carried at COST as PPE. Suppose instead Arbutus Homes initially classified Laurel Street as PPE (cost model), reclassified it as investment property at the start of 20X3, then sold it later that year for $22 million ($12M building + $10M land allocation).

Exhibit 10-22: Transfer from PPE (cost model) into investment property, then sale

Step 1, revalue to fair value at the transfer date (per IAS 16's revaluation rules, since this is a PPE-to-investment-property transfer):

Dr. PPE—building                    180,000
    Cr. Revaluation reserve—building (OCI)      180,000
Dr. PPE—land                      1,500,000
    Cr. Revaluation reserve—land (OCI)         1,500,000

Step 2, record the reclassification:

Dr. Investment property—building          10,980,000
Dr. Accumulated depreciation—building       1,200,000
    Cr. PPE—building                                 12,180,000
Dr. Investment property—land                9,500,000
    Cr. PPE—land                                      9,500,000

Step 3, record the eventual sale for $22 million:

Dr. Cash                                   22,000,000
    Cr. Investment property—building                 10,980,000
    Cr. Investment property—land                       9,500,000
    Cr. Gain on sale of investment property             1,520,000
Dr. Revaluation reserve—building (AOCI)        180,000
Dr. Revaluation reserve—land (AOCI)          1,500,000
    Cr. Retained earnings                              1,680,000

The critical final entry: the revaluation reserves created at the transfer moment get moved straight to retained earnings, bypassing profit or loss entirely ("not recycled through income", direct callback to Chapter 3's OCI recycling concept, except here it's explicitly a non-recycling case).

Illustration 3, same transfer, but the PPE had been carried under the revaluation model (not cost) beforehand:

Exhibit 10-23: Transfer from PPE (revaluation model) into investment property, then sale

Step 1: No entry needed, the transfer happens at the start of the year, and the asset was already revalued as of the prior year-end.

Step 2, record reclassification:

Dr. Investment property—building        10,980,000
    Cr. PPE—building                              10,980,000
Dr. Investment property—land              9,500,000
    Cr. PPE—land                                   9,500,000

Step 3, record the sale for $22 million:

Dr. Cash                                  22,000,000
    Cr. Investment property—building                10,980,000
    Cr. Investment property—land                      9,500,000
    Cr. Gain on sale of investment property            1,520,000
Dr. Revaluation reserve—building (AOCI)       200,000
Dr. Revaluation reserve—land (AOCI)         1,500,000
    Cr. Retained earnings                             1,700,000

Compare the building's revaluation reserve transferred to retained earnings: $200,000 here vs. $180,000 in Exhibit 10-22. The $20,000 difference exists because the revaluation model (Exhibit 10-23) had been charging higher depreciation ($620,000 in 20X2, per Exhibit 10-19's revaluation-model row) than the cost model (Exhibit 10-22, $600,000/year flat), that extra $20,000 of depreciation expense had already reduced retained earnings while the property was still classified as PPE, so the larger $200,000 revaluation-reserve transfer at sale exactly compensates for that additional depreciation charge taken earlier. Nothing is lost or gained overall, it's purely a timing/bookkeeping reconciliation.

Part D: Agriculture

(LO 10-4, second half)

Why agriculture gets its own standard (IAS 41 / ASPE Section 3041): two unique features. First, agriculture involves constant cycles of change (growth, degeneration/decay, reproduction) that need active management (nutrients, water, etc.) and measurement of quantity/quality changes. Second, historical cost is almost meaningless for biological items, your text's example: the cost of seedlings is a tiny fraction of a mature apple tree's value. So IAS 41 generally requires fair value for biological items.

1. Definition and scope

Agricultural activity: the management by an entity of the biological transformation of biological assets for sale, or for conversion into agricultural produce or additional biological assets.

Two parts of this definition matter: - Active management is required, this includes fish farming and tree plantations, but excludes fishing the open ocean or logging unmanaged forests (no "management" of a biological transformation process is occurring in those cases). - Scope extends only to the point of harvest, not beyond. Post-harvest processing is covered by other standards (inventories: IAS 2; revenue: IFRS 15, referenced in your text as IAS 18 which was its predecessor).

Exhibit 10-24 reconstructed: Scope of IAS 41

Applicable standards:  ◄────── IAS 41 Agriculture ──────►│◄── Other standards (e.g., IAS 2) ──►

Activities:            ◄──────── Agricultural activities ────────►│◄── Non-agricultural activities ──►

                    Reproduction ──╮
                                    ├──► Growth/Degeneration ──► Harvest ──► Post-harvest processing ──► End of processing
                    Acquire         │
                    biological ─────╯
                    asset

Relevant assets:      Biological assets    │    Agricultural produce    │    Processed products
Examples:             Vines, dairy cattle, │    Grapes, milk, logs      │    Juice, jelly, wine,
                       trees                │                            │    yogurt, cheese, lumber, paper

Biological asset: a living animal or plant. Agricultural produce: the harvested product of biological assets.

2. Accounting for biological assets and agricultural produce

Unlike the general recognition criteria for other assets (which reference only cost), IAS 41 ¶10 brings in fair value explicitly at the recognition stage:

¶10 An entity shall recognize a biological asset or agricultural produce when, and only when: (a) the entity controls the asset as a result of past events; (b) it is probable that future economic benefits associated with the asset will flow to the entity; and (c) the fair value or cost of the asset can be measured reliably.

Compare condition (c) to PPE's (Chapter 8) and intangible assets' (Chapter 9) equivalent condition: "the cost of the asset can be measured reliably." Agriculture is the first (and only) asset category in your course where fair value is written directly into the recognition criterion itself, not just as a later measurement choice.

a. Agricultural produce: at harvest, estimate fair value less point-of-sale costs, that net figure is what gets recorded.

b. Biological assets: measured at fair value less point-of-sale costs both at initial recognition and every subsequent balance sheet date. The only exception: an enterprise can use cost (less depreciation) instead, but only if it demonstrates it cannot reliably measure fair value, meaning there's a presumption in favour of fair value, and the enterprise bears the burden of proof to rebut it. Critically: this exception can only be elected at initial recognition, you can't start with fair value and later switch to cost claiming unreliability. (The reverse is allowed: start at cost due to unreliability, later switch to fair value once it becomes reliably measurable.)

Bearer plants, a genuinely tricky case, explained with your text's own example. Contrast a dairy cow (easy to transport, sell, and price, reliable fair value) against a mature fruit-bearing tree (you cannot uproot it without destroying its roots, its value is literally "attached to the land," and you'd only get a reliable fair value if the whole farm/land were sold, not the tree alone).

Bearer plant: a biological asset used only to grow agricultural produce over multiple periods, and which is itself unlikely to ever be sold as agricultural produce.

Because farmers genuinely couldn't obtain reliable fair values for bearer plants in practice, the IASB amended IAS 41 in 2014 (effective January 1, 2014) to exclude bearer plants from the fair value requirement entirely, they're now accounted for like ordinary PPE instead.

c. Gains and losses. All fair-value-driven gains/losses go through profit or loss, not OCI (again, the specialized-standard pattern from Part 0's map), because they arise from the enterprise's normal operating activities. Examples straight from your text: newborn chicks/lambs/calves → likely gains; a banana plantation hit by Panama disease (a fungus) → likely a loss.

Exhibit 10-25: Real example: Andrew Peller Limited (Canadian winery, ticker ADW-A, Canadian Securities Exchange)

Fiscal year ended March 31, 2023 (figures in $000s):

Note 2 accounting policy excerpts: "The consolidated financial statements have been prepared under the historical cost convention, except for derivatives, which are measured at fair value, and biological assets, which are measured at fair value less costs to sell." Cost of goods sold "includes the cost of finished goods inventories sold during the year, inventory writedowns, and revaluations of agricultural produce to fair value less costs to sell at the point of harvest." Inventories use weighted average cost (calculated separately by import wine, domestic wine, and spirits, by varietal and vintage year) at the lower of cost and net realizable value (this is the ordinary IAS 2 inventory rule from Chapter 6, applied to harvested grapes once they've become inventory). Grapes grown on Company-controlled vineyards, once part of inventory, are measured at fair value less costs to sell at the point of harvest. Biological assets specifically (unharvested grapes) are measured at fair value, "which approximates cost as there has been minimal biological transformation since the initial cost incurred." At harvest, fair value is determined "by reference to local market prices for grapes of a similar quality and the same varietal." Gains/losses from fair value changes are recognized in the income statement in the period they arise.

Note 6, biological assets roll-forward:

Andrew Peller harvested $7,082 thousand of grapes in 2023 (2022: $8,666 thousand).

A subtlety worth noting: Andrew Peller classifies only unharvested grapes as "biological assets." Separately, its PP&E note discloses $31.1 million in "vines, vineyard land, and infrastructure" at March 31, 2023, carried at cost less accumulated amortization. This confirms Andrew Peller treats its vines themselves as bearer plants under IAS 16 (PPE), while only the grapes growing on those vines fall under IAS 41's fair-value regime. Same vineyard, two different standards for two different assets within it, exactly the bearer-plant distinction explained above, seen in a real annual report.

Focus on Data Analytics: Cluster Analysis for grape valuation

Determining a fair value for harvested grapes "by reference to local market prices for similar quality/varietal" sounds simple, but grape quality depends on a huge number of factors: climate, vine age, sugar content, yield control, harvest timing, rootstock, even soil type. Cluster analysis, a statistical technique for grouping similar objects by shared characteristics, helps here: feed in the quality-defining characteristics of grapes currently for sale in the market, and the analysis identifies which market grapes most closely resemble your own, giving you a defensible basis for the fair value estimate. Tools mentioned: Alteryx, or (for more flexibility) Python or R.

Part E: Non-Current Assets Held for Sale and Discontinued Operations

(LO 10-5)

Non-current assets are, by definition, meant to be held more than one year, but sometimes an enterprise decides to sell one before that year is up. IFRS 5 governs the transition period.

¶6 An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.

Disposal group: a group of assets and liabilities to be disposed of together in a single transaction (e.g., an entire subsidiary a company plans to sell, which would typically bundle both current and non-current assets and liabilities).

Two conditions must both be met: the asset must be available for immediate sale, AND expected to sell within one year of being classified as held for sale. If genuinely available for sale but market conditions mean a sale can't realistically be expected within a year, it stays classified as an ordinary (held-for-use) non-current asset.

Practically: this is essentially an impairment test using only the fair-value-less-cost-to-sell leg of the recoverable amount (never value in use), because continued use for its own sake isn't the plan. If impaired, the loss flows through net income or OCI following exactly the same cost-model/revaluation-model rules from Part B.

A genuinely debated wrinkle: depreciation/amortization stops entirely once an asset is classified held for sale. Arguments for: expected holding period is short (so the amount would be small anyway), and any real value decline from continued use just shows up later as a smaller gain/larger loss on the eventual sale. Argument against (your text explicitly flags this as "controversial"): not recording depreciation is inconsistent with the genuine decline in productive capacity that continued use causes.

Discontinued operations

Component of an entity: operations/cash flows clearly distinguishable (operationally and for reporting) from the rest of the entity, at least one CGU or combination of CGUs (e.g., a subsidiary or product division). Discontinued operations: a component that's been disposed of, or is classified held for sale, and (i) represents a separate major line of business or geographic area, or (ii) is part of a single coordinated disposal plan for such a line/area, or (iii) is a subsidiary acquired exclusively with a view to resale.

Required presentation/disclosure (since discontinued operations can be a significant chunk of total operations, and readers need to separate "what continues" from "what's going away" for forecasting purposes):

1. A single after-tax amount on the statement of comprehensive income = net profit/loss from discontinued operations + gain/loss on disposal (if sold) or from impairment (if not yet sold).
2. Disaggregate that single amount (face of statement or notes) into six components: revenue; expenses; pre-tax profit; income tax expense; gain/loss on disposal or impairment; income tax on that gain/loss.
3. Disclose operating, investing, and financing cash flows of the discontinued operations (statement or notes).

Simplified exception: if a subsidiary was acquired specifically with the intent to resell it, its results would never have been part of "continuing operations" anyway, so IFRS 5 allows just the single after-tax amount from (1), skipping the detailed disaggregation in (2)/(3).

Exhibit 10-26: Real example: Rio Tinto PLC (2010 annual report)

Rio Tinto (British-Australian mining company) purchased Alcan Inc. (Canadian aluminum producer) in 2007.

Balance sheet excerpt (current assets, millions USD):

Income statement excerpt (millions USD):

Earnings per share (basic, USD):

Diluted EPS:

Note 19 (assets held for sale): at Dec. 31, 2010, held-for-sale assets/liabilities comprised Alcan's Engineered Products group (AEP), excluding the Cable Division, following an August 5, 2010 binding offer from Apollo Global Management and the Fonds Stratégique d'Investissement (FSI) to buy a 61% stake in AEP (excluding Cable). The divestment completed January 4, 2011. Terms were confidential.

Part F: Practical Illustration: Canadian Tire Corporation

Excerpts from Canadian Tire's 2022 financial statements, showing this chapter's standards applied in practice:

Part G: Substantive Differences: IFRS vs. ASPE

Part H: Summary by Learning Objective

LO 10-1: Apply the revaluation model: IFRS allows choosing the revaluation model over cost for non-current assets with sufficiently reliable fair values. Depreciable assets use either the proportional or elimination method to handle accumulated depreciation; subsequent depreciation changes prospectively. Equity effects are asymmetric: positive cumulative adjustments → revaluation surplus (OCI); negative cumulative adjustments → profit or loss.

LO 10-2: Evaluate impairment testing needs/extent: search annually for impairment indications; test annually for goodwill/indefinite-life intangibles regardless of indications. Group interdependent-cash-flow assets into CGUs. An asset/CGU is impaired if carrying amount exceeds recoverable amount (higher of fair value less cost to sell, and value in use). Impairment = carrying amount − recoverable amount.

LO 10-3: Account for impairment: allocate a CGU's impairment loss proportionally by carrying value, except where allocation would push an asset's carrying amount below its own recoverable amount. Record the loss through income statement/retained earnings, unless a revaluation surplus exists (then through OCI to reduce that surplus first).

LO 10-4: Investment property and agriculture: investment property = held for rental income or capital appreciation; measured at cost or fair value (choice applies to all investment property); fair value model requires annual estimates, no depreciation. Transfer rules mitigate earnings management opportunities. Agricultural activities include acquisition, growth, reproduction, and production through harvest (not subsequent processing). Agricultural produce and biological assets measured at fair value less point-of-sale costs, except where fair value can't be reliably measured (cost model instead), once fair value is used, it continues to be used.

LO 10-5: Held for sale/discontinued operations: classify as held for sale if available for sale and expected to sell within one year. Test for impairment using fair value less cost to sell as the recoverable amount (not value in use). Enterprises disposing of (or planning to dispose of) a component of the entity must separately present/disclose discontinued operations' results.

Part I: Checkpoint Questions and Answers

CP10-1: Elimination method (resets accumulated depreciation to zero) vs. proportional method (adjusts gross carrying amount and accumulated depreciation by the same percentage).

CP10-2: Through net income when "under water" (cumulative revaluations below zero); through OCI when "above water" (cumulative revaluations above zero).

CP10-3: Indefinite-life intangibles and goodwill: annually. All other assets: when there are indications of impairment.

CP10-4: Fair value less cost to sell, and value in use.

CP10-5: (i) Fair value model needs annual estimates, revaluation model can be less frequent; (ii) fair value model always through net income, revaluation model through OCI or net income depending on cumulative history; (iii) fair value model requires no depreciation, revaluation model still requires it.

CP10-6: Account under IAS 16 up to the transfer date, then revalue per IAS 16; the revalued amount becomes the new investment-property cost basis under IAS 40.

CP10-7: Biological assets are alive (pre-harvest); agricultural produce has been harvested.

CP10-8: Fair value less point-of-sale costs, generally; cost only when fair value can't be reliably measured.

CP10-9: Recorded at the lower of carrying value and fair value less cost to sell, an impairment test excluding value in use, since management intends to sell rather than continue using the asset.

Additional Practice (supplementary, not from your textbook)

These two problems are my own construction, built for extra practice since this chapter has no PBL scenario available to you yet, clearly not textbook quotes or exhibits.

Practice Problem 1: Revaluation, both methods

Nakusp Industries owns equipment with gross carrying amount $200,000 and accumulated depreciation $50,000 (net carrying amount $150,000). A revaluation determines fair value is $180,000.

Work through both methods, then check below:

• Fair value exceeds net carrying amount by: ($180,000 ÷ $150,000) − 1 = 20%.
• Proportional method: gross carrying amount increases 20% → $200,000 × 1.20 = $240,000; accumulated depreciation increases 20% → $50,000 × 1.20 = $60,000; net = $240,000 − $60,000 = $180,000 ✓. Journal entry: Dr. Equipment $40,000 / Cr. Accum. dep. $10,000 / Cr. [P&L or OCI] $30,000.
• Elimination method: accumulated depreciation resets to $0; gross carrying amount = net carrying amount = $180,000. Journal entry: Cr. Equipment $20,000 (i.e., gross carrying amount actually decreases from $200,000 to $180,000) / Dr. Accum. dep. $50,000 / Cr. [P&L or OCI] $30,000.
• Check: both methods produce the same $30,000 net credit and the same $180,000 final net carrying amount, only the gross/accumulated-depreciation split differs, exactly as in the Quesnel Company example above.

Practice Problem 2: Impairment allocation with an unimpaired asset

A CGU contains two assets with net carrying amounts of $300,000 (Asset X) and $100,000 (Asset Y), total $400,000. The CGU's recoverable amount is determined to be $340,000, so there's a $60,000 impairment loss to allocate. Separately, it's known that Asset Y's own fair value less cost to sell is $95,000.

Work through the allocation, then check below:

• Initial proportional allocation: Asset X = 75% of $400,000 → 75% × $60,000 = $45,000 loss; Asset Y = 25% → 25% × $60,000 = $15,000 loss.
• Check Asset Y against its own known recoverable-amount information: post-allocation carrying amount would be $100,000 − $15,000 = $85,000, which is below its own fair-value-less-cost-to-sell of $95,000, this is not allowed (an asset's carrying amount shouldn't fall below its own individually-known recoverable amount).
• Corrected: cap Asset Y's loss at $100,000 − $95,000 = $5,000 (bringing it exactly to $95,000, no lower). The remaining $15,000 − $5,000 = $10,000 that would have gone to Asset Y must be reallocated entirely to Asset X (the only other asset in the CGU): Asset X's total loss = $45,000 + $10,000 = $55,000.
• Final check: Asset X carrying amount = $300,000 − $55,000 = $245,000; Asset Y = $100,000 − $5,000 = $95,000. Total = $245,000 + $95,000 = $340,000 ✓ (matches the CGU's recoverable amount exactly).

Executive Summary (One Page)

This chapter is about applying fair value to non-current assets in four distinct contexts, after two chapters (8 and 9) that used historical cost exclusively. The first context is the revaluation model (Part A), an optional alternative to the cost model for PPE and intangible assets, available only when fair value can be reliably measured (which rules out most intangibles in practice), applied consistently by asset class to prevent cherry-picking. Adjusting a depreciable asset's carrying value to fair value requires choosing between the proportional method (scaling gross cost and accumulated depreciation by the same percentage, preserving the asset's apparent age) and the elimination method (resetting accumulated depreciation to zero, making the asset look freshly purchased), neither is more "correct," and the choice is a matter of professional judgment. The offsetting equity entry follows an asymmetric rule best pictured graphically: cumulative gains for a specific asset accumulate in other comprehensive income as a revaluation surplus, while cumulative losses ("under water" assets) flow through net income, with any single year's adjustment potentially splitting between the two if it crosses the zero line. Depreciation is then recalculated prospectively based on the new carrying amount and remaining useful life.

The second context is impairment (Part B), which, unlike revaluation, is mandatory, reflecting the prudence/conservatism principle that assets shouldn't be overstated. The process runs through three stages: first defining cash generating units (the smallest asset groupings with largely independent cash flows) and determining whether a test is even required (automatic annually for goodwill and indefinite-life intangibles; otherwise only when specific indications of impairment exist); then comparing carrying value against the recoverable amount, defined as the higher of fair value less cost to sell and value in use, since management can always choose the better of selling versus continuing to use the asset; and finally recognizing any resulting loss, allocated proportionally across a CGU's assets except where doing so would push an individual asset below its own separately-known recoverable amount. Reversals of impairment are permitted under IFRS (capped at what the carrying amount would have been absent the original impairment) but never under ASPE, which also differs from IFRS in using undiscounted cash flows to test for impairment (while still using discounted fair value to measure the loss itself) and in never permitting the revaluation model at all. Beyond mechanical compliance, impairment plays real economic roles: communicating deteriorating conditions to users, supporting creditors' one-sided interest in asset-value declines under debt covenants, and, perhaps most practically, removing the psychological and reported-earnings barrier that might otherwise make management reluctant to dispose of an economically obsolete asset purely to avoid booking a large one-time accounting loss.

The remaining three contexts each apply fair value through a specialized, narrower standard, and in every one of them, unlike ordinary PPE revaluation, fair value changes flow exclusively through net income rather than ever touching OCI. Investment property (Part C) (land or buildings held for rental income or capital appreciation, distinct from owner-occupied PPE and from inventory) offers a similar cost-versus-fair-value choice, but transfers between these three classifications require a genuine change in use and follow specific rules designed to prevent earnings management through simple reclassification. Agriculture (Part D) is unique in writing fair value directly into the asset recognition criterion itself, reflecting the reality that historical cost bears almost no relationship to a living, biologically transforming asset's actual worth, with a carved-out exception for bearer plants (trees, vines) that cannot be reliably fair-valued separately from the land they're rooted in, and which are instead accounted for as ordinary PPE. Finally, non-current assets held for sale (Part E) are measured at the lower of carrying value and fair value less cost to sell (with value in use dropping out of consideration entirely, since continued use is no longer the plan), depreciation stops the moment the held-for-sale classification is met, and sufficiently significant disposals, components of the entity, trigger extensive separate presentation and disclosure as discontinued operations, so that financial statement users can distinguish what the business will keep doing from what it's leaving behind.

Key Takeaways

1. Revaluation is optional and requires reliably measurable fair value; impairment is mandatory regardless of which measurement model (cost or revaluation) an enterprise otherwise uses.
2. For depreciable assets under the revaluation model, the proportional method preserves the depreciation-to-cost ratio (implying "as if these prices existed at purchase"); the elimination method resets accumulated depreciation to zero (implying "as if newly purchased"), neither is inherently more correct.
3. Revaluation gains accumulate in OCI (revaluation surplus) only while the asset's cumulative revaluation history stays positive ("above water"); once "under water," further losses (and any recovery back toward zero) run through net income instead.
4. The recoverable amount in an impairment test is the higher of fair value less cost to sell and value in use, not the more conservative (lower) figure, because management can rationally choose whichever alternative (sell or continue using) is more favourable.
5. Goodwill and indefinite-life intangibles are tested for impairment every year automatically; everything else only when there's a specific indication of impairment.
6. Impairment losses within a cash generating unit are allocated proportionally by carrying value, except goodwill absorbs losses first, and no asset can be written down below its own individually-known recoverable amount (triggering reallocation of that shortfall to other assets in the CGU).
7. Impairment reversals are capped at what the carrying amount would have been had no impairment ever been recorded (not simply capped at the original loss amount), permitted under IFRS, never permitted under ASPE.
8. Investment property, and biological assets/agricultural produce, both route fair value changes exclusively through net income, never OCI, unlike the revaluation model for ordinary PPE and intangibles.
9. Transfers between PPE, inventory, and investment property require a genuine change in use and specific IFRS rules (not a discretionary reclassification), precisely to prevent earnings management via relabeling appreciated assets.
10. Bearer plants (trees, vines, used only to grow produce, not sellable as produce themselves) are excluded from IAS 41's fair value requirement and accounted for as ordinary PPE instead, since their value can't reliably be separated from the land.
11. Non-current assets held for sale are measured at the lower of carrying value and fair value less cost to sell (value in use is irrelevant here), and depreciation stops entirely once the held-for-sale classification criteria are met.
12. Discontinued operations require extensive separate disclosure (a single after-tax summary amount, a six-component disaggregation, and cash flow details) so users can distinguish continuing operations from what the business is exiting.

Common Misconceptions and Mistakes

• Assuming fair value changes always go through OCI. That's specific to the revaluation model for ordinary PPE/intangibles, and even then only for the "above water" portion. Investment property and agriculture fair value changes always go through net income, there's no OCI option in those specialized standards at all.
• Picking the lower (more conservative-sounding) of fair-value-less-cost-to-sell and value-in-use for the recoverable amount. It's the higher of the two, because management can choose the better alternative (sell vs. continue using).
• Assuming impairment reversal is capped simply at "the amount of the original loss." It's capped at what the carrying amount would have been absent the impairment, which requires recomputing what depreciation would have continued to be in the interim, not just adding back the original write-down dollar-for-dollar.
• Forgetting to check whether an individually-known recoverable amount for one asset in a CGU would be violated by simple proportional allocation. If it would be, that asset's loss is capped, and the shortfall must be reallocated to the other assets, don't stop at the first, simpler proportional calculation.
• Assuming the revaluation model and the fair value model (investment property) are the same thing. They overlap conceptually but differ in three concrete ways (frequency, income statement vs. OCI treatment, and whether depreciation is still required), see Checkpoint CP10-5.
• Believing a company can simply reclassify appreciated PPE as investment property to recognize a gain. IFRS requires a genuine change in use, precisely to block this kind of earnings management.
• Assuming trees, vines, and other perennial plants are always accounted for under IAS 41 at fair value. Since the 2014 amendment, bearer plants specifically are excluded from IAS 41 and accounted for like ordinary PPE, only the produce growing on them (grapes, fruit) stays under IAS 41.
• Assuming depreciation continues as normal until an asset actually sells. It stops the moment the asset meets the "held for sale" classification criteria, not on the sale date itself.
• Confusing "component of an entity" with any old asset sale. Discontinued-operations treatment only applies to disposals large/distinct enough to be a separate major line of business, geographic area, or a subsidiary bought purely for resale, not routine equipment sales.

Cheat Sheet

The four fair-value contexts in this chapter

Revaluation: proportional vs. elimination

Revaluation equity treatment (the "underwater" rule)

Cumulative revaluation adjustment > 0 ("above water")  →  further gains → OCI (revaluation surplus)
Cumulative revaluation adjustment < 0 ("under water")  →  further losses (or gains reversing losses) → net income
Crossing zero in one year → split: enough to reach zero → net income; remainder → OCI

Impairment test formula

Recoverable amount = higher of (Fair value − cost to sell) and (Value in use) Impairment loss = Carrying amount − Recoverable amount (only if carrying amount > recoverable amount)

Impairment testing frequency

Impairment loss allocation within a CGU

1. Goodwill absorbs the loss first.
2. Remaining loss allocated proportionally by net carrying amount.
3. Exception: no asset written down below its own known individual recoverable amount, reallocate any resulting shortfall to the other assets.

IAS 40 vs. IAS 16 quick comparison

IFRS vs. ASPE: impairment quick reference

Key terminology glossary

End of study guide. Since this chapter's source file was complete (no missing exhibits or checkpoints), there are no open content gaps to flag here.

Cross-Chapter Connections

• Chapter 8: Cost model baseline. Chapter 10 is built directly on top of Chapter 8. Revaluation, impairment, and post-revaluation depreciation all assume the cost model cold. This is the largest structural gap in your vault: Chapter 8 has no guide.
• Chapter 9: Goodwill and indefinite-life intangibles. Chapter 9 establishes which assets are tested annually; Chapter 10 supplies the mechanics, and the goodwill no-reversal carve-out.
• Chapter 3: OCI and recycling. Revaluation surplus is an OCI-fed equity reserve. The transfer-to-retained-earnings-without-recycling rule on disposal (Exhibit 10-22) is the deliberate counterpoint to Chapter 3's recycling discussion. Also: held-for-sale presentation and discontinued operations.
• Chapter 6: Lower of cost and NRV. LOCM and impairment share one logic: assets may not be carried above recoverable value. Different assets, same prudence principle.
• Chapter 4: Biological assets. Chapter 4's IFRS/ASPE table cross-references IAS 41, treated in full here.
• Chapter 2: Measurement bases. The four measurement bases reappear here as fair value, fair value less costs to sell, and value in use.

Common CPA Exam Traps

Key IFRS/ASPE Rules

Journal Entry / Calculation Walkthrough

Memory Anchors

Adversarial CPA Mini-Scenario

🎯 Key Takeaways for CPA Candidates

1. Recoverable amount is the HIGHER of fair value less costs to sell and value in use, because management can rationally choose the better alternative. Not the more conservative figure.
2. Revaluation adjustments are asymmetric and history-dependent: above water → OCI, under water → P&L, crossing zero → split at zero.
3. Goodwill impairment can never be reversed (IAS 36.124). ASPE prohibits all reversals.
4. The reversal cap is what carrying value would have been absent the impairment, a counterfactual schedule, not the original loss amount.
5. CGU allocation: goodwill absorbs first, then proportional by carrying amount, then check the IAS 36.105 floor (highest of FVLCD, value in use, and zero) and reallocate any blocked amount.
6. Goodwill and indefinite-life intangibles are tested annually regardless of indications; everything else only on indication, with an annual search for indications still mandatory.
7. Proportional and elimination methods produce the same net carrying amount; only the gross/accumulated-depreciation split differs. Neither is "correct", it is professional judgment.
8. Revaluation is optional; impairment is mandatory. ASPE permits neither the revaluation model nor reversals.
9. Specialized standards (IAS 40 investment property, IAS 41 agriculture) route all fair value changes through profit or loss, the OCI option disappears entirely.
10. Bearer plants are excluded from IAS 41 since the 2014 amendment and accounted for as PPE under IAS 16. Vines are PPE; grapes are biological assets.
11. Held-for-sale assets are measured at the lower of carrying amount and FVLCD, value in use drops out, and depreciation ceases at classification, not at sale.
12. Classification (PPE vs. investment property) changes presentation, volatility, and whether depreciation is recorded, but not the total equity effect (Arbutus Homes: $780,000 / $480,000 / $3,000,000 either way).

Retrieval Practice

Questions visible, answers hidden. Attempt each before expanding.

Source Fidelity & Obsidian QA