Question

Panther Ltd acquired a plant on January 1, 2020 at a cost of $100 million. The plant has a 10-year life, 20 million residual value, and it is depreciated on a straight-line basis. On January 1, 2023, Panther determines the fair value of the asset (net of any accumulated depreciation) to be $130 million.

Required:

1. Determine the impact the plant has on Panther’s income in Years 2020-2024 using (a) IFRS, assuming that the revaluation model is used for measurement subsequent to initial recognition, and (b) U.S. GAAP.

2. Summarize the difference in income, total assets, and equity using the two different sets of accounting standards over the period 2020-2024.

Answer 1

SOLUTION :

1.

Both under IFRS and US GAAP, the income impact is such that there will be a reduction due to depreciation. The effect is quantified as follows :

Under IFRS

For the year ended 31/12/2020 :

(100 - 20) / 10 = $ 8 million

This amount will reduce the net income to that extent. Journal entry will be (All amounts are in millions) :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2020	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2021 :

The same as above is applicable since under straight line basis, amount of depreciation does not change.

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2021	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2022 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2022	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2023 :

The asset was revalued on 01/01/2023 at $ 130 million net of accumulated depreciation. To understand the impact of this, we should first understand the written down value (WDV) of the asset on that date. It will be:

100 - (8 X 3 years) = $ 76 million

The value of an asset appearing at books at $ 76 million was calculated as $ 130 million. Revaluation surplus will be therefore $ 54 million (130 - 76). Under IFRS, this will be trasferred to Revaluation Reserve Account and will be part of Other Comprehensive Income (OCI). OCI itself is an item under equity and it will not impact the net profit or loss for the period. Journal entry will be :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2023	Plant	54
	To Revaluation Reserve		54

This will make the plant now (on 31/12/2023) stand at a value of $ 130 million. It is this revalued asset we are going to depreciate hereafter over its remaining useful life. Therefore amount of depreciation for 2023 and 2024 are :

(130 - 20) / 7 years = $ 15 million (rounded). Journal entry will be :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2023	Retained Earnings	15
	To Accumulated Depreciation		15

For the year ended 31/12/2024 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2024	Retained Earnings	15
	To Accumulated Depreciation		15

Total impact on net income over the periods 2020 - 2024 under IFRS will be $ 54 million (8 + 8 + 8 + 15 + 15).

Under US GAAP :

A significant difference between IFRS and US GAAP is that US GAAP doesn't allow revaluation on plant assets. Therefore the depreciation once calculated under straight line method, can be applied as the same throughout the asset's useful life. Therefore impact on net income would be :

For the year ended 31/12/2020 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2020	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2021 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2021	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2022 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2022	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2023 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2023	Retained Earnings	8
	To Accumulated Depreciation		8

For the year ended 31/12/2024 :

Date	Account Titles & Explanation	Debit $	Credit $
31/12/2024	Retained Earnings	8
	To Accumulated Depreciation		8

Total impact on net income over the periods 2020 - 2024 under US GAAP will be $ 40 million (8 + 8 + 8 + 8 + 8).

2.

Summary of differences in impact on income, total assets and equity using two different sets of accounting standards over the period 2020 - 2024. Since the question is specific on "total" assets, impact of accumulated depreciation on plan has not been considered. Assets are therefore at gross figures.

IFRS:

Year	Income	Total Assets	Equity
2020	-8	100	0
2021	-8	100	0
2022	-8	100	0
2023	-15	130	24
2024	-15	130	0

US GAAP:

Year	Income	Total Assets	Equity
2020	-8	100	0
2021	-8	100	0
2022	-8	100	0
2023	-8	100	0
2024	-8	100	0

NOTE:

Under IFRS, if the increase in revaluation reserve reverses a revaluation decrease for the same asset that had been previously charged to retained earnings, then such increase should be first credited to retained earnings to the extent of previous loss and balance alone shall be transferred to OCI.