What are the key depreciation methods and how do impairment and revaluation differ?
I'm reviewing long-lived assets for CFA Level I. I know there's straight-line, declining balance, and units-of-production, but when does impairment come in? And the revaluation model under IFRS confuses me -- how is it different from impairment?
Long-lived assets is a dense topic, but it breaks down cleanly into three areas: depreciation, impairment, and revaluation.
Depreciation Methods
Consider a delivery truck purchased by Cascade Logistics for $120,000 with a $20,000 salvage value and a 5-year useful life.
| Method | Year 1 Expense | Formula |
|---|---|---|
| Straight-line | $20,000 | ($120K - $20K) / 5 |
| Double-declining | $48,000 | 2/5 x $120K (ignores salvage initially) |
| Units-of-production | Varies | (Actual units / Total units) x $100K |
Impairment (Both IFRS and US GAAP)
An asset is impaired when its carrying value exceeds its recoverable amount. But the test differs:
- US GAAP (Two-step): First, compare carrying value to undiscounted future cash flows (recoverability test). If carrying value is higher, then write down to fair value.
- IFRS (One-step): Compare carrying value to the higher of fair value less costs of disposal and value in use (present value of future cash flows). Write down if carrying value exceeds this recoverable amount.
Crucial difference: Under IFRS, impairment losses on assets (except goodwill) can be reversed if conditions improve. Under US GAAP, impairment reversals are prohibited.
Revaluation Model (IFRS Only)
Under IFRS, companies can elect to carry long-lived assets at fair value instead of historical cost less depreciation. Increases in value go to revaluation surplus in OCI (equity), while decreases go through the income statement -- unless they reverse a prior surplus.
Quick Exam Decision Tree:
| Situation | Treatment |
|---|---|
| Fair value drops below cost | Impairment loss on income statement |
| Fair value rises above cost (IFRS) | Revaluation surplus in OCI |
| Fair value rises above cost (US GAAP) | Not allowed -- cost model only |
| Prior impairment reverses (IFRS) | Reversal through income statement |
| Prior impairment reverses (US GAAP) | No reversal permitted |
For more on IFRS vs GAAP differences in long-lived assets, check our CFA Level I course materials.
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