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Terms in this set (21)

An asset impairment and asset revaluation are two very similar adjustments, with subtle differences. Both require the evaluation of the asset for their fair value, and then take appropriate action in updating their ledgers.

The major difference between the two is that a revaluation can be made upwards to increase the value of the asset to market value, or downwards to decrease the value.
An impairment, on the other hand, only refers to a fall in the market value.

Another difference between the two is the event which triggers the adjustment.
An asset revaluation can happen at any point, usually when the directors feel that the carrying value of the asset is significantly lower than their fair value, and want to reflect that fair value on the Statement of Financial Position.
Typically a revaluation would increase the carrying value initially, although in subsequent years the value may reduce, resulting in a downward revaluation.

An asset impairment is unique, in that at the end of each reporting date, an entity should assess whether there is any indication that an asset may be impaired. If such indications exist, the recoverable amount should be estimated, i.e. an impairment review should be carried out. If no such indications exist, it is not necessary to carry out an impairment review.
Typical indicators that an asset has been impaired would include a decline in market value, technological, legal or economic changes, physical damage or plans to dispose of the asset.

If an entity revalue a property in accordance with IAS 16 Property, plant and equipment (IAS 16), the impact of the associated accounting entries is to state the asset account at the revalued amount, eliminate the accumulated depreciation to date relating to the property, and increase or decrease the revaluation surplus within equity in the statement of financial position.
If Acellerate choose to revalue it is not necessary for the property to be revalued every year, and for that revaluation to be incorporated into the financial statements.
However, it is important that the information in the financial statements is reliable and relevant for users of financial information. Therefore, the revaluation must be performed with sufficient frequency that the information relating to the property is relevant and reliable to users. It may be suggested that, the more volatile the property valuation, the more frequently it should be subject
to incorporating that valuation in the financial statements.
If the property subsequently falls in value, then this should be accounted for in the financial statements. The fall in value should first be set against the revaluation surplus relating to that property, with any excess fall in value written off as an expense in the statement of profit or loss.
As there would then be a change in the carrying amount of the property, the annual depreciation charge must be recalculated based upon the remaining estimated life of the property at that point in time.

If Acellerate choose to conduct an impairment review, and the recession is deemed to have impaired the carrying value of the property, then this would be accounted for as a one off.
Subsequently, Acellerate would still have to conduct their normal annual impairment reviews, but would not be bound to impair the value with any regularity, only where there were future indications of further impairment
Initial Measurement
The contract you have outlined is likely to fall within the definition of a lease for the purposes of IFRS 16 since it permits us to use an asset in exchange for
payment going forward. As such, we would recognise a lease liability in our statement of financial position at the present value of the payments that have not yet been made, in this case, E$5.5m. In this case, there are no residual value guarantees or purchase options, so we do not need to consider these matters further.
If the first payment of rent is to be made at the inception of the lease, this would be deducted from the E$5.5 on initial recognition.

We would also recognise a right-of-use asset in our statement of financial position. In our case, this would include the E$5.5m present value of the lease payments, plus any initial direct costs and the costs of restoring the site to its initial state at the end of the lease.
In this case, the lease term is 20 years with no options to cancel or renew. The lease term on which the present value calculation should be based is, therefore,
the nominal 20 years.

Subsequent Measurement
The lease liability will be increased at the implicit interest rate in the lease. The interest charge will be expensed to the statement of profit & loss. The lease liability will be decreased by the payments made under the lease and recorded at the new value (after both the interest increase and payment decrease adjustments) in the statement of financial position. The lease liability will be reflected in both current liabilities to the extent that it is payable within one year and non-current liabilities in relation to subsequent years.

The right-of-use asset declines in value over the life of the lease, reflecting the fact that we will have the use of it for a shorter period. We would record it in
the statement of financial position at its amortised value. Depreciation will be calculated over the shorter of the useful life or the term of the lease. In this instance, I would expect that to be the 20 years of the lease. We would therefore reduce the value of the asset straight line over 20 years, or E$275k p.a. In the event that there is any impairment loss during the life of the lease, this would also be deducted from the right of use asset.
In accordance with IAS 16 Property, Plant and Equipment an asset should be recognised as an asset when:
- it is probable that future economic benefits will flow to the entity and
- the cost of the asset can be measured reliably

Initial Measurement
Applying IAS 16 Property Plant and Equipment, the site would be recorded at cost in the statement of financial position, including any costs incurred to bring it into a workable condition. Given that the site is considered to have an indefinite useful life, this implies that the site currently has no buildings on it. The treatment of any structures we erect would need to be considered separately, but in general, buildings would be capitalised and depreciated over their useful life.
The costs of establishing the shuttle service and the running costs thereof would not be recognised as a part of the cost of the larger 10,000 sqm. the site, since they do not relate directly to the asset.

Subsequent Measurement
IAS 16 requires that we apply either the cost model or the revaluation model. The choice between these methods is our option, but we will be required to apply that choice consistently to assets of the same class. If we have already made an election between these models on other land assets, then we would follow that election.
The cost model would generally require no ongoing entries in relation to the land since it has an indefinite useful life and there is, therefore, no depreciation.
The revaluation model would require us to revalue the property periodically and record the asset at its fair value.
In both models, if there are impairment losses in the future, we would be required to write down the asset accordingly. The asset would be held at cost less impairment losses under the cost model, or fair value less impairment losses under the revaluation model.
The most immediate and obvious method of financing our short-term costs is through using our cash balance. We had a sharp drop in our cash balance between 2019 and 2020 (-25%) and thus it may not be fully appropriate to use our cash balance for all of the short-term costs that will be incurred as part of this expansion. However, one advantage associated with this type of financing is that carries no interest cost and requires no action in regard to managing receivables or payables.
Another method of financing these costs would be to collect any receivables balances that we have due on our commercial credit facility. I am aware that Acellerate offers commercial customers a credit facility and it may be possible to call in some of that debt if it is overdue. It may even be possible to offer an early settlement discount to our commercial customers, as long as that early settlement discount is lower than the interest rate on overdrafts.
Finally, we could increase our cash reserves immediately by engaging the services of a factoring company. There are two different types of factoring - With recourse, under which, the factor does not take the risk of bad debts and without recourse, under which, the factor does take the risk of bad debts. Engaging in a factor could release some cash immediately as factors provide a percentage of the value of a credit sale immediately and then provide the remainder (minus a charge) at a later date. This may be a way to get some immediate cash to service some of the costs associated with the proposal. Whilst factoring is a great way to raise short-term financing, it is also quite expensive and may be unnecessary if our existing cash balance already covers the shorter-term costs associated with the expansion.
One non-financial consideration that we should make in regards to this decision is whether our maintenance and sales staff would require additional training if we were to choose the electric fleet. We already offer some electric vehicles, but perhaps these new electrical vehicles may be more complex and could require our maintenance staff, in particular, to go on training courses to learn how these cars are configured. In addition, our sales staff may require training and a debrief on the benefits of these cars such that they will be able to answer any customer queries in relation to these cars and use the "green" credentials of these vehicles to help increase sales.

The environmental impact of our decision also needs to be considered. The direction of travel in patterns of consumer behaviour is generally towards "greener" alternatives. This is likely to be especially true among our younger customers, who may generally be more environmentally conscious. Electric vehicles, therefore, offer us the chance to position Acellerate as a brand committed to reducing adverse impacts on the environment. This is likely to stand us in good stead for the future as today's young customers mature into frequent business users. Electric vehicles generally come from newer, more 'tech savvy' manufacturers. We may find that such manufacturers are leading the charge towards connected technology. Therefore, increasing the electric proportion of our fleet will help ensure our connected-car technologies are leading the rental market.
Tax depreciation allowances are available on items of plant and machinery (including cars used for business purposes) at a rate of 25% per year on a reducing balance basis. A full year's allowance is available in the year of purchase.
At the moment, we are able to claim a capital allowance of 25% on a reducing balance basis. The government's proposal would mean that we would be able to use the full cost of the fleet as a tax-deductible expense. If we are to purchase the electrical fleet per your attached schedule, it would cost us E$29.6 million. If the government provide 100% allowances, this will give us a tax deduction of E$29.6 million in 2021 or whichever year we decide to make this purchase. This is far more than the current capital allowance, which would grant us a tax-deductible expense of E$7.4 million in Year 1. Given that our business model is to generally keep cars for less than one year, the new tax allowances could be an incentive for Acellerate to pursue the electrical car option.
This being said, it is important to note that the new incentives may be somewhat irrelevant to Acellerate if the company fails to make a profit in 2021. Our financial performance in 2020 was such that we made a loss. As a result of making a loss, we would not have made any tax payments, and thus if we make a loss again in 2021, these tax deductions will not be as relevant.
In addition, I would assume that the government is allowing the tax deductions for electric vehicles to be claimed entirely in the first year of purchase. This means that it might make more sense for Acellerate to replace electric vehicles annually rather than keeping them for a four year period. The government may institute rules around this, however, so we should carefully examine any instruction on this new capital allowance.