Only up to where you would have been

Two years on, the price recovers

Cobalt Ridge impaired its crusher by 120,000 to a carrying amount of 380,000 and re-based depreciation to 76,000 a year. Two years later the carrying amount is:

$$380,000-2\times 76,000=228,000$$

Ore prices have recovered — the external indicator that caused the impairment has reversed — and management's new estimate of the recoverable amount is $420,000. IAS 36 requires the reversal of an earlier impairment loss when the estimates used to determine the recoverable amount have changed. But not all the way.

The cap

Ask what the carrying amount would have been had no impairment ever been recorded. From 500,000 with five years left, depreciation would have run at 100,000 a year:

$$500,000-2\times 100,000=300,000$$

A reversal may raise the carrying amount to the lower of the recoverable amount and that never-impaired figure. Here 300,000 is the lower, so the maximum reversal is:

$$\text{Reversal}=\min (420,000,300,000)-228,000=72,000$$

not 420,000 − 228,000 = 192,000. The extra 120,000 the CFO would like to book is not a reversal of anything: it would carry the crusher above the amount depreciation alone would have produced, which is a revaluation — and revaluations are a different model, with their gains in OCI, that this company does not use. A reversal restores; it does not revalue.

Dr Accumulated Depreciation—Crusher        72,000
    Cr Reversal of Impairment Loss                 72,000

The credit is income in profit or loss — the mirror of the impairment loss — and it reverses through the same account the loss went to, accumulated depreciation, which falls from 572,000 to 500,000 so the carrying amount is 800,000 − 500,000 = 300,000.

When the cap does not bind

Suppose the recoverable amount had recovered only to $260,000. Then min(260,000, 300,000) = 260,000, and the reversal is 260,000 − 228,000 = 32,000. The cap is always computed, but it only bites when the recoverable amount has climbed above the never-impaired line.

Depreciation is re-based again

After the 72,000 reversal the carrying amount is 300,000 with three years of life left: depreciation returns to 300,000 ÷ 3 = 100,000 a year — the original rate, which is what "back to where you would have been" means. After a 32,000 reversal it would be 260,000 ÷ 3 ≈ 86,667.

Two things that never reverse

Goodwill impairment is never reversed under IAS 36 — a later rise is presumed to be internally generated goodwill, which is not recognised. And under ASPE no PP&E impairment is reversed at all (L3.6). Both are favourite distractors: the reversal rule is IFRS-only, and PP&E-and-intangibles-only.