Accounting & Finance
Accounting for assets II
by Dr J Landström
Copyright © 2012 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 7e
Objectives of this lecture
• Know how to revalue an item of PP&E in
accordance with IAS 16
• Explain and account for upward revaluations to
fair value, as opposed to write-downs to
recoverable amount
• Account for revaluations that reverse previous
revaluation increments and decrements
• Account for accumulated depreciation when a
non-current depreciable asset is revalued
Introduction to revaluations
• Historical cost has been criticised for bearing
no relation to current asset values
• Companies may revalue many non-current
assets
• Asset revaluations
– A reassessment of the carrying amount of a noncurrent asset to fair value as at a particular date
– Excludes recoverable amount write-downs (i.e.
impairment losses)
Measuring PP&E at cost or fair value
• IAS 16 requires each class of PP&E to be
measured at either cost or fair value
– Examples of classes are land and buildings,
machinery and motor vehicles
• Entities may switch from fair value to cost for
justifiable reasons and provided adequate
disclosures are made (IAS 16)
Measuring PP&E at cost or fair value
• Where an entity changes from cost to fair value
(the ‘revaluation model’) for a class of noncurrent assets and there was a previous
impairment loss (IAS 16):
– any increase in an asset’s carrying amount is first
recognised as income; and
– any excess above the amount if no impairment loss
was recognised is transferred to a revaluation
surplus account
The use of fair values
• Revaluations of non-current assets must be to fair
value (IAS 16) defined as:
– the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between
market participants at the measurement date (IFRS 13).
• Fair value is determined on the assumption that
the entity is a going concern
• Revaluations must be made regularly so the
carrying amount does not materially differ from its
fair value
Revaluation increments
• General procedure (IAS 16)
Dr Asset
Cr Revaluation surplus
• The revaluation surplus is part of shareholders’
funds (owners’ equity)
Treatment of balances of accumulated
depreciation upon revaluation
• If a revalued asset is a depreciable asset, any balance of
accumulated depreciation is credited to the asset account
prior to revaluation (IAS 16)
• Journal entry (net-amount method)
– Part I:
Dr Accumulated depreciation—machine
Cr Machine
– Part II:
Dr Machine
Cr Revaluation surplus
• Subsequent depreciation is to be based on the revalued
amount of the asset
Revaluation of a depreciable asset
using the net-amount method
• As at 1 July 2014, Aniax Ltd has a machine
that originally cost £100,000 and has
accumulated depreciation of £60,000.
• Aniax decided on 1 July 2014 that the item
should be revalued to its fair value, which was
£110,000.
• What are the journal entries?
Revaluation decrements
• In line with the concept of conservatism, revaluation decrements
are recognised as an expense within profit or loss
• Contrast this with a revaluation increment wherein the increase in
the revaluation surplus is included in ‘other comprehensive
income’
• Journal entry (IAS 16)
– Part I (first net deprecation against asset actg):
Dr Accumulated depreciation
Cr Asset
– Part II (then proceed with further decrement to new level):
Cr Asset
Dr Loss on revaluation of asset
Revaluation decrement
• Refer to the previous example, except this time
the fair value of the machine (acquired for
£100,000 and having accumulated depreciation
of £60,000) is £20,000 rather than £110,000
• What are the journal entries?
Revaluation of a depreciable asset
using the net-amount method
• As at 1 July 2014, Aniax Ltd has a machine that originally
cost £100,000 and has accumulated depreciation of
£60,000 with another 5 years useful life.
• Aniax decided on 1 July 2014 that the item should be
revalued to its fair value, which was £110,000.
• Aniax decided on 1 July 2015 that the item should be
revalued to its fair value, which was £10,000.
• The company applies a straight line depreciation plan for
this asset class.
• The assets is not expected to have any residual value.
• What are the journal entries?
Reversal of revaluation
decrements and increments
• For an asset class, reversals of previous revaluations should
be recorded by the reverse of the initial revaluation entries
• If a revaluation decrement reverses a previous increment for
the same asset, then the entries are:
– Part I:
Dr Accumulated depreciation
Cr Asset
– Part II:
Cr Asset
Dr Revaluation surplus
Dr Loss on revaluation (the excess, if any)
Reversal of revaluation
decrements and increments
• If a revaluation increment reverses a previous
decrement for the same asset, then we
recognise a gain (in SOP&L) to the extent it
reverses the previous revaluation decrement.
• The general form of the journal entry would be:
Dr Asset
Cr Gain on revaluation
Cr Revaluation surplus (the excess if any)
Accounting for profit on disposal of a
revalued non-current asset
• When an asset is sold, any resulting balance in
the revaluation surplus (IAS 16):
– is transferred to retained earnings
– cannot be transferred to the profit or loss
Summary
• If the recoverable amount is below the carrying
amount, an impairment loss should be recorded
• For upwards revaluations:
– assets are to be revalued to fair value
– any increase is to be transferred to a revaluation
surplus (part of equity), unless it is a reversal
• For downwards revaluations:
– any decrease is to be treated as an expense, unless
it is a reversal
Summary
• When a revaluation increment is undertaken:
– any existing accumulated depreciation should be credited
against the non-current asset (if the net method is used), and
– the non-current asset should be increased by the amount of
the revaluation and it is treated as a revaluation surplus
• When a revaluation decrement is undertaken:
– any existing accumulated depreciation should be credited
against the non-current asset (if the net method is used), and
– the non-current asset should be decreased by the amount of
the revaluation and it is treated as a loss