Question

1) Total marks: 10 marks

Mr Howe a junior partner of CPA fir, Dewey, CHeatem and Howe (DCH) is very excited about the opprtunities created by fair value relvaluation of non current assets. hr believes that there is an enormous opportunities for large firms to increase their book profits via the gains from such revaluations.

Required:

Mr Tu Dewie has asked you to review the AASB rules on the fair market revaluation of non current assets and to assess what profit enhancing opportunities may arise because of those rules.

Answer 1

Overview:

As per the AASB rules on the fair market revaluation of non current assets, Non current assets are recognised in books of accounts on the basis of the following two recognition criteria:

• Initial recognition criteria
• Subsequent recognition criteria

After meeting the initial recognition criteria, the following two models are used to measure the asset subsequently:

i) Cost Model: As per Cost Model, non-current assets shall be carried at cost after subtracting accumulated depreciation and accumulated impairment losses. Therefore, according to the cost model, only impairment losses,i.e. only downward revaluation can be recorded.

ii) Revaluation Model: As per the Revaluation Model, every non-current asset whose fair value can be estimated precisely should be recorded at the fair value as on the date of revaluation after deducting subsequent depreciation as well as impairment losses. Thus, Revaluation model allows both upward and downward revaluationn.

- If the carrying amount of the non-current asset is increased as a result of upward revaluation, the increase is recorded under the head 'Revaluation Surplus' under Equity main head. If revaluation loss (pertaining to the same asset) was previously recognised in profit or loss due to downward revaluation, then first the amount of upward revaluation will first be taken to profit or loss to the extent of such loss recorded previously, and the balance shall be carried to the 'Revaluation Surplus'.

- If the carrying amount of the non-current asset is decreased due to downward revaluation, the decrease shall be treated in profit or loss account. However, if there exists a credit balance in Revaluation Surplus then first such downward revaluation shall be offset against Revaluation Surplus and balance amount (if any) should be carried to profit or loss account.

Such credit balance of Revaluation Surplus is transferred to retained earnings at the time of disposal of the given asset. Transfer from revaluation surplus can never be routed to retained earnings through profit or loss account.

Conclusion:

In no circumstance, we can have the availability of the advantage of increasing the book value as no amount can unnecessarily be transferred to profit or loss as suggested by AASB rules.

Therefore we can reasonably conclude that the book profits can never be increased as a result of Revaluation of Non-Current Assets.