Question

IAS 16, Property, Plant and Equipment allows companies to choose either the cost model or the revaluation model to measure the carrying amount of property, plant and equipment subsequent to its initial recognition as an asset.

Discuss how you should account for revaluation gains and losses when the valuation model is used. In addition, explain how the reversals of the revaluation gains and losses should be reported.

Answer 1

IAS 16,Property, plant and equipment overview

There are essentially four key areas when accounting for property plant and equipment that you must ensure that you are familiar with:

• Initial recognition
• Depreciation
• Revaluation
• Derecognition(disposal)

Here we are going to discuss about the topic revaluation.

IAS 16 permits the choice of two possible treatment in respect of property,plant and equipment:

• The cost model (carry an asset at cost less accumulated depreciation/impairments).
• The revaluation model (carry an asset at it's fair value at the revaluation date less subsequent accumulated depreciation impairment).

If the revaluation policy is adopted this should be applied to all assets in the entire category,I.e of you revalue a building, you must revalue all land and buildings in that class of assets. Revaluations must also be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.

Accounting for a revaluation

There are a series of accounting adjustments that must be undertaken when devaluing a non-current asset.These adjustments are indicated below.

The initial revaluation

Revaluation gains:

A gain on revaluation is always recognized in equity, under a revaluation reserve(unless the gain reverse's revaluation losses on the same assets that were previously recognized in the income statement-in this instance the gain is to be shown in the income statement)

The revaluation gain is known as an unrealised gain which later becomes realised when the asset is disposed of(derecognised).

Double entry:

• Dr Non-current asset cost(difference between valuation and original cost/valuation)
• Dr Accumulated depreciation (with any historical cost accumulated depreciation)
• Cr Revaluation reserve(gain on revaluation)

Revaluation losses

A revaluation loss should be charged against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of the same asset. Any additional loss must be charged as an expense in the statement of profit or loss.

Double entry:

• Dr Revaluation reserve(to maximum of original gain )
• Dr Income statement (any residual loss)
• Cr Non-current asset(loss on revaluation)

What is the double entry to record the revaluation?

Depreciation

The asset must continue to be depreciated following the revaluation. However, now that the asset has been revalued the depreciable amount has changed.In simple terms the revalued amount should be depreciated over the assets remaining useful life.

Reserves transfer

The depreciation charge on the revalued asset will be different to the depreciation that would have been charged based on the historical cost of the asset. As a result of this,IAS 16 permits a transfer to be made of an amount equal to the excess depreciation from the revaluation reserve to retained earnings.

Double entry:

• Dr Revaluation reserve
• Cr Retained earnings

This movement in reserves should also be disclosed in the statement of changes in equity.

If the revaluation takes place at the start of the year then the revaluation should be accounted for immediately and depreciation should be charged in accordance with the rule above.

If however the revaluation takes place at the year-end then the asset would be depreciated for a full 12 months first based on the original depreciation of that asset. This will enable the carrying amount of the asset to be known at the revaluation date,at which point the revaluation can be accounted for.

A further situation may arise if the retakes place midway through the year. If this were to happen the carrying amount would need to be found at the date of revaluation, and therefore the asset would be depreciated based on the original depreciation for the period up until revaluation, then the revaluation will take place and be accounted for. Once the asset has been revalued you will need to consider the last period of depreciation. This will be found based upon the revaluation rules (depreciate the revalued amount over remaining useful life). This will be the most complicated situation and you must ensure that your working is clearly structured for this;ie depreciate for first period based on old depreciation, revalued then depreciate last period based on new depreciation rule for revalued assets.