Question

Meno Berhad purchased a piece of land on 1 January 2015 for RM 3 million. It is the policy of the company to use the revaluation model to account for its land. The revaluation exercise is carried out an interval of 5 years. On 31 December 2019, an independent valuer valued the land at RM 4.8 million. The board of directors decided to incorporate this amount n the statement of financial position and to transfer the surplus to the statement of profit or loss.

Required:

Briefly explain whether the action by the board of directors is appropriate.

Answer 1

Every company has option to choose among cost model or revaluation model. In revaluation model, a company can revaluate it's fixed assets that may be building, land, machinery,etc at regular interval.

As given in question, company is using revaluation modelz where revaluation is to be exercised every 5 years.

Under the revaluation model, any required adjustments upper or lower is being allowed to any company. With this comes a rule that the gain or any surplus obtained from this revaluation, is not to be recognised in the income statement or profit or loss account. Instead it has to be disclosed in the statement of comprehensive income.

As discussed in the question above, the independent values has valued the land at the correct intervals that is 5 year as the land was bought on 1^st Jan, 2015 and after interval of 5 years or completion of 5 year that is on 31^st Dec, 2019, he revalued the land. So the interval is correct for revaluation.

But the board of directors decision to incorporate the amount to statements of financial position and recording the surplus as gain in the prifur and loss account is not appropriate as it would s the rule for revaluation model that , the surplus or gain has not to be recorded in the profit or loss or income statement. Instead there is need to make a statement of comprehensive income to disclose it.

Thus, it is clear that the action taken by the board of directors is wrong and not appropriate as they decided to record the gain realised in income statements.