Question

A director of a public listed company has expressed concerns about the accounting treatment of some of the company's items of property, plant and equipment which have increased in value. His concern is that the statement of financial position does not show the true value of assets which have increased in value and that this 'undervaluation' is compounded by having to charge depreciation on these assets, which also reduces reported profit. He argues that this does not make economic sense.

Required:

Respond to director's concerns by summarizing the principal requirements of IAS 16 Property, Plant and Equipment in relation the revaluation of property, plant and equipment, including subsequent treatment.

Answer 1

STEP 1 - INITIAL MEASUREMENT :
An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use.

STEP 2 - SUBSEQUENT TO INITIAL RECOGNITION

The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date.

Hence the company's items of property, plant and equipment which have increased in value shall be revalued and the depreciation shall be computed accordingly.
STEP 3 - DEPRECIATION

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under

STEP - 4 DISCLOSURES

Revalued property, plant and equipment

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required

• the effective date of the revaluation
• whether an independent valuer was involved
• for each revalued class of property, the carrying amount that would have been recognised had the assets been carried under the cost model
• the revaluation surplus, including changes during the period and any restrictions on the distribution of the balance to shareholders.