Question

Discuss the difference in accounting treatments between revaluation increments and decrements. Focus your discussion on the difference in the accounting treatment for the tax effect of them.

Answer 1

In relation to revaluation increments, AASB 116 states:

If an asset's carrying amount increased due to revaluation, the increase shall be credited directly to equity under the heading of a revaluation reserve. However, the increase shall be recognised in profit and loss to the extent that it reverses a devaluation decrease of the same asset previously recognised in profit or loss.

In relation to revaluation decrements, AASB 115 states:

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be debited directly to equity under the heading of revaluation reserve to the extent of any credit balance existing in the revaluation reserve in respect of that asset.

Thus, if an asset’s fair value goes up (and it does not represent a reversal of a decrement) then the increment does not go to profits,rather, it goes directly to equity (to revaluation reserve). If it goes down, it is treated as an expense (to the extent it does not reverse a previous increment).This seems to be a conservative approach and does seem however biased. It is not a symmetrical treatment and therefore does seem somewhat biased. Financial statements should not be biased in one direction or another. Indeed, the AASB Framework proposes that general purpose financial reports should be free from bias and represent faithfully the underlying transactions in a neutral and objective way. It is a little diffto believe that the treatment of revaluations as required by AASB 116 is totally neutral and unbiased.