Question

Topic on: Non-Current Assets Held For Sale

On January 1, 2020, Racelle Company purchased land at a cost of P6,000,000. The entity used the REVALUATION MODEL for this asset.

The fair value of the land was P7,000,000 on Dec. 31, 2020 and P8,500,000 on Dec 31, 2021.

On July 1, 2022, the entity decided to sell the land and therefore classified the asset as held for sale.

The fair value of the land on July 1, 2022 is P7,600,000. The estimated cost of disposal is very minimal.

On Dec. 31, 2022, the land was sold for P8,000,000.

Questions:

1. What amount in OCI should be recognized in the statement of comprehensive income for the year ended Dec. 31, 2021?
2. What amount of gain or loss on sale of land is recognized in 2022?
3. What amount of OCI is recycled to retained earnings in 2022?

Answer 1

Jan.1,2020 – Purchase of land at cost P6,000,000

Dec. 31, 2020 – Fair value of land P7,000,000

Dec. 31,2021 – Fair value of land P8,500,000

July 1, 2022 – Asset classified as ‘held for sale’, fair value P7,600,000

Dec. 31,2022 – Sale of land P8,000,000

Under revaluation model, assets are recognized at fair value on the financial reporting date less any accumulated depreciation or impairment losses. Further, the gain/loss arising on account of revaluation of asset at fair value is recorded as revaluation surplus/revaluation loss under ‘Other Comprehensive Income’ under ‘Stockholders’ equity’ section of balance sheet.

When the fair value of asset is more than its carrying value, a revaluation gain arises.

So, in this case, since fair value of asset is more than cost on Dec. 31, 2020, a gain of P7,000,000 – P6,000,000 = P1,000,000 will be recorded in Other Comprehensive Income for the year ended Dec.31,2020.

Next, on Dec. 31,2021, the carrying value of asset is P7,000,000 and the fair value is estimated at P8,500,000. So, again an Other Comprehensive Income gain of P1,500,000 (P8,500,000 – P7,000,000) will be recognized in the Statement of Comprehensive Income for the year ended Dec. 31,2021.

Next, when the asset is classified as held for sale on July 1,2022, it is revalued at lower of carrying value or fair value less costs to sell, and impairment arising is recognized as a revaluation decrease. This is as per IFRS 5 which states that upon classification of non-current assets as held for sale, the asset is to be recorded at lower of carrying value or fair value less costs to sell. In case of assets carried at revalued amount, the impairment (decrease in value) is treated as revaluation decrease.

On July 1,2022, the asset will be revalued at P7,600,000 and a loss of P900,000 (P8,500,000 – P7,600,000) will be recognized in OCI account.

When the land is sold on Dec. 31, 2022 for P8,000,000, gain of P400,000 (P8,000,000 – P7,600,000) will be recognized in income statement on account of sale of land.

The amount of OCI recycled to Retained earnings will be the balance in OCI account,i.e, P1,000,000+P1,500,000 – P400,000 = P2,100,000