Question

D1. Discuss whether and how a company should account for a revaluation increase and a revaluation decrease on property, plant and equipment. Discuss also the accounting treatment if such an increase or decrease is reversed.

Answer 1

● IAS 16/AASB 116 states the general policy that, whenever a non-current asset is to be revalued, the entire class of assets to which that asset belongs must be revalued to fair value, so that all assets of the same class are stated at amounts which are determined at the same date.

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1)When non-current assets of a particular class are initially revalued upwards to fair value, the revaluation increase on each asset in that class must be credited directly to a Gain on Revaluation (Other Comprehensive Income) account.

2)This account is then closed as the end of the reporting period, through the Other Comprehensive Income (OCI) Summary account, into the equity account entitled “Revaluation Surplus” in IAS 16/AASB 116.

3)Accumulated depreciation up to the date of the revaluation is usually written back against the asset’s cost/carrying amount on the date of the revaluation.

4)Under the standard, downward revaluations of assets within a class of non-current assets can occur only when those assets’ carrying amounts exceed their fair values.

5)A revaluation decrease represents a write-down of a class of non-current assets from carrying amount to fair value.

6)The standard requires a revaluation decrease to be treated as an expense (and hence a reduction of profit) in the current period.

7)As with revaluation increases, any accumulated depreciation on the assets should be written off against the assets.

8)For reversal and/or offset of a revaluation increase credited to a Revaluation Surplus, the Revaluation Surplus created under the standard should be written down through Other comprehensive Income, but only to the extent that it has been previously written up.

9)Additional reversals are then treated as an expense, (a decrease)

10)Any reversal of an initial revaluation decrease should be credited as income and added to the entity’s profit to reverse the previously recognised expense, but only to the extent of the previous write-down.

11)Any amount in excess of the previous write-down should then be credited to a Gain on Revaluation (Other Comprehensive Income) account, and eventually into the Revaluation Surplus.