Question

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One of the main differences between U.S. GAAP and IAS/IFRS is the measurement of property, plant & equipment subsequent to initial recognition. Read IAS 16 and answer the following questions. Provide a list of the references you have used to search this topic.



1) How should the recoverability of the carrying amount of property, plant & equipment be accounted for?

2) How should any revaluation surplus from a revalued asset be treated if the revalued asset is disposed of?

3) What additional disclosures should be made if property, plant & equipment are stated at revalued amounts?

4) Explain the effect on the company’s financial statements if a company switches to the revaluation model? How should this change be accounted for?

Answer 1

1.Recoverability of the carrying amount

IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

2.If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss. [IAS 16.41]

3.Additional disclosures

The following disclosures are also required: [IAS 16.74]

• restrictions on title and items pledged as security for liabilities
• expenditures to construct property, plant, and equipment during the period
• contractual commitments to acquire property, plant, and equipment
• compensation from third parties for items of property, plant, and equipment that were impaired, lost or given up that is included in profit or loss.

4.The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another asset [IAS 16.48].

reference:-https://www.iasplus.com/en/standards/ias/ias16