Revaluation of a non-current asset

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IAS 16

IAS 16 allows entities the choice of two valuation models for its non-current assets – the cost model or the revaluation model.

Each model needs to be applied consistently to all non-current assets of the same ‘class’. A class of assets is a grouping of assets that have a similar nature or function within the business.

For example, properties would typically be one class of assets, and plant and equipment another.

Additionally, if the revaluation model is chosen, the revaluations need to be kept up to date, although IAS 16 is not specific as to how often assets need to be revalued.

When the revaluation model is used, assets are carried at their fair value, defined as ‘the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction’.

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 the statement of profit or loss

IAS 16 allows (but does not require) entities to make a transfer of the ‘excess depreciation’ (the extra depreciation which results due to the increased value of the asset) from the revaluation reserve directly to retained earnings.

Accounting treatment

  • Adjust cost account to revalued amount.

  • Remove accumulated depreciation charged on the asset to date.

  • Put the balance to the revaluation reserve.

The required double-entry is:

Dr Non-current asset cost
Dr Accumulated Depreciation
Cr Revaluation Reserve

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