After the initial recognition there are 2 choices:
Cost less accumulated depreciation and impairment
Depreciation should begin when ready for use not wait until actually used
Fair value at the date of revaluation less depreciation
If we follow the revaluation model - how often should we revalue?
Revaluations should be carried out regularly
For volatile items this will be annually, for others between 3-5 years or less if deemed necessary.
Ok and which assets get revalued?
If an item is revalued, its entire class of assets should be revalued
And to what value?
Market value normally is fair value.
Specialised properties will be revalued to their depreciated replacement cost.
Accounting treatment of a Revaluation
If you revalue the asset UP ("Revaluation Gain")
Any increase is credited to equity under the heading "revaluation surplus" (and shown in the OCI - "Revaluation gain")
CR equity (Reserve) - “revaluation surplus”
If you revalue the asset DOWN ("Impairment loss")
is taken to the income statement
DR I/S ("Impairment loss")
If you revalue the asset UP and then DOWN ("Revaluation loss")
Any decrease down is taken to the revaluation reserve (and OCI) as a debit.
DR equity (Reserve) - “revaluation loss”
If you revalue the asset DOWN and then UP ("Reversal of Impairment")
CR Income statement ("Reversal of impairment")
Disposal of a Revalued Asset
The revaluation surplus in equity - IS NOT transferred to the income statement - it just drops into RE.
It will, therefore, only show up in the statement of changes in equity.
Let´s make no mistake about this - the revaluation adjustments can be very tricky.
when you revalue upwards:
the asset will increase .... therefore
the depreciation will increase ... and hence
the expenses will increase ...
This means smaller profits and smaller retained earnings just because of the revaluation!
Shareholders will not be impressed by this as retained earnings are where they are legally allowed to get their dividends from.
Because of this, a transfer is made out of the revaluation reserve and into retained earnings every year with the extra depreciation caused by the previous revaluation.