B1cd. PPE - After Initial recognition 4 / 7

Syllabus B1cd)

c) Discuss the requirements of relevant accounting standards in relation to the revaluation of non-current assets.

d) Account for revaluation and disposal gains and losses for non-current assets.

After the initial recognition there are 2 choices:

Cost model

  • Cost less accumulated depreciation and impairment

  • Depreciation should begin when ready for use not wait until actually used

Revaluation model

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")

  • DR Asset
    CR equity (Reserve) - “revaluation surplus”

If you revalue the asset DOWN ("Impairment loss")

is taken to the income statement

  • DR I/S ("Impairment loss")
    CR Assets

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”
    CR Assets

If you revalue the asset DOWN and then UP ("Reversal of Impairment")

  • DR Assets
    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:

  1. the asset will increase .... therefore

  2. the depreciation will increase ... and hence

  3. the expenses will increase ...

  4. 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.