ACCA SBR ^INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - PPE - After Initial recognition - Notes ^{4 / 16}

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.

An increase in the revalued amount (above depreciated historic cost)

Any increase above depreciated historic cost is credited to equity under the heading "revaluation surplus" (and shown in the OCI)

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

An increase in the revalued amount (up to depreciated historic cost)

is taken to the income statement.

• DR Assets
  CR I/S

A decrease down to Historic cost

Any decrease down to depreciated historic cost is taken to the revaluation reserve (and OCI) as a debit.

• DR equity - “revaluation surplus” (and OCI)
  CR Assets

A decrease below historic cost

Any decrease below depreciated historic cost is debited to the income statement

• DR Income statement
  CR Assets

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.

This, though, then causes more problems if the asset is subsequently impaired etc. - but worry not - the COW has the answer!

This is what you do in a tricky looking revaluation question:

1. Calculate the Depreciated Historic Cost

   This is basically what the asset would have been worth had nothing (revaluations/impairments) occurred in the past. 

   We do this because anything above this figure is a genuine revaluation and so goes to the RR. 

   Similarly anything below this is a genuine impairment and goes to the income statement.

2. Calculate the NBV just before the Revaluation or Impairment in question

3. Now calculate the difference between step 2 and the new NBV(the amount to be revalued or impaired to).

   This will be the debit or credit to the asset. 

   The other side of the entry will depend on the depreciated historic cost calculated in step 1.

I know all that sounds tricky - so let’s look at an illustration:

Illustration

An asset is bought for 1,000 (10yr UEL).
2 years later it is revalued to 1,000. 
One year after that it is impaired to 400.

What is the double entry for this impairment?

1. Calculate the Depreciated Historic Cost

   DHC would be 1,000 less 3 years of depreciation = 700

2. Calculate the NBV just before the Impairment

   NBV at date of impairment = 1000 NBV one year earlier. 
   So 1,000 less depreciation of (1,000 / 8) = 125 = 875

3. Now calculate the difference between step 2 and the amount to be impaired to

   Impair to 400.

   So from 875 to 400 - credit Asset 475

4. Accounting treatment

   Dr RR with any amount above the DHC of 700. So 875-700 = 175
   Dr I/S with any amount below DHC of 700. So 700-400 = 300

   Dr I/S 300
   Dr RR 175
   Cr PPE 475

Illustration

1/1/20x2 an asset has a carrying amount of 140 and a remaining UEL of 7  years. No residual value. The asset is revalued to 60 on 1/1/20x3. 

On 1/120x5 the asset is revalued to 110

1. Calculate the Depreciated Historic Cost

   DHC would be 140 - depreciation (140 / 7 years x 3 years)  = 80

2. Calculate the NBV just before the Revaluation

   The asset is revalued to 60 on 1/1/20x3. 

   So 60 less depreciation of (60 / 6 x 2) = 40

3. Now calculate the difference between step 2 and the amount to be revalued to

   On 1/120x5 the asset is revalued to 110

   So from 40 to 110 - DR Asset 70

4. Accounting treatment

   Cr RR with any amount above the DHC of 80. So 110-80 = 30
   Cr I/S with any amount below DHC of 80. So 80-40 = 40

   Dr PPE 70
   Cr I/S 40
   Cr RR 30