CIMA F1 Syllabus B. Financial Statements - PPE - After Initial recognition - Notes 3 / 7
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
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)Example
A company acquired an office building for $250,000 on May 1, 2013. The building is being depreciated using the straight-line method at a rate of 3% per year.
To align with the current market value, the building was revalued to $400,000 on May 1, 2015.
The company prepares its financial statements annually on May 1.
Cost of the asset(1/5/13) $250,000
Accumulated depreciation ($15,000)
$250,000 x 3% x 2
Carrying value (1/5/15) $235,000Assets new value on 1/5/15 $400,000
Amount to be reflected in revaluation surplus = $400,000 - $235,000 = $165,000
DR Asset $165,000
CR equity - “revaluation surplus” (and OCI) $165,000
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 Retained Earnings (RE).
It will, therefore, only show up in the statement of changes in equity.
Subsequent expenditure
As per IAS16, any expenditure incurred to improve the future economic benefits that the existing non-current asset will generate can be capitalized.