PPE - After Initial recognition 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)                        $235,000

    Assets 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.

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