9.2 IAS 16 Revaluations & IAS 36 Impairment of assets

Question 1

IAS 16 The revalued amount of an asset is

Answer 1

• the assets fair value at the date of revaluation
• IAS 16 allows treatment of assets to be shown at their revalued amount
• revaluing to fair value means the item of property, plant and equipment will reflect the current value of the asset at the point revaluation occurs

Question 2

IAS 16 Key revaluation issues to remember include

Answer 2

• if an asset is revalued, any accumulated depreciation up to the date of revaluation should be reversed (this will increase the revaluation surplus, aka revaluation reserve)
• depreciation will then be calculated on the revalued amount
• revaluations must be made for the whole of the class of assets (ie. all buildings)
• the frequency of revaluations will depend on the volatility of the fair values of the asset class (more volatile, more frequent)

Question 3

IAS 16 Steps to account for revaluation

Answer 3

1. Restate asset cost to the revalued amount
2. Remove any existing accumulated depreciation
3. Transfer the increase in the cost account and the existing accumulated depreciation to the revaluation surplus account
4. Recalculate current years depreciation on the revalued amount if applicable (if happens at end of year will affect future years, if at start will affect current year). Depreciation will be calculated as revalued amount over the remaining useful life (taken from date of revaluation)

Question 4

IAS 16 Upwards revaluation of PPE - Accounting entries (increase):

Answer 4

Dr Asset cost (revalued amount - original cost)
Dr Accumulated depreciation (up to revaluation date, nil after)
Cr Revaluation surplus (revalued amount - previous carrying amount)

• Revaluation surplus will appear in equity section of SOFS
• An entity is allowed to gradually release this reserve into retained earnings over the life of the asset by reducing the revaluation surplus (Dr) and increasing the retained earnings (Cr) - seen in SOCIE

Question 5

IAS 16 Downwards revaluation of PPE - Accounting entries (decrease):

Answer 5

Dr Revaluation surplus (only to reverse the previous revaluation upwards)
Dr P/L (with any excess once revaluation increase is reversed)
Cr PPE cost account

• If an asset subsequently decreases in value we will reduce the cost account (Cr) to the new fair value and decrease the revaluation surplus (Dr) up to the maximum we have previously revalued for that particular asset
• Any excess must be charged to the P/L as an expense for the year

Question 6

IAS 16 Any revaluations made during the year which affect revaluation surplus (upwards / downwards) must be shown on

Answer 6

• the face of the SPLOCI under heading OCI
• the amount should reflect the movement made in revaluation surplus during the year

Question 7

IAS 16 Retirement and disposals of assets

Answer 7

An item of PPE should be eliminated from SOFP on disposal or when the asset is permanently withdrawn from use

Gain / (loss) on disposal = Net disposal proceeds - Carrying amount

Gains or losses on disposal should be recorded in the SPL in appropriate expense category (loss will increase expense / gain will reduce expense)

Question 8

IAS 16 Disposal of revalued assets

Answer 8

• When a previously revalued asset is disposed of, the gain is the difference between the proceeds received and the carrying amount on the SOFP
• the unrealised gain in the revaluation surplus must then be removed
• this amount must be transferred to retained earnings
• this movement will be seen in SOCIE and won’t affect the years profits

Question 9

IAS 16 requires the following disclosures for each class of PPE

Answer 9

• measurement bases, ie. cost or valuation
• depreciation methods with useful life or depreciation rate
• gross carrying amount and accumulated depreciation at the beginning and end of the period
• reconciliation of additions, disposals, revaluations, impairments and depreciation

Question 10

IAS 16 requires the additional disclosures for each class of PPE when assets have been revalued

Answer 10

• basis of valuation
• date of valuation
• whether an independent valuer was used
• carrying amount if not revaluation had taken place
• revaluation surplus

Question 11

IAS 36 Impairment of assets

Answer 11

• defines an impairment loss as the amount by which the carrying amount of an asset exceeds it’s recoverable amount (recoverable amount - carrying amount = loss)
• recoverable amount is the higher of
  
  • Net selling price (fair value - cost of disposal)
  • Value in use (present value of estimated future cash flows arising from use and disposal of asset)
• an entity should assess at each reporting date whether there is an indication that an asset may be impaired
• if yes the recoverable amount should be estimated (ie. impairment review), if not no review is needed

Question 12

IAS 36 The following situations may indicate that an asset has been impaired

Answer 12

• decline in market value
• technological, legal or economic changes
• physical damage
• plans to dispose of asset

Question 13

IAS 36 Recognition and measurement of an impairment loss

Answer 13

• an impairment loss occurs when the recoverable amount of an asset is less than it’s carrying amount
• an impairment loss should be recorded as an expense in SPL, unless asset has previously been revalued upwards
• in this case the impairment loss can be offset against the revaluation surplus

Question 14

IAS 36 requires the following disclosures for each class of PPE

Answer 14

• the amount of impairment losses recognised in the SPL during the period and where it has been included (ie. which expense category)
• the amount of reversals for impairment losses recognised in the SPL during the period and where it has been included
• the amount of impairment losses recognised directly in equity during the period
• the amount of reversal of impairment losses recognised directly in equity during the period