IAS 16 : Measurement After Recognition : Revaluation Model

Question 1

If the revaluation model is adopted, PP&E is initially recognised at cost and subsequently carried at a revalued amount, being its fair value (if it can be measured reliably) at the date of the revaluation, less subsequent accumulated depreciation and impairment losses. [IAS 16.29, 31].
In practice, ‘fair value’ will usually be the market value of the asset.

Answer 1

If the revaluation model is adopted, PP&E is initially recognised at cost and subsequently carried at a revalued amount, being its fair value (if it can be measured reliably) at the date of the revaluation, less subsequent accumulated depreciation and impairment losses. [IAS 16.29, 31].
In practice, ‘fair value’ will usually be the market value of the asset.

Question 2

There is no requirement for a professional external valuation or even for a professionally qualified valuer to perform the appraisal, although in practice professional advice is often sought.

Answer 2

There is no requirement for a professional external valuation or even for a professionally qualified valuer to perform the appraisal, although in practice professional advice is often sought.

Question 3

Valuation frequency is not prescribed by IAS 16. Instead it states that revaluations are to be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. [IAS 16.31].
Therefore, the frequency of revaluations depends upon the changes in fair values of the items of PP&E being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. The standard suggests that some items of PP&E have frequent and volatile changes in fair value and these should be revalued annually

Answer 3

Valuation frequency is not prescribed by IAS 16. Instead it states that revaluations are to be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. [IAS 16.31].
Therefore, the frequency of revaluations depends upon the changes in fair values of the items of PP&E being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is necessary. The standard suggests that some items of PP&E have frequent and volatile changes in fair value and these should be revalued annually

Question 4

If the revaluation model is adopted, IAS 16 specifies that all items within a class of PP&E are to be revalued simultaneously to prevent selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. [IAS 16.29, 36, 38].

A class of PP&E : a grouping of assets of a similar
nature and use in an entity’s operations.

Answer 4

If the revaluation model is adopted, IAS 16 specifies that all items within a class of PP&E are to be revalued simultaneously to prevent selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. [IAS 16.29, 36, 38].

A class of PP&E : a grouping of assets of a similar
nature and use in an entity’s operations.

Question 5

IAS 16 suggests that the following are examples of separate classes of PP&E:

(i) land;
(ii) land and buildings;
(iii) machinery;
(iv) ships;
(v) aircraft;
(vi) motor vehicles;
(vii) furniture and fixtures;
(viii) office equipment; and
(ix) bearer plants. [IAS 16.37].

Answer 5

IAS 16 suggests that the following are examples of separate classes of PP&E:

(i) land;
(ii) land and buildings;
(iii) machinery;
(iv) ships;
(v) aircraft;
(vi) motor vehicles;
(vii) furniture and fixtures;
(viii) office equipment; and
(ix) bearer plants. [IAS 16.37].

Question 6

These are very broad categories of PP&E and it is possible for them to be classified further into groupings of assets of a similar nature and use.

Office buildings and factories or hotels and fitness centres, could be separate classes of asset. If the entity used the same type of asset in two different geographical locations, e.g. clothing manufacturing facilities for similar products or products with similar markets, say in Sri Lanka and Guatemala, it is likely that these would be seen as part of the same class of asset.

However, if the entity manufactured pharmaceuticals and clothing, both in European facilities, then few would argue that these could be assets with a sufficiently different nature and use to be a separate class. Ultimately it must be a matter of judgement in the context of the specific operations of individual entities.

Answer 6

These are very broad categories of PPE and it is possible for them to be classified further into groupings of assets of a similar nature and use.

Office buildings and factories or hotels and fitness centres, could be separate classes of asset. If the entity used the same type of asset in two different geographical locations, e.g. clothing manufacturing facilities for similar products or products with similar markets, say in Sri Lanka and Guatemala, it is likely that these would be seen as part of the same class of asset.

However, if the entity manufactured pharmaceuticals and clothing, both in European facilities, then few would argue that these could be assets with a sufficiently different nature and use to be a separate class. Ultimately it must be a matter of judgement in the context of the specific operations of individual entities.

Question 7

IAS 16 permits a rolling valuation of a class of assets provided the revaluation of such class of assets is completed within a short period of time and ‘provided the revaluations are kept up to date’. [IAS 16.38].

Answer 7

IAS 16 permits a rolling valuation of a class of assets provided the revaluation of such class of assets is completed within a short period of time and ‘provided the revaluations are kept up to date’. [IAS 16.38].

Question 8

The meaning of fair value

Fair value is defined in IFRS 13. IFRS 13 does not prescribe when to measure fair value but provides guidance on how to measure it under IFRS when fair value is required or permitted by IFRS.

IFRS 13 clarifies that fair value is an exit price from the perspective of market participants. ‘Fair value’ is defined as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’. [IAS 16.6, IFRS 13 Appendix A].

Answer 8

Fair value is defined in IFRS 13. IFRS 13 does not prescribe when to measure fair value but provides guidance on how to measure it under IFRS when fair value is required or permitted by IFRS.

IFRS 13 clarifies that fair value is an exit price from the perspective of market participants. ‘Fair value’ is defined as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’. [IAS 16.6, IFRS 13 Appendix A].

Question 9

The meaning of fair value : Revaluing assets under IFRS 13

IFRS 13 specifies that ‘fair value is a market-based measurement, not an entity-specific measurement’. [IFRS 13.2].
Some of the new principles that affect the revaluation of PP&E are the concept of highest and best use and the change in focus of the fair value hierarchy from valuation techniques to inputs. IFRS 13 also requires a significant number of disclosures, including the categorisation of a fair value measurement with the fair value measurement hierarchy.

Answer 9

IFRS 13 specifies that ‘fair value is a market-based measurement, not an entity-specific measurement’. [IFRS 13.2].
Some of the new principles that affect the revaluation of PP&E are the concept of highest and best use and the change in focus of the fair value hierarchy from valuation techniques to inputs. IFRS 13 also requires a significant number of disclosures, including the categorisation of a fair value measurement with the fair value measurement hierarchy.

Question 10

The meaning of fair value : Revaluing assets under IFRS 13 (Highest and best use) 1

IFRS 13 states that ‘a fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use’. [IFRS 13.27].
This evaluation will include uses that are ‘physically possible, legally permissible and financial feasible’. [IFRS 13.28].

Answer 10

IFRS 13 states that ‘a fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use’. [IFRS 13.27]. This evaluation will include uses that are ‘physically possible, legally permissible and financial feasible’. [IFRS 13.28].

Question 11

The meaning of fair value : Revaluing assets under IFRS 13 (Highest and best use) 2

The highest and best use is determined from the perspective of market participants that would be acquiring the asset, but the starting point is the asset’s current use. It is presumed that an entity’s current use of the asset is the asset’s highest and best use, unless market or other factors suggest that a different use of the asset by market participants would maximise its value. [IFRS 13.29].

Answer 11

The highest and best use is determined from the perspective of market participants that would be acquiring the asset, but the starting point is the asset’s current use. It is presumed that an entity’s current use of the asset is the asset’s highest and best use, unless market or other factors suggest that a different use of the asset by market participants would maximise its value. [IFRS 13.29].

Question 12

The meaning of fair value : Revaluing assets under IFRS 13 (Highest and best use) 3

The fair value of an item of PP&E will either be measured based on the value it would derive on a standalone basis or in combination with other assets or other assets and liabilities, i.e. the asset’s ‘valuation premise’. ‘Valuation premise’ is a valuation concept that addresses how a non-financial asset derives its maximum value to market participants. The highest and best use of an item of PP&E ‘might provide maximum value to market participants through its use in combination with other assets as a group or in combination with other assets and liabilities (e.g. a business)’ or it ‘might have maximum value to market participants on a stand-alone basis’. [IFRS 13.31(a)-(b)]

Answer 12

The fair value of an item of PP&E will either be measured based on the value it would derive on a standalone basis or in combination with other assets or other assets and liabilities, i.e. the asset’s ‘valuation premise’. ‘Valuation premise’ is a valuation concept that addresses how a non-financial asset derives its maximum value to market participants. The highest and best use of an item of PP&E ‘might provide maximum value to market participants through its use in combination with other assets as a group or in combination with other assets and liabilities (e.g. a business)’ or it ‘might have maximum value to market participants on a stand-alone basis’.
[IFRS 13.31(a)-(b)]

Question 13

The meaning of fair value : Revaluing assets under IFRS 13 (Highest and best use) 4

Example 18.4: Highest and best use
An entity acquires land in a business combination. The land is currently developed for industrial use as a site
for a factory. The current use of land is presumed to be its highest and best use unless market or other factors
suggest evidence for a different use.

Scenario (1): In the particular jurisdiction, it can be difficult to obtain consents to change use from industrial to residential use for the land and there is no evidence that the area is becoming desirable for residential development. The fair value is based on the current industrial use of the land.

Answer 13

Example 18.4: Highest and best use
An entity acquires land in a business combination. The land is currently developed for industrial use as a site
for a factory. The current use of land is presumed to be its highest and best use unless market or other factors
suggest evidence for a different use.

Scenario (1): In the particular jurisdiction, it can be difficult to obtain consents to change use from industrial to residential use for the land and there is no evidence that the area is becoming desirable for residential development. The fair value is based on the current industrial use of the land.

Question 14

The meaning of fair value : Revaluing assets under IFRS 13 (Highest and best use) 5

Scenario (2): Nearby sites have recently been developed for residential use as sites for high-rise apartment buildings. On the basis of that development and recent zoning and other changes that facilitated the residential development, the entity determines that the land currently used as a site for a factory could also be developed as a site for residential use because market participants would take into account the potential to develop the site for residential use when pricing the land.

Answer 14

Scenario (2): Nearby sites have recently been developed for residential use as sites for high-rise apartment buildings. On the basis of that development and recent zoning and other changes that facilitated the residential development, the entity determines that the land currently used as a site for a factory could also be developed as a site for residential use because market participants would take into account the potential to develop the site for residential use when pricing the land.

Question 15

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 1

IFRS 13 does not limit the types of valuation techniques an entity might use to measure fair value but instead focuses on the types of inputs that will be used. The standard requires the entity to use the valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. [IFRS 13.61]

Answer 15

IFRS 13 does not limit the types of valuation techniques an entity might use to measure fair value but instead focuses on the types of inputs that will be used. The standard requires the entity to use the valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. [IFRS 13.61]

Question 16

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 2

The objective is that the best available inputs should be used in valuing the assets. These inputs could be used in any valuation technique provided they are consistent with the three valuation approaches in the standard: the market approach, the cost approach and the income approach. [IFRS 13.62].

Answer 16

The objective is that the best available inputs should be used in valuing the assets. These inputs could be used in any valuation technique provided they are consistent with the three valuation approaches in the standard: the market approach, the cost approach and the income approach. [IFRS 13.62].

Question 17

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 3

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business. [IFRS 13.B5]. For PP&E, market techniques will usually involve market transactions in comparable assets or, for certain assets valued as businesses, market multiples derived from comparable transactions. [IFRS 13.B5, B6].

Answer 17

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business. [IFRS 13.B5]. For PP&E, market techniques will usually involve market transactions in comparable assets or, for certain assets valued as businesses, market multiples derived from comparable transactions. [IFRS 13.B5, B6].

Question 18

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 4

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (i.e. current replacement cost). It is based on what a market participant buyer would pay to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence includes physical deterioration, functional (technological) and economic (external) obsolescence so it is broader than and not the same as depreciation under IAS 16.
[IFRS 13.B8, B9].

Answer 18

The cost approach reflects the amount that would be required currently to replace the service capacity of an asset (i.e. current replacement cost). It is based on what a market participant buyer would pay to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence. Obsolescence includes physical deterioration, functional (technological) and economic (external) obsolescence so it is broader than and not the same as depreciation under IAS 16.
[IFRS 13.B8, B9].

Question 19

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 5

The income approach converts future amounts (e.g. cash flows or income and expenses) to a single discounted amount. The fair value reflects current market expectations about those future amounts. In the case of PP&E, this will usually mean using a present value (i.e. discounted cash flow) technique.
[IFRS 13.B10, B11].

Answer 19

The income approach converts future amounts (e.g. cash flows or income and expenses) to a single discounted amount. The fair value reflects current market expectations about those future amounts. In the case of PP&E, this will usually mean using a present value (i.e. discounted cash flow) technique.
[IFRS 13.B10, B11].

Question 20

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 6

IFRS 13 does not place any preference on the techniques. An entity can use any valuation technique, or use multiple techniques, as long as it applies the valuation technique consistently. A change in a valuation technique is considered a change in an accounting estimate in accordance with IAS 8. [IFRS 13.66].

Answer 20

IFRS 13 does not place any preference on the techniques. An entity can use any valuation technique, or use multiple techniques, as long as it applies the valuation technique consistently. A change in a valuation technique is considered a change in an accounting estimate in accordance with IAS 8. [IFRS 13.66].

Question 21

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 7

Instead, the inputs used to measure the fair value of an asset have a hierarchy. Level 1 inputs are those that are quoted prices in active markets (i.e. markets in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis) for identical assets that the entity can access at the measurement date. [IFRS 13.76]. Level 1 inputs have the highest priority, followed by inputs, other than quoted prices, that are observable for the asset either directly or indirectly (Level 2). The lowest priority inputs are those based on unobservable inputs (Level 3). [IFRS 13.72]. The valuation techniques, referred to above, will use a combination of inputs to determine the fair value of the asset.

Answer 21

Instead, the inputs used to measure the fair value of an asset have a hierarchy. Level 1 inputs are those that are quoted prices in active markets (i.e. markets in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis) for identical assets that the entity can access at the measurement date. [IFRS 13.76]. Level 1 inputs have the highest priority, followed by inputs, other than quoted prices, that are observable for the asset either directly or indirectly (Level 2). The lowest priority inputs are those based on unobservable inputs (Level 3). [IFRS 13.72]. The valuation techniques, referred to above, will use a combination of inputs to determine the fair value of the asset.

Question 22

The meaning of fair value : Revaluing assets under IFRS 13 (Valuation approachese) 8

As stated above, land and buildings are the most commonly revalued items of PP&E. These types of assets use a variety of inputs such as other sales, multiples or discounted cash flows. While some of these maybe Level 1 inputs, we generally expect the fair value measurement as a whole to be categorised within Level 2 or Level 3 of the fair value hierarchy for disclosure purposes (see 8.2 below).

Answer 22

As stated above, land and buildings are the most commonly revalued items of PP&E. These types of assets use a variety of inputs such as other sales, multiples or discounted cash flows. While some of these maybe Level 1 inputs, we generally expect the fair value measurement as a whole to be categorised within Level 2 or Level 3 of the fair value hierarchy for disclosure purposes (see 8.2 below).

Question 23

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 1

IFRS 13 permits the use of a cost approach for measuring fair value, for example current replacement costs. Before using current replacement cost as a method to measure fair value, an entity should ensure that both:

• the highest and best use of the assets is consistent with their current use; and
• the principal market (or in its absence, the most advantageous market) is the same as the entry market.

Answer 23

IFRS 13 permits the use of a cost approach for measuring fair value, for example current replacement costs. Before using current replacement cost as a method to measure fair value, an entity should ensure that both:

• the highest and best use of the assets is consistent with their current use; and
• the principal market (or in its absence, the most advantageous market) is the same as the entry market.

Question 24

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 2

The resulting current replacement cost should also be assessed to ensure market participants would actually transact for the asset in its current condition and location at this price.

Answer 24

The resulting current replacement cost should also be assessed to ensure market participants would actually transact for the asset in its current condition and location at this price.

Question 25

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 3

In particular, an entity should ensure that both:
• the inputs used to determine replacement cost are consistent with what market participant buyers would pay to acquire or construct a substitute asset of comparable utility; and

• the replacement cost has been adjusted for obsolescence that market participant buyers would consider so that the depreciation adjustment reflects all forms of obsolescence (i.e. physical deterioration, technological (functional) and economic obsolescence and environmental factors), which is broader than depreciation calculated in accordance with IAS 16

Answer 25

In particular, an entity should ensure that both:
• the inputs used to determine replacement cost are consistent with what market participant buyers would pay to acquire or construct a substitute asset of comparable utility; and

• the replacement cost has been adjusted for obsolescence that market participant buyers would consider so that the depreciation adjustment reflects all forms of obsolescence (i.e. physical deterioration, technological (functional) and economic obsolescence and environmental factors), which is broader than depreciation calculated in accordance with IAS 16

Question 26

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 4

Before IAS 16 was amended by IFRS 13, DRC was permitted to measure the fair value of specialised properties. In some ways DRC is similar to current replacement cost. The crucial difference is that under IAS 16 entities were not obliged to ensure that the resulting price is one that would be paid by a market participant (i.e. it is an exit price).

Answer 26

Before IAS 16 was amended by IFRS 13, DRC was permitted to measure the fair value of specialised properties. In some ways DRC is similar to current replacement cost. The crucial difference is that under IAS 16 entities were not obliged to ensure that the resulting price is one that would be paid by a market participant (i.e. it is an exit price).

Question 27

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 5

The objective of DRC is to make a realistic estimate of the current cost of constructing an asset that has the same service potential as the existing asset. DRC therefore has a similar meaning to current replacement cost under IFRS 13 except that current replacement cost is an exit price and its use is not restricted to specialised assets as IFRS 13 requires entities to use the best available inputs in valuing any assets.

Answer 27

The objective of DRC is to make a realistic estimate of the current cost of constructing an asset that has the same service potential as the existing asset. DRC therefore has a similar meaning to current replacement cost under IFRS 13 except that current replacement cost is an exit price and its use is not restricted to specialised assets as IFRS 13 requires entities to use the best available inputs in valuing any assets.

Question 28

The meaning of fair value : Revaluing assets under IFRS 13 (The cost approach: current replacement cost and depreciated replacement cost (DRC)) 6

DRC can still be used, but care is needed to ensure that the resulting measurement is consistent with the requirements of IFRS 13 for measuring fair value. Since DRC measures the current entry price, it can only be used when the entry price equals the exit price.

Answer 28

DRC can still be used, but care is needed to ensure that the resulting measurement is consistent with the requirements of IFRS 13 for measuring fair value. Since DRC measures the current entry price, it can only be used when the entry price equals the exit price.

Question 29

Accounting for valuation surpluses and deficits 1

Increases in the carrying amount of PP&E as a result of revaluations should be credited to OCI and accumulated in a revaluation surplus account in equity. To the extent that a revaluation increase of an asset reverses a revaluation decrease of the same asset that was previously recognised as an expense in profit or loss, such increase should be credited to income in profit or loss.

Answer 29

Increases in the carrying amount of PP&E as a result of revaluations should be credited to OCI and accumulated in a revaluation surplus account in equity. To the extent that a revaluation increase of an asset reverses a revaluation decrease of the same asset that was previously recognised as an expense in profit or loss, such increase should be credited to income in profit or loss.

Question 30

Accounting for valuation surpluses and deficits 2

Decreases in valuation should be charged to profit
or loss, except to the extent that they reverse the existing accumulated revaluation surplus on the same asset and therefore such decrease is recognised in OCI. The decrease recognised in OCI reduces the amount accumulated in equity under revaluation surplus account. [IAS 16.39, 40].
This means that it is not permissible under the
standard to carry a negative revaluation reserve in respect of any item of PP&E.

Answer 30

Decreases in valuation should be charged to profit
or loss, except to the extent that they reverse the existing accumulated revaluation surplus on the same asset and therefore such decrease is recognised in OCI. The decrease recognised in OCI reduces the amount accumulated in equity under revaluation surplus account. [IAS 16.39, 40].
This means that it is not permissible under the
standard to carry a negative revaluation reserve in respect of any item of PP&E.

Question 31

Accounting for valuation surpluses and deficits 3

The same rules apply to impairment losses. An impairment loss on a revalued asset is first used to reduce the revaluation surplus for that asset. Only when the impairment loss exceeds the amount in the revaluation surplus for that same asset is any further
impairment loss recognised in profit or loss. [IAS 36.61].

Answer 31

The same rules apply to impairment losses. An impairment loss on a revalued asset is first used to reduce the revaluation surplus for that asset. Only when the impairment loss exceeds the amount in the revaluation surplus for that same asset is any further
impairment loss recognised in profit or loss. [IAS 36.61]

Question 32

Accounting for valuation surpluses and deficits 4

IAS 16 generally retains a model in which the revalued amount substitutes for cost in both statement of financial position and statement of profit or loss and on derecognition there is no recycling to profit and loss of amounts taken directly to OCI. The revaluation
surplus included equity in respect of an item of PP&E may be transferred directly to retained earnings when the asset is derecognised (i.e. transferring the whole of the surplus when the asset is retired or disposed of). [IAS 16.41].

Answer 32

IAS 16 generally retains a model in which the revalued amount substitutes for cost in both statement of financial position and statement of profit or loss and on derecognition there is no recycling to profit and loss of amounts taken directly to OCI. The revaluation
surplus included equity in respect of an item of PP&E may be transferred directly to retained earnings when the asset is derecognised (i.e. transferring the whole of the surplus when the asset is retired or disposed of). [IAS 16.41].

Question 33

Accounting for valuation surpluses and deficits 5

IAS 16 also allows some of the revaluation surplus to be transferred to retained earnings as the asset is used by an entity. In such a case, the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost may be transferred from revaluation surplus to retained earnings in equity.

Answer 33

IAS 16 also allows some of the revaluation surplus to be transferred to retained earnings as the asset is used by an entity. In such a case, the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on its original cost may be transferred from revaluation surplus to retained earnings in equity.

Question 34

Accounting for valuation surpluses and deficits 6

Any effect on taxation, both current and deferred, resulting from the revaluation of PP&E is recognised and disclosed in accordance with IAS 12 – Income Taxes. [IAS 16.42]

Answer 34

Any effect on taxation, both current and deferred, resulting from the revaluation of PP&E is recognised and disclosed in accordance with IAS 12 – Income Taxes. [IAS 16.42]

Question 35

Accounting for valuation surpluses and deficits 7

There are three elements to dealing with a revaluation:

 The asset cost must be adjusted to its revalued amount
 The accumulated depreciation must be eliminated
 The increase in the carrying value of the asset is taken directly to the revaluation reserve in equity.

Answer 35

There are three elements to dealing with a revaluation:

 The asset cost must be adjusted to its revalued amount
 The accumulated depreciation must be eliminated
 The increase in the carrying value of the asset is taken directly to the revaluation reserve in equity.

Question 36

Accounting for valuation surpluses and deficits 8

Steps:

1 Restate asset’s cost to the new valuation.
2 Eliminate any existing accumulated depreciation for the asset.
3 Show the total increase in Other Comprehensive Income, at the foot of the statement of profit or loss. This would then be taken to the revaluation
surplus (much like the profit for the year gets taken to retained earnings).

Answer 36

Steps:

1 Restate asset’s cost to the new valuation.
2 Eliminate any existing accumulated depreciation for the asset.
3 Show the total increase in Other Comprehensive Income, at the foot of the statement of profit or loss. This would then be taken to the revaluation
surplus (much like the profit for the year gets taken to retained earnings).

Question 37

Accounting for valuation surpluses and deficits 9

Journal (assuming revalued amount is greater than original cost):

Dr Non-current assets cost/valuation
(revalued amount – cost) X
Dr Accumulated depreciation
(eliminate accumulated balance) X
Cr Other Comprehensive Income
(revaluation surplus) X

Answer 37

Journal (assuming revalued amount is greater than original cost):

Dr Non-current assets cost/valuation
(revalued amount – cost) X
Dr Accumulated depreciation
(eliminate accumulated balance) X
Cr Other Comprehensive Income
(revaluation surplus) X

Question 38

Accounting for valuation surpluses and deficits 10

The double entry will therefore be as follows:

CR Asset (500 – 150) 350
DR Accumulated depreciation 400
CR Revaluation reserve 50

These adjustments will alter the carrying value of the asset to $150,000 (from $100,000), accumulated depreciation is $0 and the revaluation reserve for the asset is increased by $50,000.

Answer 38

The double entry will therefore be as follows:

CR Asset (500 – 150) 350
DR Accumulated depreciation 400
CR Revaluation reserve 50

These adjustments will alter the carrying value of the asset to $150,000 (from $100,000), accumulated depreciation is $0 and the revaluation reserve for the asset is increased by $50,000.

Question 39

Accounting for valuation surpluses and deficits 11

Depreciation charges after revaluation, for inclusion in profit or loss, must be based on the revised value (= revalued amount).
In the example above, the $150,000 carrying value will be depreciated over its remaining life of two years, at $75,000 per year. This will be the depreciation charge each year in profit or loss.
An annual reserve transfer may be made each year from the revaluation reserve directly to accumulated profits, for the difference between depreciation based on historical cost and depreciation on the revalued amount.

Answer 39

Depreciation charges after revaluation, for inclusion in profit or loss, must be based on the revised value (= revalued amount).
In the example above, the $150,000 carrying value will be depreciated over its remaining life of two years, at $75,000 per year. This will be the depreciation charge each year in profit or loss.
An annual reserve transfer may be made each year from the revaluation reserve directly to accumulated profits, for the difference between depreciation based on historical cost and depreciation on the revalued amount.

Question 40

Accounting for valuation surpluses and deficits 12

This transfer is made directly between the reserves and is not reported in profit or loss:

Depreciation based on historical cost ($500,000/10 years) 50,000
Depreciation based on the revalued amount 75,000
Transfer from revaluation reserve to accumulated profit 25,000
(for the excess depreciation charge)

In this example, the effect after two years is that the asset will be fully depreciated and the balance on the revaluation reserve for the asset will have been reduced to $0.

Answer 40

This transfer is made directly between the reserves and is not reported in profit or loss:

Depreciation based on historical cost ($500,000/10 years) 50,000
Depreciation based on the revalued amount 75,000
Transfer from revaluation reserve to accumulated profit 25,000
(for the excess depreciation charge)

In this example, the effect after two years is that the asset will be fully depreciated and the balance on the revaluation reserve for the asset will have been reduced to $0.

Question 41

Accounting for valuation surpluses and deficits 13

Revaluation gains are recorded as a component of other comprehensive income either within the statement of profit or loss and other comprehensive income or in a separate statement. This gain is then carried in a revaluation surplus within equity. This revaluation surplus is a capital reserve and is therefore not permitted to be distributed to the shareholders.

Answer 41

Revaluation gains are recorded as a component of other comprehensive income either within the statement of profit or loss and other comprehensive income or in a separate statement. This gain is then carried in a revaluation surplus within equity. This revaluation surplus is a capital reserve and is therefore not permitted to be distributed to the shareholders.

Question 42

Accounting for valuation surpluses and deficits 14

Revaluation losses, which represent an impairment of the asset value, are recognised in the statement of profit or loss. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain and can therefore be taken to other comprehensive income in the year. Any excess impairment will then be recorded as an impairment expense in the statement of profit or loss.

Note that offset of gains and losses between different properties is not permitted.

Answer 42

Revaluation losses, which represent an impairment of the asset value, are recognised in the statement of profit or loss. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain and can therefore be taken to other comprehensive income in the year. Any excess impairment will then be recorded as an impairment expense in the statement of profit or loss.

Note that offset of gains and losses between different properties is not permitted.

Question 43

Accounting for valuation surpluses and deficits 15
Depreciation of revalued assets

Once an asset has been revalued the following treatment is required.
• Depreciation must be charged, based on valuation less residual value, over the remaining useful life of the asset
• The whole charge must go to the statement of profit or loss for the year.
• An annual reserves transfer may be made, from revaluation surplus to retained earnings, for the additional depreciation charged on the revalued amount compared to cost. This permitted treatment under IAS 16 is to address the imbalance between a non-distributable gain held in revaluation surplus and the reduction in retained earnings due to the increased depreciation charge.
• This transfer would be shown on the SOCIE.

Answer 43

Once an asset has been revalued the following treatment is required.
• Depreciation must be charged, based on valuation less residual value, over the remaining useful life of the asset
• The whole charge must go to the statement of profit or loss for the year.
• An annual reserves transfer may be made, from revaluation surplus to retained earnings, for the additional depreciation charged on the revalued amount compared to cost. This permitted treatment under IAS 16 is to address the imbalance between a non-distributable gain held in revaluation surplus and the reduction in retained earnings due to the increased depreciation charge.
• This transfer would be shown on the SOCIE.

Question 44

Accounting for valuation surpluses and deficits 16
Depreciation of revalued assets

Journals

Dr Statement of profit or loss – depreciation charge X
Cr Accumulated depreciation X

And:

Dr Revaluation surplus
(depreciation on valuation – depreciation on original cost) X
Cr Retained earnings X

Note: This transfer is not part of other comprehensive income, it is shown on the SOCIE only.

Answer 44

Journals

Dr Statement of profit or loss – depreciation charge X
Cr Accumulated depreciation X

And:

Dr Revaluation surplus
(depreciation on valuation – depreciation on original cost) X
Cr Retained earnings X

Note: This transfer is not part of other comprehensive income, it is shown on the SOCIE only.

Question 45

Adopting a policy of revaluation

Although the initial adoption of a policy of revaluation by an entity that has previously used the cost model is a change in accounting policy, it is not dealt with as a prior period adjustment in accordance with IAS 8. Instead, the change is treated as a revaluation during the current period as set out in 6.2 above. [IAS 8.17].

This means that the entity is not required to obtain valuation information about comparative periods.

Answer 45

Although the initial adoption of a policy of revaluation by an entity that has previously used the cost model is a change in accounting policy, it is not dealt with as a prior period adjustment in accordance with IAS 8. Instead, the change is treated as a revaluation during the current period as set out in 6.2 above. [IAS 8.17].

This means that the entity is not required to obtain valuation information about comparative periods.

Question 46

Assets held under leases 1

When IFRS 16 is adopted, lessees no longer classify leases as finance leases or as operating leases (as was required under IAS 17), instead lessees are required to recognise most leases in their statement of financial position as lease liabilities with corresponding
right-of-use assets.

Answer 46

When IFRS 16 is adopted, lessees no longer classify leases as finance leases or as operating leases (as was required under IAS 17), instead lessees are required to recognise most leases in their statement of financial position as lease liabilities with corresponding
right-of-use assets.

Question 47

Assets held under leases 2

A lessee subsequently measures the right-of-use asset using a cost model under IFRS 16, unless it applies one of the following measurement models allowed by IFRS 16:

• the fair value model in IAS 40, but only if the lessee applies this to its investment property and the right-of-use asset meets the definition of investment property in IAS 40; or
• if the lessee applies the revaluation model in IAS 16 to a class of PP&E, the lessee would also have the option to revalue all of the right-of-use assets that relate to that class of PP&E.

Answer 47

A lessee subsequently measures the right-of-use asset using a cost model under IFRS 16, unless it applies one of the following measurement models allowed by IFRS 16:

• the fair value model in IAS 40, but only if the lessee applies this to its investment property and the right-of-use asset meets the definition of investment property in IAS 40; or
• if the lessee applies the revaluation model in IAS 16 to a class of PP&E, the lessee would also have the option to revalue all of the right-of-use assets that relate to that class of PP&E.