Week 3 Everything

Question 1

Historical cost has been criticised

Answer 1

Historical cost has been criticised for bearing no

relation to current asset values.

Question 2

AASB116 entitles entities to choose between:

Answer 2

carry the non-current
assets at cost or revaluate
them to fair value

Question 3

revaluate them to fair value reassess

Answer 3

(both upward or downward) the carrying amount

of a non-current asset to fair value

Question 4

The choice between cost or fair value regards

Answer 4

The choice between cost or fair value regards an
entire class of property, plant and equipment. Entities may switch from fair value to cost for justifiable reasons and provide adequate disclosures. Some classes of assets might be measured at cost and others at fair value.

Question 5

Fair value is defined (AASB 13 Fair Value Measurement) as:

Answer 5

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. Fair value is determined on the assumption that the entity is a going concern. It is an estimate therefore wide disclosure is required.

Question 6

How do we account for revaluation?

Need to distinguish among:

Answer 6

1. Revaluation increments (upward)
2. Revaluation decrements (downward)
3. Reversal on (previous) revaluations

Question 7

Frequency of revaluations

Answer 7

Revaluations must be made with sufficient regularity so the carrying amount of each asset in the class does not differ materially from its fair value. If values change regularly and changes are material, revaluations might be necessary each reporting period. Otherwise every three to five years is sufficient.

Question 8

Reversals of (previous) revaluations

There are 2 types of reversals

Answer 8

1. Reversal of a previous revaluation increment

2. Reversal of a previous revaluation decrement

Question 9

1. Reversal on previous revaluation increment

Answer 9

Proceed as follows:

1) Reduce revaluation surplus up to it is $0
2) If any excess, record it as a loss in income statement

Question 10

2. Reversal on previous revaluation decrement

Answer 10

Proceed as follows:

1)Recognise a gain in income statement up to previous loss

2)If any excess, record it as a revaluation surplus in
equity

Question 11

Asymmetric treatment

Answer 11

Revaluation increments have no effects on IS. But higher expenses for higher depreciations.

Reevaluation decrements result in a loss in IS due to the conservatism principle.

Question 12

Revaluation surplus

Answer 12

Revaluation surplus is a reserve in stakeholders’ equity, it is not profit, but is part of other comprehensive income