Week 3: IAS16 PPE, Revaluation Method and IAS36 Impairment of Assets

Question 1

What is the histroical cost method?

Answer 1

1 – HISTORICAL COST MODEL

• Carried at cost
• Capitalise costs to bring asset into operation
• Depreciation annually
• If assets are impaired, asset is written down

Question 2

What is the reavaultion model?

Answer 2

REVALUATION MODEL

• Carried at cost initially plus costs to bring asset into operation
• Revalued up or down periodically
• If chosen, all assets in a class must be valued this way.
• Gains are recorded in shareholders equity but impairment losses in P&L
• Depreciation calculated on revalued amount for remaining life and could be higher
• If assets are impaired, asset is written down

Question 3

In the reavaultion method for non depreciabel assets how you debit and credit it?

Answer 3

If Asset increases in value, then:

DR	 Asset  (Increase in Value) (SOFP)
	CR	Revaluation Reserve (S/E section)

If Asset decreases in value, then:

DR 	Revaluation Reserve (use up Reval reserve surplus)	DR 	Expense (with excess)

	CR 	Asset (Decrease in Value) (SOFP)

Question 4

C plc bought some land 2 years ago for £30,000. Subsequently, the land value fell to £26,000.

This was charged to Profit and Loss

This year, there has been a surge in land prices. The land is now worth £40 000.

How should this transaction be recorded in the double entry?

Answer 4

Revaluation of Land (2 years ago) from £30,000 to £26,000 2 years ago

£30,000 - £26,000 = £4,000 Loss

Dr Expense (P&L) £4,000
Cr Land (SOFP) £4,000

Statement of Financial Position (New line item balances)

Assets
Land £26,000

Revaluation of Land ( this year) from £26,000 to £40,000

£40,000 - £26,000 = £14,000 Increase

Dr. Land £14,000
Cr. Reverse previous Loss £4,000
Cr. Revaluation Reserve £10,000

Statement of Financial Position (New line item balances)

Assets

Land £40,000

Shareholders Equity

Revaluation Reserve £10,000

Question 5

C plc bought some land for £45,000 3 years ago.

The asset was revalued to £60,000
2 years ago.

This year, the value has fallen to £39,000.

How should this transaction be recorded in the double entry?

Answer 5

Revaluation of Land (this year) from £60,000 to £39,000

£60,000 - £39,000 = £21,000 Loss

Dr Revaluation Reserve (use up first) £15,000
Dr Expense (balance to expense) £6,000
Cr Land £21,000

Statement of Financial Position (New line item balances)

Assets
Land £39,000

Shareholders Equity
Revaluation Reserve £0

Question 6

How do you work the revaluation method for depreciable assets?

Answer 6

Calculate NBV (Carrying Value)

Calculate Gain or Loss by comparing carrying value to revalued amount and adjust revaluation reserve for gain/(loss)

Adjust Asset account to new fair value

Reverse previous Accumulated Depreciation on asset

Recalculate new S/L or Reducing Balance depreciation on remaining useful life

Question 7

D plc bought machinery for £20,000 1/1/16.

Straight Line depreciation, 5 years

On 1/1/2018, the asset was revalued to £24,000.

The expected useful life remains unchanged.

How should this transaction be recorded in the double entry?

Answer 7

Calculate Net Book Value

1. Annual Depreciation Charge

£20,000/5 yrs = £4,000 per year

2. Accumulated Depreciation 2 years

£4,000 x 2 = £8,000

3. Net Book Value today

£20,000 - £8,000 = £12,000

4. Revaluation Gain/(Loss

£24,000 - £12,000 NBV = £12,000 Increase

Record Revaluation Gain and Reverse A/D of £8,000 to reset NBV

£24,000 - £12,000 NBV = £12,000 Gain

Dr. PPE £4,000 (£24 - £20)
Dr. A/D £8,000 (reverse)
Cr. Revaluation Reserve £12,000

Asset £24,000
A/D £0
NBV £24,000

Calculate New annual depreciation

£24,000 / 3 years = £8,000 pa

Question 8

Vann Ltd commenced trading on 1/1/2013.

Purchased a building for £120,000
Straight line over 30 years, no residual value.

After 5 years of trading, Fair value £175,000.
No change to useful life, 25 years remaining.

Calculate the annual depreciation charge to the income statement in each year of the asset’s life and the revaluation reserve as at 1/1/2018, 5 years later.

Answer 8

1. Annual Depreciation Charge

£120,000/30yrs = £4,000 per year

2. Accumulated Depreciation

5 x £4,000 = £20,000

3. Net Book Value

£120,000 - £20,000 = £100,000

4. Revaluation Gain/(Loss)

£175,000 - £100,000 = £75,000 Increase

Record Revaluation Gain and Reverse A/D of £20,000 to reset NBV

£175,000 - £100,000 = £75,000 Increase

Dr PPE £55,000 (£175 - £120)
Dr A/D £20,000 (reverse)
Cr Revaluation reserve £75,000

Asset £175,000
A/D £0
NBV £175,000

Recalculate Annual Depreciation:
£175,000 / 25 years = £7,000.
( ICAEW study manual financial accounting)

Question 9

What are the advanatges of IAS 16?

Answer 9

IAS 16: Advantages of this method

Useful when the market value of an asset has significantly increased since its purchase.

Gives a more accurate representation of the company’s financial position and performance.

Can offset future impairment losses against any surplus

Question 10

What are the disadvanatges of IAS 16?

Answer 10

IAS 16: Disadvantages of this method

All assets in the class must be recorded at fair value and revalued periodically even if that means recording losses, including higher depreciation.

Requires the entity to disclose the nature and extent of the revaluation.

Can worsen financial ratios which include asset values like return on assets or shareholders equity like return on equity.

More costly as requires professional valuations

Question 11

What is IAS 36 Impairment for Non-Current Tangible Assets?

Answer 11

IAS 36 Impairment for Non-Current Tangible Assets:

Assets should not be carried at more than recoverable amount.

If there is a triggering event, indicating impairment, then conduct impairment review

Question 12

What are some triggering events for impairment of assets?

Answer 12

1) fall in market value

2) material adverse changes in markets

3) material adverse changes in regulations

4) Recurring Losses

5) Damage

6) Chnage in the nature of business or personel

Question 13

How to determine fair value of a depreciable asset?

Answer 13

measurement of fair value less costs to sell

mesaurement may be way of:

a binding sale agreement
the current market price less cost of disposal

measurement of value in use:

value in use is determined by esitmating future cash inflows and outflows to be derived from the use of the asset and its ultimate disposal, and applying a suitable discount rate to these cash flows. cash flows relating to financing activities or income taxes should not be included

Question 14

Under IAS 36 how do you treat impairment loss?

Answer 14

Write down asset value (specific one if possible)

If asset not previously revalued, take loss to income statement as expense

If asset previously revalued:
Offset loss against revaluation gain previously booked
Excess to income statement

Question 15

what is the double entry for this

31/12/2017 Balance
A group of assets in the books of a company were previously revalued up to £1.6m (ignoring depreciation):
Carrying amount 1, 000, 000
Revalued to 1, 600, 000

31/12/2017 Revaluation Entry?

Answer 15

31/12/2017 Balance
A group of assets in the books of a company were previously revalued up to £1.6m (ignoring depreciation):
Carrying amount 1, 000, 000
Revalued to 1, 600, 000

31/12/2017 Revaluation Entry?
£1,600,000 – £1,000,000 = £600,000
Dr Asset 600,000
Cr Revaluation Reserve 600,000

Question 16

what is the impairment in this example and how is the dr and cr worked out?

On 31/12/2018: Impairment Test
Carrying amount £1, 500, 000
Fair Value £600, 000
Value in use £800, 000

What is the impairment?

Answer 16

On 31/12/2018: Impairment Test
Carrying amount £1, 500, 000
Fair Value £600, 000
Value in use £800, 000

What is the impairment?
£1,500,000 - £800,000 = £700,000
Dr Reval Reserve (use up first) £ 600 000
Dr Expense £ 100 000
Cr Property £ 700 000