chapter6 propertyplantandequipmentmodels2008

Gripping IFRS Property, plant and equipment: the models

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Chapter 6

Property, Plant and Equipment: The Models

Reference: IAS 16, SIC 21 Contents:

Page

1. Introduction

219

2. Definitions

220

3. The cost model 3.1 The ledger accounts 3.2 The magical line

Example 1: cost model: impairment loss Example 2: cost model: reversal of an impairment loss Example 3: cost model: a summary example (the asset is not depreciated) Example 4: cost model: a summary example (the asset is depreciated)

221 221 221 222 223 224 226

4. The revaluation model 4.1 Overview 4.2 The ledger accounts 4.3 The magical line

Example 5: revaluation model: a summary example (the asset is not depreciated) Example 6: revaluation model: a summary example (the asset is depreciated)

4.4 The difference between the gross and net methods 4.4.1 The gross replacement value method 4.4.2 The net replacement value method Example 7: revaluation model: value increases, creating a revaluation surplus Example 8: revaluation model: value decreases, reversing the revaluation surplus and creating a revaluation expense Example 9: revaluation model: increase in value, reversing previous revaluation expense and creating a revaluation surplus Example 10: disclosure of a revalued asset – NRVM and GRVM compared

4.5 Realisation of the revaluation surplus Example 11: removal of the revaluation surplus

227 227 227 228 230

232

234 235 235 235 237

238

240

241 242

5. Disclosure 5.1 Overview 5.2 Accounting policies and estimates 5.3 Statement of comprehensive income disclosure 5.4 Statement of financial position disclosure 5.5 Statement of changes in equity disclosure 5.6 Further encouraged disclosure 5.7 Sample disclosure involving property, plant and equipment

Example 12: cost model disclosure Example 13: revaluation model disclosure

6. Summary

243 243 243 243 244 244 244 245 247 250 257


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1. Introduction This chapter is really a continuation of the last chapter in that both chapters relate to property, plant and equipment and both are therefore governed by IAS 16. This chapter, however, deals with the two measurement models that IAS 16 allows you to apply: • the cost model; and • the revaluation model. You can choose either model but must then apply that model to an entire class of assets. This means, for example, that an entity may not use the cost model for a machine that makes bread and the revaluation model for a machine that slices bread. Both machines must be measured using the same model, say the cost model (since machines are a ‘class of asset’). Using the cost model for machines would not, however, prevent the entity from measuring its vehicles using the revaluation model because vehicles are a different class of asset to machines. The cost model is the simplest model and is based on the original cost. The cost model is therefore the base-line or benchmark method. This cost model is definitely easier to apply in practice (and research suggests that it is currently the most commonly used model). This does not for a minute suggest that the revaluation model is an unlikely test or exam question though since the current trend in accounting is to use fair values (instead of historic costs) for measurement purposes. Fortunately for you, however, the difficulty in applying the revaluation model is not due to complexity from an academic point of view, but rather it is complex to apply from a practical point of view (i.e. accounting and computer systems may need to be updated to enable the revaluation model to be used). Irrespective of the model used, the asset’s carrying amount is reflected through the use of the following accounts: • cost account • accumulated depreciation and impairment loss account. These two accounts (accumulated depreciation account and accumulated impairment loss account) could be combined into one account instead in which case, depreciation, impairment losses and impairment losses reversed would all be accumulated in the accumulated depreciation and impairment loss account. This is the approach used in this book. Irrespective of the model chosen, an asset is depreciated and tested for impairment annually. We know how to calculate depreciation (this was covered in the previous chapter). Impairments will be briefly explained in the process of this chapter, although impairment testing is explained in more detail in the next chapter. The previous chapter was based on the cost model, with the one exception: the previous chapter did not tell you about the need to test for impairments annually. If the results of an impairment test suggest that an asset’s carrying amount may be too high, it could be for the simple reason that the accumulated depreciation is insufficient, in which case extra depreciation is processed and accounted for as a change in estimate (according to IAS 8: estimates, errors and policies). If the impairment test suggests that the carrying amount may be too high, but you think the past depreciation is a fair reflection of past usage, then the asset’s recoverable amount must be calculated and then compared with its carrying amount. If the recoverable amount is less than the carrying amount, the carrying amount must be reduced by processing an impairment loss adjustment. Notice the difference: the reduction in carrying amount is expensed as an impairment loss if it reflects ‘damage’ to the asset whereas a drop in value through ‘normal usage’ is called depreciation instead. If the estimates that were used in calculating the recoverable amount change in the future, and these estimates change such that the recoverable amount then increases above the carrying amount, the previous impairment loss or part thereof may be reversed. The difference is called an impairment loss reversed.


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The carrying amount under the cost model is therefore measured at: • cost less accumulated depreciation and less accumulated impairment losses. The revaluation model, whilst requiring the entity to revalue to fair value, still requires the entity to check for impairments at the end of every year. This means that the carrying amount under the revaluation model is measured at: • fair value less subsequent accumulated depreciation and accumulated impairment losses. The calculation of the recoverable amount is covered by IAS 36, the standard governing Impairments of Assets, and is therefore covered in an entirely separate chapter. This chapter does not show you how to calculate the recoverable amount but shows you how to account for adjustments to the asset’s carrying amount. 2. Definitions Here are a further few definitions that will be used in this chapter (these are IAS 16 definitions, some of which I have modified slightly): Impairment loss: • the excess of • the carrying amount • over the recoverable amount Fair value: • the amount for which an asset could be exchanged between • knowledgeable, willing parties in an arm's length transaction. Recoverable amount: • is the higher of the asset’s

- fair value less costs to sell and - value in use.

Remember that the term ‘recoverable amount’ is covered in IAS 36, the standard governing the Impairments of Assets. This standard is covered in an entirely separate chapter and, therefore, the definitions and calculations of ‘fair value less costs to sell’ and ‘value in use’ are covered in that separate chapter. In order to understand the differences between the cost model and the revaluation model, there are a few more terms that are used in this chapter that you should first become familiar with. These terms are not defined in IAS 16 and are simply the author’s definitions. Historical carrying amount (depreciated historic cost): • original cost less • accumulated depreciation; Actual carrying amount, when using the cost model: • original cost • less accumulated depreciation and impairment losses. Actual carrying amount, when using the revaluation model: • the fair value at date of revaluation • less subsequent accumulated depreciation and impairment losses.


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3. The cost model 3.1 The ledger accounts The cost model relates to the measurement of the asset as follows: • original cost • less accumulated depreciation and • less accumulated impairment losses. When using the cost model, the cost account remains unchanged unless there is: • a purchase of another asset (in which case, the cost of the new asset is added); or • a sale of an asset (in which case, the cost of the sold asset is deducted). You may keep two separate accounts for accumulated depreciation and accumulated impairment losses, but it is possible to combine these two accounts into one account. This text has opted to combine these two accounts into one account: accumulated depreciation and impairment losses. The accumulated depreciation and impairment loss account reflects adjustments to the carrying amount caused by: • depreciation (usage); • impairment losses (damage); and • impairment losses reversed (if the damage is repaired in some way). 3.2 The magical line When using the cost model, the value of an asset may never be increased above its historical carrying amount (the magical line). Since this historical carrying amount decreases each year, the amount of any impairment loss reversed (income) will not be as great as the amount of the original impairment loss (expense). This is best explained by way of examples. At first you may find it useful to sketch a graph of the situation, plotting the ‘magical’ historical carrying amount line (HCA), and then later the actual carrying amount (ACA) and the recoverable amount (RA). Incidentally, most of us never grow out of the need for a graph!

0

Historical carrying amount line

Useful Life

Cos

t

Notice how the diagonal line represents a gradual reduction in the historical carrying amount as the asset is depreciated over its useful life. Look at the graph carefully: when using the cost model, the carrying amount of the asset is not allowed to be raised above this magical line (the diagonal line).


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For example: Assume that the recoverable amount is greater than the historical carrying amount. • If the actual carrying amount equalled the historical carrying amount, no adjustment

would be made since this would entail increasing the actual carrying amount above its historical carrying amount.

• If, however, the asset had previously been impaired, then the asset’s actual carrying amount would be less than the historical carrying amount. In this case, the actual carrying amount must be increased, but only back up to the historical carrying amount (reversal of a previous impairment loss) but not all the way up to the recoverable amount (i.e. not above the historical carrying amount line).

Another way of showing the relationship between the recoverable amount, the carrying amount and the historical carrying amount is presented in the following block diagramme. Block diagramme 1: Adjustments to the carrying amount using the cost model

HCA HCA RA

Not

allowed

HCA/ ACA

ACA RA HCA

Imp loss

Further imp loss

Imp loss reversed

Imp loss reversed

RA RA ACA ACA

This is much easier to understand if we look at a few examples involving numbers. Example 1: cost model - impairment loss: Cost of plant at 1/1/20X1: C100 000 Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years) Recoverable amount at 31/12/20X1: C60 000 Recoverable amount at 31/12/20X2: C45 000 Required: Provide the journals for both 20X1 and 20X2. Solution to example 1: cost model - impairment loss

W1: Impairment loss: 20X1 C Cost 1/1/20X1 Given 100 000 Accumulated depreciation 20X1 (100 000 x 20% x 1 yr) (20 000) Actual (and historic) carrying amount 31/12/20X1 80 000 Recoverable amount 31/12/20X1 Given (60 000) Impairment loss The RA is less than CA 20 000

Journals: 20X1 Debit Credit

Depreciation – plant (expense) (100 000/ 5yrs remaining) 20 000 Plant: accumulated depreciation & impairment losses (-A) 20 000 Depreciation of asset for year ended 31 December 20X1 Impairment loss – plant (expense) W1 20 000 Plant: accumulated depreciation & impairment losses (-A) 20 000 Impairment of asset as at 31 December 20X1


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Graphical depiction: 31/12/20X1


0 Useful Life

Cos

t

20 000 (Debit impairment loss)

60 000 (RA)

80 000 ( HCA & ACA)

Journals: 20X2 Debit Credit

Depreciation – plant (expense) (60 000/ 4yrs remaining (5-1)) 15 000 Plant: accumulated depreciation & impairment losses (-A) 15 000 Depreciation of asset for year ended 31 December 20X2

Note: no further impairment loss was required to be journalised at 31/12/20X2 since the new carrying amount (60 000 – 15 000 = 45 000) equals the recoverable amount. Example 2: cost model - reversal of impairment loss Cost of plant at 1/1/20X1: C100 000 Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years) Recoverable amount at 31/12/20X1: C60 000 Required: Provide the journals for 20X2, assuming that the recoverable amount at 31/12/20X2 was estimated at: A. C55 000; and B. C65 000 Solution to example 2: cost model - reversal of impairment loss W1: Historical carrying amount 31/12/20X2: A and B

Cost 100 000 Accumulated depreciation (100 000 x 20% x 2yrs) (40 000) 60 000

W2: Actual carrying amount 31/12/20X2 (before the impairment testing): A and B

Cost 100 000 Accumulated depreciation and impairment losses (depreciation 20X1: 20 000 + IL 20X1: 20 000 + depr 20X2: 15 000)

(55 000)

45 000

W3: Reversal of impairment loss required: A B Recoverable amount limited to historical carrying amount (given: note that in part B that the RA of 65 000 is limited to historical carrying amount of 60 000)

55 000 60 000

Less actual carrying amount (W2) 45 000 45 000 10 000 15 000


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Journals: 20X2 A B Dr/ (Cr) Dr/ (Cr) Plant: accumulated depreciation and impairment losses (-A) 10 000 15 000 Impairment loss reversed – plant (income) (10 000) (15 000) Reversal of impairment loss journal on 31/12/20X2:

Graph depicting A: 31/12/20X2

0


Useful Life

Cos

t

55 000 (RA)

45000 (ACA)

60 000 (HCA)

10 000 (Credit reversal of impairment loss)

Graph depicting B: 31/12/20X2

0


Useful Life

Cos

t

15 000 (Credit reversal of impairment loss)

45 000 (ACA)

60 000 (HCA)

65 000 (RA)(No increase allowed)

In summary, let’s consider the effects of impairment testing on: • an asset that is not depreciated: land (example 3) • an asset that is depreciated (example 4). Example 3: cost model – a summary example (the asset is not depreciated) Cost of land at 1/1/20X1: 100 000 Depreciation: This land is not depreciated Recoverable amount • 31/12/20X1 120 000 • 31/12/20X2 70 000 • 31/12/20X3 90 000 • 31/12/20X4 110 000 Required: Show the statement of financial position and ledger accounts for each of the years ended 31 December up to 20X4.


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Solution to example 3: cost model - summary example (the asset is not depreciated) Workings: W1: Carrying amount Jnl 20X4 20X3 20X2 20X1 No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Opening balance 1 90 000 70 000 100 000 100 000 Depreciation Land not depreciated (0) (0) (0) (0) Adjustment: • above

HCA Not allowed above HCA 0 0

• below HCA

Dr: Impairment loss 2 (30 000)

• up to HCA Cr: impairment loss reversed

3; 4 10 000 20 000

Closing balance: (lower of recoverable amount or carrying amount) 100 000 90 000 70 000 100 000 Historical carrying amount: (cost) 100 000 100 000 100 000 100 000 Ledger accounts:

Cost: land (asset) Accumulated impairment losses: land (asset)

1/1/ 20X1: Bank

(1) 100 000

Balance c/f 30 000

31/12/20X2 Imp loss

(2) 30 000

100 000 100 000 30 000 30 000 Balance 100 000 31/12/20X3

Imp Loss Rev

(3) 20 000 31/12/20X2: Balance b/f

30 000

Balance c/f 10 000 30 000 30 000

Bank

31/12/20X4 Imp Loss Rev

(4) 10 000

31/12/20X3: Balance b/f

10 000

1/1/ 20X1: Land

(1) 100 000

Balance c/f 0

10 000 10 000

31/12/20X4 Balance b/f

0

Impairment loss expense Reversal of impairment loss income

31/12/20X2 Acc Imp Loss

(2) 30 000

31/12/20X2 P&L

30 000

31/12/20X3 P&L

20 000


(3) 20 000

31/12/20X4 P&L

10 000


(4) 10 000

Disclosure: Company name Statement of financial position As at 31 December (extracts)

ASSETS 20X4 20X3 20X2 20X1 Non-current Assets C C C C Land 20X1: Cost: 100 000 – AIL: 0

20X2: Cost: 100 000 – AIL:30 000 20X3: Cost: 100 000 – AIL:10 000 20X4: Cost: 100 000 – AIL:0

100 000 90 000 70 000 100 000


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Example 4: cost model – a summary example (the asset is depreciated) Cost of machine at 1/1/20X1: 100 000 Depreciation: 25% per annum to a nil residual value Recoverable amount • 31/12/20X1 120 000 • 31/12/20X2 40 000 • 31/12/20X3 60 000 • 31/12/20X4 0 Required: Show the statement of financial position and ledger accounts for each of the years ended 31 December. Solution to example 4: cost model – a summary example (the asset is depreciated) Workings:

W1: Carrying amount and adjustments Jnl 20X4 20X3 20X2 20X1 No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Opening balance 1 25 000 40 000 75 000 100 000 Depreciation 100 000 / 4;

75 000 / 3; 40 000 / 2; 25 000 / 1

2

(25 000) (20 000) (25 000) (25 000)

Adjustment: • above HCA Not allowed above HCA 0 0 • up to HCA Cr: impairment loss reversed 4 5 000 • below HCA Dr: Impairment loss 3 (10 000) Closing balance: lower of recoverable amount or carrying amount 0 25 000 40 000 75 000 Historical carrying amount: (cost) 0 25 000 50 000 75 000 Disclosure: Company name Statement of financial position As at 31 December (extracts)

ASSETS 20X4 20X3 20X2 20X1 Non-current Assets C C C C Machine 20X1: Cost: 100 000 – AD&IL: 25 000

20X2: Cost: 100 000 – AD&IL:60 000 20X3: Cost: 100 000 – AD&IL:75 000 20X4: Cost: 100 000 – AD&IL:100 000

0 25 000 40 000 75 000

Ledger accounts:

Cost (asset) Bank

1/1/ 20X1:

Bank

(1) 100 000 Balance c/f 100 000

1/1/ 20X1:

Machine

(1) 100 000

100 000 100 000

Balance b/f 100 000


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Depreciation expense Accumulated depreciation & impairment losses

31/12/20X1 AD&IL 25 000

(2) 31/12/20X1 P&L

25 000

Balance c/f 25 000

31/12/20X1

Depr

(2) 25 000

31/12/20X2 AD&IL 25 000 (2)

31/12/20X2 P&L 25 000

25 000 25 000

31/12/20X3 AD&IL

20 000 (2)

31/12/20X3 P&L

20 000

31/12/20X2:

Balance b/f

25 000

31/12/20X4 AD&IL 25 000 (2)

31/12/20X4 P&L 25 000

Depr 25 000 (2)

Balance c/f 60 000 Imp loss 10 000 (3)

60 000 60 000

ILR

(4) 5 000

31/12/20X3:

Balance b/f

60 000

Balance c/f 75 000 Depr 20 000 (2)

80 000 80 000

31/12/20X4:

Balance b/f

75 000

Balance c/f 100 000 Depr 25 000 (2)

100 000 100 000

Balance b/f 100 000

Impairment loss expense Reversal of impairment loss income

31/12/20X2 AccImpLoss 10 000 (3)

31/12/20X2 P&L 10 000

31/12/20X3 P&L 5 000

31/12/20X3 AccImpLoss 5 000 (4)

4. The revaluation model 4.1 Overview The revaluation model involves revaluing the asset’s carrying amount to its fair value. This does not have to happen every year but can be at periodic intervals. Whatever interval is used, however, the revaluations must be performed regularly enough so that the carrying amount of the asset at year-end does not differ materially from its fair value. If the entity wishes to use the revaluation model for a particular asset, it must remember that it will have to apply the revaluation model to all assets within that class of assets. 4.2 The ledger accounts The revaluation model refers to the measurement of an asset’s carrying amount at: • fair value • less subsequent accumulated depreciation • less subsequent accumulated impairment losses.

When using the revaluation model, the cost account remains unchanged unless there is: • a purchase of another asset (in which case, the cost of the new asset is added); • a sale of an asset (in which case, the cost of the sold asset is deducted); or • a revaluation to fair value.


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You may keep two separate accounts for accumulated depreciation and accumulated impairment losses, but it is possible to combine these two accounts into one account. This text has opted to combine these two accounts into one account: accumulated depreciation and impairment losses. This accumulated depreciation and impairment loss account reflects adjustments to the carrying amount caused by: • depreciation (usage); • impairment losses (damage); and • impairment losses reversed (if the damage is repaired in some way). 4.3 The magical line Unlike the cost model, the revaluation model allows the carrying amount of the asset to be increased above its historical carrying amount (the magical line) as well as to be decreased below it. As with the cost model, the concepts are best understood by way of examples. At first you may find it useful to sketch a graph of the situation, plotting the ‘magical’ historical carrying amount line (HCA), and then later the actual carrying amount (ACA) and the recoverable amount (RA).

0


Useful Life

Cos

t

Notice how the diagonal line represents a gradual reduction in the historical carrying amount as the asset is depreciated over its useful life. Look at the graph carefully: when using the revaluation model, the carrying amount of the asset may be raised above this magical line (the diagonal line) – but an increase in carrying amount above the magical line is recognised in equity, not in the entity’s profits. Adjustments to the carrying amount that do not increase the carrying amount above the magical line are simply recognised as part of profit for the year (i.e. as an income or expense). In the event that the carrying amount of an asset is increased to such a degree that it is now greater than its historical carrying amount, the increase above the line is recognised in the revaluation surplus account. This account is an equity account. The portion above the line is not credited to income because income represents economic benefits that have already been earned. In contrast, such an increase in the carrying amount of an asset represents extra future economic benefits expected from the future use or sale of the asset. Furthermore, an asset has increased in value with no concomitant increase in liabilities, thus having increased equity (assets – liabilities). This increase is recognised as other comprehensive income and is accumulated in equity.


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The difference between the historical carrying amount and the fair value carrying amount can be summarised as follows:

HCA

Fair value greater than HCA

Difference in equity:

Difference in profit: Fair value

less than HCA

HCA: historical carrying amount A summary of carrying amount adjustments under the revaluation model is reflected in the following block diagramme, which shows the inter-relationship between the actual carrying amount, fair value and historical carrying amount (i.e. the balance that the asset would have had had we not been fiddling with the carrying amounts). Block diagramme 2: Adjustments to the carrying amount using the revaluation model

FV ACA

Revaluation surplus

(created/ increased)

Revaluation surplus

(reversed/ decreased)

HCA/ ACA

HCA HCA

Expense

Income

Expense

FV ACA FV

All assets must be tested for impairment – even those measured under the revaluation model. Although IAS 16 does not provide any guidance, it is submitted that when making an adjustment to an asset’s carrying amount to one that is below the historical carrying amount line, one should differentiate between adjustments to a fair value from adjustments to a recoverable amount. Although IAS 16 may not make this differentiation, this text identifies: • an expense (i.e. a downward adjustment) as:

- a revaluation expense if the carrying amount is decreased to a fair value; - an impairment loss expense if the carrying amount is decreased to a recoverable amount;

• an income (upward adjustment) as: - a revaluation income if the carrying amount is increased to a fair value; - an impairment loss reversed if the carrying amount is increased to a recoverable amount.

This differentiation is relevant, it is submitted, because for example, a drop to a lower fair value does not technically mean that the recoverable amount has dropped and therefore it does not mean that the asset is impaired. Consider the following worked example.

Worked example: C Cost: 1/1/20X1 120 000 Less accumulated depreciation: 31/12/20X2 20 000 Carrying amount (actual and historical): 31/12/20X2 100 000 Fair value: 1/1/20X3 90 000 Expected costs to sell: 1/1/20X3 5 000 Value in use: 1/1/20X3 130 000 Recoverable amount (greater of value in use and fair value less costs to sell) 130 000 • Value in use Given 130 000 • Fair value less costs to sell 90 000 – 5 000 85 000


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If the revaluation model is applied on 1 January 20X3, the asset’s carrying amount will drop from 100 000 to its fair value of 90 000. The issue is, however, that before making this downward adjustment, the asset’s recoverable amount (130 000) is far greater than its carrying amount (100 000) and therefore the asset is definitely not impaired. It would therefore not be appropriate to call this downward adjustment an impairment loss expense (because the asset is not impaired) and would therefore be better identified as a revaluation expense (or similar).

As already explained, this text differentiates a revaluation expense from an impairment loss expense (and a revaluation income from an impairment loss reversed), but there are those who advocate that such differentiation is unnecessary. On the basis that IAS 16 does not make this differentiation clearly required, it is common practice to identify all adjustments made to the carrying amount below the historical carrying amount line, (whether an adjustment to a recoverable amount or to a fair value), as follows: • expense adjustments (i.e. adjustments downwards from historical carrying amount): - impairment losses; and • income adjustments (i.e. adjustments upwards to historical carrying amount): - impairment loss reversed.

Please note that irrespective of whether or not you interpret IAS 16 and IAS 36 to require differentiation, the carrying amount will be the same. To start with, we will look at an example that involves land, since land is an asset that is generally not depreciated. This will allow us to see the essence of the revaluation model. From there we will progress to an example that involves a depreciable asset. Example 5: revaluation model – a summary example (the asset is not depreciated) Cost of land at 1/1/20X2: 100 000 Depreciation: This piece of land is not depreciated Fair value • 1/1/20X2 120 000 • 1/1/20X3 90 000 • 1/1/20X4 70 000 • 1/1/20X5 110 000 The company’s policy is to leave any balance on the revaluation surplus intact until such time as the asset is disposed of. Required: Show the statement of financial position and ledger accounts for each of the years ended 31 December 20X2 to 20X5. Solution to example 5: revaluation model - a summary example (asset is not depreciated) Workings: W1. Carrying amount and adjustments Jnl 20X5 20X4 20X3 20X2 No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Opening balance 1 70 000 90 000 120 000 100 000 Depreciation Land not depreciated (0) (0) (0) (0) Fair value adjustments: Above HCA Cr: revaluation surplus 2; 7 10 000 20 000 Down to HCA Dr: revaluation surplus 3 (20 000) Below HCA Dr: revaluation expense 4; 5 (20 000) (10 000) Up to HCA Cr: revaluation income 6 30 000 Closing balance fair value 110 000 70 000 90 000 120 000 Historical carrying amount: (cost) 100 000 100 000 100 000 100 000


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Ledger accounts:

Cost: land (asset) Revaluation surplus

1/1/ 20X1: Bank 100 000

(1) Balance c/f 100 000

Balance c/f 20 000 1/1/20X2: Cost 20 000 (2)

100 000 100 000 20 000 20 000 31/12/ 20X1: Balance b/f 100 000

1/1/20X3: Cost 20 000 (3)

31/12/20X2: Balance b/f 20 000

1/1/20X2: Rev Surp 20 000 (2) Balance c/f 120 000

20 000 20 000 31/12/20X3:

Balance b/f 0 120 000 120 000

31/12/ 20X2: Balance b/f 120 000

1/1/20X3: Rev Surp 20 000

(3) 1/1/20X5:

Cost 10 000 (7) Rev Exp 10 000 (4) 10 000 10 000 Balance c/f 90 000 31/12/20X5:

Balance b/f 10 000 120 000 120 000 31/12/ 20X3: Balance b/f 90 000

1/1/20X4: Rev Exp 20 000 (5)

Balance c/f 70 000 90 000 90 000 Bank 31/12/ 20X4: Balance b/f 70 000

1/1/ 20X1: Land 100 000 (1)

1/1/20X5: Rev Inc 30 000 (6)

Rev Surp 10 000 (7)

31/12/ 20X5:

110 000 110 000

Balance b/f 110 000 Revaluation expense Revaluation income

1/1/20X3: Cost 10 000

(4) 31/12/20X3 P&L

10 000

31/12/20X5 P&L

30 000

1/1/20X5 Cost

(3) 30 000

1/1/20X4 Cost 20 000 (5)

31/12/20X4 P&L

20 000


ASSETS 20X5 20X4 20X3 20X2 Non-current Assets C C C C Land 20X1: Cost: 100 000 – AIL: 0


110 000 70 000 90 000 120 000

EQUITY AND LIABILITIES Equity Revaluation surplus 10 000 0 0 20 000


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Now let us do an example that involves a depreciable asset. To keep things simple, we will combine the cost and accumulated depreciation accounts into one account that reflects carrying amount. It is not difficult to separate the entries between these two accounts, but is important to see the big picture before getting bogged down with the detail. Example 6: revaluation model – a summary example (the asset is depreciated) Cost of machine at 1/1/20X1: 100 000 Depreciation: 10% per annum to a nil residual value Fair value • 1/1/20X2 180 000 • 1/1/20X3 60 000 • 1/1/20X4 77 000 • 1/1/20X5 120 000 The company’s policy is to transfer the realised portion of the revaluation surplus to retained earnings as the asset is used. Required: Show the statement of financial position and ledger accounts for each of the years ended 31 December 20X1 to 20X5. Prepare the asset’s account as a net carrying amount account (i.e. do not prepare separate cost and accumulated depreciation accounts). Solution to example 6: revaluation model - a summary example (asset is depreciated) Workings:

W1: Carrying amount and adjustments

Jnl 20X5 20X4 20X3 20X2 No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)

Opening balance 20X2: 100 000 x 9 / 10

66 000 52 500 160 000 90 000

Adjustment: Above HCA Cr: revaluation

surplus 1;7; 9 54 000 7 000 90 000

Down to HCA Dr: revaluation surplus

3 (80 000)

Below HCA Dr: revaluation expense

4 (20 000)

Up to HCA Cr: revaluation income

6 17 500

Fair value 120 000 77 000 60 000 180 000 Depreciation: • 180 000/ 9 yrs 2 (20 000) • 60 000 / 8

yrs 5 (7 500)

• 77 000 / 7 yrs

8 (11 000)

• 120 000 / 6 yrs 10 (20 000) Closing balance 100 000 66 000 52 500 160 000 Historical carrying amount on date of revaluation

60 000 70 000 80 000 90 000

Ledger accounts are overleaf.


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Ledger accounts:

Carrying amount: machine (asset) Revaluation surplus (equity)

1/1/ 20X2: Balance b/f

90 000

31/12/20X2 Depr

(2) 20 000

31/12/20X2: Ret Earn (90 000/ 9)

10 000

1/1/20X2: Cost

(1) 90 000

Rev Surp 90 000 (1) Balance c/f 160 000 Balance c/f 80 000 180 000 180 000 90 000 90 000

31/12/ 20X2: Balance b/f 160 000

1/1/20X3: CA 80 000 (3)

31/12/ 20X2: Balance b/f 80 000

1/1/20X3: Rev Surp 80 000 (3)

Balance c/f 0

Rev Exp 20 000 (4) 80 000 80 000

31/12/20X3 Depr 7 500 (5)

31/12/20X3 Balance b/f 0

Balance c/f 52 500 31/12/20X4: Ret Earn (7 000/ 7) Balance c/f

1 000

6000

1/1/20X4 CA 7 000 (7)

160 000 160 000 7 000 7 000

31/12/ 20X3: Balance b/f 52 500

31/12/20X4 Balance b/f 6 000

1/1/20X4 Rev Inc

(6) 17 500

31/12/20X4 Depr

(8) 11 000

31/12/20X5: Ret Earn (60 000/ 6)

10 000

1/1/20X5 CA

(9) 54 000

Rev Surp 7 000 (7) Balance c/f 66 000 Balance c/f 50 000 77 000 77 000 60 000 60 000

31/12/ 20X4: Balance b/f 66 000

31/12/ 20X5: Balance b/f 50 000

1/1/20X5 Rev Surp 54 000 (9)

31/12/20X5 Depr 20 000 (10)

Balance c/f 100 000 120 000 120 000

31/12/ 20X5: Balance b/f 100 000

Depreciation expense Retained earnings (equity)

31/12/20X2 CA 20 000 (2)

31/12/20X2 P&L

20 000

31/12/20X2 Rev Surp 10 000

31/12/20X3 CA 7 500 (5)

31/12/20X3 P&L 7 500

31/12/20X4: Rev Surp 1 000

31/12/20X4 CA 11 000 (8)

31/12/20X4 P&L 11 000

31/12/20X5: Rev Surp 10 000

31/12/20X5 CA 20 000 (10)

31/12/20X5 P&L 20 000

Revaluation expense Revaluation income

1/1/20X3: CA 20 000 (4)

31/12/20X3 P&L

20 000

31/12/20X4 P&L

17 500

1/1/20X4 CA 17 500 (6)


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ASSETS 20X5 20X4 20X3 20X2 Non-current assets C C C C Machine 20X1: Cost: 100 000 – AIL: 0


100 000 66 000 52 500 160 000

EQUITY AND LIABILITIES Equity Revaluation surplus 50 000 6 000 0 80 000 Notice how the revaluation surplus balance in the above statement of financial position reflects the difference between the carrying amount and what it would have been had the asset not been revalued: 20X5 20X4 20X3 20X2 C C C C Carrying amount of asset is: statement of financial position 100 000 66 000 52 500 160 000 Historical carrying amount: original cost – depreciation 50 000 60 000 70 000 (a)

Revaluation surplus 80 000

50 000 6 000 0 80 000 a) Remember that by the end of 20X2, the asset has been depreciated for two years (20X1 and 20X2):

100 000 – 100 000 x 10% x 2 years = 80 000

Another interesting point is that the adjustments made to retained earnings reflect the effect that the revaluation has had on income in each of the years to date:

Effect on statement of comprehensive income between 20X2 and 20X5 Cumulative C

Actual effect on profit using the revaluation model: Depreciation expense: 20X1 to 20X5 10 000 +20 000 +7 500 +11 000 +20 000 68 500 Revaluation expense (20X3) 20 000 Revaluation income (20X4) (17 500) Net effect on profit (between 20X1 and 20X5) 71 000

Effect on profit had the cost model been used instead: Depreciation expense: 20X1 to 20X5 100 000 x 10% x 5 years (50 000) Transfer: revaluation surplus to retained earnings 10 000 + 1 000 + 10 000 21 000 4.4 The difference between the gross and net methods As mentioned under the cost model, whether the cost model or the revaluation model is used, the asset’s carrying amount is represented by two accounts: • Cost account; and • Accumulated depreciation and impairment loss account. Under the cost model, adjustments to carrying amount only affect the accumulated depreciation and impairment loss account (with the result that the cost account remains unchanged). Under the cost model, therefore, the cost account continues to reflect cost. Under the revaluation model, however, adjustments to carrying amount affect both the cost account and the accumulated depreciation and impairment loss account. In fact, since adjustments are made to the cost account such that the cost account no longer reflects cost, it is referred to as ‘gross carrying amount’ in the financial statements.


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When making adjustments to an asset’s carrying amount under the revaluation model, the entity may choose to account for the adjustment using: • the gross replacement value method; or • the net replacement value method. The carrying amounts under each of these methods will be the same, although the method used will affect the disclosure of the breakdown of the net carrying amount into its components of: • gross carrying amount (i.e. the amount sitting in the cost account); and • accumulated depreciation and impairment losses. 4.4.1 The gross replacement value method This method involves restating the cost account to the new gross replacement value and proportionally restating the accumulated depreciation so that the net carrying amount equals the net replacement value (fair value). In other words, the cost account will reflect the gross replacement value, (which equals the total economic benefits embodied in the asset) and the accumulated depreciation account will reflect how much of the total economic benefits have been used up to date. We’ll do an example in a moment. 4.4.2 The net replacement value method This method involves transferring the balance in the accumulated depreciation account (immediately prior to the revaluation) to the cost account and then adjusting this net carrying amount to the net replacement value (fair value). The difference between the ‘gross’ and ‘net’ methods is best explained by way of an example. The following three examples ignore the effects of deferred tax. The deferred tax effects of revaluations are not difficult but are covered later in this chapter. Example 7: revaluation model - increase in value, creating a revaluation surplus Plant cost at 1/1/20X1: C100 000 Depreciation: 20% straight-line per annum to a nil residual value Value at 1/1/20X2: C90 000 calculated as follows:

Gross replacement value 112 500 Accumulated depreciation 22 500 Net replacement value (i.e. fair value)

90 000 The revaluation surplus is transferred to retained earnings over the life of the asset. Required: Show the journals using the: A net replacement value method (NRVM) B gross replacement value method (GRVM) Solution to example 7: revaluation model – increase creating a revaluation surplus Workings: applicable to both (A) and (B)

W1: Actual (and historic) carrying amount 1/1/20X2: C

Cost 100 000 Accumulated depreciation (100 000 x 20% x 1 yr) (20 000) 80 000


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W2: Revaluation required at 1/1/20X2: C

Fair value 90 000 Actual carrying amount (80 000) 10 000

Graph depicting both (A) and (B): 1/1/20X2

0


Useful Life

Cos

t

10 000 (Credit revaluation surplus)

80 000 (HCA & ACA)

90 000 (FV)

Journals (A)

NRVM (B)

GRVM dr/ (cr) dr/ (cr) 20X1: Plant: cost 100 000 100 000 Bank/ Liability (100 000) (100 000) Purchase of asset: (1/1/20X1) Depreciation (100 000 / 5 years remaining) 20 000 20 000 Plant: accumulated depreciation and impairment losses (20 000) (20 000) Depreciation: 100 000 / 5 years remaining (31/12/20X1) 20X2: Plant: accumulated depreciation and impairment losses 20 000 N/A Plant: cost (20 000) N/A NRVM: set-off of accumulated depreciation before revaluing asset (1/1/20X2)

Plant: cost 10 000 N/A Revaluation surplus (10 000) N/A NRVM: revaluation of asset: (1/1/20X2) Plant: cost (112 500 - 100 000) N/A 12 500 Plant: accum. depr and imp. loss (22 500 - 20 000) N/A (2 500) Revaluation surplus (90 000 - 80 000) N/A (10 000) GRVM: revaluation of asset: (1/1/20X2) Depreciation 90 000 / 4 years remaining 22 500 22 500 Plant: accumulated depreciation and impairment losses (22 500) (22 500) Depreciation: (31/12/20X2) Revaluation surplus (10 000 / 4 years remaining) 2 500 2 500 Retained earnings (2 500) (2 500) Artificial decrease in profits reversed: (31/12/20X2) Alternative calculation: (22 500 revalued depreciation – 20 000 historic depreciation)


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Example 8: revaluation model - decrease in value, reversing the revaluation surplus and creating a revaluation expense: Assume the same information as that in the last example with the following information:

Value at 1/1/20X3: C54 000 calculated as follows:

Gross replacement value 90 000 Accumulated depreciation 36 000 Net replacement value (fair value) 54 000

Required: Show the journals using the: A net replacement value method (NRVM) B gross replacement value method (GRVM)

Solution to example 8: revaluation model - decrease in value, reversing the revaluation surplus and creating a revaluation expense : Workings applicable to both (A) and (B)

W1: Historical carrying amount at 1/1/20X3: C Cost 100 000 Accumulated depreciation (100 000 x 20% x 2 yr) (40 000) 60 000

W2: Actual carrying amount at 1/1/20X3: C Carrying amount at 1/1/20X2 after revaluation 90 000 Depreciation in 20X2 (90 000/ 4yrs) or (112 500/ 5 yrs) (22 500) 67 500

W3: Devaluation required at 1/1/20X3: C

Fair value 54 000 Actual carrying amount (67 500) (13 500) - reverse revaluation surplus (down to HCA: ACA: 67 500 – HCA: 60 000) 7 500 - revaluation expense (below HCA: HCA: 60 000 – NRV: 54 000) 6 000


0


Useful Life

Cos

t

6 000 (Debit revaluation expense)

54 000 (FV)

60 000 (HCA)

67 500 (ACA)

7 500 (Debit revaluation surplus)


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Journals: (A)

NRVM (B)

GRVM dr/ (cr) dr/ (cr) Devaluation journals 1/1/20X3: Plant: accumulated depreciation 22 500 N/A Plant: cost (22 500) N/A Set off of accumulated depreciation against cost (NRVM) Revaluation surplus (the balance in this account) 7 500 N/A Revaluation expense (further decrease expensed: 13 500 – 7 500) 6 000 N/A Plant: cost (CA: 67 500 – FV: 54 000) (13 500) N/A Reversal of balance in RS (7 500) with excess (13 500 - 7 500) expensed Revaluation surplus (the balance in this account) N/A 7 500 Revaluation expense (further decrease expensed: 13 500 – 7 500) N/A 6 000 Plant: cost (90 000 – 112 500) N/A (22 500) Plant: accum. depreciation (36 000 – 45 000) N/A 9 000 Restatement of cost and accumulated depreciation accounts: the first adjustment reduces the revaluation surplus and any excess thereafter is debited to impairment loss (p.s. the cost account is now reduced below historical cost of 100 000)

Depreciation and related journals: 31/12/20X3: Depreciation – plant (54 000 / 3 years remaining) 18 000 18 000 Plant: accum. depreciation (18 000) (18 000) Depreciation for 20X2 Comment: Please note that the difference between the journals using the NRVM and the GRVM are purely for disclosure purposes. The essence of the above adjustments can be more clearly seen in the following simplified journal: NRVM and GRVM

Debit Credit Revaluation surplus 7 500 Revaluation expense 6 000 Plant at net carrying amount 13 500 The only difference in the journals is the setting-off of the accumulated depreciation and cost account in the case of the NRVM. The NRVM requires that these two accounts are set-off against each other and then that the cost account is adjusted to the new carrying amount (fair value). The GRVM does not set-off these two accounts but adjusts each of them so that the net thereof would equal the new carrying amount (fair value). Example 9: revaluation model - increase in value, reversing a previous revaluation expense and creating a revaluation surplus Assume the same information as that given in the previous example as well as the following: Fair value at 1/1/20X4: C44 000 calculated as follows:

Gross replacement value 110 000 Accumulated depreciation 66 000 Net replacement value 44 000

Required: Show the journals using A. net replacement value method (NRVM) B. gross replacment value method (GRVM)


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Solution to example 9: revaluation model - increase in value, reversing a previous revaluation expense and creating a revaluation surplus Workings applicable to both (A) and (B)

W1: Historical carrying amount at 1/1/20X4: C Cost 100 000 Accumulated depreciation (100 000 x 20% x 3yrs) (60 000) 40 000

W2: Actual carrying amount at 1/1/20X4: C

Carrying amount at 1/1/20X3 after impairment loss 54 000 Depreciation in 20X3 (54 000/ 3yrs) or (90 000/ 5 yrs) (18 000) 36 000

W3: Increase in value required at 1/1/20X4: C

Fair value 44 000 Actual carrying amount (36 000) 8 000 - revaluation income (up to HCA: 36 000 – 40 000) 4 000 - revaluation surplus (above HCA: 40 000 – 44 000) 4 000


0


Useful Life

Cos

t

4 000 (Credit reversal of revaluation expense)

36 000 (ACA)

40 000 (HCA)

44 000 (FV)

4 000 (Credit revaluation surplus)

Journals (A)

NRVM (B)

GRVM dr/ (cr) dr/ (cr) Revaluation journals 1/1/20X4: Plant: accumulated depreciation 18 000 N/A Plant: cost (18 000 + 6 000) (18 000) N/A NRVM: Set off of accumulated depreciation against cost Plant: cost (44 000 – 36 000) 8 000 N/A Revaluation income (36 000 – 40 000) (4 000) N/A Revaluation surplus (40 000 – 44 000) (4 000) N/A NRVM: Reversal of previous revaluation expense (4 000) with excess (8 000 - 4 000) credited to equity

Plant: cost (110 000 – 90 000) N/A 20 000 Plant: accum depreciation (66 000 – 54 000) N/A (12 000) Revaluation income N/A (4 000) Revaluation surplus N/A (4 000) GRVM: Increase in value apportioned between cost and accumulated depreciation


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Journals continued … (A) NRVM

(B) GRVM

dr/ (cr) dr/ (cr) Depreciation and related journals 31/12/20X4: Depreciation – plant (44 000 / 2yrs) 22 000 22 000 Plant: accum depreciation (22 000) (22 000) Depreciation for 20X4 Revaluation surplus (22 000 – 20 000) or (4 000/ 2yrs) 2 000 2 000 Retained earnings (2 000) (2 000) Excess depreciation for 20X4 transferred to retained earnings Example 10: disclosure of a revalued asset – NRVM and GRVM compared Assume the same information as in the previous three examples A Disclose the plant note using the net replacement value method (NRVM) for 20X1 –

20X4years. B Disclose the plant note using the gross replacement value method (GRVM). Disclose all

3 years. Solution to example 10A: disclosure of a revalued asset using NRVM Company name Notes to the financial statements For the year ended 31 December 20X3 (extracts) 20X4

C 20X3

C 20X2

C 20X1

C 3. Plant (extracts)

Net carrying amount: 1 January 36 000 67 500 80 000 0 Gross carrying amount: 1 January 54 000 90 000 100 000 0 Accum. depreciation and imp. losses: 1 January

(18 000) (22 500) (20 000) (0)

Additions 0 0 0 100 000 Depreciation (22 000) (18 000) (22 500) (20 000) Revaluation (expense) / income (profit) 4 000 (6 000) 0 0 Revaluation surplus increase / (decrease) (equity)

4 000 (7 500) 10 000 0

Net carrying amount: 31 December 22 000 36 000 67 500 80 000 Gross carrying amount: 31 December 44 000 54 000 90 000 100 000 Accum. depreciation and imp. losses: 31

Dec (22 000) (18 000) (22 500) (20 000)

The last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value in use and the fair value adjustment was recorded on a net replacement value basis. Revaluations are performed annually. Had the cost model been adopted, the carrying amount would have been C20 000 (20X3: C40 000; 20X2: C60 000 and 20X1: C80 000).


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Solution to example 10B: disclosure of a revalued asset using GRVM Company name Notes to the financial statements For the year ended 31 December 20X3 (extracts) 20X4

C

20X3 C

20X2 C

20X1 C

3. Plant (extracts)

Net carrying amount: 1 January 36 000 67 500 80 000 0 Gross carrying amount: 1 January 90 000 112 500 100 000 0 Accum. deprec. and imp. losses: 1 Jan (54 000) (45 000) (20 000) (0)

Additions 0 0 0 100 000 Depreciation (22 000) (18 000) (22 500) (20 000) Revaluation (expense) / income (profits) 4 000 (6 000) 0 0 Revaluation surplus increase / (decrease) (equity)

4 000 (7 500) 10 000 0

Net carrying amount: 31 December 22 000 36 000 67 500 80 000 Gross carrying amount: 31 December 110 000 90 000 112 500 100 000 Accum. deprec. and imp. losses: 31 Dec (88 000) 3 (54 000) 2 (45 000) 1 (20 000) The last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value in use and the fair value adjustment was recorded on a gross replacement value basis. Revaluations are performed annually. Had the cost model been adopted, the carrying amount would have been C20 000 (20X3: C40 000; 20X2: C60 000 and 20X1: C80 000). Comment: Notice that the only difference between the disclosure of the two methods is the split between the amount classified as ‘gross carrying amount’ and the amount classified as ‘accumulated depreciation and impairment losses’. The net carrying amounts (at the beginning and end of the year) and the movement during the year are not affected. (1) 20 000 + 2 500 + 22 500 = 45 000 (2) 45 000 + 18 000 – 9 000 = 54 000 (3) 54 000 + 12 000 + 22 000 = 88 000 4.5 Realisation of the revaluation surplus Whether you are using the net method or the gross method to account for a revaluation, any revaluation surplus account that is created must be removed from the accounts by the time that the related asset no longer exists. The transfer is made directly to the retained earnings account, which means that the transfer is from one equity account to another equity account, thus having no effect on the statement of comprehensive income. This is not a reclassification adjustment and will therefore have no impact on the statement of comprehensive income, but will appear as a transfer between equity accounts in the statement of changes in equity. Debit Credit Revaluation surplus xxx Retained earnings xxx Transfer of the revaluation surplus to retained earnings The transfer of the revaluation surplus to retained earnings effectively reverses the effect that the artificially increased depreciation has had on profits over the life of the asset. When the asset’s depreciable amount is zero (the asset having been fully depreciated), the revaluation surplus account must also be zero.


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The transfer may be done in a variety of ways: • transfer it as one lump sum when the asset is retired (at the end of the asset’s useful life); • transfer it as one lump sum when the asset is sold or otherwise disposed of; or • transfer it gradually as and when the asset is depreciated. For local (Pakistan) legislation requirements regarding treatment of surplus arising out of revaluation see section 235 of the Companies Ordinance, 1984 and a notification of the Security Exchange Commission of Pakistan –SRO 45 (1)/2003, dated 13/01/2003 Example 11: removal of revaluation surplus An asset with a cost of C100 (1/1/20X1) and a useful life of 4 years is revalued to fair value of C120 (1/1/20X2). It is retired from use at the end of its useful life (31/12/20X4) and is sold on 18/9/20X5. The residual value is zero and the straight-line method of depreciation is appropriate. Required: Ignoring the tax effect, show the journal entries reducing the revaluation surplus to zero assuming that:

a) the transfer is done as the underlying asset is depreciated; b) the transfer is done at the end of the asset’s useful life; and c) the transfer is done when the asset is disposed of.

Solution to example 11: removal of revaluation surplus Workings

Asset carrying amount

Historic depreciation

Extra depreciation

Cost 1/1/20X1 100 100 Depreciation - original 20X1: (100 - 0)/ 4yrs (25) (25) Carrying amount 31/12/20X1 75 75 Revaluation surplus 120 - 75 45 Revalued carrying amount 120 75 45 Depreciation - revised 20X2: (120-0)/3yrs (40) (25) (15) Depreciation - revised 20X3: (120-0)/3yrs (40) (25) (15) Depreciation - revised 20X4: (120-0)/3yrs (40) (25) (15) Carrying amount 0 0 0 a) Journals: posted at end of each year Debit Credit 31 December 20X2 Revaluation surplus 15 Retained earnings 15 Transfer of revaluation surplus to retained earnings (45 / 3) 31 December 20X3 Revaluation surplus 15 Retained earnings 15 Transfer of revaluation surplus to retained earnings (45 / 3) 31 December 20X4 Revaluation surplus 15 Retained earnings 15 Transfer of revaluation surplus to retained earnings (45 / 3) b) Journals: posted 31/12/20X4 Debit Credit Revaluation surplus 45


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Retained earnings 45 Transfer of revaluation surplus to retained earnings when asset is retired from use

c) Journals: posted 18/9/20X5 Debit Credit Revaluation surplus 45 Retained earnings 45 Transfer of revaluation surplus to retained earnings on disposal of asset 5. Disclosure 5.1 Overview The disclosure of property, plant and equipment involves various aspects: accounting policies to be included in the notes to the financial statements, disclosure in the statement of comprehensive income, statement of financial position and the statement of changes in equity. 5.2 Accounting policies and estimates For each class of property, plant and equipment (e.g. land, buildings, machinery, etc) the following should be disclosed: • measurement bases used to determine the gross carrying amounts (e.g. cost model or

revaluation model); • depreciation methods used (e.g. straight-line method); and • useful lives or depreciation rates used (e.g. 5 years or 20% per annum). The nature and effect of a change in estimate must be disclosed in accordance with IAS 8 (the standard governing ‘accounting policies, changes in accounting estimates and errors’). 5.3 Statement of comprehensive income disclosure The following income and expense items should be disclosed in the notes to the financial statements and should be shown per class of property, plant and equipment (a suggestion that generally helps to reduce time wastage in tests and exams is to include these items in a note that supports the ‘profit before tax’ line item in the statement of comprehensive income): • depreciation expense (whether recognised in profit or loss or as part of the cost of another

asset); • impairment losses (and the line item of the statement of comprehensive income in which

it is included) (i.e. when the recoverable amount is less than carrying amount and any revaluation surplus has already been written off);

• reversal of impairment losses(and the line item of the statement of comprehensive income in which it is included) (i.e. when the recoverable amount is greater than carrying amount, and to the extent that the increase in carrying amount up to historical carrying amount reverses a previous impairment loss); and

• revaluation expense (i.e. when the fair value is less than carrying amount and any revaluation surplus has already been written off)

• revaluation income (i.e. when the fair value is greater than carrying amount, and to the extent that the increase in carrying amount up to historical carrying amount reverses a previous revaluation expense);

• profits or losses on the realisation, scrapping or other disposal of a non-current asset • a revaluation or devaluation that changes the balance in the revaluation surplus account

will be recognised in other comprehensive income (and accumulated as equity): this amount may be shown gross with the tax thereon shown as a separate line item in other comprehensive income or this amount may be shown net of tax (the tax effect would then be shown in a note).


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5.4 Statement of financial position disclosure The following is the main information that should be disclosed in the note to the ‘property, plant and equipment’ line item in the statement of financial position. This information must be disclosed separately for each class of property, plant and equipment (e.g. land, buildings, machinery, etc): • ‘gross carrying amount’ and ‘accumulated depreciation and impairment losses’ at the

beginning and end of each period; • a reconciliation between the ‘net carrying amount’ at the beginning and end of the period

separately disclosing each of the following where applicable: − additions; − acquisitions through business combinations; − disposals; − assets transferred to ‘non-current assets held for sale’ in accordance with IFRS 5; − depreciation; − impairment losses recognised in the statement of comprehensive income; − impairment losses reversed through the statement of comprehensive income; − increases through revaluation income; − increases in a related revaluation surplus; − decreases in a related revaluation surplus; − decreases through revaluation expense; − other movements (e.g. currency translation differences);

• the existence and amounts of restrictions on title; • the existence and amounts of assets that have been pledged as security for a liability; • the costs capitalised in respect of property, plant and equipment being constructed; • the amount of any contractual commitments to acquire assets in the future; • when the revaluation model is adopted, then disclose:

− the effective date of the latest revaluation; − whether or not the valuer was independent; − the methods and significant assumptions applied in estimating the asset’s fair values

(the extent to which these fair values were determined in accordance with active markets, recent market transactions or using other valuation techniques);

− the carrying amount of the property, plant and equipment had the cost model been adopted (per class of revalued property, plant and equipment); and

− the revaluation surplus, its movements and any restrictions on the distribution thereof. The standard also requires that the accumulated depreciation be disclosed (as opposed to the aggregate of the accumulated depreciation and accumulated impairment losses that is given in the reconciliation of the carrying amount of the asset) at the end of the period. 5.5 Statement of changes in equity disclosure If the property, plant and equipment is revalued using the revaluation model, there may be a revaluation surplus which would need to be disclosed as follows: • increase or decrease in revaluation surplus during the period (net of tax): this will be per

the statement of comprehensive income; • realisations of revaluation surplus (e.g. transfer to retained earnings as the asset is used up

or on disposal); and • any restrictions on the distribution of the surplus to shareholders. 5.6 Further encouraged disclosure • the carrying amount of property, plant and equipment that is temporarily idle; • the gross amount of property, plant and equipment that is still in use but that has been

fully depreciated; • the carrying amount of property, plant and equipment that is no longer used and is to be

disposed of (but not yet classified as held for sale in accordance with IFRS 5); and


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• the fair value of the asset in the event that the cost model is adopted and the difference between fair value and carrying amount is material.

5.7 Sample disclosure involving property, plant and equipment ABC Ltd Statement of financial position As at 31 December 20X2 (extracts)

20X2 20X1 ASSETS Note C C Non-current Assets Property, plant and equipment 4 ABC Ltd Statement of changes in equity For the year ended 31 December 20X2 (extracts) Revaluation

surplus C

Retained earnings

C

Total

C Balance at 1 January 20X1 Total comprehensive income Realised portion transferred to retained earnings Balance at 31 Dec 20X1 Total comprehensive income Realised portion transferred to retained earnings Balance at 31 December 20X2 ABC Limited Notes to the financial statements For the year ended 31 December 20X2 (extracts) 2. Accounting policies

Depreciation is not provided on land and buildings since it is considered to be an investment property. Depreciation is provided on all other property, plant and equipment over the expected economic useful life to expected residual values using the following rates and methods:

- Plant and vehicles at 10% per annum, reducing balance method. Plant is revalued annually to fair values and is thus carried at fair value less accumulated depreciation and impairment losses. All other property, plant and equipment is shown at cost less accumulated depreciation and impairment losses.

3. Profit before tax Profit before tax is stated after taking the following into account:

20X2 C

20X1 C

Depreciation on plant Depreciation on vehicles Revaluation income on plant Revaluation expense on vehicles Impairment losses on vehicles Impairment losses reversed on plant (income)

4. Property, plant and equipment

Total carrying amount:

20X2 C

20X1 C

Land and buildings Plant Vehicles


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Land and buildings 20X2

C 20X1

C Net carrying amount: 1 January Gross carrying amount: 1 January Accumulated depreciation and impairment losses: 1 January Additions Disposals Depreciation Revaluation increase/ (decrease) through equity Revaluation increase/ (decrease) through profit (Impairment loss)/ Impairment loss reversed Other Net carrying amount: 31 December Gross carrying amount: 31 December Accumulated depreciation and impairment losses: 31 Dec

Land was revalued on 1/1/20X1 by Mr X (his qualification), an independent sworn appraiser, to the fair value determined with reference to an active market. The fair value adjustment was recorded on a net replacement value basis. Revaluations are performed annually. Had the cost model been adopted, the carrying amount would have been CXXX (20X0: CXXX). Land… (description of and its situation) acquired on… (date) for… (amount paid). Additions and improvements since date of acquisition have cost… (amount).

Plant Net carrying amount: 1 January Gross carrying amount: 1 January Accumulated depreciation and impairment losses: 1 January Depreciation Revaluation increase/ (decrease) through equity Revaluation increase/ (decrease) through profit (Impairment loss)/ Impairment loss reversed Additions Disposals Other Net carrying amount: 31 December Gross carrying amount: 31 December Accumulated depreciation and impairment losses: 31 Dec

Plant is provided as security for a loan (see the note 51: loans).

Vehicles Net carrying amount: 1 January Gross carrying amount: 1 January Accumulated depreciation and impairment losses: 1 January Depreciation Revaluation increase/ (decrease) through equity Revaluation increase/ (decrease) through profit (Impairment loss)/ Impairment loss reversed Additions Disposals Other Net carrying amount: 31 December Gross carrying amount: 31 December Accumulated depreciation and impairment losses: 31 Dec


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Example 12: cost model disclosure Cost of plant at 1/1/20X1: C100 000 Depreciation: 25% straight-line per annum to a nil residual value The company measures its assets under the cost model. The following recoverable amounts were calculated:

Recoverable amount at 31 December 20X1 is C60 000

Recoverable amount at 31 December 20X2 is C55 000

There are no other items of property, plant or equipment. Required: A. Disclose the plant and all related information in the financial statements for the years ended

31 December 20X1, 20X2, 20X3 and 20X4 in accordance with the International Financial Reporting Standards, ignoring deferred tax;

B. Show the journals and show all additional or revised related disclosure assuming that: Deductible allowance (wear and tear) granted by the tax

authorities 25% straight-line per year

Normal income tax rate 30% The company intends to keep the plant. There are no other temporary differences other

than those evident from the information provided. Solution to example 12A: cost model disclosure ABC Ltd Statement of financial position As at 31 December 20X4 (EXTRACTS)

20X4 20X3 20X2 20X1 Note C C C C ASSETS Non-current Assets Property, plant and equipment 4 0 25 000 50 000 60 000 ABC Ltd Notes to the financial statements For the year ended 31 December 20X4

Note 20X4 C

20X3 C

20X1 C

20X0 C

2. Accounting policies

2.1 Property, plant and equipment Plant is measured using the cost model: cost less accumulated depreciation and impairment losses.

Depreciation is provided on all property, plant and equipment over the expected economic useful life to expected residual values using the following rates and methods:

Plant: 25% per annum, straight-line method.

3. Profit before tax

Profit before tax is stated after taking the following disclosable (income)/ expenses into account: Depreciation on plant 25 000 25 000 20 000 25 000 Impairment loss 0 0 0 15 000 Impairment loss reversed 0 0 (10 000) 0


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4. Property, plant and equipment (extracts)

20X4 C

20X3 C

20X1 C

20X0 C

Plant Net carrying amount: 1 January 25 000 50 000 60 000 0 Gross carrying amount: 100 000 100 000 100 000 0 Accumulated depreciation and imp losses: (75 000) (50 000) (40 000) 0 Additions 0 0 0 100 000 Depreciation (25 000) (25 000) (20 000) (25 000) Impairment loss 0 0 0 (15 000) Impairment loss reversed 0 0 10 000 0 Net carrying amount: 31 December 0 25 000 50 000 60 000 Gross carrying amount: 100 000 100 000 100 000 100 000 Accumulated depreciation and imp losses: (100 000) (75 000) (50 000) (40 000)

Solution to example 12B: cost model disclosure - with deferred tax Journals Dr/ (Cr) 20X1: Plant: cost 100 000 Bank/ Liability (100 000) Purchase of asset: (1/1/20X1) Depreciation (100 000 / 4 years remaining) 25 000 Plant: accumulated depreciation and impairment losses (25 000) Depreciation on plant Impairment loss CA: (100 000 – 25 000) – RA: 60 000 15 000 Plant: accumulated depreciation and impairment losses (15 000) Impairment loss Deferred tax W1 or [(25 000 + 15 000) – (25 000)] x 30% 4 500 Tax expense (4 500) Deferred tax caused by plant/ impairment loss 20X2: Depreciation (60 000 / 3 years remaining) 20 000 Plant: accumulated depreciation and impairment losses (20 000) Depreciation on plant Plant: accumulated depreciation and impairment losses 10 000 Impairment losses reversed CA: (60 000 – 20 000) – RA: 55 000, ltd to 50 000 cost (10 000) Impairment loss reversed Tax expense W1 or [(20 000 - 10 000) – (25 000)] x 30% 4 500 Deferred tax (4 500) Deferred tax caused by plant/ impairment loss reversed & revised depreciation 20X3 Depreciation (50 000 / 2 years remaining) 25 000 Plant: accumulated depreciation and impairment losses (25 000) Depreciation on plant 20X4 Depreciation (25 000 / 1 year remaining) 25 000 Plant: accumulated depreciation and impairment losses (25 000) Depreciation on plant


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249

ABC Ltd Statement of financial position As at 31 December 20X4 (EXTRACTS)

20X4 20X3 20X2 20X1 Note C C C C ASSETS Non-current Assets Property, plant and equipment 4 0 25 000 50 000 60 000 Deferred taxation 5 0 0 0 4 500 ABC Limited Notes to the financial statements For the year ended 31 December 20X4 (extracts)

Note 20X4 C

20X3 C

20X2 C

20X1 C

5. Deferred taxation asset/ (liability)

The deferred taxation balance comprises: Capital allowances (the balances in W1) 0 0 0 4 500 0 0 0 4 500

6. Taxation expense/ (income)

Normal income tax - current X X X X - deferred (the movement in W1) 0 0 4 500 (4 500)

All other notes would remain the same. W1: Deferred tax calculation:

Plant Carrying amount

Tax base

Temporary difference

Deferred taxation

Details

Balance: 1/1/20X1 0 0 0 0 Purchase 100 000 100 000

4 500 Movement: Dr DT (FP) Cr TE (CI)

Depreciation (100 000/ 4 years) (100 000 x 25%

(25 000) (25 000)

Impairment loss (15 000) 0 Balance: 31/12/20X1 60 000 75 000 15 000 4 500 Asset

balance Depreciation (60 000/ 3 years) (100 000 x 25%

(20 000) (25 000)

(4 500) Movement: Cr DT (FP) Dr TE (CI) Impairment loss reversed 10 000 0

Balance: 31/12/20X2 50 000 50 000 0 0 Depreciation (50 000/ 2 years) (100 000 x 25%

(25 000) (25 000)

Balance: 31/12/20X3 25 000 25 000 0 0 Depreciation (25 000/ 1 year) (100 000 x 25%

(25 000) (25 000)

Balance: 31/12/20X4 0 0 0 0


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Example 13: revaluation model disclosure Cost of plant at 1/1/20X1: C100 000 Depreciation: 20% straight-line per annum to a nil residual

value The company revalue its plant on an annual basis and records the fair value adjustments using the net replacement value basis. The following revaluations were performed:

Fair value at 1/1/20X2 is C90 000



There are no other items of property, plant or equipment. Profit for each year is C100 000 (after tax). There are no components of other comprehensive income other than that which is evident from the information provided. Required: A. Disclose the plant and all related information in the financial statements for the years ended

31 December 20X1, 20X2, 20X3 and 20X4 in accordance with the International Financial Reporting Standards, ignoring deferred tax.

B. Repeat the journals (using the net replacement value method) and show all additional or revised related disclosure assuming that:

Deductible allowance (wear and tear) granted by the tax authorities

20% straight-line per year

Normal income tax rate 30% The company intends to keep the plant. There are no other temporary differences other

than those evident from the information provided. The company shows components of other comprehensive income net of tax.

C. Assume the information given in B above except that the company presents the components of other comprehensive income gross with their tax effects shown as a separate line item. Present the statement of comprehensive income and the note on tax on other comprehensive income.

Solution to example 13A: revaluation model disclosure - no deferred tax The journals for part A may be found under examples 7, 8 and 9. ABC Ltd Statement of comprehensive income (extracts) For the year ended 31 December 20X4 Notes 20X4 20X3 20X2 20X1 C C C C Profit for the period 100 000 100 000 100 000 100 000 Other comprehensive income net of tax 4 000 (7 500) 10 000 0 Revaluation surplus / (devaluation) 4 000 (7 500) 10 000 0 Total comprehensive income 104 000 92 500 110 000 100 000


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251

ABC Ltd Statement of changes in equity (extracts) For the year ended 31 December 20X4 Revaluation

surplus Retained earnings

Total

C C C Balance at 1 January 20X1 0 X X Total comprehensive income 0 100 000 100 000 Balance at 31 December 20X1 0 X X Total comprehensive income 10 000 100 000 110 000 Realised portion transferred to retained earnings (2 500) 2 500 Balance at 31 December 20X2 7 500 X X Total comprehensive income (7 500) 100 000 92 500 Balance at 31 December 20X3 0 X X Total comprehensive income 4 000 100 000 104 000 Realised portion transferred to retained earnings (2 000) 2 000 Balance at 31 December 20X4 2 000 X X ABC Ltd Statement of financial position (extracts) As at 31 December 20X4

20X4 20X3 20X2 20X1 Note C C C C ASSETS Non-current Assets Property, plant and equipment 4 22 000 36 000 67 500 80 000 EQUITY AND LIABILITIES Revaluation surplus (from SOCIE) 2 000 0 7 500 0 ABC Limited Notes to the financial statements For the year ended 31 December 20X4 (extracts)

20X4 C

20X3 C

20X2 C

20X1 C

2. Accounting policies

2.1 Property, plant and equipment Plant is revalued annually to fair values and is thus carried at fair value less accumulated depreciation and impairment losses.

Depreciation is provided on all property, plant and equipment over the expected economic useful life to expected residual values using the following rates and methods:

Plant: 20% per annum, straight-line method.

3. Profit before tax

Profit before tax is stated after taking the following disclosable (income)/ expenses into account: Depreciation on plant 22 000 18 000 22 500 20 000 Revaluation expense 0 6 000 0 0 Revaluation income (4 000) 0 0 0


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252

ABC Limited Notes to the financial statements For the year ended 31 December 20X4 (extracts) continued …

20X4 C

20X3 C

20X2 C

20X1 C

4. Property, plant and equipment (extracts)

Plant Net carrying amount: 1 January 36 000 67 500 80 000 Gross carrying amount: 54 000 90 000 100 000 0 Accumulated depreciation and impairment losses:

(18 000) (22 500) (20 000) 0

Additions 0 0 0 100 000 Depreciation (22 000) (18 000) (22 500) (20 000) Revaluation surplus increase/ (decrease) 4 000 (7 500) 10 000 0 Revaluation income/ (expense) 4 000 (6 000) 0 0 Net carrying amount: 31 December 22 000 36 000 67 500 80 000 Gross carrying amount: 44 000 54 000 90 000 100 000 Accumulated depreciation and impairment losses:

(22 000) (18 000) (22 500) (20 000)

The last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value in use and the fair value adjustment was recorded on a net replacement value basis. Revaluations are performed annually.

Carrying amount had the cost model been used instead:

80 000

20 000

40 000

60 000

Solution to example 13B revaluation model disclosure - with deferred tax Journals Dr/ (Cr) 1/1/20X1 Plant: cost 100 000 Bank/ Liability (100 000) Purchase of asset 31/12/20X1 Depreciation (100 000 / 5 years remaining) 20 000 Plant: accumulated depreciation (20 000) Depreciation 1/1/20X2: Plant: accumulated depreciation 20 000 Plant: cost (20 000) NRVM: set-off of accumulated depreciation before revaluing asset Plant: cost W1 10 000 Revaluation surplus (10 000) NRVM: revaluation of asset Revaluation surplus W1 3 000 Deferred tax (3 000) Deferred tax on revaluation of asset 31/12/20X2: Depreciation W1 22 500 Plant: accumulated depreciation (22 500) Depreciation on plant


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253

Journals continued … Dr/ (Cr) 31/12/20X2 continued … Revaluation surplus (7 000 / 4 years remaining) or (22 500 revalued

depreciation – 20 000 historic depreciation) x 70% 1 750

Retained earnings (1 750) Artificial decrease in after-tax profits reversed: (31/12/20X2) Deferred tax W1 750 Taxation (750) Depreciation versus tax deductible allowance: (31/12/20X2) 1/1/20X3 Plant: accumulated depreciation 22 500 Plant: cost (22 500) Set off of accumulated depreciation against cost (NRVM) Revaluation surplus W1: balance in revaluation surplus 7 500 Revaluation expense W1: (13 500 - 7 500) 6 000 Plant: cost 67 500 -54 000 (13 500) Devaluation of plant to fair value Deferred tax W1; or 7 500 x 30% 2 250 Revaluation surplus (2 250) Deferred tax on reversal of equity: 31/12/20X3 Depreciation W1 18 000 Plant: accumulated depreciation (18 000) Depreciation on plant Deferred tax W1 1 200 Tax (1 200) Depreciation & impairment loss versus tax deductible allowance 1/1/20X4 Plant: accumulated depreciation 18 000 Plant: cost (18 000) Set off of accumulated depreciation against cost (NRVM) Plant: cost 36 000 – 44 000 8 000 Revaluation income W1: up to historical carrying amount (4 000) Revaluation surplus W1: above historical carrying amount (4 000) Revaluation to an increased fair value Revaluation surplus W1; or 4 000 x 30% 1 200 Deferred taxation (1 200) Deferred tax on revaluation surplus 31/12/20X4 Depreciation W1 22 000 Plant: accumulated depreciation (22 000) Depreciation on plant Revaluation surplus (2 800) / 2 years; OR (22 000 revalued depreciation –

20 000 historic depreciation) x 70% 1 400

Retained earnings (1 400) Artificial decrease in after-tax profits reversed Tax W1: 1 200 - 600 600 Deferred tax (600) Depreciation & impairment loss reversed versus tax deductible allowance:


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254

Disclosure: ABC Ltd Statement of comprehensive income (extracts) For the year ended 31 December 20X4 Notes 20X4 20X3 20X2 20X1 C C C C Profit for the period 100 000 100 000 100 000 100 000 Other comprehensive income(net of tax)

7 2 800 (5 250) 7 000 0

Revaluation surplus / (devaluation) 2 800 (5 250) 7 000 0 Total comprehensive income 102 800 94 750 107 000 100 000 ABC Ltd Statement of changes in equity For the year ended 31 December 20X4 (EXTRACTS) Revaluation

surplus Retained earnings

Total

C C C Balance at 1 January 20X1 0 X X Total comprehensive income 0 100 000 0 Balance at 31 December 20X1 0 X X Total comprehensive income 7 000 100 000 107 000 Realised portion transferred to retained earnings (1 750) 1 750 0 Balance at 31 December 20X2 5 250 X X Total comprehensive income (5 250) 100 000 94 750 Balance at 31 December 20X3 0 X X Total comprehensive income 2 800 100 000 102 800 Realised portion transferred to retained earnings (1 400) 1 400 0 Balance at 31 December 20X4 1 400 X X ABC Ltd Statement of financial position As at 31 December 20X4 (EXTRACTS)

20X4 20X3 20X2 20X1 Note C C C C ASSETS Non-current Assets Property, plant and equipment 3 22 000 36 000 67 500 80 000 Deferred taxation 4 0 1 200 0 0 EQUITY AND LIABILITIES Equity Revaluation surplus (from SOCIE) 1400 0 5250 0 Non-current liabilities Deferred taxation 4 600 0 2 250 0


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255

ABC Limited Notes to the financial statements For the year ended 31 December 20X4 (extracts)

20X4

C 20X3

C 20X2

C 20X1

C 5. Deferred taxation asset/ (liability)

The deferred taxation balance comprises: Property, plant and equipment (600) 1 200 (2 250) 0 (600) 1 200 (2 250) 0

Reconciliation: Opening balance 1 200 (2 250) 0 0 Deferred tax charge in the statement of comprehensive income

(600) 1 200 750 0

Deferred tax on revaluation/ devaluation (1 200) 2 250 (3 000) 0 Closing balance (600) 1 200 (2 250) 0

6. Taxation expense/ (income)

Normal income tax - current X X X X - deferred 600 (1 200) (750) 0

W1: Deferred tax calculation:

Plant Carrying amount

Tax base

Temp diff

Deferred taxation

Details Revaluation surplus

Balance: 1/1/20X1 0 0 0 0 Purchase 100 000 100 000 0 0 Depreciation (100 000/ 5 years)

(20 000) (20 000) 0 0

Balance: 31/12/20X1 80 000 80 000 0 0 Revaluation surplus (equity increase)

10 000 0 (10 000) (3 000) Cr DT (FP) Dr RS (FP)

(10 000) 3 000

Fair value 90 000 80 000 (7 000) Depreciation (90 000/ 4 years)

(22 500) (20 000) 2 500 750 Dr DT (FP) Cr TE (CI)

1 750

Balance: 31/12/20X2 67 500 60 000 (7 500) (2 250) Liability (5 250) Revaluation surplus (equity decrease)

(7 500) 0 7 500 2 250 Dr DT (FP) Cr RS (FP)

7 500 (2 250)

Historical carrying amount

60 000 60 000 0

1 200 Dr DT (FP) Cr TE (CI)

0

Revaluation expense (6 000) 0 6 000 Fair value 54 000 60 000 Depreciation (54 000/ 3 years)

(18 000) (20 000) (2 000)

Balance: 31/12/20X3 36 000 40 000 4 000 1 200 Asset 0 Revaluation income 4 000 0 (4 000) (1 200) Cr DT (FP)

Dr TE (CI)

Historical carrying amount

40 000 40 000

Revaluation surplus (equity increase)

4 000 0 (4 000) (1 200) Cr DT (FP) Dr RS (FP)

(4 000) 1 200

Fair value 44 000 40 000 2 800 Depreciation (44 000/ 2 years)

(22 000) (20 000) 2 000 600 Dr DT (FP) Cr TE (CI)

(1 400)

Balance: 31/12/20X4 22 000 20 000 (2 000) (600) Liability 1 400


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256

Solution to example 13C: revaluation model disclosure – with deferred tax Comment: the only difference between Part C and Part B is that other comprehensive income is shown gross (i.e. before tax) rather than net of tax. This requires an additional note to reflect the tax thereon. The journals and workings for Part C are identical to those in Part B. ABC Ltd Statement of comprehensive income (extracts) For the year ended 31 December 20X4

Notes 20X4 20X3 20X2 20X1 C C C C Profit for the period 100 000 100 000 100 000 100 000 Other comprehensive income net of tax 2 800 (5 250) 7 000 0 Revaluation surplus / (devaluation) before tax 4 000 (7 500) 10 000 0 Taxation effect of other comprehensive income 7 (1 200) 2 250 (3 000) 0 Total comprehensive income 102 800 94 750 107 000 100 000 ABC Ltd Notes to the financial statements (extracts) For the year ended 31 December 20X4

Notes 20X4 20X3 20X2 20X1 C C C C 7. Tax effects of components of other comprehensive income Revaluation surplus / (devaluation)

Gross 4 000 (7 500) 10 000 0 Tax (1 200) 2 250 (3 000) 0 Net 2 800 (5 250) 7 000 0


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257

6. Summary Measurement models

Cost model Revaluation model

cost Calculation of the carrying amount:

less accumulated depreciation less accumulated impairment losses

an asset may be written down below HCA, but may never be revalued above its HCA

the rule:

debit asset;

increase in value: previous impairment reversed

credit reversal of impairment loss (I) limited to the carrying amount that it would have had had there never been an impairment loss (i.e. its historical carrying amount)

debit impairment loss (E); decrease in value: impairment

credit asset

fair value on date of revaluation Calculation of the carrying amount:

less subsequent accumulated depreciation

less subsequent accumulated impairment losses

the asset may be valued at its fair value (if greater/ less than its HCA)

the rule:

debit asset (FV – ACA); increase in value:

credit income (to extent reverses previous decrease: HCA – ACA)

credit revaluation surplus (FV – HCA)

credit asset (FV – ACA); decrease in value:

debit RS (to extent reverses previous increases: ACA – HCA)

debit expense (HCA - FV)

transferred annually to retained earnings (amount transferred equals after tax effect on profits as a result of increased depreciation); OR

the revaluation surplus:

transferred to retained earnings when the asset is fully depreciated; OR

transferred to retained earnings when the asset is disposed of.


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258

Disclosure (main points only)

Accounting policies

depreciation methods rates (or useful lives) cost or revaluation model

In the statement of comprehensive income

related

In the statement of changes in equity

In the statement of financial position

Depreciation Impairment losses Reversals of

impairments Revaluation expense Revaluation income

Increase or decrease in RS

Tax effect of creation or increase in RS

Transfers from RS to RE

Any restrictions on distributions to shareholders

Reconciliation between opening and closing balances

Break-down of these balances into gross carrying amount and accumulated depreciation and impairment losses

If revaluation model, also

- CA using cost model - Basis used for

revaluation - Effective date of

revaluation - Valuer independent - Reversal of RS - Impairment loss

expensed - Increase in/ creation

of RS - Reversal of

impairment loss If cost model used,

also - the FV.

chapter6 propertyplantandequipmentmodels2008

Technology

used model

cost model disclosure

therevaluation model

simplest model

cost model istherefore

revaluation surplusexample

revaluation surplus241example

revaluation expenseexample