Financial Accounting II

Lecture 06

Revaluation of Assets

• The benchmark treatment of IAS 16 is to carry property plant and equipment at Cost less Accumulated Depreciation and any Accumulated Impairment Losses.

Recognition of Fixed Assets – Benchmark Treatment

Accumulated Impairment Losses

Difference Between Depreciation and Impairment

• The standard allows as an alternative treatment to record property plant and equipment at its Revalued Amount less Accumulated Depreciation and any Accumulated Impairment Losses

Recognition of Fixed Assets – Allowed Alternative Treatment

• All assets of same class are revalued at the same time.

• Only recognized surveyor can carryout the revaluation.

Revaluation Policy

• If the allowed alternative, that is stating the assets at revalued amount is adopted then the revaluation has to be carried out at regular intervals.

Frequency of Revaluation

• These intervals may vary from every year to three to five years depending upon the volatility in the market value of assets in use.

Frequency of Revaluation

• IAS 16 requires that revaluation should be carried out by professionally qualified valuers.

Who Can Conduct Revaluation

• Companies Ordinance in 4th Schedule requires that valuation should be carried out by an independent valuer competent to do so.

Who Can Conduct Revaluation

• The value of an item of property, plant and equipment may be increased or decreased as a result of revaluation.

Effect of Revaluation

• A revaluation loss is charged to profit and loss account in the period in which the revaluation is carried out.

Treatment of Revaluation Loss

• However a revaluation decrease should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in surplus in respect of the same asset.

Treatment of Revaluation Loss

• A revaluation surplus is credited directly to equity under the heading of Revaluation Surplus.

Treatment of Revaluation Surplus

• However a revaluation increase should be treated as income to the extent that it reverses the revaluation decrease of the same asset previously recognized as expense.

Treatment of Revaluation Surplus

• Where a company revalues its fixed assets, the increase in, or sums added by writing up of, the value of such assets as appearing in the books of accounts of the company shall be transferred to an account to be called “Surplus on Revaluation of Fixed Assets Accounts” and shown in the balance-sheet of the company after Capital and Reserves.

Revaluation [Section 235]

• Except and to the extent actually realized on disposal of the assets which are revalued, the surplus on revaluation of fixed assets shall not be applied to set-off or reduce any deficit or loss, whether past, current or future, or in any manner applies, adjusted or treated so as to add to the income, profit or surplus of the company, or utilized directly or indirectly by way of dividend or bonus.

Revaluation [Section 235]

• Provided that the surplus on revaluation of fixed assets may be applied by the company in setting-off or in diminution of any deficit arising from the revaluation of any other fixed assets of the company

Revaluation [Section 235]

• IAS 16 has provided two methods of restating the carrying amount of a revalued asset.Gross carrying value of the asset

should be restated along with the accumulated depreciation so that the carrying value equals the revalued amount.

Restating the Carrying Amount

• Cost and Accumulated Depreciation of the asset before revaluation:

Cost of Asset/Gross carrying Amount Rs. 500,000

Accumulated Depreciation Rs. 200,000Carrying amount Rs. 300,000

• Suppose the asset is revalued at Rs. 450,000

Example

• Now the cost and accumulated depreciation of the asset would be restated as follows;

Gross carrying Amount(500,000 x 450,000 / 300,000) Rs. 750,000Accumulated Depreciation(200,000 x 450,000 / 300,000) Rs. 300,000Carrying amount Rs. 450,000

Example

• The second method is.Accumulated depreciation is eliminated

against the gross carrying value of the asset and the carrying amount is restated to the revalued amount.

Restating the Carrying Amount

• Accumulated depreciation of the asset would be written off against the gross carrying amount of the asset, bringing it down to 300,000 (its carrying value). This carrying value would then be restated to Rs. 450,000;

Gross carrying Amount Rs. 450,000Accumulated Depreciation Rs. 0Carrying amount Rs. 450,000

Example

• The revaluation surplus is transferred to retained earnings when the surplus is realized. The surplus is realized when:The asset is disposed off.With the use of the asset.

Realization of Revaluation Surplus

• Cost and Accumulated Depreciation of the asset before revaluation:Cost of Asset/Gross carrying Amount Rs.

500,000Accumulated Depreciation Rs. 200,000Carrying amount Rs. 300,000

• The asset is revalued at Rs. 450,000• Suppose depreciation is charged at 20 % on

written down value.

Example

• The depreciation charge on old carrying amount would have been Rs. 60,000/-

• On the revalued amount depreciation would be Rs. 90,000/-.

• The difference of Rs. 30,000/- would be transferred from revaluation surplus to retained earnings.

Example