IAS 16 : Measurement after Recognition 2

Revaluation in classes

If an item is revalued, the entire class to which that asset belongs will also be revalued.

A class is a grouping of assets of a similar nature and use.

The following are examples of common separate classes:

(1)      land;

(2)      land and buildings;

(3)      machinery;

(4)      ships;

(5)      aircraft;

(6)      motor vehicles;

(7)      furniture and fixtures; and

(8)      office equipment.

It should be noted that land is not depreciated.

The items within a class are revalued simultaneously (or not at all) to avoid selective revaluation of assets, and the reporting of amounts that are a mixture of costs and values as at different dates.

A class of assets may be revalued on a rotating basis, provided revaluation of the class of assets is completed within a short period, and provided the revaluations are kept up to date.

EXAMPLE rotating valuation You own various offices. You decide to revalue them every 3 years. The revaluations may be done at the same time, or one third of the properties may be revalued each year.

Carrying Amount Increase

If an asset’s carrying amount is increased as a result of a revaluation, the increase will be credited directly to equity under the heading of Equity - Revaluation Reserve.

EXAMPLE carrying amount increase Your computer centre, carrying value of $15 mln. has been revalued at $17 mln. The $2 mln. surplus will be credited to the revaluation surplus reserve within equity.
	I/B	DR	CR
Property, plant & equipment	B	$2 mln
Equity - Revaluation Reserve	B		$2 mln
This records the revaluation of the computer centre

However, the increase will be recorded in the income statement to the extent that it reverses a revaluation decrease of the same asset previously recorded in the income statement.

EXAMPLE prior revaluation decrease Your computer centre had a carrying value of $20 mln. It has been revalued at $19 mln. The $1mln. shortfall is expensed to the income statement.
	I/B	DR	CR
Accumulated impairment	B		$1 mln
Impairment loss	I	$1 mln
This records the revaluation of the computer centre in the first year

At the next valuation (Year 2), it is revalued at $23 mln. $1 mln. of the surplus will be credited to the income statement (to offset the first year’s charge). The remaining $3 mln. surplus will be credited directly to the revaluation surplus reserve within equity, without appearing on the income statement.
	I/B	DR	CR
Property, plant & equipment	B	$3 mln
Accumulated impairment	B	$1 mln
Impairment gain	I		$1 mln
Equity - Revaluation Reserve	B		$3 mln
This records the revaluation of the computer centre in the second year

Carrying Amount Decrease

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease will be recorded in income statement.

.

EXAMPLE carrying amount increase following decrease Your computer centre had a carrying value of $10 mln. It has been revalued at $12 mln. The $2 mln. surplus is credited to the revaluation surplus reserve within equity.
	I/B	DR	CR
Property, plant & equipment	B	$2 mln
Equity - Revaluation Reserve	B		$2 mln
This records the revaluation of the computer centre in the first year

At the next valuation, it is revalued at $7 mln. $2 mln. of the shortfall will be charged to the revaluation surplus reserve. The remaining $3m shortfall will be charged to the income statement.
	I/B	DR	CR
Equity - Revaluation Reserve	B	$2 mln
Impairment loss	I	$3 mln
Property, plant & equipment	B		$5 mln
This records the revaluation of the computer centre at the next valuation in the second year

Asset write off

When the asset is eliminated from the balance sheet, the revaluation surplus included in equity may be transferred directly to retained earnings.

EXAMPLE asset write off Your computer centre had a cost of $22 mln. It has been revalued at $28 mln. The $6 mln. surplus has been credited to the revaluation surplus reserve within equity.
	I/B	DR	CR
Property, plant & equipment	B	$6 mln
Equity - Revaluation Reserve	B		$6 mln
This records the revaluation of the computer centre

It is sold for $30 mln. $2 mln. is shown as a gain in the income statement. The $6 mln. is transferred directly from the revaluation surplus to retained earnings, with no impact on the income statement.
	I/B	DR	CR
Cash	B	$30 mln
Property, plant & equipment	B		$28 mln
Profit sale of computer centre	I		$2 mln
This records the sale of the computer centre
Equity - Revaluation Reserve	B	$6 mln
Equity - Retained earnings	B		$6 mln
This records the transfer from Equity - Revaluation Reserve to retained earnings

Asset used – transfer part to retained earnings

As the asset is used some of the Equity - Revaluation Reserve may be transferred to retained earnings.

The amount transferred is the difference between depreciation on revalued carrying amount and depreciation on original cost.

Transfers from Equity - Revaluation Reserve to retained earnings are not made through income statement.

(Revaluations may generate deferred tax adjustments. These are explained in the IAS 12 Income Taxes workbook.)

EXAMPLE transfer part to retained earnings Your computer centre had a cost of $60 mln. It is being depreciated over 20 years. It has been revalued at $80 mln. The $20 mln. surplus has been credited to the Equity - Revaluation Reserve within equity.
	I/B	DR	CR
Property, plant & equipment	B	$20 mln
Equity - Revaluation Reserve	B		$20 mln
This records the revaluation of the computer centre

Depreciation = 5%, and is now increased to $4 mln. per year.

This is charged to the income statement each year.

	I/B	DR	CR
Accumulated depreciation	B		$4 mln
Depreciation	I	$4 mln
Annual depreciation charge

Each year, $1 mln. of the revaluation surplus (5%) can be transferred from the Equity - Revaluation Reserve directly to retained earnings, with no impact on the income statement. (Depreciation on revalued amount $4 mln. – depreciation on original valuation $3 mln.). This transfers $1 mln. of non-distributable reserves to distributable reserves. This calculation ignores deferred tax.

	I/B	DR	CR
Equity - Revaluation Reserve	B	$1 mln
Retained earnings	B		$1 mln
This records the annual transfer from Equity - Revaluation Reserve to retained earnings