Requirements of relevant accounting standards in relation to revaluation of non-current assets PDF

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Requirements of relevant accounting standards in relation to revaluation of noncurrent assets IAS 16 establishes principles for recognizing property, plant and equipment as assets, measuring their carrying amounts, and measuring the depreciation charges and impairment losses to be recognized in relation to them. Property, plant and equipment are tangible items that: -are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and -are expected to be used during more than one period. Property, plant and equipment include bearer plants related to agricultural activity. The cost of an item of property, plant and equipment is recognized as an asset if, and only if: it is probable that future economic benefits associated with the item will flow to the entity; and the cost of the item can be measured reliably. An item of property, plant and equipment is initially measured at its cost. Cost includes: -its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; -any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and -the estimated costs of dismantling and removing the item and restoring the site on which it is located, unless those costs relate to inventories produced during that period. After recognition, an entity chooses either the cost model or the revaluation model as its accounting policy and applies that policy to an entire class of property, plant and equipment: -under the cost model, an item of property, plant and equipment is carried at its cost less any accumulated depreciation and any accumulated impairment losses. -under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably is carried at a revalued amount, which is its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations must be made regularly and kept current. Revaluation increases are recognized in other comprehensive income and accumulated in equity, unless they reverse a previous revaluation decrease. Revaluation decreases are recognized in profit or loss unless they reverse a previous revaluation increase. The revaluation model is an alternative to the cost model and is used for the periodic valuation and reporting of long-lived assets. Whereas IFRS permits the use of either the revaluation model or the cost model, the revaluation model is not allowed under US GAAP. Under the revaluation model, the carrying amounts are the fair values at the date of revaluation less

any subsequent accumulated depreciation or amortization. The model creates the possibility for the values of long-lived assets to increase to amounts that are greater than their historical costs. The revaluation model may only be used if the fair value of the assets can be reliably measured. As a result, it can be used for classes of intangible assets only if an active market for the assets exists. It is rarely used for either tangible or intangible assets, but more so for intangible assets. Whether an asset revaluation affects earnings depends on whether the revaluation initially increases or decreases an asset class’ carrying amount. If the carrying amount of the asset class is initially decreased, the decrease is recognized in profit or loss on the income statement. Subsequently, if the carrying amount of the asset class increases, the increase is recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset class that was previously recognized in profit or loss. An increase in excess of the reversal amount will not be recognized in the income statement but instead will be directly recorded to equity in a revaluation surplus account. An upward revaluation will be treated the same as the amount which is in excess of the reversal amount.When an asset is retired or disposed of, any related revaluation surplus which is included in equity will be transferred directly to retained earnings. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The depreciation charge for each period is recognized in profit or loss unless it is included in the carrying amount of another asset. The depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. To determine whether an item of property, plant and equipment is impaired, an entity applies IAS 36. At the time of acquisition non-current assets are recorded at cost. After initial recognition however, entities can either continue to measure asset on historical-cost basis or change it to revaluation basis. Under revaluation model non-current assets may be carried at revalued amount i.e. fair value of asset at the date of revaluation less subsequent accumulated depreciation and impairment losses. Mathematically it can be expressed as following: Revalued amount of asset = Fair value of asset – Accumulated depreciation – Impairment

Accounting for revaluation of asset Accounting for revaluation of non-current asset is a three step process: 1. Adjusting the cost of asset i.e. account of asset 2. Eliminating accumulated depreciation of asset being revalued 3. Recognizing revaluation gain or loss

Presentation of Revaluation surplus Revaluation gain or revaluation surplus is the increase in entity’s asset that it will realize over the useful life of asset or when it’s sold. Therefore instead of crediting the whole amount to profit and loss account in the period of revaluation increase, it is recorded under equity. Entity has a choice to reduce the amount of revaluation surplus at the same rate used to calculate depreciation using excess depreciation concept or leave it as is. Reversal of previously recognized revaluation gain or loss Normally things are pretty straightforward and the accounting of revaluation concludes as mentioned above. However, if there was  

any previous revaluation loss before current revaluation increase; OR any revaluation gain before current revaluation decrease then step 3 will be amended as following:

If there is any previously recognized revaluation decrease (as revaluation loss in P&L a/c) then current revaluation increase will first be applied to reverse previous decrease and the remaining amount will then be credited to the revaluation surplus account. If there is any previously recognized revaluation increase (as revaluation surplus under equity) then current revaluation decrease will first be applied to reverse any revaluation surplus and the remaining amount will then be debited to the profit and loss account...