Revaluation model

As part of IAS 16 Property, Plant and Equipment it is possible to use the revaluation model. An asset will be carried at its fair value at the revaluation date less subsequent depreciation and/or impairment. Gains/losses arising on the revaluation of an entity’s property (other than investment property) are recorded within equity as a revaluation reserve.

When an item of property, plant and equipment is revalued, the entire class of the asset should be revalued. Classes of property plant and equipment are provided here. Fair value of an item of PPE is not necessarily the market price. Fair value of land and building is determined on the basis of market based evidence which is termed as appraisal method. It is preferred that the measurement of the fair value of land and building is undertaken by professional valuers. Whereas the fair value of plant and equipment is carried out applying income approach or depreciated replacement cost approach.

Types of assets

Fair value

1. Land and Buildings.

Market value as appraised. Appraisal is normally carried by real estate qualified valuation consultant (industry experts).

2. Plant, machinery and significant equipment for which market value exist.

Market value. Often appraised by plant and equipment valuation consultants (many also insurance valuators).

3. Plant, machinery and significant equipment for which market value is not available because of specialized nature of the assets.

Income approach: Times of Earning Before Interest , Tax , Depreciation and Amortisation.

Depreciated replacement cost.

Often appraised by plant and equipment valuation consultants (many also insurance valuators).

The frequency of revaluation depends upon volatility in the fair value of the assets. A asset that experiences highly volatile movements in fair value requires annual revaluations while other assets may be revalued in an interval of every three to five years. Property, plant and equipment Property, plant and equipment

The increase in the carrying amount of the property, plant and equipment on revaluation should be recognized in other comprehensive income and accumulated in equity under a heading ‘revaluation reserve’. If the entity has previously charged any revaluation loss (on the same asset) to profit or loss, the increase as a result of a new valuation report is credited to profit or loss (and not accumulated into the revaluation reserve).

On the other hand, if there is decrease in the carrying amount of an asset out of revaluation, the revaluation loss is charged to profit or loss. If there exists any revaluation reserve (on the same asset) , the revaluation of loss can be charged to such revaluation surplus to the extent possible.

Example

Axe Ltd. purchased a building worth $200,000 on January 1, 2008. It records the building using the following journal entry.

Building Revaluation model 200,000
Cash Revaluation model 200,000

Assume on December 31, 2010 the company intends to switch to revaluation model and carries out a revaluation exercise which estimates the fair value of the building to be $190,000 as at December 31, 2010. The carrying amount at the date is $170,000 and revalued amount is $190,000 so an upward adjustment of $20,000 is required to building account. It is recorded through the following journal entry.

Building Revaluation model 20,000
Revaluation reserve (as a seperated equity component) through other operating income Revaluation model 20,000

If a revalued asset is subsequently valued down due to impairment, the loss is first written off against any balance available in the revaluation surplus and if the loss exceeds the revaluation surplus balance of the same asset the difference is charged to income statement as impairment loss.

Suppose on December 31, 2012 Axe Ltd. revalues the building again to find out that the fair value should be $160,000. Carrying amount as at December 31, 2012 is $190,000 minus 2 years depreciation of $22,352 which amounts to $167,648. The carrying amount exceeds the fair value by $7,648 so the account balance should be reduced by that amount. We already have a balance of $20,000 in the revaluation surplus account related to the same building, so no impairment loss shall go to income statement. The journal entry would be:

Revaluation reserve (as a seperated equity component) through other operating income Revaluation model 7,648
Building Revaluation model 7,648

Had the fair value been $140,000 the excess of carrying amount over fair value would have been $27,648. In that situation the following journal entry would have been required.

Revaluation reserve (as a seperated equity component) through other operating income 20,000
Impairment loss in profit or loss 7,648
Building 20,000
Building impairment loss 7,648

Revaluation model

Revaluation model

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