Gripping IFRS                                      Property, plant and equipment: the models                              ...
Gripping IFRS                                         Property, plant and equipment: the models1. IntroductionThis chapter...
Gripping IFRS                                       Property, plant and equipment: the modelsThe carrying amount under the...
Gripping IFRS                                        Property, plant and equipment: the models3. The cost model3.1 The led...
Gripping IFRS                                           Property, plant and equipment: the modelsFor example:Assume that t...
Gripping IFRS                                                 Property, plant and equipment: the modelsGraphical depiction...
Gripping IFRS                                           Property, plant and equipment: the models Journals: 20X2          ...
Gripping IFRS                                                     Property, plant and equipment: the models  Solution to e...
Gripping IFRS                                               Property, plant and equipment: the models  Example 4: cost mod...
Gripping IFRS                                             Property, plant and equipment: the models                 Deprec...
Gripping IFRS                                       Property, plant and equipment: the modelsYou may keep two separate acc...
Gripping IFRS                                            Property, plant and equipment: the modelsThe difference between t...
Gripping IFRS                                              Property, plant and equipment: the models    If the revaluation...
Gripping IFRS                                             Property, plant and equipment: the modelsLedger accounts:       ...
Gripping IFRS                                            Property, plant and equipment: the models Now let us do an exampl...
Gripping IFRS                                             Property, plant and equipment: the modelsLedger accounts:       ...
Gripping IFRS                                           Property, plant and equipment: the modelsDisclosure:Company nameSt...
Gripping IFRS                                            Property, plant and equipment: the modelsWhen making adjustments ...
Gripping IFRS                                               Property, plant and equipment: the models W2: Revaluation requ...
Gripping IFRS                                              Property, plant and equipment: the modelsExample 8: revaluation...
Gripping IFRS                                            Property, plant and equipment: the modelsJournals:               ...
Gripping IFRS                                             Property, plant and equipment: the modelsSolution to example 9: ...
Gripping IFRS                                            Property, plant and equipment: the modelsJournals continued …    ...
Gripping IFRS                                              Property, plant and equipment: the modelsSolution to example 10...
Gripping IFRS                                            Property, plant and equipment: the modelsThe transfer may be done...
Gripping IFRS                                            Property, plant and equipment: the models  Retained earnings     ...
Gripping IFRS                                       Property, plant and equipment: the models5.4 Statement of financial po...
Gripping IFRS                                              Property, plant and equipment: the models•    the fair value of...
Gripping IFRS                                            Property, plant and equipment: the models    Land and buildings  ...
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
Chapter6 propertyplantandequipmentmodels2008
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Chapter6 propertyplantandequipmentmodels2008

  1. 1. Gripping IFRS Property, plant and equipment: the models Chapter 6 Property, Plant and Equipment: The ModelsReference: IAS 16, SIC 21Contents: Page 1. Introduction 219 2. Definitions 220 3. The cost model 221 3.1 The ledger accounts 221 3.2 The magical line 221 Example 1: cost model: impairment loss 222 Example 2: cost model: reversal of an impairment loss 223 Example 3: cost model: a summary example (the asset is not depreciated) 224 Example 4: cost model: a summary example (the asset is depreciated) 226 4. The revaluation model 227 4.1 Overview 227 4.2 The ledger accounts 227 4.3 The magical line 228 Example 5: revaluation model: a summary example (the asset is not 230 depreciated) Example 6: revaluation model: a summary example (the asset is 232 depreciated) 4.4 The difference between the gross and net methods 234 4.4.1 The gross replacement value method 235 4.4.2 The net replacement value method 235 Example 7: revaluation model: value increases, creating a revaluation surplus 235 Example 8: revaluation model: value decreases, reversing the revaluation 237 surplus and creating a revaluation expense Example 9: revaluation model: increase in value, reversing previous 238 revaluation expense and creating a revaluation surplus Example 10: disclosure of a revalued asset – NRVM and GRVM 240 compared 4.5 Realisation of the revaluation surplus 241 Example 11: removal of the revaluation surplus 242 5. Disclosure 243 5.1 Overview 243 5.2 Accounting policies and estimates 243 5.3 Statement of comprehensive income disclosure 243 5.4 Statement of financial position disclosure 244 5.5 Statement of changes in equity disclosure 244 5.6 Further encouraged disclosure 244 5.7 Sample disclosure involving property, plant and equipment 245 Example 12: cost model disclosure 247 Example 13: revaluation model disclosure 250 6. Summary 257 218 Chapter 6
  2. 2. Gripping IFRS Property, plant and equipment: the models1. IntroductionThis 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, dealswith 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. Thismeans, for example, that an entity may not use the cost model for a machine that makes breadand the revaluation model for a machine that slices bread. Both machines must be measuredusing the same model, say the cost model (since machines are a ‘class of asset’). Using thecost model for machines would not, however, prevent the entity from measuring its vehiclesusing 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 istherefore the base-line or benchmark method. This cost model is definitely easier to apply inpractice (and research suggests that it is currently the most commonly used model). This doesnot for a minute suggest that the revaluation model is an unlikely test or exam questionthough since the current trend in accounting is to use fair values (instead of historic costs) formeasurement purposes. Fortunately for you, however, the difficulty in applying therevaluation model is not due to complexity from an academic point of view, but rather it iscomplex to apply from a practical point of view (i.e. accounting and computer systems mayneed 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 thefollowing accounts:• cost account• accumulated depreciation and impairment loss account.These two accounts (accumulated depreciation account and accumulated impairment lossaccount) could be combined into one account instead in which case, depreciation, impairmentlosses and impairment losses reversed would all be accumulated in the accumulateddepreciation 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 impairmenttesting is explained in more detail in the next chapter.The previous chapter was based on the cost model, with the one exception: the previouschapter did not tell you about the need to test for impairments annually. If the results of animpairment test suggest that an asset’s carrying amount may be too high, it could be for thesimple reason that the accumulated depreciation is insufficient, in which case extradepreciation 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 maybe too high, but you think the past depreciation is a fair reflection of past usage, then theasset’s recoverable amount must be calculated and then compared with its carrying amount. Ifthe recoverable amount is less than the carrying amount, the carrying amount must be reducedby processing an impairment loss adjustment. Notice the difference: the reduction in carryingamount is expensed as an impairment loss if it reflects ‘damage’ to the asset whereas a drop invalue through ‘normal usage’ is called depreciation instead.If the estimates that were used in calculating the recoverable amount change in the future, andthese estimates change such that the recoverable amount then increases above the carryingamount, the previous impairment loss or part thereof may be reversed. The difference is calledan impairment loss reversed. 219 Chapter 6
  3. 3. Gripping IFRS Property, plant and equipment: the modelsThe 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 theentity 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 governingImpairments of Assets, and is therefore covered in an entirely separate chapter. This chapterdoes not show you how to calculate the recoverable amount but shows you how to account foradjustments to the asset’s carrying amount.2. DefinitionsHere are a further few definitions that will be used in this chapter (these are IAS 16definitions, some of which I have modified slightly):Impairment loss:• the excess of• the carrying amount• over the recoverable amountFair value:• the amount for which an asset could be exchanged between• knowledgeable, willing parties in an arms 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 governingthe 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 familiarwith. 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. 220 Chapter 6
  4. 4. Gripping IFRS Property, plant and equipment: the models3. The cost model3.1 The ledger accountsThe 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 accumulatedimpairment losses, but it is possible to combine these two accounts into one account. This texthas opted to combine these two accounts into one account: accumulated depreciation andimpairment losses.The accumulated depreciation and impairment loss account reflects adjustments to thecarrying amount caused by:• depreciation (usage);• impairment losses (damage); and• impairment losses reversed (if the damage is repaired in some way).3.2 The magical lineWhen using the cost model, the value of an asset may never be increased above its historicalcarrying 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 theoriginal impairment loss (expense).This is best explained by way of examples. At first you may find it useful to sketch a graph ofthe situation, plotting the ‘magical’ historical carrying amount line (HCA), and then later theactual carrying amount (ACA) and the recoverable amount (RA). Incidentally, most of usnever grow out of the need for a graph! Historical carrying amount line Cost 0 Useful LifeNotice how the diagonal line represents a gradual reduction in the historical carrying amountas the asset is depreciated over its useful life. Look at the graph carefully: when using the costmodel, the carrying amount of the asset is not allowed to be raised above this magical line(the diagonal line). 221 Chapter 6
  5. 5. Gripping IFRS Property, plant and equipment: the modelsFor 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 carryingamount 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 RA HCA ACA Further Imp loss Imp loss Imp loss imp loss reversed reversed RA RA ACA ACAThis 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 000Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years)Recoverable amount at 31/12/20X1: C60 000Recoverable amount at 31/12/20X2: C45 000Required: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 000Journals: 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 222 Chapter 6
  6. 6. Gripping IFRS Property, plant and equipment: the modelsGraphical depiction: 31/12/20X1 80 000( HCA & ACA)Cost 20 000 (Debit impairment loss) Historical carrying amount line 60 000(RA) 0 Useful LifeJournals: 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 20X2Note: no further impairment loss was required to be journalised at 31/12/20X2 since the new carryingamount (60 000 – 15 000 = 45 000) equals the recoverable amount.Example 2: cost model - reversal of impairment lossCost of plant at 1/1/20X1: C100 000Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years)Recoverable amount at 31/12/20X1: C60 000Required:Provide the journals for 20X2, assuming that the recoverable amount at 31/12/20X2 wasestimated at:A. C55 000; andB. C65 000Solution to example 2: cost model - reversal of impairment lossW1: Historical carrying amount 31/12/20X2: A and B Cost 100 000 Accumulated depreciation (100 000 x 20% x 2yrs) (40 000) 60 000W2: Actual carrying amount 31/12/20X2 (before the impairment testing): A and B Cost 100 000 Accumulated depreciation and impairment losses (55 000) (depreciation 20X1: 20 000 + IL 20X1: 20 000 + depr 20X2: 15 000) 45 000 W3: Reversal of impairment loss required: A B Recoverable amount limited to historical carrying amount 55 000 60 000 (given: note that in part B that the RA of 65 000 is limited to historical carrying amount of 60 000) Less actual carrying amount (W2) 45 000 45 000 10 000 15 000 223 Chapter 6
  7. 7. Gripping IFRS Property, plant and equipment: the models 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 60 000( HCA)Cost 55 000(RA) 10 000 (Credit reversal of impairment loss) Historical carrying amount line 45000( ACA) 0 Useful LifeGraph depicting B: 31/12/20X2 65 000(RA) (No increase allowed) 60 000( HCA)Cost 15 000 (Credit reversal of impairment loss) Historical carrying amount line 45 000( ACA) 0 Useful LifeIn 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 000Depreciation: This land is not depreciatedRecoverable amount• 31/12/20X1 120 000• 31/12/20X2 70 000• 31/12/20X3 90 000• 31/12/20X4 110 000Required:Show the statement of financial position and ledger accounts for each of the years ended 31December up to 20X4. 224 Chapter 6
  8. 8. Gripping IFRS Property, plant and equipment: the models 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 Not allowed above HCA 0 0 HCA • below Dr: Impairment loss 2 (30 000) HCA • up to HCA Cr: impairment loss 3; 4 10 000 20 000 reversed 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: 31/12/20X2Bank (1) 100 000 Balance c/f 30 000 Imp loss (2) 30 000 100 000 100 000 30 000 30 000Balance 100 000 31/12/20X3 31/12/20X2: Imp Loss Rev (3) 20 000 Balance b/f 30 000 Balance c/f 10 000 30 000 30 000 31/12/20X4 31/12/20X3: Bank Imp Loss Rev (4) 10 000 Balance b/f 10 000 1/1/ 20X1: Balance c/f 0 Land (1) 100 000 10 000 10 000 31/12/20X4 Balance b/f 0 Impairment loss expense Reversal of impairment loss income31/12/20X2 31/12/20X2 31/12/20X3 31/12/20X3Acc Imp Loss (2) 30 000 P&L 30 000 P&L 20 000 Acc Imp Loss (3) 20 000 31/12/20X4 31/12/20X4 P&L 10 000 Acc Imp Loss (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: 0 100 000 90 000 70 000 100 000 20X2: Cost: 100 000 – AIL:30 000 20X3: Cost: 100 000 – AIL:10 000 20X4: Cost: 100 000 – AIL:0 225 Chapter 6
  9. 9. Gripping IFRS Property, plant and equipment: the models 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; 2 (25 000) (20 000) (25 000) (25 000) 75 000 / 3; 40 000 / 2; 25 000 / 1 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 0 25 000 40 000 75 000 20X2: Cost: 100 000 – AD&IL:60 000 20X3: Cost: 100 000 – AD&IL:75 000 20X4: Cost: 100 000 – AD&IL:100 000 Ledger accounts: Cost (asset) Bank1/1/ 20X1: 1/1/ 20X1: (1)Bank 100 000 Balance c/f 100 000 Machine (1) 100 000 100 000 100 000Balance b/f 100 000 226 Chapter 6
  10. 10. Gripping IFRS Property, plant and equipment: the models Depreciation expense Accumulated depreciation & impairment losses31/12/20X1 31/12/20X1 31/12/20X1AD&IL (2) P&L 25 000 25 000 Balance c/f 25 000 Depr (2) 25 00031/12/20X2 31/12/20X2 25 000 25 000AD&IL (2) 25 000 P&L 25 00031/12/20X3 31/12/20X3 31/12/20X2:AD&IL (2) P&L 20 000 20 000 Balance b/f 25 00031/12/20X4 31/12/20X4 (2) Depr 25 000AD&IL (2) 25 000 P&L 25 000 Balance c/f 60 000 Imp loss (3) 10 000 60 000 60 000 31/12/20X3: (4) ILR 5 000 Balance b/f 60 000 Balance c/f 75 000 Depr (2) 20 000 80 000 80 000 31/12/20X4: Balance b/f 75 000 Balance c/f 100 000 Depr (2) 25 000 100 000 100 000 Balance b/f 100 000 Impairment loss expense Reversal of impairment loss income31/12/20X2 31/12/20X2 31/12/20X3 31/12/20X3AccImpLoss (3) 10 000 P&L 10 000 P&L 5 000 AccImpLoss (4) 5 000 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. 227 Chapter 6
  11. 11. Gripping IFRS Property, plant and equipment: the modelsYou may keep two separate accounts for accumulated depreciation and accumulatedimpairment losses, but it is possible to combine these two accounts into one account. This texthas opted to combine these two accounts into one account: accumulated depreciation andimpairment losses.This accumulated depreciation and impairment loss account reflects adjustments to thecarrying amount caused by:• depreciation (usage);• impairment losses (damage); and• impairment losses reversed (if the damage is repaired in some way).4.3 The magical lineUnlike the cost model, the revaluation model allows the carrying amount of the asset to beincreased above its historical carrying amount (the magical line) as well as to be decreasedbelow it.As with the cost model, the concepts are best understood by way of examples. At first youmay find it useful to sketch a graph of the situation, plotting the ‘magical’ historical carryingamount line (HCA), and then later the actual carrying amount (ACA) and the recoverableamount (RA). Historical carrying amount line Cost 0 Useful LifeNotice how the diagonal line represents a gradual reduction in the historical carrying amountas the asset is depreciated over its useful life. Look at the graph carefully: when using therevaluation model, the carrying amount of the asset may be raised above this magical line (thediagonal line) – but an increase in carrying amount above the magical line is recognised inequity, not in the entity’s profits. Adjustments to the carrying amount that do not increase thecarrying 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 nowgreater than its historical carrying amount, the increase above the line is recognised in therevaluation surplus account. This account is an equity account. The portion above the line isnot credited to income because income represents economic benefits that have already beenearned. In contrast, such an increase in the carrying amount of an asset represents extra futureeconomic benefits expected from the future use or sale of the asset. Furthermore, an asset hasincreased in value with no concomitant increase in liabilities, thus having increased equity(assets – liabilities). This increase is recognised as other comprehensive income and isaccumulated in equity. 228 Chapter 6
  12. 12. Gripping IFRS Property, plant and equipment: the modelsThe difference between the historical carrying amount and the fair value carrying amount canbe summarised as follows: Fair value greater than HCA Difference in equity:HCA Fair value Difference in profit: less than HCAHCA: historical carrying amountA summary of carrying amount adjustments under the revaluation model is reflected in thefollowing block diagramme, which shows the inter-relationship between the actual carryingamount, fair value and historical carrying amount (i.e. the balance that the asset would havehad had we not been fiddling with the carrying amounts).Block diagramme 2: Adjustments to the carrying amount using the revaluation model FV ACA Revaluation Revaluation surplus surplus (created/ (reversed/ HCA/ increased) decreased) HCA HCA ACA Expense Income Expense FV ACA FVAll 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 anadjustment to an asset’s carrying amount to one that is below the historical carrying amountline, one should differentiate between adjustments to a fair value from adjustments to arecoverable 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 fairvalue does not technically mean that the recoverable amount has dropped and therefore it doesnot 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 85 000 229 Chapter 6
  13. 13. Gripping IFRS Property, plant and equipment: the models 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 lossexpense (and a revaluation income from an impairment loss reversed), but there are thosewho advocate that such differentiation is unnecessary. On the basis that IAS 16 does not makethis differentiation clearly required, it is common practice to identify all adjustments made tothe carrying amount below the historical carrying amount line, (whether an adjustment to arecoverable 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 requiredifferentiation, the carrying amount will be the same. To start with, we will look at anexample that involves land, since land is an asset that is generally not depreciated. This willallow us to see the essence of the revaluation model. From there we will progress to anexample 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 000Depreciation: This piece of land is not depreciatedFair value• 1/1/20X2 120 000• 1/1/20X3 90 000• 1/1/20X4 70 000• 1/1/20X5 110 000The company’s policy is to leave any balance on the revaluation surplus intact until such timeas the asset is disposed of.Required:Show the statement of financial position and ledger accounts for each of the years ended 31December 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 000Depreciation Land not depreciated (0) (0) (0) (0)Fair value adjustments:Above HCA Cr: revaluation surplus 2; 7 10 000 20 000Down 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 000Closing balance fair value 110 000 70 000 90 000 120 000Historical carrying amount: (cost) 100 000 100 000 100 000 100 000 230 Chapter 6
  14. 14. Gripping IFRS Property, plant and equipment: the modelsLedger accounts: Cost: land (asset) Revaluation surplus1/1/ 20X1: 1/1/20X2:Bank (1) 100 000 Balance c/f 100 000 Balance c/f 20 000 Cost (2) 20 000 100 000 100 000 20 000 20 00031/12/ 20X1: 1/1/20X3: 31/12/20X2:Balance b/f 100 000 Cost (3) 20 000 Balance b/f 20 0001/1/20X2: 20 000 20 000Rev Surp (2) 20 000 Balance c/f 120 000 31/12/20X3: Balance b/f 0 120 000 120 00031/12/ 20X2: 1/1/20X3: 1/1/20X5: (3)Balance b/f 120 000 Rev Surp 20 000 Cost (7) 10 000 (4) Rev Exp 10 000 10 000 10 000 Balance c/f 90 000 31/12/20X5: 120 000 120 000 Balance b/f 10 00031/12/ 20X3: 1/1/20X4:Balance b/f 90 000 Rev Exp (5) 20 000 Balance c/f 70 000 90 000 90 000 Bank31/12/ 20X4: 1/1/ 20X1:Balance b/f 70 000 Land (1) 100 0001/1/20X5:Rev Inc (6) 30 000Rev Surp (7) 10 000 110 000 110 00031/12/ 20X5:Balance b/f 110 000 Revaluation expense Revaluation income1/1/20X3: 31/12/20X3 31/12/20X5 1/1/20X5Cost (4) 10 000 P&L 10 000 P&L 30 000 Cost (3) 30 0001/1/20X4 31/12/20X4Cost (5) 20 000 P&L 20 000Disclosure:Company nameStatement of financial positionAs at 31 December (extracts)ASSETS 20X5 20X4 20X3 20X2Non-current Assets C C C CLand 20X1: Cost: 100 000 – AIL: 0 110 000 70 000 90 000 120 000 20X2: Cost: 100 000 – AIL:30 000 20X3: Cost: 100 000 – AIL:10 000 20X4: Cost: 100 000 – AIL:0EQUITY AND LIABILITIESEquityRevaluation surplus 10 000 0 0 20 000 231 Chapter 6
  15. 15. Gripping IFRS Property, plant and equipment: the models 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 Jnl 20X5 20X4 20X3 20X2adjustments No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)Opening balance 20X2: 100 000 x 9 / 66 000 52 500 160 000 90 000 10Adjustment:Above HCA Cr: revaluation 1;7; 9 54 000 7 000 90 000 surplusDown to HCA Dr: revaluation 3 (80 000) surplusBelow HCA Dr: revaluation 4 (20 000) expenseUp to HCA Cr: revaluation 6 17 500 incomeFair value 120 000 77 000 60 000 180 000Depreciation:• 180 000/ 9 yrs 2 (20 000)• 60 000 / 8 5 (7 500) yrs• 77 000 / 7 8 (11 000) yrs• 120 000 / 6 yrs 10 (20 000)Closing balance 100 000 66 000 52 500 160 000Historical carrying amount on date of 60 000 70 000 80 000 90 000revaluation Ledger accounts are overleaf. 232 Chapter 6
  16. 16. Gripping IFRS Property, plant and equipment: the modelsLedger accounts: Carrying amount: machine (asset) Revaluation surplus (equity)1/1/ 20X2: 31/12/20X2 31/12/20X2: 1/1/20X2:Balance b/f 90 000 Depr (2) 20 000 Ret Earn 10 000 Cost (1) 90 000 (90 000/ 9)Rev Surp (1) 90 000 Balance c/f 160 000 Balance c/f 80 000 180 000 180 000 90 000 90 00031/12/ 20X2: 1/1/20X3: 31/12/ 20X2:Balance b/f 160 000 CA (3) 80 000 Balance b/f 80 000 1/1/20X3: Balance c/f 0 Rev Surp (3) 80 000 Rev Exp (4) 20 000 80 000 80 000 31/12/20X3 31/12/20X3 Depr (5) 7 500 Balance b/f 0 Balance c/f 52 500 31/12/20X4: 1/1/20X4 Ret Earn 1 000 CA (7) 7 000 (7 000/ 7) Balance c/f 6000 160 000 160 000 7 000 7 00031/12/ 20X3: 31/12/20X4Balance b/f 52 500 Balance b/f 6 0001/1/20X4 31/12/20X4 31/12/20X5: 1/1/20X5Rev Inc (6) 17 500 Depr (8) 11 000 Ret Earn 10 000 CA (9) 54 000 (60 000/ 6)Rev Surp (7) 7 000 Balance c/f 66 000 Balance c/f 50 000 77 000 77 000 60 000 60 00031/12/ 20X4: 31/12/ 20X5:Balance b/f 66 000 Balance b/f 50 0001/1/20X5 31/12/20X5Rev Surp (9) 54 000 Depr (10) 20 000 Balance c/f 100 000 120 000 120 00031/12/ 20X5:Balance b/f 100 000 Depreciation expense Retained earnings (equity)31/12/20X2 31/12/20X2 31/12/20X2CA (2) 20 000 P&L 20 000 Rev Surp 10 00031/12/20X3 31/12/20X3 31/12/20X4:CA (5) 7 500 P&L 7 500 Rev Surp 1 00031/12/20X4 31/12/20X4 31/12/20X5:CA (8) 11 000 P&L 11 000 Rev Surp 10 00031/12/20X5 31/12/20X5CA (10) 20 000 P&L 20 000 Revaluation expense Revaluation income1/1/20X3: 31/12/20X3 31/12/20X4 1/1/20X4CA (4) 20 000 P&L 20 000 P&L 17 500 CA (6) 17 500 233 Chapter 6
  17. 17. Gripping IFRS Property, plant and equipment: the modelsDisclosure:Company nameStatement of financial positionAs at 31 December (extracts)ASSETS 20X5 20X4 20X3 20X2Non-current assets C C C CMachine 20X1: Cost: 100 000 – AIL: 0 100 000 66 000 52 500 160 000 20X2: Cost: 100 000 – AIL:30 000 20X3: Cost: 100 000 – AIL:10 000 20X4: Cost: 100 000 – AIL:0EQUITY AND LIABILITIESEquityRevaluation surplus 50 000 6 000 0 80 000Notice how the revaluation surplus balance in the above statement of financial position reflects thedifference between the carrying amount and what it would have been had the asset not been revalued: 20X5 20X4 20X3 20X2 C C C CCarrying amount of asset is: statement of financial position 100 000 66 000 52 500 160 000Historical carrying amount: original cost – depreciation 50 000 60 000 70 000 (a) 80 000Revaluation surplus 50 000 6 000 0 80 000a) 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 000Another interesting point is that the adjustments made to retained earnings reflect the effect that therevaluation has had on income in each of the years to date: CumulativeEffect on statement of comprehensive income between 20X2 and 20X5 CActual effect on profit using the revaluation model:Depreciation expense: 20X1 to 20X5 10 000 +20 000 +7 500 +11 000 +20 000 68 500Revaluation expense (20X3) 20 000Revaluation income (20X4) (17 500)Net effect on profit (between 20X1 and 20X5) 71 000Effect 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 0004.4 The difference between the gross and net methodsAs 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 accumulateddepreciation and impairment loss account (with the result that the cost account remainsunchanged). Under the cost model, therefore, the cost account continues to reflect cost.Under the revaluation model, however, adjustments to carrying amount affect both the costaccount and the accumulated depreciation and impairment loss account. In fact, sinceadjustments are made to the cost account such that the cost account no longer reflects cost, itis referred to as ‘gross carrying amount’ in the financial statements. 234 Chapter 6
  18. 18. Gripping IFRS Property, plant and equipment: the modelsWhen making adjustments to an asset’s carrying amount under the revaluation model, theentity 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 methodused will affect the disclosure of the breakdown of the net carrying amount into itscomponents 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 methodThis method involves restating the cost account to the new gross replacement value andproportionally restating the accumulated depreciation so that the net carrying amount equalsthe net replacement value (fair value). In other words, the cost account will reflect the grossreplacement value, (which equals the total economic benefits embodied in the asset) and theaccumulated depreciation account will reflect how much of the total economic benefits havebeen used up to date. We’ll do an example in a moment.4.4.2 The net replacement value methodThis method involves transferring the balance in the accumulated depreciation account(immediately prior to the revaluation) to the cost account and then adjusting this net carryingamount 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 ofrevaluations are not difficult but are covered later in this chapter.Example 7: revaluation model - increase in value, creating a revaluation surplusPlant cost at 1/1/20X1: C100 000Depreciation: 20% straight-line per annum to a nil residual valueValue 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 000The 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 surplusWorkings: 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) 80 000 235 Chapter 6
  19. 19. Gripping IFRS Property, plant and equipment: the models W2: Revaluation required at 1/1/20X2: C Fair value 90 000 Actual carrying amount (80 000) 10 000Graph depicting both (A) and (B): 1/1/20X2 90 000 (FV) 10 000 (Credit revaluation surplus) 80 000 (HCA & ACA) Cost Historical carrying amount line 0 Useful LifeJournals (A) (B) NRVM 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/ANRVM: set-off of accumulated depreciation before revaluing asset(1/1/20X2)Plant: cost 10 000 N/A Revaluation surplus (10 000) N/ANRVM: 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) Alternativecalculation: (22 500 revalued depreciation – 20 000 historicdepreciation) 236 Chapter 6
  20. 20. Gripping IFRS Property, plant and equipment: the modelsExample 8: revaluation model - decrease in value, reversing the revaluation surplusand 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 000Required: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 revaluationsurplus 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 000Graph depicting both (A) and (B): 1/1/20X3 67 500 (ACA) 7 500 (Debit revaluation surplus) 60 000 (HCA)Cost 6 000 (Debit revaluation expense) 54 000(FV) Historical carrying amount line 0 Useful Life 237 Chapter 6
  21. 21. Gripping IFRS Property, plant and equipment: the modelsJournals: (A) (B) NRVM GRVM dr/ (cr) dr/ (cr)Devaluation journals 1/1/20X3:Plant: accumulated depreciation 22 500 N/A Plant: cost (22 500) N/ASet off of accumulated depreciation against cost (NRVM)Revaluation surplus (the balance in this account) 7 500 N/ARevaluation expense (further decrease expensed: 13 500 – 7 500) 6 000 N/A Plant: cost (CA: 67 500 – FV: 54 000) (13 500) N/AReversal of balance in RS (7 500) with excess (13 500 - 7 500) expensedRevaluation surplus (the balance in this account) N/A 7 500Revaluation 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 000Restatement of cost and accumulated depreciation accounts: the firstadjustment reduces the revaluation surplus and any excess thereafter isdebited to impairment loss (p.s. the cost account is now reduced belowhistorical 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 20X2Comment:Please note that the difference between the journals using the NRVM and the GRVM are purely fordisclosure purposes. The essence of the above adjustments can be more clearly seen in the followingsimplified journal: NRVM and GRVM Debit CreditRevaluation surplus 7 500Revaluation expense 6 000 Plant at net carrying amount 13 500The only difference in the journals is the setting-off of the accumulated depreciation and cost accountin the case of the NRVM.The NRVM requires that these two accounts are set-off against each other and then that the costaccount 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 wouldequal the new carrying amount (fair value).Example 9: revaluation model - increase in value, reversing a previous revaluationexpense and creating a revaluation surplusAssume 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 000Required:Show the journals usingA. net replacement value method (NRVM)B. gross replacment value method (GRVM) 238 Chapter 6
  22. 22. Gripping IFRS Property, plant and equipment: the modelsSolution to example 9: revaluation model - increase in value, reversing a previousrevaluation expense and creating a revaluation surplusWorkings 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 000Graph depicting both (A) and (B): 1/1/20X4 44 000 (FV) 4 000 (Credit revaluation surplus) 40 000 (HCA)Cost 4 000 (Credit reversal of revaluation expense) Historical carrying amount line 36 000 (ACA) 0 Useful LifeJournals (A) (B) NRVM 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/ANRVM: Set off of accumulated depreciation against costPlant: 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/ANRVM: Reversal of previous revaluation expense (4 000) with excess(8 000 - 4 000) credited to equityPlant: 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 accumulateddepreciation 239 Chapter 6
  23. 23. Gripping IFRS Property, plant and equipment: the modelsJournals continued … (A) (B) NRVM 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 20X4Revaluation 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 earningsExample 10: disclosure of a revalued asset – NRVM and GRVM comparedAssume the same information as in the previous three examplesA 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 NRVMCompany nameNotes to the financial statementsFor the year ended 31 December 20X3 (extracts) 20X4 20X3 20X2 20X1 C C C C3. Plant (extracts)Net carrying amount: 1 January 36 000 67 500 80 000 0Gross carrying amount: 1 January 54 000 90 000 100 000 0Accum. depreciation and imp. losses: 1 (18 000) (22 500) (20 000) (0)JanuaryAdditions 0 0 0 100 000Depreciation (22 000) (18 000) (22 500) (20 000)Revaluation (expense) / income (profit) 4 000 (6 000) 0 0Revaluation surplus increase / (decrease) 4 000 (7 500) 10 000 0(equity)Net carrying amount: 31 December 22 000 36 000 67 500 80 000Gross carrying amount: 31 December 44 000 54 000 90 000 100 000Accum. depreciation and imp. losses: 31 (22 000) (18 000) (22 500) (20 000) DecThe last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value inuse and the fair value adjustment was recorded on a net replacement value basis. Revaluations areperformed 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). 240 Chapter 6
  24. 24. Gripping IFRS Property, plant and equipment: the modelsSolution to example 10B: disclosure of a revalued asset using GRVMCompany nameNotes to the financial statementsFor the year ended 31 December 20X3 (extracts) 20X4 20X3 20X2 20X1 C C C C3. Plant (extracts)Net carrying amount: 1 January 36 000 67 500 80 000 0Gross carrying amount: 1 January 90 000 112 500 100 000 0Accum. deprec. and imp. losses: 1 Jan (54 000) (45 000) (20 000) (0)Additions 0 0 0 100 000Depreciation (22 000) (18 000) (22 500) (20 000)Revaluation (expense) / income (profits) 4 000 (6 000) 0 0Revaluation surplus increase / (decrease) 4 000 (7 500) 10 000 0(equity)Net carrying amount: 31 December 22 000 36 000 67 500 80 000Gross carrying amount: 31 December 110 000 90 000 112 500 100 000Accum. 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 inuse and the fair value adjustment was recorded on a gross replacement value basis. Revaluations areperformed 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 splitbetween the amount classified as ‘gross carrying amount’ and the amount classified as ‘accumulateddepreciation 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 0004.5 Realisation of the revaluation surplusWhether you are using the net method or the gross method to account for a revaluation, anyrevaluation surplus account that is created must be removed from the accounts by the timethat the related asset no longer exists. The transfer is made directly to the retained earningsaccount, 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 areclassification adjustment and will therefore have no impact on the statement ofcomprehensive income, but will appear as a transfer between equity accounts in the statementof changes in equity. Debit CreditRevaluation surplus xxx Retained earnings xxxTransfer of the revaluation surplus to retained earningsThe transfer of the revaluation surplus to retained earnings effectively reverses the effect thatthe artificially increased depreciation has had on profits over the life of the asset. When theasset’s depreciable amount is zero (the asset having been fully depreciated), the revaluationsurplus account must also be zero. 241 Chapter 6
  25. 25. Gripping IFRS Property, plant and equipment: the modelsThe 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 ofrevaluation see section 235 of the Companies Ordinance, 1984 and a notification of theSecurity Exchange Commission of Pakistan –SRO 45 (1)/2003, dated 13/01/2003Example 11: removal of revaluation surplusAn asset with a cost of C100 (1/1/20X1) and a useful life of 4 years is revalued to fair valueof C120 (1/1/20X2). It is retired from use at the end of its useful life (31/12/20X4) and is soldon 18/9/20X5. The residual value is zero and the straight-line method of depreciation isappropriate.Required:Ignoring the tax effect, show the journal entries reducing the revaluation surplus to zeroassuming 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 Asset carrying Historic ExtraWorkings amount depreciation depreciationCost 1/1/20X1 100 100Depreciation - original 20X1: (100 - 0)/ 4yrs (25) (25)Carrying amount 31/12/20X1 75 75Revaluation surplus 120 - 75 45Revalued carrying amount 120 75 45Depreciation - 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 0a) Journals: posted at end of each year Debit Credit31 December 20X2Revaluation surplus 15 Retained earnings 15Transfer of revaluation surplus to retained earnings (45 / 3)31 December 20X3Revaluation surplus 15 Retained earnings 15Transfer of revaluation surplus to retained earnings (45 / 3)31 December 20X4Revaluation surplus 15 Retained earnings 15Transfer of revaluation surplus to retained earnings (45 / 3)b) Journals: posted 31/12/20X4 Debit CreditRevaluation surplus 45 242 Chapter 6
  26. 26. Gripping IFRS Property, plant and equipment: the models Retained earnings 45Transfer of revaluation surplus to retained earnings when asset isretired from usec) Journals: posted 18/9/20X5 Debit CreditRevaluation surplus 45 Retained earnings 45Transfer of revaluation surplus to retained earnings on disposal of asset5. Disclosure5.1 OverviewThe disclosure of property, plant and equipment involves various aspects: accounting policiesto be included in the notes to the financial statements, disclosure in the statement ofcomprehensive income, statement of financial position and the statement of changes in equity.5.2 Accounting policies and estimatesFor each class of property, plant and equipment (e.g. land, buildings, machinery, etc) thefollowing 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 (thestandard governing ‘accounting policies, changes in accounting estimates and errors’).5.3 Statement of comprehensive income disclosureThe following income and expense items should be disclosed in the notes to the financialstatements and should be shown per class of property, plant and equipment (a suggestion thatgenerally helps to reduce time wastage in tests and exams is to include these items in a notethat 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). 243 Chapter 6
  27. 27. Gripping IFRS Property, plant and equipment: the models5.4 Statement of financial position disclosureThe 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 andequipment (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 theaggregate of the accumulated depreciation and accumulated impairment losses that is given inthe reconciliation of the carrying amount of the asset) at the end of the period.5.5 Statement of changes in equity disclosureIf the property, plant and equipment is revalued using the revaluation model, there may be arevaluation 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 244 Chapter 6
  28. 28. Gripping IFRS Property, plant and equipment: the models• 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 equipmentABC LtdStatement of financial positionAs at 31 December 20X2 (extracts) 20X2 20X1ASSETS Note C CNon-current AssetsProperty, plant and equipment 4ABC LtdStatement of changes in equityFor the year ended 31 December 20X2 (extracts) Revaluation Retained Total surplus earnings C C CBalance at 1 January 20X1Total comprehensive incomeRealised portion transferred to retained earningsBalance at 31 Dec 20X1Total comprehensive incomeRealised portion transferred to retained earningsBalance at 31 December 20X2ABC LimitedNotes to the financial statementsFor 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 20X2 20X1 Profit before tax is stated after taking the following into account: C 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 20X2 20X1 Total carrying amount: C C Land and buildings Plant Vehicles 245 Chapter 6
  29. 29. Gripping IFRS Property, plant and equipment: the models Land and buildings 20X2 20X1 C 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 246 Chapter 6

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