Different Methods of Depreciation and their respective revaluation methods.

1. 07
FINANCIAL
REPORTING

2. DO IT YOURSELF
DEPRECIATION

3. DEPRECIATION- Important tips
• Depreciation begins when as asset is available for use
(NOT from the date that it was actually brought into use)
• Depreciation will NOT cease when asset is temporarily idle
• When as asset consists of significant parts, that will be
“used up” at different rates or in different patterns (i.e. where
different methods of depreciation are appropriate), it is
advisable to treat these parts individually
• If a company decides that any of the 3 factors (residual
value, useful life or method of depreciation) needs to be
changed, this must be adjusted as a change in accounting
estimate (IAS 8)

4. TEST YOURSELF
• Bell ltd. Purchased an asset for $100,000 on Jan 1st,
2015
• It was available for use on 1st Feb but brought into use
on 1st March
• It was temporarily idle for the month of April
• Asset has a useful life of 10 years and nil residual
value
• Straight line depreciation method is used
• The company’s financial year closes on Oct 31st, 2015.
Calculate depreciation during 2015

5. SOLUTION
• Depreciation will start on 1st Feb and will not be
ceased during April
• 100,000 x 9 = $7,500
10 12

6. TEST YOURSELF
An asset is purchased on Jan1st, 2010 for $100,000.
The asset has a total useful life of 10 years but the
company will dispose off the asset after 5 years for
an estimated $30,000 (present value). This figure is
calculated before taking into account the present
value of expected disposal cost of $20,000. The
straight line depreciation method is used.
Calculate depreciation for the year ending Dec 31st,
2010

7. SOLUTION
1) Expected disposal proceeds (PV) 30,000
Less: expected disposal cost (PV) (20,000)
Residual value 10,000
2) Cost 110,000
Less: Residual value (10,000)
Depreciable amount 100,000
3) Useful life is the shorter of useful life of the asset (10 years) or useful life for the
business (5 years)
4) Depreciation for 2010 = 100,000 $20,000
5 years

8. DEPRECIATION FOR SELF CONSTRUCTED ASSET
• Terrace ltd. was constructing an asset. The material and
labor cost was $100,000 during 2014, all paid in cash
• The company used one of its machine for construction
of this asset for a period of 6 months in 2014. The
depreciation of this machine was $20,000 for the 12
months period ending on Dec 31, 2014
• The constructed asset is a plant that became available
for use on Oct 1st, 2014 and was depreciated for 5 years
to a nil residual value
Record Journal entries in 2014

9. SOLUTION
Construction in process 100,000
Bank 100,000
Payment of construction cost
Depreciation- machine 20,000
Acc. dep.- machine 20,000
Depreciation of machine booked

10. SOLUTION continued……
Construction in process 10,000
Depreciation- machine 10,000
Transfer of depreciation expense to the cost of the
new asset (plant)
Plant 110,000
Construction in process 110,000
Completion of asset booked

11. SOLUTION continued……
Depreciation- plant 5,500
Acc. dep. - plant 5,500
Depreciation of the plant booked
110,000 x 3 = $5,500
5 12

12. SUBSEQUENT MEASUREMENT
REVALUATION

13. ASSETS
Initial
Recognition
Subsequent
Measurement
Purchase Exchange
Govt.
Grant
Borrowing
Cost
COST Revaluation
Impairment
Fair value
(N/A for PPE)

14. Cost Revaluation Fair value
N/A for PPE
Historic cost
Increase in value is not
recorded
Increase in value is
recorded
Increase in value is
recorded
Impairment is recorded Impairment is recorded Impairment is recorded
Not required every year Required every year
Gains are recorded as
revaluation reserve through
other comprehensive
income
Gains / losses are
charged to P&L
Impairment losses goes
to P&L
Losses goes to P&L after
writing off existing
revaluation reserves
Models used for recognition of Assets

15. MEASUREMENT SUBSEQUENT TO INITIAL
RECOGNITION (REVALUATION)
• Asset is valued at Revalued amount
• Revaluation is only allowable if the Fair value of asset can be measure
reliably
• Frequency of revaluation is dependent upon volatility of fair values
• When any item of PPE is revalued, the entire class of that asset
should be revalued
• Journal entry: Asset xxxxxxxx
Surplus on revaluation xxxxxxxxx
What if the Fair value of Asset does not exist? (Check “Entity’s specific value” definition-
important)- do it yourself

16. Presentation of “Surplus on revaluation”

17. 3 POSSIBILITIES IN REVALUATION
• Increase in value, creating a revaluation surplus
( Simple Revaluation)
• Decrease in value, reversing the revaluation
surplus and creating a revaluation expense
(Devaluation after revaluation)
• Increase in value, reversing a previous
revaluation expense and creating a revaluation
surplus (Revaluation after devaluation)
NOTE: Summary of revaluation is provided at the end of these slides

18. BASIC REVALUATION MODEL
Nullify
existing
Accumulat
ed
depreciati
on of the
asset
Compare
Carrying &
Fair value
of the
Asset then
Debit>
Asset &
Credit>
Revaluatio
n surplus
Book New
depreciati
on on Fair
value of
the Asset
Debit
(write off)
revaluatio
n surplus
by the
useful life
and
Retained
earnings
should be
credited

19. TEST YOURSELF
• Plant cost at 1/1/2013= $100,000
• Depreciation: straight line @ 20% & nil residual
value
• Fair value on 1/1/2014= $90,000
• The revaluation surplus is transferred to retained
earnings over the life of asset
Record Journal entries of 2013 & 2014

20. SOLUTION
WORKING
Cost 100,000
Acc. Dep. (20%) (20,000)
Carrying amount on 1/1/2014 80,000
Fair value 90,000
Carrying amount (80,000)
Revaluation surplus on 1/1/2014 10,000

21. SOLUTION continued…….
2013
Plant 100,000
A/P 100,000
Asset purchased on 1/1/2013
Depreciation 20,000
Acc. Dep.- plant 20,000
Depreciation booked (100,000*20%) on 31/12/2013

22. SOLUTION continued…….
2014
Acc. dep.-plant 20,000
Plant 20,000
Set off acc. dep. Before revaluing the asset on 1/1/2014
Plant 10,000
Revaluation surplus 10,000
Surplus booked on 1/1/2014

23. SOLUTION continued…………
• Alternatively we can also record one compound entry
instead of previous two entries to book accumulated
depreciation and revaluation surplus;
2014
Acc. dep.-plant 20,000
Plant 10,000
Revaluation surplus 10,000
Write off previous Acc. Dep. and booking of revaluation
surplus on 1/1/2014

24. SOLUTION continued…….
2014
Depreciation 22,500
Acc. dep.- plant 22,500
Revised deprecation booked on 31/12/2014 (90000/4)
Revaluation surplus 2,500
Retained earnings 2,500
Surplus realized through usage on 31/12/2014 (10000/4)

25. TEST YOURSELF

26. DEVALUATION AFTER
REVALUATION
Nullify existing
Accumulated
depreciation of
the asset
Compare
Historical &
Actual carrying
amount with new
Fair value
Total devaluation=
Nullify previous
revaluation and
difference should
be booked as an
EXPENSE
Depreciation for
the year based on
new Fair value
booked

27. TEST YOURSELF (PREVIOUS QUESTION)
• Plant cost at 1/1/2013= $100,000
• Depreciation: straight line @ 20% & nil residual
value
• Fair value on 1/1/2014= $90,000
• The revaluation surplus is transferred to retained
earnings over the life of asset
• Fair value on 1/1/2015= $54,000
Record Journal entries of 2015

28. SOLUTION
WORKING
Historical Cost 1/1/2013 100,000
Acc. Dep. (20%)*2 years (40,000)
Historical Carrying amount on 1/1/2015 60,000
Fair value aft revaluation 1/1/2014 90,000
Depreciation in 2014 (90000/4) (22,500)
Actual Carrying amount on 1/1/2015 67,500
Which value is the company using in its books historical or Actual?

29. SOLUTION continued…….
WORKING
Devaluation required on 1/1/2015
Fair value 54,000
Actual carrying amount (67,500)
(13,500)
ACCOUNTING TREATMENT OF (13,500)
Reverse revaluation surplus 7,500
(Actual carrying amount- Historic carrying amount)
(67,500-60,000) or existing revaluation reserve (7,500)
Booked as Revaluation / impairment expense
(Below historic cost = 60,000-54,000) 6,000

30. SOLUTION continued…….
2015
Acc. dep. – plant 22,500
Plant 22,500
Set off acc. dep. against devaluation on 1/1/2015
Revaluation surplus 7,500
Revaluation / impairment expense 6,000
Plant 13,500
Reversal of surplus and booking of expense below HCA on 1/1/2015

31. SOLUTION continued…….
2015
Depreciation 18,000
Acc. dep.- plant 18,000
Depreciation for the year booked on 31/12/2015
54000/3 = 18,000 where 3 years is the remaining
useful life of plant

32. Nullify existing
accumulated
depreciation of the
asset
Compare Historical &
Actual carrying
amount with new
Fair value
Total revaluation=
Income up till HCA
Revaluation surplus
ABOVE HCA
Depreciation for the
year booked based
on new Fair value
Debit (write off)
revaluation surplus
by useful life and
retained earnings
should be credited
REVALUATION AFTER DEVALUATION

33. TEST YOURSELF (PREVIOUS QUESTION)
• Plant cost at 1/1/2013= $100,000
• Depreciation: straight line @ 20% & nil residual value
• Fair value on 1/1/2014= $90,000
• The revaluation surplus is transferred to retained
earnings over the life of asset
• Fair value on 1/1/2015= $54,000
• Fair value on 1/1/2016= $44,000
Record Journal entries of 2016

34. SOLUTION
WORKING
Historical Cost 1/1/2013 100,000
Acc. Dep. (20%)*3 years (60,000)
Historical Carrying amount on 1/1/2016 40,000
Fair value aft. Devaluation 1/1/2015 54,000
Depreciation in 2015 (54000/3) (18,000)
Actual Carrying amount on 1/1/2016 36,000
Which value is the company using in its books historical or Actual?

35. SOLUTION continued…….
WORKING
Increase in value required on 1/1/2016
Fair value 44,000
Actual carrying amount (36,000)
8,000
ACCOUNTING TREATMENT OF 8,000
Revaluation income/ recovery of impairment loss- up till HCA (36000-
40000) 4,000
Revaluation surplus- above HCA (40000-44000) 4,000

36. SOLUTION continued…….
2016
Acc. dep. – plant 18,000
Plant 18,000
Set off acc. dep. Before revaluation on 1/1/2016
Plant 8,000
Revaluation surplus 4,000
Revaluation income/ recovery of impairment 4,000
loss
Reversal of previous revaluation expense (4000) with excess credited to
equity (8000-4000)

37. SOLUTION continued…….
2016
Depreciation 22,000
Acc. dep.- plant 22,000
Revised deprecation booked on 31/12/2016 (44,000/2)
Revaluation surplus 2,000
Retained earnings 2,000
Surplus realized through usage on 31/12/2016 (4,000/2)

38. Revaluation Summary
SIMPLE REVALUATION
Surplus should be credited to equity
DEVALUATION AFTER REVALUATION
• Write off the surplus first
• Additional loss should be booked as impairment loss
REVALUATION AFTER DEVALUATION
• Surplus should be booked first as Recovery of impairment loss
• Additional surplus should be booked as Revaluation surplus

39. GENERAL INFORMATION
Please note that the following points will NOT be
tested in exams;
• Some companies treat replacement of significant
Assets parts as current assets in the head “spare
parts” to avoid depreciation
• If company “A” exchange asset of worth $100,000
with asset of company “B” and the value of
company “B’s” asset is $120,000 then the rule Fair
value of asset given up will NOT be applicable and
the asset will be booked as $120,000 but WHY?