Use of Revaluation Model for Valuation of Property Plant and Equipment (PPE) under International Financial Reporting Standard (IFRS) with Examples

1. Use of Revaluation Model for Valuation of PPE under IFRS
A.C.A Sajal Maheshwari

2. Index
 Measurement at Initial Recognition
 Measurement after Initial Recognition
 Frequency of Revaluation
 Accounting Treatment for Revaluation of PPE
 Revaluation of Class of Assets
 Treatment of Surplus or Deficit arising on the Revaluation of the assets
 Utilisation of the Revaluation Reserves
 Dividend declaration out of Revaluation Reserve
 Accounting Treatment for Deferred Tax
 Consolidation in Group
 IAS 8 Implication

3.  Measurement at Initial Recognition – Cost Basis
Cash Price equivalent at recognition date
Exchange of assets @ Fair Value
If Fair Value cannot be determined, then at Carrying Vale of Asset given up
Self Constructed Assets
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4.  Measurement after Initial Recognition i.e. at
Reporting Date
Option 1: Cost Model
• After recognition as an asset, an item of PPE shall be carried at its cost less any
accumulated depreciation and an accumulated impairment losses. [Para 30]
Option 2: Revaluation Model
• After recognition as an asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair value at the date of
the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. [Para 31]
2

5.  Frequency of Revaluation
 Revaluations shall be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using fair
value at the end of the reporting period. [Para 31]
 IAS 16 therefore does not requires annual revaluation adjustments. The frequency of the
revaluations will depend upon fluctuations in the fair values of the items of the PPE
under consideration.
3

6.  Accounting Treatment for Revaluation of PPE
 Option 1: Gross Carrying amount (CA) is
adjusted in a manner that is consistent
with the revaluation of the carrying
amount of the asset.
 Gross CA is restated to observable
market data
 Gross CA restated proportionately
to the change in the carrying
amount
 Option 2: The Accumulated
depreciation is eliminated against the
Gross Carrying amount of the Asset.
(Refer Example 1 for detailed accounting treatment)
4

7. Example 1
Date
Original Cost of
the Asset
Accumulated
Depreciation
Net Carrying
Amount
Other Details
31-Dec-05 100,000 37,000 63,000Gross CA assessed at 150,000 and the
Fair Value of the Asset as on date
assessed at 84,000
5

8. Solution to Example 1:
Entry to be posted as on 31st December 2005
 Option 1:
 (DR) Fixed Assets (BS) 50,000
(CR) Revaluation Surplus (OCI) 21,000
(CR) Provision for Depreciation (BS) 29,000
OR
 (DR) Fixed Assets (BS) 33,333 [100,000*84/63-100,000]
(CR) Revaluation Surplus (OCI) 21,000
(CR) Provision for Depreciation (BS) 12,333 [37000*84/63-37,000]
*BS represents “Balance Sheet”
*OCI represents “Other Comprehensive Income”
6

9. Solution to Example 1:
Entry to be posted as on 31st December 2005
(cont.)
 Option 2:
(DR) Provision for Depreciation 37,000
(CR) Fixed Assets 16,000
(CR) Revaluation Surplus 21,000
7

10.  Revaluation of Class of Assets
Selective Revaluation of
Asset(s)
r
Revaluation of Entire Class of
Assets
a
8

11. Is it possible to revalue the assets or a class of
assets of a specific division of the Company?
 NO.
Class of assets of a company may be revalued but not a class of assets or all assets
belonging to specific division of a company as that will result in selective
revaluation of the assets.
[Interpretation drawn from Para 36-38 of IAS 16]
9

12.  Treatment of Surplus or Deficit arising on the
Revaluation of the assets
FV: 8,000 FV: 12,000
FV: 5,000 FV: 11,000 FV: 9,000 FV: 15,000
Carrying Amount
10,000
2,000
OCI
(2,000)
SOPL
(3,000)
SOPL
2,000 SOPL
1,000 OCI
(2,000) OCI
(1,000) SOPL
3,000
OCI
FIRST TIME REVALUATION
SECOND TIME
REVALUATION
10

13.  Utilisation of the Revaluation Reserves
(Transfer between the revaluation reserve and the retained earnings which should be made on a net of tax basis)
Systematic Allocation:
Amount of the surplus transferred would
be the difference between depreciation
based on the revalued carrying amount
of the asset and depreciation based on
the asset’s original cost. [Para 41]
Complete Transfer:
Transferred directly to
retained earnings when
the
asset is derecognised in
respect of that asset.
No Transfer:
This would result in
PERMANENT RETENTION OF
THE REVALUATION RESERVE
as Deficits adjustments are
allowed on an asset to asset
basis under Para 40.
11

14.  Dividend declaration out of Revaluation Reserve
Question: Whether Dividend can be declared out of the Revaluation Reserve?
 In line with Section 379 and 380 of CAMA, 2004, Dividend cannot be declared out
of the Revaluation Reserves of the Company.
12

15.  Dividend declaration out of Revaluation Reserve
Question: Whether Dividend can be declared out of the Amount transferred to the
Retained Earnings from the Revaluation Reserves either under the systematic
allocation or on a totality basis when the Asset is derecognized?
 Accordingly, Dividend declared out of the amount transferred from the
Revaluation Reserves to the Retained Earnings will be effectively subjected to a
Tax of 30% under the CITA.
13

16.  Accounting Treatment for Deferred Tax
 International Financial Reporting Standards require or permit particular item to be recognized in
other comprehensive income. Examples of such items are:
o (a) a change in carrying amount arising from the revaluation of property, plant and equipment
(see IAS 16);
[Extract of Para 62]
(Refer Example 2 in the next slide)
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17. Example 2
 A non-current asset costing 2,000 was acquired at the start of year 1. It is being depreciated
straight line over four years, resulting in annual depreciation charges of 500. Thus a total of 2,000
of depreciation is being charged. Tax Rate is 25%. The capital allowances (depreciation under the
Income Tax) granted on this asset are:
The asset is revalued to 2,500 at the end of year 2.
Year Capital Allowance
Carrying Value Under the Tax
Books at the end of the year
Depreciation in the Financial
Books
Asset Value on the Books
1 800 1200 500 1500
2 600 600 500 1000
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18. Example 2 (Cont.)
Solution: The carrying value at the end of the Year 2 will be 2,500 while the tax base remains
at 600. There is, therefore, a temporary difference of 1,900, of which 1,500 relates to the
revaluation surplus. This gives rise to a deferred tax liability of 25% x 1,900 = 475 at the year-
end to report in the Statement of Financial Position. However 75 has already been provided
for in the first year as DTL. Accordingly the DTL Liability is to be created for an amount of 400.
The Entries to be posted are as follows;
(DR) PPE (Fixed Assets) 1500
(CR) Revaluation Surplus (OCI) 1500
(DR) Tax expense (in SOPL) 25
(DR) Tax Expense (OCI) 375
(CR) Deferred tax liability 400
Revaluation Surplus in the OCI will be shown net of tax element, i.e. at 1,125
*OCI represents “Other Comprehensive Income”
*SOPL represents “Statement of Profit and Loss”
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19. Amount transferred from Revaluation Surplus to
Retained Earnings to be net of Deferred Tax
a
Refer Example 2.1 for detailed explanation
*SOCE represents Statement of Changes in Equity
Revaluation Surplus (SOCE) Retained Earnings (SOCE)
Systematic
Allocation
Complete
Transfer
Net of Deferred Tax
Transfer
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20. Example 2.1
 Assume that the Carrying Amount of the PPE at the end of Year 3 becomes 1,250 while the Carrying amount as per the
Tax Books (i.e. the tax base) of the asset is 240.
Now the deferred tax liability in the books should be (1250-240)*25%=252.5
Accordingly, the entry to be posted at the End of Year 3 will be;
(DR) Deferred tax liability 222.5 [475-252.5]
(CR) Tax Expense (in SOPL) 222.5
(DR) Revaluation Surplus 562.5,
(CR) Retained Earnings 562.5
Year Capital Allowance
Carrying Value Under the Tax
Books at the end of the year
Depreciation in the Financial
Books
Asset Value on the Books
1 800 1200 500 1500
2 600 600 500 1000
3 360 240 1250 1250
Asset has
been
revalued at
2,500 at the
end of year
2, useful life
remains the
same i.e. 4
Years
1. [1250(Revised Depreciation)-500 (Original
Depreciation)= 750]
2. [750*25% (Tax rate) =187.5],
3. [750-187.5=562.5]
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21.  Consolidation in Group
[Para IFRS 10:19]
Prepare
Uniform Accounting
Policies for like
transactions
Parent
Consolidated Financial
Statements
19

22.  Consolidation in Group
Different Accounting
Policies for like
transactions from the
Group
Member of the Group
Make appropriate
adjustments to Group’s
FS in preparation of the
Consolidated FS
To Ensure conformity with the
Groups Accounting Policies
[Para IFRS 10:B87]
“FS” represents Financial Statements
20

23.  Initial Adoption of Revaluation Basis –
Implication under IAS 8: Accounting Policies,
Changes in Accounting Estimates and Errors.
 The initial application of a policy to revalue assets in accordance with IAS 16 PPE or
IAS 38 Intangible Assets is a change in an accounting policy to be dealt with as a
revaluation in accordance with IAS 16 or IAS 38, rather than in accordance with IAS
8. [Para 8:17]
 Consequently the valuation uplift or write down occurring on the initial adoption of
the revaluation basis is dealt with in Other Comprehensive Income (and
accumulated in the revaluation surplus) or P/L, in line with IAS 16.
 Prior Period Amounts are not restated
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24.  END OF PRESENTATION

25. Accounting Standard Relevant Text:
 An item of PPE that qualifies for recognition as an asset shall be measured at its
cost. [Para 15]
 If an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belong shall be
revalued.[Para 36]
 The items within a class of property, plant and equipment are revalued
simultaneously to avoid selective revaluation of assets and the reporting of
amounts in the financial statements that are a mixture of costs and values
as at different dates. However, a class of assets may be revalued on a
rolling basis provided revaluation of the class of assets is completed within
a short period and provided the revaluations are kept up to date. [Para 38]
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26. Treatment of Surplus or Deficit arising on the
Revaluation of the assets
 First Time Revaluation or Revaluation on the
Same side as the previous movement
o SURPLUS - If an asset’s carrying amount
is increased as a result of a revaluation,
the increase shall be recognized in other
comprehensive income and
accumulated in equity under the
heading of revaluation surplus.[Para 39]
o DEFICIT - If an asset’s carrying amount is
decreased as a result of a revaluation, the
decrease shall be recognized in profit or
loss. [Para 40]
 Revaluation NOT on the Same side as the previous movement
o SURPLUS - The increase shall be recognized in profit or
loss to the extent that it reverses a revaluation decrease of
the same asset previously recognized in profit or loss.
[Para 39] (*)
*The amount of Revaluation Surplus that is credited to
the Profit and Loss should be reduced by the cumulative
reduction in depreciation as a result of recognizing the
previous revaluation deficit
o DEFICIT - The decrease shall be recognized in other
comprehensive income to the extent of any credit balance
existing in the revaluation surplus in respect of that asset.
The decrease recognized in other comprehensive income
reduces the amount accumulated in equity under the
heading of revaluation surplus. [Para 40]
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27.  Utilisation of the Revaluation Reserves
Complete Transfer: The
revaluation surplus included in
equity in respect of an item of
property, plant and equipment
may be transferred directly to
retained earnings when the
asset is derecognised. [Para 41]
Systematic Allocation: Some of the
surplus may be transferred as the
asset is used by an entity. In such a
case, the amount of the surplus
transferred would be the difference
between depreciation based on the
revalued carrying amount of the asset
and depreciation based on the asset’s
original cost. [Para 41]
(Transfers from revaluation surplus to retained earnings, regardless of the method of movement are not made through
profit or loss. Any transfer between the revaluation reserve and the retained earnings which should be made on a net of
tax basis will reduce the amount that is available for offset against future revaluation deficits in respect of individual
assets)
No Transfer: The reserve transfers
referred to in Para 41 are implied to be
at the option of the reporting entity
rather than being mandated by the
Standard. There would therefore appear
to be another alternative to make no
transfer. HOWEVER THIS WOULD
RESULT IN PERMANENT RETENTION OF
THE REVALUATION RESERVE as Deficits
adjustments are allowed on an asset to
asset basis under Para 40.
27

28. Question: Whether Dividend can be declared out
of the Revaluation Reserve?
Relevant Sections of the CAMA, 2004
 Section 379(5) - Subject to the provisions of this Act, dividends shall be payable
to the shareholders only out of the distributable profits of the company.
 Section 380 - Subject to the company being able to pay its debts as they fall due,
the company may pay dividends out of the following profits‐
o (a) profits arising from the use of the company's property although it is a
wasting asset;
o (b) revenue reserves;
o (c) realized profit on a fixed asset sold, but where more than one asset is sold,
the net realized profit on the assets sold.
 Accordingly, Dividend cannot be declared out of the Revaluation Reserves of the
Company under the CAMA, 2004
28

29. Question: Whether Dividend can be declared out of the
Amount transferred to the Retained Earnings from the
Revaluation Reserves either under the systematic allocation
or on a totality basis when the Asset is derecognized?
Relevant Sections of the CITA
Section 19 - Payment of dividend by a Nigerian company
Where a dividend is paid out as profit on which no tax is payable due to‐
(a) no total profits; or
(b) total profits which are less than the amount of dividend which is paid, whether or not the recipient
of the dividend is a Nigerian company, is paid by a Nigerian company,
the company paying the dividend shall be charged to tax at the rate prescribed in subsection (1) of
section 40 of this Act (30%) as if the dividend is the total profits of the company for the year of
assessment to which the accounts, out of which the dividend is declared, relates.
Accordingly, Dividend declared out of the amount transferred from the Revaluation Reserves to the
Retained Earnings will be effectively subjected to a Tax of 30% under the CITA.
29

30. Question: Whether Dividend can be declared out of
the Amount transferred to the Retained Earnings from
the Revaluation Reserves either under the systematic
allocation or on a totality basis when the Asset is
derecognized?
Accordingly, Dividend declared out of the amount transferred from the Revaluation Reserves
to the Retained Earnings will be effectively subjected to a Tax of 30% under the CITA.
30

31. Amount transferred from Revaluation Surplus to
Retained Earnings to be net of Deferred Tax
 IAS 16 does not specify whether an entity should transfer each year from revaluation surplus
to retained earnings an amount equal to the difference between the depreciation or
amortization on a revalued asset and the depreciation or amortization based on the cost of
that asset. If an entity makes such a transfer, the amount transferred is net of any related
deferred tax. Similar considerations apply to transfers made on disposal of an item of
property, plant or equipment. [Para 64]
Refer Example 2.1 for detailed explanation
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