DFS: Revaluation of property, plant & equipment

definite.studies

I am puzzled by the recognition of changes in asset values in the income statement.

Reading Osborne's Limited Company Accounts (IAS) p100, it seems as though the revaluation sometimes causes income & expenditure to be shown in the income statement and sometimes it doesn't. I expected the treatment to be similar to depreciation except allowing for both increases and decreases in asset values. As I read the book though, it seems that you can revalue PP&E directly in the BS without showing any income or expenditure or affecting the profit.

Is this a special rule to avoid questionable effects on profits & taxes from asset revaluations? If so, then why show reversals of previous valuations as income & expenditure - is that a kind of punishment for previous errors?

Has anyone seen past papers where this was part of the scenario?

peugeot

Under IAS 16 (Property Plant and Equipment) a company can adopt either the 'cost' model or 'revaluation model' in terms of measuring their fixed assets. If they adopt the 'revaluation' model then they should revalue all assets within the same class. For AAT purposes I suspect the only revaluation would be in the case of buildings. Revaluations are not necessarily errors as buildings may increase in value as has been seen in recent years.

If a revaluation is done on a building and this results in the carrying value of the building needed to be uplifted - i.e. a gain - then the gain is recognised in equity (not the income statement) unless it represents an amount less than or equal to any previous losses which were written off to the income statement.

If the property suffers a loss then this loss is recognised immediately in the income statement (to follow the prudence concept in the IASB's Framework Document).

Example:

Building in balance sheet at £140,000 revalued up to £180,000. Previous valuation resulted in a loss being debited to the income statement of £20,000.

The building requires an uplift of (180k - 140k) = 40k but we have written off £20k in previous periods. We would credit the income statement with £20k and credit revaluation surplus in equity of £20k.

If the building had not suffered a loss in previous periods the full £40k would go to the revaluation surplus. Also, don't forget to take account the effects on accumulated depreciation charges. Depreciation should be charged on the revalued amount over the remaining useful life of the asset (or otherwise if the question so directs).


Kind regards
Steve

definite.studies

OK thanks, I get the point about prudence. You do recognise losses and you don't recognise gains unless you are cancelling out some earlier prudence.

I was having some difficulty with the double-entry bookkeeping aspect, but I think I get it now. The change in asset value in the BS is balanced either by income or expenditure in the Income Statement or an adjustment to the Revaluation Surplus in the BS. If asset values go above the original cost, then the Revaluation Surplus is credited to show the amount due to the owners but without showing more profit. Whereas if asset values go down below their original cost this is an expense which reduces the profit shown. Generally, if the asset is above its original cost we balance changes in asset value with the Revaluation Surplus and if it is below the original cost then we adjust Income or Expenses.

I take it that assets are revalued individually or grouped as cash generating units, so the overall Revaluation Surplus does not have to go back to zero before declaring a loss on some assets in the Income Statement.

The above all relates to Property Plant & Equipment under IAS 16, but Investment Property would be treated differently according to IAS 40. That would be simpler under the fair value model in that the Revaluation Surplus is not used. Investment Property is meant to produce an income by increasing in value and is more like a tradeable item in that it can be sold off during the normal course of business.

Bluewednesday

the balance sheet credit is the revaluation surplus, but if reversing a previous expense it would an income in the income statement.

The revaluation surplus is a reserve that sits in the equity section.

peugeot

Thank you for replying Annette. My internet connection died last night but Annette has answered for me.

Kind regards
Steve