IAS 16 and the Revaluation Approach: Reporting Property, Plant and Equipment at Fair Value. date or the balance sheet date. The revaluation reserve is debited for the amount of revaluation reserve accumulated in the past, impairment loss is debited for the difference between revaluation loss and revaluation reserve accumulated in the past, and the related PPE account is credited for the amount of revaluation loss. IAS 16 is applied in accounting for property, plant and equipment. For 2 years, $10,000 ($5,000 each) of Revaluation Reserve was transferred to Retained Earnings, so the balance of Revaluation Reserve on 31st December 2020 is $10,000 (initial balance of $20,000 less $10,000 transferred to Retained Earnings). An impairment loss decreases the depreciable amount; thus, depreciation expense should be reduced proportionally. The following example illustrates this approach: let us assume a fixed asset for a start (period t 0) at an initial value (purchase price) of 100 units. If the difference between the fair value and the carrying amount exceeds the accumulated impairment losses of a related item of PPE, a double entry must be made in the general journal. The journal entry is as follows: Hotroad LLC acquired a new asphalt mixing plant for $300,000 on 1st of January 2016. State how the answers to Examples 1 and 2 would change if FRS 15 were applied rather than IAS 16. After the revaluation gain was recognized, the depreciable amount and annual depreciation expense should be adjusted as follows: Depreciable amount = $67,000 – $10,000 = $57,000, Annual depreciation expense = $57,000 ÷ 3 = $19,000. Revaluation decrease : (400.000) (1.800.000 – 2.200.000) Carrying amount 2018 1.800.00 (2.200.00 – 400.000) As you can see in this procedure establish in the paragraph 35b IAS 16, the accumulated depreciation must be eliminated and the asset adjusted to arrive at fair value. Okay, now let talk about the time in which assets should be depreciated, Depreciation of Fixed Assets should be started when the assets are ready for use, according to IAS 16.55. The carrying amount on the same date was $82,000 (initial cost of $100,000 less accumulated depreciation of $18,000). It requires an asset to be carried at its initial cost (also referred to as historical cost) less any accumulated depreciation and impairment losses. A class of assets is a grouping of assets that have a similar nature or function within … IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets specify two models for subsequent accounting for tangible and … Example 1 – ABC Inc. management has decided to use the revaluation method under IFRS to value for the only land it owns. IAS 16, ‘Property, plant and equipment’ includes guidance on how to account for property carried at cost. As the amount of revaluation reserve is not sufficient to cover revaluation loss, the impairment loss of $20,000 must be recorded. (IAS 16, p.34). In contrast, an impairment gain increases the depreciable amount, and depreciation expense must be increased proportionally, but the excessive depreciation (difference between adjusted depreciation expense and its historical value) must be transferred to retain earnings at the end of the accounting period. Example 1 – ABC Inc. management has decided to use the revaluation method under IFRS to value for the only land it owns. Remember that this explanation and this exercise you can find in video and also you can download the template so that you can resolve the exercise on your own. Depreciation and changes in the valuation of fixed assets according to IAS 16. However, some of the surplus may be transferred as the asset is used by an entity. Annual depreciation expense = $350,000 ÷ 7 = $50,000. Double entry: Dr Non-current asset cost (difference between valuation and original cost/valuation) Dr Accumulated depreciation (with any historical cost accumulated depreciation) Cr Revaluation reserve (gain on revaluation) EXAMPLE 7 A company purchased a building on 1 April 20X1 for $100,000. EXAMPLE non-depreciation of land. DR. CR. In procedure b, the entity must eliminate accumulated depreciation and adjust the asset value to arrive at fair value. The IAS 16 requires the plant to be measured at its full cost of $350,000 ($300,000+$15,000+$35,000). Another common example includes contractual penalties received from contractors constructing an asset, which should also be deducted from the cost of PP&E. There is no exact provision regarding the frequency of revaluation. 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. For Example 2 , if the revaluation loss was caused by a consumption of economic benefits, then the whole loss would be recognised in the profit and loss … If an entity decides to change the subsequent measurement method of an asset, for example to measure from this moment all buildings using the cost method when it had been using the revaluation method, this is a change in an accounting policy and in accordance with paragraph 26 of IAS 8, should apply the changes retrospectively affecting financial statements of previous periods. The corporation is a lessee in most of its leases but also acts as a lessor occasionally, and owns a property that it classifies as investment property. You buy a piece of land for a … IFRS 16 - a closer look at … If the land is subsequently revalued to $12m, then the gain of $2m is recognised in OCI and will be taken to OCE. Assume that on 1st January 2016 the fair value of the water filter machine was estimated as $67,000. Okay, now let talk about the time in which assets should be depreciated, Depreciation of Fixed Assets should be started when the assets are ready for use, according to IAS 16.55. As it is less than the carrying amount $110,000 (initial cost of $350,000 plus revaluation gain of $20,000 less accumulated depreciation $260,000) at the same date, the revaluation loss of $30,000 must be recognized. Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and therefore it is one of the most important and commonly applied standards.. Under the revaluation model, revaluation loss must be recognized if the fair value of an item of property, plant, and equipment is less than its carrying amount, but the way it should be treated depends on whether or not loss is recognized first or there is a previously accumulated revaluation reserve. 16 Revaluation … An example given in paragraph IAS 16.17(e) refers to income from selling samples produced when testing equipment. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic … According to IAS 16, for property, plant and equipment, the revaluation model is the determination as at the reporting date of the value of the fixed asset, at market price, and then making depreciation write-offs on that new value (and impairment losses, if any). After 1 year on 1st January 2015, the fair value of the machine was estimated as $75,000. Welcome to this post, in this opportunity, I am going to show you how the subsequent recognition of property, plant and equipment. ... convergence of U.S. and International accounting standards into a set of universal standards has been a controversial, though inevitable, endeavor. Another common example includes contractual penalties received from contractors constructing an asset, which should also be deducted from the cost of PP&E. Let us take an example ; A company has a policy of revaluing its PPE. If we follow the revaluation model - how often should we revalue? As the fair value exceeds the carrying amount by $20,000, the revaluation gain must be recognized and recorded in the general journal as follows: After revaluation, the annual depreciation expense must be adjusted as follows: Annual depreciation expense = $220,000 ÷ 4 = $55,000. It requires a single entry in the general journal where the debited account is PPE, and the credited account is Revaluation Reserve. Original cost – $1,000,000. Revaluations should be carried out regularly. 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. Practical guide to Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 for interest rate benchmark (IBOR) reform The IASB has issued amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 that address issues arising during the reform of benchmark interest rates including the replacement of one benchmark rate with an … IAS 16 : Measurement after Recognition 1 Measurement after Recognition An undertaking will choose either the cost model, or the revaluation model, as its accounting policy, and will apply that policy to an … As can be seen, an adjustment was made to the original cost of the asset and to the original accumulated depreciation; to check that the accounting recognition is correct, it must be verified that the difference between the re-expressed historical cost and the re- expressed accumulated depreciation (781,940 – 130,877), it must be equal to the revaluation previously calculated, that is, 651,063. Unlike the cost model, the revaluation model allows entities to recognize revaluation gains if the fair value of an item of property, plant, or equipment exceeds its carrying amount at the revaluation date, and the revaluation gain must be recognized. The revaluation model allows restoration of impairment losses, but how it should be treated depends on whether or not gain on revaluation exceeds their amount. This may involve transferring the whole of the surplus when the asset is retired or disposed of. Free IFRS Quizzes IAS 16 – Property Plant and Equipment Quiz ) , () ) Previous Lesson. The annual depreciation expense should be adjusted as follows: Annual depreciation expense = $80,000 ÷ 2 = $40,000. The revaluation model is used as accounting policy. The effect of increase in carrying amount of an asset as a result of revaluation is included in other comprehensive income (OCI), but the decrease and impairment losses impact P/L. 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