Revaluation of Assets

  • The market value of land and buildings usually represents fair value, assuming existing use and line of business. Such valuations are usually carried out by professionally qualified valuers.
  • Most importantly, when an item of property, plant and equipment is revalued, the whole class of assets to which it belongs should be revalued.
  • In the case of plant and equipment, fair value can also be taken as market value. Where a market value is not
  • available, however, depreciated replacement cost should be used. There may be no market value where types of plant and equipment are sold only rarely or because of their specialized nature (i.e. they would normally only be sold as part of an ongoing business).
  • The frequency of valuation depends on the volatility of the fair values of individual items of property, plant
  • and equipment. The more volatile the fair value, the more frequently revaluations should be carried out. Where the current fair value is very different from the carrying value then a revaluation should be carried out.
  • All the items within a class should be revalued at the same time, to prevent selective revaluation of certain assets and to avoid disclosing a mixture of costs and values from different dates in the financial statements. A rolling basis of revaluation is allowed if the revaluations are kept up to date and the revaluation of the whole
  • class is completed in a short period of time.
financial accounting ii  Revaluation of Assets

Recognition of Fixed Assets – Benchmark Treatment
The benchmark treatment of IAS 16 is to carry property plant and equipment at Cost less Accumulated Depreciation and any Accumulated Impairment Losses. Impairment Losses:
A fall in the value of an asset, so that its recoverable amount is now less than its carrying value in the balance sheet.
Carrying value:
Is the net value at which the asset is included in the balance sheet (i.e. after deducting accumulated depreciation and any impairment losses?)
Difference between Depreciation and Impairment
Depreciation is the result of systematic allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to net profit or loss for the period either directly or indirectly.
However the impairment in the value of any asset is a fall in the value of an asset due to many reasons beyond the
control of the company, so that its recoverable amount is now less than its carrying value in the balance sheet.
Recognition of Fixed Assets – Allowed Alternative Treatment
The standard allows as an alternative treatment to record property plant and equipment at its Revalued Amount less Accumulated Depreciation and any Accumulated Impairment Losses Revalued Amount:
The revalued amount of any asset is the fair value of that asset. The market value of any asset represents its fair value.
Revaluation Policy
All assets of same class are revalued at the same time.
Only recognized surveyor can carryout the revaluation.
When an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to
which that asset belongs should be revalued.
A class of property, plant and property is a grouping of assets of a similar nature and use in an enterprise’s operations.

The following are examples of separate classes:
(a) Land;
(b) Land and building;
(c) Machinery;
(d) Ships
(e) Aircrafts;
(f) Motor vehicles;
(g) Furniture and fixtures; and

(h) Office equipment.
Frequency of Revaluation

  • A review of the useful life of property, plant and equipment should be carried out at least each financial year
  • end and the depreciation charge for the current and future periods should be adjusted if expectations have changed significantly from previous estimates. Changes are changes in accounting estimates and are
  • accounted for prospectively as adjustments to future depreciation.
  • If the allowed alternative, that is stating the assets at revalued amount is adopted then the revaluation has to be carried out at regular intervals.
  • These intervals may vary from every year to three to five years depending upon the volatility in the market

value of assets in use.
Who Can Conduct Revaluation?
International Accounting Standard IAS 16 requires that revaluation should be carried out by professionally qualified valuers.
Companies Ordinance in 4th Schedule requires that valuation should be carried out by an independent valuer (expert) competent to do so. The Companies Ordinance 1984 defines the expert as:
“Expert” includes an engineer, a valuer, an accountant and every other person whose profession gives authority to a statement made by him. Effect of Revaluation
The value of an item of property, plant and equipment may be increased or decreased as a result of revaluation.
How should any increase in value be treated when a revaluation takes place? The debit will be the increase in value in
the balance sheet, but what about the credit? IAS 16 requires the increase to be credited to a revaluation surplus (i.e. part of owners’ equity), unless the increase is reversing a previous decrease which was recognized as an expense. To
the extent that this offset is made, the increase is recognized as income; any excess is then taken to the revaluation reserve.
Treatment of Revaluation Loss
A revaluation loss is charged to profit and loss account in the period in which the revaluation is carried out.
However a revaluation decrease should be charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in surplus in respect of the same asset.
In other words decrease should be recognised as an expense, except where it offsets a previous increase taken as a revaluation surplus in owners’ equity. Any decrease greater than the previous upwards increase in value must be taken as an expense in the income statement.
Example:
A company has an asset which originally cost Rs. 150,000, revalued upwards to Rs. 200,000 two years ago. The value has now fallen to Rs. 130,000.
Solution:
The double entry is:
DEBIT Revaluation Surplus Rs. 50,000
DEBIT Income and Expense Account Rs. 20,000
CREDIT Asset Value (Balance Sheet) Rs. 70,000
Treatment of Revaluation Surplus
A revaluation surplus is credited directly to equity under the heading of Revaluation Surplus.
However a revaluation increase should be treated as income to the extent that it reverses the revaluation decrease of the same asset previously recognized as expense.
The revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized. The whole surplus may be realized on the retirement or disposal of the asset. However, some of the surplus mat be realized as the asset is used by the enterprise; in such a case, the amount of the surplus realized is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. The transfer from revaluation surplus to retained earnings is not made through the income statement
Example:
A company has an item of land carried in its books at Rs. 130,000. Two years ago slump in land values led the company to reduce the carting value from Rs. 150,000. This was taken as an expense in the income statement. There has been a surge in land prices in the current year, however, and the land is now worth Rs. 200,000.
Required: Account for the revaluation in the current year.
Solution:
The double entry is:
DEBIT Asset Value (Balance Sheet) Rs. 70,000
CREDIT Income Statement Rs. 20,000
CREDIT Revaluation Surplus Rs. 50,000
Revaluation [Section 235]
Where a company revalues its fixed assets, the increase in, or sums added by writing up of, the value of such assets as appearing in the books of accounts of the company shall be transferred to an account to be called “Surplus on Revaluation of Fixed Assets Accounts” and shown in the balance-sheet of the company after Capital and Reserves.
Except and to the extent actually realized on disposal of the assets which are revalued, the surplus on revaluation of fixed assets shall not be applied to set-off or reduce any deficit or loss, whether past, current or future, or in any manner applies, adjusted or treated so as to add to the income, profit or surplus of the company, or utilized directly or indirectly by way of dividend or bonus.
Provided that the surplus on revaluation of fixed assets may be applied by the company in setting-off or in diminution of any deficit arising from the revaluation of any other fixed assets of the company
After revaluation as aforesaid, depreciation on the assets so revalued shall be provided with reference to the value assigned to such assets before revaluation and surplus on revaluation may be amortized according to life of the assets.
If default is made in complying with any requirements of this section, the directors of the company who are knowingly and willfully in default shall be punishable with fine not exceeding twenty thousand rupees and shall also be jointly and severally liable to the company for any loss sustained by the company on account of such default.
Restating the Carrying Amount
IAS 16 has provided two methods of restating (revaluing) the carrying amount of any asset.
The first Method is:
Gross carrying value of the asset should be restated along with the accumulated depreciation so that the carrying value equals the revalued amount.
Example
Cost and Accumulated Depreciation of the asset before revaluation:
Cost of Asset/Gross carrying Amount Rs. 500,000
Accumulated Depreciation Rs. 200,000
Carrying amount Rs. 300,000
Suppose the asset is revalued at Rs. 450,000
Solution
Now the cost and accumulated depreciation of the asset would be restated as follows;
Gross carrying Amount
(500,000 x 450,000 / 300,000) Rs. 750,000
Accumulated Depreciation
(200,000 x 450,000 / 300,000) Rs. 300,000
Carrying amount Rs. 450,000
Restating the Carrying Amount
The second method is.
Accumulated depreciation is eliminated against the gross carrying value of the asset and the carrying amount is restated to the revalued amount.
Example
Accumulated depreciation of the asset would be written off against the gross carrying amount of the asset, bringing it down to 300,000 (its carrying value). This carrying value would then be restated to Rs. 450,000;
Gross carrying Amount Rs. 450,000
Accumulated Depreciation 0
Carrying amount Rs. 450,000
Realization of Revaluation Surplus

  • The revaluation surplus is transferred to retained earnings when the surplus is realized. The surplus is realized
  • when:
  • The asset is disposed off.
  • With the use of the asset.
  • There is a further complication when a revalued asset is being depreciated. An upward revaluation means that the
  • depreciation charge will increase. Normally, a revaluation surplus is only realized when the asset is sold, but when it is being depreciated, part of that surplus is being realized as the asset is used. The amount of the surplus realized is the
  • difference between depreciation charged on the revalued amount and the (lower) depreciation which would have been charged on the asset’s original cost. This amount can be transferred to retained (i.e. realized) earnings but not through the income statement.

Example – 01
Cost and Accumulated Depreciation of the asset before revaluation:
Cost of Asset/Gross carrying Amount Rs. 500,000
Accumulated Depreciation Rs. 200,000
Carrying amount Rs. 300,000
The asset is revalued at Rs. 450,000
Suppose depreciation is charged at 20 % on written down value.
Solution:
The depreciation charge on old carrying amount would have been Rs. 60,000/-
On the revalued amount depreciation would be Rs. 90,000/-.
The difference of Rs. 30,000/- would be transferred from revaluation surplus to retained earnings.
Example – 02
A company bought an asset for Rs. 10,000 at the beginning of 20X6. It had a useful life of five years. On 1 January 20X8 the asset was revalued to Rs. 12,000. The expected useful life has remained unchanged (i.e. three years remain).
Solution:
On 1 January 20X8 the carrying value of the asset is:
Rs. 10,000 – (2 x Rs. 10,000 / 5) = Rs. 6,000.
For the revaluation:
DEBIT Asset Value (Balance Sheet) Rs. 6,000
CREDIT Revaluation Reserve Rs. 6,000
The depreciation for the next three years will be Rs. 12,000 / 3 = Rs. 4,000, compared to depreciation on cost of Rs. 10,000 / 5 = Rs. 2,000. So each year, the extra Rs. 2,000 can be treated as part of the surplus which has become realized:
DEBIT Revaluation Surplus Rs. 2,000
CREDIT Retained Earnings Rs. 2,000
This is a movement on owners’ equity only, not an item in the income statement.

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