i’m a little bit confused over here. can someone please explain it to me. “Regardless of prior revaluation, any increase in an asset’s value above its histroical cost is not reported as a gain in the income statement, but is reporteted as a component of shareholder’s equity in an account called revaluation surplus.”
Then someonewhere it said " Under Ifrs the loss can be reversed if the value of the impaired asset recovers in the future. However, the loss reversal is limited to the orginal impairment loss. Thus the carrying value of the asset after reversal cannont exceed the carrying value before the impairment loss was recongized.
I understand the first part, but not really the second part. so what if the impaired asset value go above its orginal cost? Do i write up the asset to its orginal cost on the b/s and report the rest of the gains to stockerholder’s equity?
That is why, the second statement says “the loss reversal is limited to the orginal impairment loss”, that means if the impaired asset value goes above its original cost, it will only be recognised to the extent of the previous reversal, nothing else.
For e.g
Original value : $5000
Assume the market value of asset now is $4500, so
Impairment : ($500)
Current value : $4500
Now, the following year, the asset recovers in value and the market value of the asset is ,say, $5500
Therefore,normally, current value = 5500 . BUT, recovery cannot exceed the previous loss, so current value = 5000
The first sentence refers to revaluation(allowed under IFRS only) whereas the second refers to impairment.
Revaluation requires an asset to be revalued to its fair value and allows the assets to be revalued above historical cost (recognised under equity as a revaluation surplus-unless it’s an investment property that is).
Impairment requires an asset to be revalued from the carrying value of the asset to the higher of the assets recoverable amount and value in use (IFRS) OR to the assets fair value (GAAP).
Impairment allows for only the historical cost to be the max value of the asset, hence what is being explained by the second sentence and what Salam’s preceeding example refers to.
This isn’t quite accurate. Under the revaluation method, the asset can (and should) be recorded above cost if its fair value is greater than cost. The piece where cost becomes a ceiling is when the revaluationis recognized in P&L - any gain over the historical cost is credited to a revaluation surplus account in SE (OCI account), which is then drawn down for subsequent impairments, until the assets fair value is less than cost again.
