I’m getting some mixed notes on how the excess amount is reported
If an asset was written down, but there’s a reval up to the amount of the loss plus excess, how is the excess amount reported? Is it reported as gain on the income statement or recognizd in shareholder’s equity?
Hello,
Perhaps a numerical example will help.
Let’s consider a hypothetical example where a machine has a value of 100 today .
i.e. Yo = $100
At the financial close next period, the machine is revalued to 50.
i.e. Y1 = $50
These are the following entries:
The following year financial close, the machine increased in value from 50 to 120
i.e. Y2 = $120
These are the entries:
Remember write up is ’ up to the extent that it reverses a previously reported loss from revaluation to fair value- I quote from the notes_’_
Don’t know whether it states in the CFA material, but the revaluation method is also subject to annual depreciation like standard method, so you have to deduct from depreciation before comparing to the new fair value
Hello elcfa,
Can I check with you regarding those words in bold from your previous post.
From Schweser Notes, I quote:
_ Professor’s note:Under the revaluation model, a firm does not recognize depreciation expense on an asset, but instead revalues it downward if its fair value decreases with use or age. _
Can you clarify this?
Thank you
Regards,
Ernest
Hm,
Wonder whether the Professor in Schweser gets mixed up.
Revaluation model is not allowed in USGAAP, so it is only relevant in IFRS.
The relevant standard in iFRS is IAS 16 where it clearly states that both methods needs to do depreciation.
I would prefer to quote you more authorative source than Schweser.
http://www.iasplus.com/en-gb/standards/ias/ias16
Here is an example
http://accountingexplained.com/financial/non-current-assets/revaluation-of-fixed-assets
Hope that it clarifies.
Revaluation is allowed in US GAAP, Upward Revaluation isn’t allowed in the US GAAP. The Schweser ‘professor’ and your links are saying the same thing. Change in depreciation due to revaluation is adjusted for prospectively.
Yes, can you clarify this? Is it the NBVs that are compared?
In accounting terminology, at least in IFRS, revaluation method refers to the method of adjusting to the FV both upward and downward. If it is only downward, it is called impairment.
Not sure how you reach that conclusion.
Not sure what you mean here, but each year, the difference between adjusted depreciation charge and original depreciation charge is transferred from the reserve account directly to Retained Earnings, not through the PL.
Yes, Look at the example in the lowest link I provided earlier. First, you take the booked value, depreciate it as usual then compare to the FV. If they are different, you assign the FV to be a new BV, take the delta either directly to the reserve or through PL depending on the previous conditions (i.e,. whether there is a positive amount in the reserve or has been a revalued loss through the PL before…).
http://accountingexplained.com/financial/non-current-assets/revaluation-of-fixed-assets
Just to bring some perspective. The revaluation method is seldom used, because of the extra work it requires: find the FV of assets. It is used at all, it is mostly for buildings, where it is at least worth the effort (big value assets) and relative easy to find FV.
There is also no requirement of annual valuation, just as often as required, e.g., every 5 years if infrequent change in FV. In the meantime, one has to do depreciation as usual.
The NBV of the assest is compared with the FV, and the depreciation rate is charged on the FV.