Chapter6 propertyplantandequipmentmodels2008

Gripping IFRS Property, plant and equipment: the models

Chapter 6
Property, Plant and Equipment: The Models

Reference: IAS 16, SIC 21

Contents: Page

1. Introduction 219

2. Definitions 220

3. The cost model 221
3.1 The ledger accounts 221
3.2 The magical line 221
Example 1: cost model: impairment loss 222
Example 2: cost model: reversal of an impairment loss 223
Example 3: cost model: a summary example (the asset is not depreciated) 224
Example 4: cost model: a summary example (the asset is depreciated) 226

4. The revaluation model 227
4.1 Overview 227
4.2 The ledger accounts 227
4.3 The magical line 228
Example 5: revaluation model: a summary example (the asset is not 230
depreciated)
Example 6: revaluation model: a summary example (the asset is 232
depreciated)
4.4 The difference between the gross and net methods 234
4.4.1 The gross replacement value method 235
4.4.2 The net replacement value method 235
Example 7: revaluation model: value increases, creating a revaluation surplus 235
Example 8: revaluation model: value decreases, reversing the revaluation 237
surplus and creating a revaluation expense
Example 9: revaluation model: increase in value, reversing previous 238
revaluation expense and creating a revaluation surplus
Example 10: disclosure of a revalued asset – NRVM and GRVM 240
compared
4.5 Realisation of the revaluation surplus 241
Example 11: removal of the revaluation surplus 242

5. Disclosure 243
5.1 Overview 243
5.2 Accounting policies and estimates 243
5.3 Statement of comprehensive income disclosure 243
5.4 Statement of financial position disclosure 244
5.5 Statement of changes in equity disclosure 244
5.6 Further encouraged disclosure 244
5.7 Sample disclosure involving property, plant and equipment 245
Example 12: cost model disclosure 247
Example 13: revaluation model disclosure 250
6. Summary 257

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1. Introduction

This chapter is really a continuation of the last chapter in that both chapters relate to property,
plant and equipment and both are therefore governed by IAS 16. This chapter, however, deals
with the two measurement models that IAS 16 allows you to apply:
• the cost model; and
• the revaluation model.

You can choose either model but must then apply that model to an entire class of assets. This
means, for example, that an entity may not use the cost model for a machine that makes bread
and the revaluation model for a machine that slices bread. Both machines must be measured
using the same model, say the cost model (since machines are a ‘class of asset’). Using the
cost model for machines would not, however, prevent the entity from measuring its vehicles
using the revaluation model because vehicles are a different class of asset to machines.

The cost model is the simplest model and is based on the original cost. The cost model is
therefore the base-line or benchmark method. This cost model is definitely easier to apply in
practice (and research suggests that it is currently the most commonly used model). This does
not for a minute suggest that the revaluation model is an unlikely test or exam question
though since the current trend in accounting is to use fair values (instead of historic costs) for
measurement purposes. Fortunately for you, however, the difficulty in applying the
revaluation model is not due to complexity from an academic point of view, but rather it is
complex to apply from a practical point of view (i.e. accounting and computer systems may
need to be updated to enable the revaluation model to be used).

Irrespective of the model used, the asset’s carrying amount is reflected through the use of the
following accounts:
• cost account
• accumulated depreciation and impairment loss account.

These two accounts (accumulated depreciation account and accumulated impairment loss
account) could be combined into one account instead in which case, depreciation, impairment
losses and impairment losses reversed would all be accumulated in the accumulated
depreciation and impairment loss account. This is the approach used in this book.

Irrespective of the model chosen, an asset is depreciated and tested for impairment annually.
We know how to calculate depreciation (this was covered in the previous chapter).
Impairments will be briefly explained in the process of this chapter, although impairment
testing is explained in more detail in the next chapter.

The previous chapter was based on the cost model, with the one exception: the previous
chapter did not tell you about the need to test for impairments annually. If the results of an
impairment test suggest that an asset’s carrying amount may be too high, it could be for the
simple reason that the accumulated depreciation is insufficient, in which case extra
depreciation is processed and accounted for as a change in estimate (according to IAS 8:
estimates, errors and policies). If the impairment test suggests that the carrying amount may
be too high, but you think the past depreciation is a fair reflection of past usage, then the
asset’s recoverable amount must be calculated and then compared with its carrying amount. If
the recoverable amount is less than the carrying amount, the carrying amount must be reduced
by processing an impairment loss adjustment. Notice the difference: the reduction in carrying
amount is expensed as an impairment loss if it reflects ‘damage’ to the asset whereas a drop in
value through ‘normal usage’ is called depreciation instead.

If the estimates that were used in calculating the recoverable amount change in the future, and
these estimates change such that the recoverable amount then increases above the carrying
amount, the previous impairment loss or part thereof may be reversed. The difference is called
an impairment loss reversed.

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The carrying amount under the cost model is therefore measured at:
• cost less accumulated depreciation and less accumulated impairment losses.

The revaluation model, whilst requiring the entity to revalue to fair value, still requires the
entity to check for impairments at the end of every year.

This means that the carrying amount under the revaluation model is measured at:
• fair value less subsequent accumulated depreciation and accumulated impairment losses.

The calculation of the recoverable amount is covered by IAS 36, the standard governing
Impairments of Assets, and is therefore covered in an entirely separate chapter. This chapter
does not show you how to calculate the recoverable amount but shows you how to account for
adjustments to the asset’s carrying amount.

2. Definitions

Here are a further few definitions that will be used in this chapter (these are IAS 16
definitions, some of which I have modified slightly):

Impairment loss:
• the excess of
• the carrying amount
• over the recoverable amount

Fair value:
• the amount for which an asset could be exchanged between
• knowledgeable, willing parties in an arm's length transaction.

Recoverable amount:
• is the higher of the asset’s
- fair value less costs to sell and
- value in use.

Remember that the term ‘recoverable amount’ is covered in IAS 36, the standard governing
the Impairments of Assets. This standard is covered in an entirely separate chapter and,
therefore, the definitions and calculations of ‘fair value less costs to sell’ and ‘value in use’
are covered in that separate chapter.

In order to understand the differences between the cost model and the revaluation model,
there are a few more terms that are used in this chapter that you should first become familiar
with. These terms are not defined in IAS 16 and are simply the author’s definitions.

Historical carrying amount (depreciated historic cost):
• original cost less
• accumulated depreciation;

Actual carrying amount, when using the cost model:
• original cost
• less accumulated depreciation and impairment losses.

Actual carrying amount, when using the revaluation model:
• the fair value at date of revaluation
• less subsequent accumulated depreciation and impairment losses.

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3. The cost model

3.1 The ledger accounts

The cost model relates to the measurement of the asset as follows:
• original cost
• less accumulated depreciation and
• less accumulated impairment losses.

When using the cost model, the cost account remains unchanged unless there is:
• a purchase of another asset (in which case, the cost of the new asset is added); or
• a sale of an asset (in which case, the cost of the sold asset is deducted).

You may keep two separate accounts for accumulated depreciation and accumulated
impairment losses, but it is possible to combine these two accounts into one account. This text
has opted to combine these two accounts into one account: accumulated depreciation and
impairment losses.

The accumulated depreciation and impairment loss account reflects adjustments to the
carrying amount caused by:
• depreciation (usage);
• impairment losses (damage); and
• impairment losses reversed (if the damage is repaired in some way).

3.2 The magical line

When using the cost model, the value of an asset may never be increased above its historical
carrying amount (the magical line). Since this historical carrying amount decreases each year,
the amount of any impairment loss reversed (income) will not be as great as the amount of the
original impairment loss (expense).

This is best explained by way of examples. At first you may find it useful to sketch a graph of
the situation, plotting the ‘magical’ historical carrying amount line (HCA), and then later the
actual carrying amount (ACA) and the recoverable amount (RA). Incidentally, most of us
never grow out of the need for a graph!

Historical carrying amount line
Cost

0 Useful Life
Notice how the diagonal line represents a gradual reduction in the historical carrying amount
as the asset is depreciated over its useful life. Look at the graph carefully: when using the cost
model, the carrying amount of the asset is not allowed to be raised above this magical line
(the diagonal line).

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For example:
Assume that the recoverable amount is greater than the historical carrying amount.
• If the actual carrying amount equalled the historical carrying amount, no adjustment
would be made since this would entail increasing the actual carrying amount above its
historical carrying amount.
• If, however, the asset had previously been impaired, then the asset’s actual carrying
amount would be less than the historical carrying amount. In this case, the actual carrying
amount must be increased, but only back up to the historical carrying amount (reversal of
a previous impairment loss) but not all the way up to the recoverable amount (i.e. not
above the historical carrying amount line).

Another way of showing the relationship between the recoverable amount, the carrying
amount and the historical carrying amount is presented in the following block diagramme.

Block diagramme 1: Adjustments to the carrying amount using the cost model

HCA HCA RA
Not
allowed
HCA/
ACA RA HCA
ACA
Further
Imp loss Imp loss Imp loss
imp loss
reversed reversed
RA RA ACA ACA

This is much easier to understand if we look at a few examples involving numbers.
Example 1: cost model - impairment loss:

Cost of plant at 1/1/20X1: C100 000
Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years)
Recoverable amount at 31/12/20X1: C60 000

Required:
Provide the journals for both 20X1 and 20X2.

Solution to example 1: cost model - impairment loss
W1: Impairment loss: 20X1 C
Cost 1/1/20X1 Given 100 000
Accumulated depreciation 20X1 (100 000 x 20% x 1 yr) (20 000)
Actual (and historic) carrying amount 31/12/20X1 80 000
Recoverable amount 31/12/20X1 Given (60 000)
Impairment loss The RA is less than CA 20 000

Journals: 20X1 Debit Credit
Depreciation – plant (expense) (100 000/ 5yrs remaining) 20 000
Plant: accumulated depreciation & impairment losses (-A) 20 000
Depreciation of asset for year ended 31 December 20X1
Impairment loss – plant (expense) W1 20 000
Impairment of asset as at 31 December 20X1

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Graphical depiction: 31/12/20X1

80 000( HCA & ACA)
Cost

20 000 (Debit impairment loss)

60 000(RA)

0 Useful Life

Journals: 20X2 Debit Credit
Depreciation – plant (expense) (60 000/ 4yrs remaining (5-1)) 15 000
Depreciation of asset for year ended 31 December 20X2

Note: no further impairment loss was required to be journalised at 31/12/20X2 since the new carrying
amount (60 000 – 15 000 = 45 000) equals the recoverable amount.

Example 2: cost model - reversal of impairment loss

Depreciation: 20% straight-line per annum (i.e. over a useful life of 5 years)

Required:
Provide the journals for 20X2, assuming that the recoverable amount at 31/12/20X2 was
estimated at:
A. C55 000; and
B. C65 000

Solution to example 2: cost model - reversal of impairment loss
W1: Historical carrying amount 31/12/20X2: A and B

Cost 100 000
Accumulated depreciation (100 000 x 20% x 2yrs) (40 000)
60 000
W2: Actual carrying amount 31/12/20X2 (before the impairment testing): A and B

Cost 100 000
Accumulated depreciation and impairment losses (55 000)
(depreciation 20X1: 20 000 + IL 20X1: 20 000 + depr 20X2: 15 000)
45 000
W3: Reversal of impairment loss required: A B

Recoverable amount limited to historical carrying amount 55 000 60 000
(given: note that in part B that the RA of 65 000 is limited to
historical carrying amount of 60 000)
Less actual carrying amount (W2) 45 000 45 000
10 000 15 000

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Journals: 20X2 A B
Dr/ (Cr) Dr/ (Cr)
Plant: accumulated depreciation and impairment losses (-A) 10 000 15 000
Impairment loss reversed – plant (income) (10 000) (15 000)
Reversal of impairment loss journal on 31/12/20X2:

Graph depicting A: 31/12/20X2

60 000( HCA)
Cost

55 000(RA)
10 000 (Credit reversal of impairment loss)
45000( ACA)

0 Useful Life

Graph depicting B: 31/12/20X2

65 000(RA)
(No increase allowed)

60 000( HCA)
Cost

15 000 (Credit reversal of impairment loss)

45 000( ACA)

0 Useful Life

In summary, let’s consider the effects of impairment testing on:
• an asset that is not depreciated: land (example 3)
• an asset that is depreciated (example 4).

Example 3: cost model – a summary example (the asset is not depreciated)
Cost of land at 1/1/20X1: 100 000
Depreciation: This land is not depreciated
Recoverable amount
• 31/12/20X1 120 000
• 31/12/20X2 70 000
• 31/12/20X3 90 000
• 31/12/20X4 110 000

Required:
Show the statement of financial position and ledger accounts for each of the years ended 31
December up to 20X4.

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Solution to example 3: cost model - summary example (the asset is not depreciated)
Workings:
W1: Carrying amount Jnl 20X4 20X3 20X2 20X1
No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
Opening balance 1 90 000 70 000 100 000 100 000
Depreciation Land not depreciated (0) (0) (0) (0)
Adjustment:
• above Not allowed above HCA 0 0
HCA
• below Dr: Impairment loss 2 (30 000)
HCA
• up to HCA Cr: impairment loss 3; 4 10 000 20 000
reversed
Closing balance:
(lower of recoverable amount or carrying
amount) 100 000 90 000 70 000 100 000

Historical carrying amount: (cost) 100 000 100 000 100 000 100 000

Ledger accounts:

Cost: land (asset) Accumulated impairment losses: land (asset)
1/1/ 20X1: 31/12/20X2
Bank (1) 100 000 Balance c/f 30 000 Imp loss (2) 30 000
100 000 100 000 30 000 30 000
Balance 100 000 31/12/20X3 31/12/20X2:
Imp Loss Rev (3) 20 000 Balance b/f 30 000
Balance c/f 10 000
30 000 30 000
31/12/20X4 31/12/20X3:
Bank Imp Loss Rev (4) 10 000 Balance b/f 10 000
1/1/ 20X1:
Balance c/f 0
Land (1) 100 000
10 000 10 000
31/12/20X4
Balance b/f 0

Impairment loss expense Reversal of impairment loss income
31/12/20X2 31/12/20X2 31/12/20X3 31/12/20X3
Acc Imp Loss (2) 30 000 P&L 30 000 P&L 20 000 Acc Imp Loss (3) 20 000
31/12/20X4 31/12/20X4
P&L 10 000 Acc Imp Loss (4) 10 000

Disclosure:
Company name
Statement of financial position
As at 31 December (extracts)
ASSETS 20X4 20X3 20X2 20X1
Non-current Assets C C C C
Land 20X1: Cost: 100 000 – AIL: 0 100 000 90 000 70 000 100 000
20X2: Cost: 100 000 – AIL:30 000
20X3: Cost: 100 000 – AIL:10 000
20X4: Cost: 100 000 – AIL:0

225 Chapter 6


Example 4: cost model – a summary example (the asset is depreciated)

Cost of machine at 1/1/20X1: 100 000
Depreciation: 25% per annum to a nil residual value
Recoverable amount
• 31/12/20X1 120 000
• 31/12/20X2 40 000
• 31/12/20X3 60 000
• 31/12/20X4 0

Required:
December.

Solution to example 4: cost model – a summary example (the asset is depreciated)

Workings:

W1: Carrying amount and adjustments Jnl 20X4 20X3 20X2 20X1
Opening balance 1 25 000 40 000 75 000 100 000
Depreciation 100 000 / 4; 2 (25 000) (20 000) (25 000) (25 000)
75 000 / 3;
40 000 / 2;
25 000 / 1
Adjustment:
• above HCA Not allowed above HCA 0 0
• up to HCA Cr: impairment loss reversed 4 5 000
• below HCA Dr: Impairment loss 3 (10 000)
Closing balance:
lower of recoverable amount or carrying amount 0 25 000 40 000 75 000

Historical carrying amount: (cost) 0 25 000 50 000 75 000

Disclosure:

Company name
ASSETS 20X4 20X3 20X2 20X1
Machine 20X1: Cost: 100 000 – AD&IL: 25 000 0 25 000 40 000 75 000
20X2: Cost: 100 000 – AD&IL:60 000
20X3: Cost: 100 000 – AD&IL:75 000
20X4: Cost: 100 000 – AD&IL:100 000

Ledger accounts:

Cost (asset) Bank
1/1/ 20X1: 1/1/ 20X1:
(1)
Bank 100 000 Balance c/f 100 000 Machine (1) 100 000
100 000 100 000
Balance b/f 100 000

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Depreciation expense Accumulated depreciation & impairment losses
31/12/20X1 31/12/20X1 31/12/20X1
AD&IL (2) P&L
25 000 25 000 Balance c/f 25 000 Depr (2) 25 000
31/12/20X2 31/12/20X2
25 000 25 000
AD&IL (2) 25 000 P&L 25 000
31/12/20X3 31/12/20X3 31/12/20X2:
AD&IL (2) P&L
20 000 20 000 Balance b/f 25 000
31/12/20X4 31/12/20X4 (2)
Depr 25 000
AD&IL (2) 25 000 P&L 25 000
Balance c/f 60 000 Imp loss (3) 10 000
60 000 60 000
31/12/20X3:
(4)
ILR 5 000 Balance b/f 60 000
Balance c/f 75 000 Depr (2) 20 000
80 000 80 000
31/12/20X4:
Balance b/f 75 000
Balance c/f 100 000 Depr (2) 25 000
100 000 100 000
Balance b/f 100 000

Impairment loss expense Reversal of impairment loss income
31/12/20X2 31/12/20X2 31/12/20X3 31/12/20X3
AccImpLoss (3) 10 000 P&L 10 000 P&L 5 000 AccImpLoss (4) 5 000

4. The revaluation model

4.1 Overview

The revaluation model involves revaluing the asset’s carrying amount to its fair value. This
does not have to happen every year but can be at periodic intervals. Whatever interval is used,
however, the revaluations must be performed regularly enough so that the carrying amount of
the asset at year-end does not differ materially from its fair value.

If the entity wishes to use the revaluation model for a particular asset, it must remember that it
will have to apply the revaluation model to all assets within that class of assets.

4.2 The ledger accounts

The revaluation model refers to the measurement of an asset’s carrying amount at:
• fair value
• less subsequent accumulated depreciation
• less subsequent accumulated impairment losses.

When using the revaluation model, the cost account remains unchanged unless there is:
• a purchase of another asset (in which case, the cost of the new asset is added);
• a sale of an asset (in which case, the cost of the sold asset is deducted); or
• a revaluation to fair value.

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You may keep two separate accounts for accumulated depreciation and accumulated
impairment losses, but it is possible to combine these two accounts into one account. This text
has opted to combine these two accounts into one account: accumulated depreciation and
impairment losses.

This accumulated depreciation and impairment loss account reflects adjustments to the
carrying amount caused by:
• depreciation (usage);
• impairment losses (damage); and
• impairment losses reversed (if the damage is repaired in some way).

4.3 The magical line

Unlike the cost model, the revaluation model allows the carrying amount of the asset to be
increased above its historical carrying amount (the magical line) as well as to be decreased
below it.

As with the cost model, the concepts are best understood by way of examples. At first you
may find it useful to sketch a graph of the situation, plotting the ‘magical’ historical carrying
amount line (HCA), and then later the actual carrying amount (ACA) and the recoverable
amount (RA).

Cost

0 Useful Life

Notice how the diagonal line represents a gradual reduction in the historical carrying amount
as the asset is depreciated over its useful life. Look at the graph carefully: when using the
revaluation model, the carrying amount of the asset may be raised above this magical line (the
diagonal line) – but an increase in carrying amount above the magical line is recognised in
equity, not in the entity’s profits. Adjustments to the carrying amount that do not increase the
carrying amount above the magical line are simply recognised as part of profit for the year
(i.e. as an income or expense).

In the event that the carrying amount of an asset is increased to such a degree that it is now
greater than its historical carrying amount, the increase above the line is recognised in the
revaluation surplus account. This account is an equity account. The portion above the line is
not credited to income because income represents economic benefits that have already been
earned. In contrast, such an increase in the carrying amount of an asset represents extra future
economic benefits expected from the future use or sale of the asset. Furthermore, an asset has
increased in value with no concomitant increase in liabilities, thus having increased equity
(assets – liabilities). This increase is recognised as other comprehensive income and is
accumulated in equity.

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The difference between the historical carrying amount and the fair value carrying amount can
be summarised as follows:
Fair value
greater than HCA Difference in equity:

HCA

Fair value Difference in profit:
less than HCA
HCA: historical carrying amount

A summary of carrying amount adjustments under the revaluation model is reflected in the
following block diagramme, which shows the inter-relationship between the actual carrying
amount, fair value and historical carrying amount (i.e. the balance that the asset would have
had had we not been fiddling with the carrying amounts).

Block diagramme 2: Adjustments to the carrying amount using the revaluation model

FV ACA
Revaluation Revaluation
surplus surplus
(created/ (reversed/
HCA/ increased) decreased)
HCA HCA
ACA
Expense Income Expense

FV ACA FV

All assets must be tested for impairment – even those measured under the revaluation model.
Although IAS 16 does not provide any guidance, it is submitted that when making an
adjustment to an asset’s carrying amount to one that is below the historical carrying amount
line, one should differentiate between adjustments to a fair value from adjustments to a
recoverable amount. Although IAS 16 may not make this differentiation, this text identifies:
• an expense (i.e. a downward adjustment) as:
- a revaluation expense if the carrying amount is decreased to a fair value;
- an impairment loss expense if the carrying amount is decreased to a recoverable amount;
• an income (upward adjustment) as:
- a revaluation income if the carrying amount is increased to a fair value;
- an impairment loss reversed if the carrying amount is increased to a recoverable amount.

This differentiation is relevant, it is submitted, because for example, a drop to a lower fair
value does not technically mean that the recoverable amount has dropped and therefore it does
not mean that the asset is impaired. Consider the following worked example.

Worked example: C
Cost: 1/1/20X1 120 000
Less accumulated depreciation: 31/12/20X2 20 000
Carrying amount (actual and historical): 31/12/20X2 100 000
Fair value: 1/1/20X3 90 000
Expected costs to sell: 1/1/20X3 5 000
Value in use: 1/1/20X3 130 000
Recoverable amount (greater of value in use and fair value less costs to sell) 130 000
• Value in use Given 130 000
• Fair value less costs to sell 90 000 – 5 000 85 000

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If the revaluation model is applied on 1 January 20X3, the asset’s carrying amount will drop
from 100 000 to its fair value of 90 000. The issue is, however, that before making this
downward adjustment, the asset’s recoverable amount (130 000) is far greater than its
carrying amount (100 000) and therefore the asset is definitely not impaired. It would
therefore not be appropriate to call this downward adjustment an impairment loss expense
(because the asset is not impaired) and would therefore be better identified as a revaluation
expense (or similar).

As already explained, this text differentiates a revaluation expense from an impairment loss
expense (and a revaluation income from an impairment loss reversed), but there are those
who advocate that such differentiation is unnecessary. On the basis that IAS 16 does not make
this differentiation clearly required, it is common practice to identify all adjustments made to
the carrying amount below the historical carrying amount line, (whether an adjustment to a
recoverable amount or to a fair value), as follows:
• expense adjustments (i.e. adjustments downwards from historical carrying amount):
- impairment losses; and
• income adjustments (i.e. adjustments upwards to historical carrying amount):
- impairment loss reversed.

Please note that irrespective of whether or not you interpret IAS 16 and IAS 36 to require
differentiation, the carrying amount will be the same. To start with, we will look at an
example that involves land, since land is an asset that is generally not depreciated. This will
allow us to see the essence of the revaluation model. From there we will progress to an
example that involves a depreciable asset.

Example 5: revaluation model – a summary example (the asset is not depreciated)
Cost of land at 1/1/20X2: 100 000
Depreciation: This piece of land is not depreciated
Fair value
• 1/1/20X2 120 000
• 1/1/20X3 90 000
• 1/1/20X4 70 000
• 1/1/20X5 110 000

The company’s policy is to leave any balance on the revaluation surplus intact until such time
as the asset is disposed of.
Required:
December 20X2 to 20X5.
Solution to example 5: revaluation model - a summary example (asset is not depreciated)
Workings:

W1. Carrying amount and adjustments Jnl 20X5 20X4 20X3 20X2
Opening balance 1 70 000 90 000 120 000 100 000
Depreciation Land not depreciated (0) (0) (0) (0)
Fair value adjustments:
Above HCA Cr: revaluation surplus 2; 7 10 000 20 000
Down to HCA Dr: revaluation surplus 3 (20 000)
Below HCA Dr: revaluation expense 4; 5 (20 000) (10 000)
Up to HCA Cr: revaluation income 6 30 000
Closing balance fair value 110 000 70 000 90 000 120 000

Historical carrying amount: (cost) 100 000 100 000 100 000 100 000

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Ledger accounts:

Cost: land (asset) Revaluation surplus
1/1/ 20X1: 1/1/20X2:
Bank (1) 100 000 Balance c/f 100 000 Balance c/f 20 000 Cost (2) 20 000
100 000 100 000 20 000 20 000
31/12/ 20X1: 1/1/20X3: 31/12/20X2:
Balance b/f 100 000 Cost (3) 20 000 Balance b/f 20 000
1/1/20X2: 20 000 20 000
Rev Surp (2) 20 000 Balance c/f 120 000 31/12/20X3:
Balance b/f 0
120 000 120 000
31/12/ 20X2: 1/1/20X3: 1/1/20X5:
(3)
Balance b/f 120 000 Rev Surp 20 000 Cost (7) 10 000
(4)
Rev Exp 10 000 10 000 10 000
Balance c/f 90 000 31/12/20X5:
120 000 120 000 Balance b/f 10 000
31/12/ 20X3: 1/1/20X4:
Balance b/f 90 000 Rev Exp (5) 20 000
Balance c/f 70 000
90 000 90 000 Bank
31/12/ 20X4: 1/1/ 20X1:
Balance b/f 70 000 Land (1) 100 000
1/1/20X5:
Rev Inc (6) 30 000
Rev Surp (7) 10 000
110 000 110 000

31/12/ 20X5:
Balance b/f 110 000
Revaluation expense Revaluation income
1/1/20X3: 31/12/20X3 31/12/20X5 1/1/20X5
Cost (4) 10 000 P&L 10 000 P&L 30 000 Cost
(3)
30 000
1/1/20X4 31/12/20X4
Cost (5) 20 000 P&L 20 000

Disclosure:

Company name
ASSETS 20X5 20X4 20X3 20X2
Land 20X1: Cost: 100 000 – AIL: 0 110 000 70 000 90 000 120 000
20X2: Cost: 100 000 – AIL:30 000
20X3: Cost: 100 000 – AIL:10 000
20X4: Cost: 100 000 – AIL:0
EQUITY AND LIABILITIES
Equity
Revaluation surplus 10 000 0 0 20 000

231 Chapter 6


Now let us do an example that involves a depreciable asset. To keep things simple, we will
combine the cost and accumulated depreciation accounts into one account that reflects
carrying amount. It is not difficult to separate the entries between these two accounts, but is
important to see the big picture before getting bogged down with the detail.

Example 6: revaluation model – a summary example (the asset is depreciated)

Cost of machine at 1/1/20X1: 100 000
Depreciation: 10% per annum to a nil residual value
Fair value
• 1/1/20X2 180 000
• 1/1/20X3 60 000
• 1/1/20X4 77 000
• 1/1/20X5 120 000

The company’s policy is to transfer the realised portion of the revaluation surplus to retained
earnings as the asset is used.

Required:
Show the statement of financial position and ledger accounts for each of the years ended
31 December 20X1 to 20X5. Prepare the asset’s account as a net carrying amount account
(i.e. do not prepare separate cost and accumulated depreciation accounts).

Solution to example 6: revaluation model - a summary example (asset is depreciated)

Workings:

W1: Carrying amount and Jnl 20X5 20X4 20X3 20X2
adjustments No. Dr/ (Cr) Dr/ (Cr) Dr/ (Cr) Dr/ (Cr)
Opening balance 20X2: 100 000 x 9 / 66 000 52 500 160 000 90 000
10
Adjustment:
Above HCA Cr: revaluation 1;7; 9 54 000 7 000 90 000
surplus
Down to HCA Dr: revaluation 3 (80 000)
surplus
Below HCA Dr: revaluation 4 (20 000)
expense
Up to HCA Cr: revaluation 6 17 500
income
Fair value 120 000 77 000 60 000 180 000
Depreciation:
• 180 000/ 9 yrs 2 (20 000)
• 60 000 / 8 5 (7 500)
yrs
• 77 000 / 7 8 (11 000)
yrs
• 120 000 / 6 yrs 10 (20 000)
Closing balance 100 000 66 000 52 500 160 000

Historical carrying amount on date of 60 000 70 000 80 000 90 000
revaluation

Ledger accounts are overleaf.

232 Chapter 6


Ledger accounts:

Carrying amount: machine (asset) Revaluation surplus (equity)
1/1/ 20X2: 31/12/20X2 31/12/20X2: 1/1/20X2:
Balance b/f 90 000 Depr (2) 20 000 Ret Earn 10 000 Cost (1) 90 000
(90 000/ 9)
Rev Surp (1) 90 000 Balance c/f 160 000 Balance c/f 80 000
180 000 180 000 90 000 90 000
31/12/ 20X2: 1/1/20X3: 31/12/ 20X2:
Balance b/f 160 000 CA (3) 80 000 Balance b/f 80 000
1/1/20X3: Balance c/f 0
Rev Surp (3) 80 000
Rev Exp (4) 20 000 80 000 80 000
31/12/20X3 31/12/20X3
Depr (5) 7 500 Balance b/f 0
Balance c/f 52 500 31/12/20X4: 1/1/20X4
Ret Earn 1 000 CA (7) 7 000
(7 000/ 7)
Balance c/f 6000
160 000 160 000 7 000 7 000
31/12/ 20X3: 31/12/20X4
Balance b/f 52 500 Balance b/f 6 000
1/1/20X4 31/12/20X4 31/12/20X5: 1/1/20X5
Rev Inc (6) 17 500 Depr (8) 11 000 Ret Earn 10 000 CA (9) 54 000
(60 000/ 6)
Rev Surp (7) 7 000 Balance c/f 66 000 Balance c/f 50 000
77 000 77 000 60 000 60 000
31/12/ 20X4: 31/12/ 20X5:
Balance b/f 66 000 Balance b/f 50 000
1/1/20X5 31/12/20X5
Rev Surp (9) 54 000 Depr (10) 20 000
Balance c/f 100 000
120 000 120 000
31/12/ 20X5:
Balance b/f 100 000

Depreciation expense Retained earnings (equity)
31/12/20X2 31/12/20X2 31/12/20X2
CA (2) 20 000 P&L 20 000 Rev Surp 10 000
31/12/20X3 31/12/20X3 31/12/20X4:
CA (5) 7 500 P&L 7 500 Rev Surp 1 000
31/12/20X4 31/12/20X4 31/12/20X5:
CA (8) 11 000 P&L 11 000 Rev Surp 10 000
31/12/20X5 31/12/20X5
CA (10) 20 000 P&L 20 000

Revaluation expense Revaluation income
1/1/20X3: 31/12/20X3 31/12/20X4 1/1/20X4
CA (4) 20 000 P&L 20 000 P&L 17 500 CA (6) 17 500

233 Chapter 6


Disclosure:

Company name
ASSETS 20X5 20X4 20X3 20X2
Non-current assets C C C C
Machine 20X1: Cost: 100 000 – AIL: 0 100 000 66 000 52 500 160 000
20X2: Cost: 100 000 – AIL:30 000
20X3: Cost: 100 000 – AIL:10 000
20X4: Cost: 100 000 – AIL:0
EQUITY AND LIABILITIES
Equity
Revaluation surplus 50 000 6 000 0 80 000

Notice how the revaluation surplus balance in the above statement of financial position reflects the
difference between the carrying amount and what it would have been had the asset not been revalued:
20X5 20X4 20X3 20X2
C C C C
Carrying amount of asset is: statement of financial position 100 000 66 000 52 500 160 000
Historical carrying amount: original cost – depreciation 50 000 60 000 70 000 (a) 80 000
Revaluation surplus 50 000 6 000 0 80 000
a) Remember that by the end of 20X2, the asset has been depreciated for two years (20X1 and 20X2):
100 000 – 100 000 x 10% x 2 years = 80 000

Another interesting point is that the adjustments made to retained earnings reflect the effect that the
revaluation has had on income in each of the years to date:
Cumulative
Effect on statement of comprehensive income between 20X2 and 20X5
C
Actual effect on profit using the revaluation model:
Depreciation expense: 20X1 to 20X5 10 000 +20 000 +7 500 +11 000 +20 000 68 500
Revaluation expense (20X3) 20 000
Revaluation income (20X4) (17 500)
Net effect on profit (between 20X1 and 20X5) 71 000
Effect on profit had the cost model been used instead:
Depreciation expense: 20X1 to 20X5 100 000 x 10% x 5 years (50 000)
Transfer: revaluation surplus to retained earnings 10 000 + 1 000 + 10 000 21 000

4.4 The difference between the gross and net methods

As mentioned under the cost model, whether the cost model or the revaluation model is used,
the asset’s carrying amount is represented by two accounts:
• Cost account; and
• Accumulated depreciation and impairment loss account.

Under the cost model, adjustments to carrying amount only affect the accumulated
depreciation and impairment loss account (with the result that the cost account remains
unchanged). Under the cost model, therefore, the cost account continues to reflect cost.

Under the revaluation model, however, adjustments to carrying amount affect both the cost
account and the accumulated depreciation and impairment loss account. In fact, since
adjustments are made to the cost account such that the cost account no longer reflects cost, it
is referred to as ‘gross carrying amount’ in the financial statements.

234 Chapter 6


When making adjustments to an asset’s carrying amount under the revaluation model, the
entity may choose to account for the adjustment using:
• the gross replacement value method; or
• the net replacement value method.

The carrying amounts under each of these methods will be the same, although the method
used will affect the disclosure of the breakdown of the net carrying amount into its
components of:
• gross carrying amount (i.e. the amount sitting in the cost account); and
• accumulated depreciation and impairment losses.

4.4.1 The gross replacement value method

This method involves restating the cost account to the new gross replacement value and
proportionally restating the accumulated depreciation so that the net carrying amount equals
the net replacement value (fair value). In other words, the cost account will reflect the gross
replacement value, (which equals the total economic benefits embodied in the asset) and the
accumulated depreciation account will reflect how much of the total economic benefits have
been used up to date. We’ll do an example in a moment.

4.4.2 The net replacement value method

This method involves transferring the balance in the accumulated depreciation account
(immediately prior to the revaluation) to the cost account and then adjusting this net carrying
amount to the net replacement value (fair value).

The difference between the ‘gross’ and ‘net’ methods is best explained by way of an example.
The following three examples ignore the effects of deferred tax. The deferred tax effects of
revaluations are not difficult but are covered later in this chapter.

Example 7: revaluation model - increase in value, creating a revaluation surplus

Plant cost at 1/1/20X1: C100 000
Depreciation: 20% straight-line per annum to a nil residual value
Value at 1/1/20X2: C90 000 calculated as follows:
Gross replacement value 112 500
Accumulated depreciation 22 500
Net replacement value (i.e. fair value) 90 000

The revaluation surplus is transferred to retained earnings over the life of the asset.

Required:
Show the journals using the:
A net replacement value method (NRVM)
B gross replacement value method (GRVM)

Solution to example 7: revaluation model – increase creating a revaluation surplus

Workings: applicable to both (A) and (B)

W1: Actual (and historic) carrying amount 1/1/20X2: C

Cost 100 000
Accumulated depreciation (100 000 x 20% x 1 yr) (20 000)
80 000

235 Chapter 6


W2: Revaluation required at 1/1/20X2: C

Fair value 90 000
Actual carrying amount (80 000)
10 000

Graph depicting both (A) and (B): 1/1/20X2

90 000 (FV)
10 000 (Credit revaluation surplus)
80 000 (HCA & ACA)
Cost


0 Useful Life

Journals (A) (B)
NRVM GRVM
dr/ (cr) dr/ (cr)
20X1:
Plant: cost 100 000 100 000
Bank/ Liability (100 000) (100 000)
Purchase of asset: (1/1/20X1)
Depreciation (100 000 / 5 years remaining) 20 000 20 000
Plant: accumulated depreciation and impairment losses (20 000) (20 000)
Depreciation: 100 000 / 5 years remaining (31/12/20X1)
20X2:
Plant: accumulated depreciation and impairment losses 20 000 N/A
Plant: cost (20 000) N/A
NRVM: set-off of accumulated depreciation before revaluing asset
(1/1/20X2)
Plant: cost 10 000 N/A
Revaluation surplus (10 000) N/A
NRVM: revaluation of asset: (1/1/20X2)
Plant: cost (112 500 - 100 000) N/A 12 500
Plant: accum. depr and imp. loss (22 500 - 20 000) N/A (2 500)
Revaluation surplus (90 000 - 80 000) N/A (10 000)
GRVM: revaluation of asset: (1/1/20X2)
Depreciation 90 000 / 4 years remaining 22 500 22 500
Plant: accumulated depreciation and impairment losses (22 500) (22 500)
Depreciation: (31/12/20X2)
Revaluation surplus (10 000 / 4 years remaining) 2 500 2 500
Retained earnings (2 500) (2 500)
Artificial decrease in profits reversed: (31/12/20X2) Alternative
calculation: (22 500 revalued depreciation – 20 000 historic
depreciation)

236 Chapter 6


Example 8: revaluation model - decrease in value, reversing the revaluation surplus
and creating a revaluation expense:

Assume the same information as that in the last example with the following information:

Value at 1/1/20X3: C54 000 calculated as follows:
Net replacement value (fair value) 54 000

Required:
Show the journals using the:
A net replacement value method (NRVM)
B gross replacement value method (GRVM)

Solution to example 8: revaluation model - decrease in value, reversing the revaluation
surplus and creating a revaluation expense :

Workings applicable to both (A) and (B)

W1: Historical carrying amount at 1/1/20X3: C

Cost 100 000
Accumulated depreciation (100 000 x 20% x 2 yr) (40 000)
60 000

W2: Actual carrying amount at 1/1/20X3: C

Carrying amount at 1/1/20X2 after revaluation 90 000
Depreciation in 20X2 (90 000/ 4yrs) or (112 500/ 5 yrs) (22 500)
67 500

W3: Devaluation required at 1/1/20X3: C

Fair value 54 000
(13 500)
- reverse revaluation surplus (down to HCA: ACA: 67 500 – HCA: 60 000) 7 500
- revaluation expense (below HCA: HCA: 60 000 – NRV: 54 000) 6 000


67 500 (ACA)
7 500 (Debit revaluation surplus)
60 000 (HCA)
Cost

6 000 (Debit revaluation expense)

54 000(FV) Historical carrying amount line

0 Useful Life

237 Chapter 6


Journals: (A) (B)
NRVM GRVM
dr/ (cr) dr/ (cr)
Devaluation journals 1/1/20X3:

Plant: accumulated depreciation 22 500 N/A
Plant: cost (22 500) N/A
Set off of accumulated depreciation against cost (NRVM)

Revaluation surplus (the balance in this account) 7 500 N/A
Revaluation expense (further decrease expensed: 13 500 – 7 500) 6 000 N/A
Plant: cost (CA: 67 500 – FV: 54 000) (13 500) N/A
Reversal of balance in RS (7 500) with excess (13 500 - 7 500) expensed

Revaluation surplus (the balance in this account) N/A 7 500
Revaluation expense (further decrease expensed: 13 500 – 7 500) N/A 6 000
Plant: cost (90 000 – 112 500) N/A (22 500)
Plant: accum. depreciation (36 000 – 45 000) N/A 9 000
Restatement of cost and accumulated depreciation accounts: the first
adjustment reduces the revaluation surplus and any excess thereafter is
debited to impairment loss (p.s. the cost account is now reduced below
historical cost of 100 000)

Depreciation and related journals: 31/12/20X3:

Depreciation – plant (54 000 / 3 years remaining) 18 000 18 000
Plant: accum. depreciation (18 000) (18 000)
Depreciation for 20X2

Comment:
Please note that the difference between the journals using the NRVM and the GRVM are purely for
disclosure purposes. The essence of the above adjustments can be more clearly seen in the following
simplified journal: NRVM and GRVM
Debit Credit
Revaluation surplus 7 500
Revaluation expense 6 000
Plant at net carrying amount 13 500

The only difference in the journals is the setting-off of the accumulated depreciation and cost account
in the case of the NRVM.
The NRVM requires that these two accounts are set-off against each other and then that the cost
account is adjusted to the new carrying amount (fair value).
The GRVM does not set-off these two accounts but adjusts each of them so that the net thereof would
equal the new carrying amount (fair value).

Example 9: revaluation model - increase in value, reversing a previous revaluation
expense and creating a revaluation surplus
Assume the same information as that given in the previous example as well as the following:
Fair value at 1/1/20X4: C44 000 calculated as follows:
Net replacement value 44 000
Required:
Show the journals using
A. net replacement value method (NRVM)
B. gross replacment value method (GRVM)

238 Chapter 6


Solution to example 9: revaluation model - increase in value, reversing a previous
revaluation expense and creating a revaluation surplus
Workings applicable to both (A) and (B)

W1: Historical carrying amount at 1/1/20X4: C
Cost 100 000
Accumulated depreciation (100 000 x 20% x 3yrs) (60 000)
40 000

W2: Actual carrying amount at 1/1/20X4: C
Carrying amount at 1/1/20X3 after impairment loss 54 000
Depreciation in 20X3 (54 000/ 3yrs) or (90 000/ 5 yrs) (18 000)
36 000

W3: Increase in value required at 1/1/20X4: C
Fair value 44 000
8 000
- revaluation income (up to HCA: 36 000 – 40 000) 4 000
- revaluation surplus (above HCA: 40 000 – 44 000) 4 000


44 000 (FV)
4 000 (Credit revaluation surplus)

40 000 (HCA)
Cost

4 000 (Credit reversal of revaluation expense)

36 000 (ACA)

0 Useful Life

Journals (A) (B)
NRVM GRVM
dr/ (cr) dr/ (cr)
Revaluation journals 1/1/20X4:

Plant: accumulated depreciation 18 000 N/A
Plant: cost (18 000 + 6 000) (18 000) N/A
NRVM: Set off of accumulated depreciation against cost

Plant: cost (44 000 – 36 000) 8 000 N/A
Revaluation income (36 000 – 40 000) (4 000) N/A
Revaluation surplus (40 000 – 44 000) (4 000) N/A
NRVM: Reversal of previous revaluation expense (4 000) with excess
(8 000 - 4 000) credited to equity

Plant: cost (110 000 – 90 000) N/A 20 000
Plant: accum depreciation (66 000 – 54 000) N/A (12 000)
Revaluation income N/A (4 000)
Revaluation surplus N/A (4 000)
GRVM: Increase in value apportioned between cost and accumulated
depreciation

239 Chapter 6


Journals continued … (A) (B)
NRVM GRVM
dr/ (cr) dr/ (cr)
Depreciation and related journals 31/12/20X4:
Depreciation – plant (44 000 / 2yrs) 22 000 22 000
Plant: accum depreciation (22 000) (22 000)
Depreciation for 20X4

Revaluation surplus (22 000 – 20 000) or (4 000/ 2yrs) 2 000 2 000
Retained earnings (2 000) (2 000)
Excess depreciation for 20X4 transferred to retained earnings

Example 10: disclosure of a revalued asset – NRVM and GRVM compared

Assume the same information as in the previous three examples

A Disclose the plant note using the net replacement value method (NRVM) for 20X1 –
20X4years.
B Disclose the plant note using the gross replacement value method (GRVM). Disclose all
3 years.

Solution to example 10A: disclosure of a revalued asset using NRVM

Company name
Notes to the financial statements
For the year ended 31 December 20X3 (extracts)
20X4 20X3 20X2 20X1
C C C C
3. Plant (extracts)

Net carrying amount: 1 January 36 000 67 500 80 000 0
Gross carrying amount: 1 January 54 000 90 000 100 000 0
Accum. depreciation and imp. losses: 1 (18 000) (22 500) (20 000) (0)
January

Additions 0 0 0 100 000
Depreciation (22 000) (18 000) (22 500) (20 000)
Revaluation (expense) / income (profit) 4 000 (6 000) 0 0
Revaluation surplus increase / (decrease) 4 000 (7 500) 10 000 0
(equity)

Net carrying amount: 31 December 22 000 36 000 67 500 80 000
Gross carrying amount: 31 December 44 000 54 000 90 000 100 000
Accum. depreciation and imp. losses: 31 (22 000) (18 000) (22 500) (20 000)
Dec

The last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value in
use and the fair value adjustment was recorded on a net replacement value basis. Revaluations are
performed annually. Had the cost model been adopted, the carrying amount would have been C20 000
(20X3: C40 000; 20X2: C60 000 and 20X1: C80 000).

240 Chapter 6


Solution to example 10B: disclosure of a revalued asset using GRVM
Company name
20X4 20X3 20X2 20X1
C C C C
3. Plant (extracts)

Net carrying amount: 1 January 36 000 67 500 80 000 0
Gross carrying amount: 1 January 90 000 112 500 100 000 0
Accum. deprec. and imp. losses: 1 Jan (54 000) (45 000) (20 000) (0)

Additions 0 0 0 100 000
Depreciation (22 000) (18 000) (22 500) (20 000)
Revaluation (expense) / income (profits) 4 000 (6 000) 0 0
Revaluation surplus increase / (decrease) 4 000 (7 500) 10 000 0
(equity)

Net carrying amount: 31 December 22 000 36 000 67 500 80 000
Gross carrying amount: 31 December 110 000 90 000 112 500 100 000
Accum. deprec. and imp. losses: 31 Dec (88 000) 3 (54 000) 2 (45 000) 1 (20 000)

The last revaluation was performed on 1/1/20X4 by an independent sworn appraiser to the fair value in
use and the fair value adjustment was recorded on a gross replacement value basis. Revaluations are
performed annually. Had the cost model been adopted, the carrying amount would have been C20 000
(20X3: C40 000; 20X2: C60 000 and 20X1: C80 000).

Comment: Notice that the only difference between the disclosure of the two methods is the split
between the amount classified as ‘gross carrying amount’ and the amount classified as ‘accumulated
depreciation and impairment losses’. The net carrying amounts (at the beginning and end of the year)
and the movement during the year are not affected.

(1) 20 000 + 2 500 + 22 500 = 45 000
(2) 45 000 + 18 000 – 9 000 = 54 000
(3) 54 000 + 12 000 + 22 000 = 88 000

4.5 Realisation of the revaluation surplus

Whether you are using the net method or the gross method to account for a revaluation, any
revaluation surplus account that is created must be removed from the accounts by the time
that the related asset no longer exists. The transfer is made directly to the retained earnings
account, which means that the transfer is from one equity account to another equity account,
thus having no effect on the statement of comprehensive income. This is not a
reclassification adjustment and will therefore have no impact on the statement of
comprehensive income, but will appear as a transfer between equity accounts in the statement
of changes in equity.
Debit Credit
Revaluation surplus xxx
Retained earnings xxx
Transfer of the revaluation surplus to retained earnings

The transfer of the revaluation surplus to retained earnings effectively reverses the effect that
the artificially increased depreciation has had on profits over the life of the asset. When the
asset’s depreciable amount is zero (the asset having been fully depreciated), the revaluation
surplus account must also be zero.

241 Chapter 6


The transfer may be done in a variety of ways:
• transfer it as one lump sum when the asset is retired (at the end of the asset’s useful life);
• transfer it as one lump sum when the asset is sold or otherwise disposed of; or
• transfer it gradually as and when the asset is depreciated.

For local (Pakistan) legislation requirements regarding treatment of surplus arising out of
revaluation see section 235 of the Companies Ordinance, 1984 and a notification of the
Security Exchange Commission of Pakistan –SRO 45 (1)/2003, dated 13/01/2003

Example 11: removal of revaluation surplus

An asset with a cost of C100 (1/1/20X1) and a useful life of 4 years is revalued to fair value
of C120 (1/1/20X2). It is retired from use at the end of its useful life (31/12/20X4) and is sold
on 18/9/20X5. The residual value is zero and the straight-line method of depreciation is
appropriate.

Required:
Ignoring the tax effect, show the journal entries reducing the revaluation surplus to zero
assuming that:
a) the transfer is done as the underlying asset is depreciated;
b) the transfer is done at the end of the asset’s useful life; and
c) the transfer is done when the asset is disposed of.
Solution to example 11: removal of revaluation surplus

Asset carrying Historic Extra
Workings amount depreciation depreciation
Cost 1/1/20X1 100 100
Depreciation - original 20X1: (100 - 0)/ 4yrs (25) (25)
Carrying amount 31/12/20X1 75 75
Revaluation surplus 120 - 75 45
Revalued carrying amount 120 75 45
Depreciation - revised 20X2: (120-0)/3yrs (40) (25) (15)
Carrying amount 0 0 0

a) Journals: posted at end of each year Debit Credit

31 December 20X2
Revaluation surplus 15
Retained earnings 15
Transfer of revaluation surplus to retained earnings (45 / 3)

31 December 20X3

31 December 20X4

b) Journals: posted 31/12/20X4 Debit Credit


242 Chapter 6


Transfer of revaluation surplus to retained earnings when asset is
retired from use

c) Journals: posted 18/9/20X5 Debit Credit

Transfer of revaluation surplus to retained earnings on disposal of asset

5. Disclosure

5.1 Overview

The disclosure of property, plant and equipment involves various aspects: accounting policies
to be included in the notes to the financial statements, disclosure in the statement of
comprehensive income, statement of financial position and the statement of changes in equity.

5.2 Accounting policies and estimates

For each class of property, plant and equipment (e.g. land, buildings, machinery, etc) the
following should be disclosed:
• measurement bases used to determine the gross carrying amounts (e.g. cost model or
revaluation model);
• depreciation methods used (e.g. straight-line method); and
• useful lives or depreciation rates used (e.g. 5 years or 20% per annum).

The nature and effect of a change in estimate must be disclosed in accordance with IAS 8 (the
standard governing ‘accounting policies, changes in accounting estimates and errors’).

5.3 Statement of comprehensive income disclosure

The following income and expense items should be disclosed in the notes to the financial
statements and should be shown per class of property, plant and equipment (a suggestion that
generally helps to reduce time wastage in tests and exams is to include these items in a note
that supports the ‘profit before tax’ line item in the statement of comprehensive income):
• depreciation expense (whether recognised in profit or loss or as part of the cost of another
asset);
• impairment losses (and the line item of the statement of comprehensive income in which
it is included) (i.e. when the recoverable amount is less than carrying amount and any
revaluation surplus has already been written off);
• reversal of impairment losses(and the line item of the statement of comprehensive income
in which it is included) (i.e. when the recoverable amount is greater than carrying amount,
and to the extent that the increase in carrying amount up to historical carrying amount
reverses a previous impairment loss); and
• revaluation expense (i.e. when the fair value is less than carrying amount and any
revaluation surplus has already been written off)
• revaluation income (i.e. when the fair value is greater than carrying amount, and to the
extent that the increase in carrying amount up to historical carrying amount reverses a
previous revaluation expense);
• profits or losses on the realisation, scrapping or other disposal of a non-current asset
• a revaluation or devaluation that changes the balance in the revaluation surplus account
will be recognised in other comprehensive income (and accumulated as equity): this
amount may be shown gross with the tax thereon shown as a separate line item in other
comprehensive income or this amount may be shown net of tax (the tax effect would then
be shown in a note).

243 Chapter 6


5.4 Statement of financial position disclosure

The following is the main information that should be disclosed in the note to the
‘property, plant and equipment’ line item in the statement of financial position.

This information must be disclosed separately for each class of property, plant and
equipment (e.g. land, buildings, machinery, etc):
• ‘gross carrying amount’ and ‘accumulated depreciation and impairment losses’ at the
beginning and end of each period;
• a reconciliation between the ‘net carrying amount’ at the beginning and end of the period
separately disclosing each of the following where applicable:
− additions;
− acquisitions through business combinations;
− disposals;
− assets transferred to ‘non-current assets held for sale’ in accordance with IFRS 5;
− depreciation;
− impairment losses recognised in the statement of comprehensive income;
− impairment losses reversed through the statement of comprehensive income;
− increases through revaluation income;
− increases in a related revaluation surplus;
− decreases in a related revaluation surplus;
− decreases through revaluation expense;
− other movements (e.g. currency translation differences);
• the existence and amounts of restrictions on title;
• the existence and amounts of assets that have been pledged as security for a liability;
• the costs capitalised in respect of property, plant and equipment being constructed;
• the amount of any contractual commitments to acquire assets in the future;
• when the revaluation model is adopted, then disclose:
− the effective date of the latest revaluation;
− whether or not the valuer was independent;
− the methods and significant assumptions applied in estimating the asset’s fair values
(the extent to which these fair values were determined in accordance with active
markets, recent market transactions or using other valuation techniques);
− the carrying amount of the property, plant and equipment had the cost model been
adopted (per class of revalued property, plant and equipment); and
− the revaluation surplus, its movements and any restrictions on the distribution thereof.

The standard also requires that the accumulated depreciation be disclosed (as opposed to the
aggregate of the accumulated depreciation and accumulated impairment losses that is given in
the reconciliation of the carrying amount of the asset) at the end of the period.

5.5 Statement of changes in equity disclosure

If the property, plant and equipment is revalued using the revaluation model, there may be a
revaluation surplus which would need to be disclosed as follows:
• increase or decrease in revaluation surplus during the period (net of tax): this will be per
the statement of comprehensive income;
• realisations of revaluation surplus (e.g. transfer to retained earnings as the asset is used up
or on disposal); and
• any restrictions on the distribution of the surplus to shareholders.

5.6 Further encouraged disclosure

• the carrying amount of property, plant and equipment that is temporarily idle;
• the gross amount of property, plant and equipment that is still in use but that has been
fully depreciated;
• the carrying amount of property, plant and equipment that is no longer used and is to be
disposed of (but not yet classified as held for sale in accordance with IFRS 5); and

244 Chapter 6


• the fair value of the asset in the event that the cost model is adopted and the difference
between fair value and carrying amount is material.

5.7 Sample disclosure involving property, plant and equipment

ABC Ltd
As at 31 December 20X2 (extracts)
20X2 20X1
ASSETS Note C C
Non-current Assets
Property, plant and equipment 4

ABC Ltd
Statement of changes in equity
Revaluation Retained Total
surplus earnings
C C C
Balance at 1 January 20X1
Total comprehensive income
Realised portion transferred to retained earnings
Balance at 31 Dec 20X1
Total comprehensive income
Realised portion transferred to retained earnings
Balance at 31 December 20X2

ABC Limited

2. Accounting policies
Depreciation is not provided on land and buildings since it is considered to be an investment
property. Depreciation is provided on all other property, plant and equipment over the expected
economic useful life to expected residual values using the following rates and methods:
- Plant and vehicles at 10% per annum, reducing balance method.
Plant is revalued annually to fair values and is thus carried at fair value less accumulated
depreciation and impairment losses. All other property, plant and equipment is shown at cost less
accumulated depreciation and impairment losses.

3. Profit before tax
20X2 20X1
Profit before tax is stated after taking the following into account: C C
Depreciation on plant
Depreciation on vehicles
Revaluation income on plant
Revaluation expense on vehicles
Impairment losses on vehicles
Impairment losses reversed on plant (income)

4. Property, plant and equipment
20X2 20X1
Total carrying amount: C C
Land and buildings
Plant
Vehicles

245 Chapter 6


Land and buildings 20X2 20X1
C C
Net carrying amount: 1 January
Gross carrying amount: 1 January
Accumulated depreciation and impairment losses: 1 January
Additions
Disposals
Depreciation
Revaluation increase/ (decrease) through equity
Revaluation increase/ (decrease) through profit
(Impairment loss)/ Impairment loss reversed
Other
Net carrying amount: 31 December
Gross carrying amount: 31 December
Accumulated depreciation and impairment losses: 31 Dec

Land was revalued on 1/1/20X1 by Mr X (his qualification), an independent sworn appraiser, to
the fair value determined with reference to an active market. The fair value adjustment was
recorded on a net replacement value basis. Revaluations are performed annually. Had the cost
model been adopted, the carrying amount would have been CXXX (20X0: CXXX). Land…
(description of and its situation) acquired on… (date) for… (amount paid). Additions and
improvements since date of acquisition have cost… (amount).

Plant
Depreciation
Additions
Disposals
Other

Plant is provided as security for a loan (see the note 51: loans).

Vehicles
Depreciation
Additions
Disposals
Other

246 Chapter 6


Example 12: cost model disclosure

Depreciation: 25% straight-line per annum to a nil residual value

The company measures its assets under the cost model. The following recoverable amounts
were calculated:

Recoverable amount at 31 December 20X1 is C60 000
Recoverable amount at 31 December 20X2 is C55 000

There are no other items of property, plant or equipment.

Required:
A. Disclose the plant and all related information in the financial statements for the years ended
31 December 20X1, 20X2, 20X3 and 20X4 in accordance with the International Financial
Reporting Standards, ignoring deferred tax;
B. Show the journals and show all additional or revised related disclosure assuming that:
Deductible allowance (wear and tear) granted by the tax 25% straight-line per year
authorities
Normal income tax rate 30%
The company intends to keep the plant. There are no other temporary differences other
than those evident from the information provided.

Solution to example 12A: cost model disclosure

ABC Ltd
As at 31 December 20X4 (EXTRACTS)
20X4 20X3 20X2 20X1
Note C C C C
ASSETS
Non-current Assets
Property, plant and equipment 4 0 25 000 50 000 60 000

ABC Ltd
For the year ended 31 December 20X4
Note 20X4 20X3 20X1 20X0
C C C C
2. Accounting policies

2.1 Property, plant and equipment

Plant is measured using the cost model: cost less accumulated depreciation and impairment losses.

Depreciation is provided on all property, plant and equipment over the expected economic useful
life to expected residual values using the following rates and methods:
Plant: 25% per annum, straight-line method.

3. Profit before tax

Profit before tax is stated after taking the following disclosable (income)/ expenses into account:

Depreciation on plant 25 000 25 000 20 000 25 000
Impairment loss 0 0 0 15 000
Impairment loss reversed 0 0 (10 000) 0

247 Chapter 6

Chapter6 propertyplantandequipmentmodels2008

Chapter6 propertyplantandequipmentmodels2008

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