Revaluation in a nutshell

Hello Everyone!! 

Today, we are going to learn about Property, Plant & Equipment standard from this small excel model which covers 95% of the whole standard. Also, we can learn about disposing an asset of a company.

ABC Co. purchased a machine worth 10,00,000CU and has a policy to depreciate the asset under WDV method for the first 9 years and thereon, it uses SLM. Excess depreciation is calculated from year 2 as it is a revaluation model we have adopted for this machinery. 

First calculate NBV

Year 1: NBV = Cost of asset * Depreciation rate - Cost of asset (This will also be the opening balance for Year 2).

Year 2: NBV = Year 1 NBV - Depreciation amount - Impairment +/- (Revalued amount - Year 2 opening NBV).

And this step will be carried forward for all years, per say, 20 years useful life.

This will give us the schedule of NBV, Depreciation charges, Revalued asset values and excess depreciation if any. 

To speak about excess depreciation, it is the difference between the revalued and carrying value of asset's depreciable amounts. Usually, there will be an excess depreciation if there is a revaluation gain. It will be taken to Revaluation reserve and IFRS gives us an option to transfer this excess depreciation to retained earning from revaluation surplus. This transfer occurs only after the asset is sold or retired. 

The cost model: When the machine is purchased, cost model is adopted mandatorily.

Cost model (NBV)= Asset value - Depreciation - Impairment

The Revaluation model: From the second year onwards, companies can choose to adopt Fair value model as this will give additional benefits like increased asset value if an active markets exists for this asset. However, companies usually choose Cost model as this will stop reducing the assets value due to external market factors or due to hyperinflationary economies. 

Revaluation model (NBV)= Carrying amount -  Depreciation - Impairment +/- Revaluation loss or gain.

NOTE: IAS 16 and IndAS prescribes that depreciation must be subtracted from the carrying value NBV of the revalued asset. 

Now that we have found out how to calculate the NBV, we will further learn the underlying principles about how to deal with revaluation gain or deficit. First, if there is a downward revaluation, it must be taken to SPLOCI-PL directly. If there is an upward revaluation next year, it must be taken to SPLOCI-PL first to offset the previous years deficit. Similarly a first time upward revaluation must be taken to SOCIE directly or through SPLOCI-OCI. 

The game is simple, when it is first time deficit, this must be offset by next years gain. Example: If the deficit of 1000CU is charged to SPLOCI-PL, the next year's 2000CU gain must first be offset i.e., take 1000CU to SPLOCI-PL and the rest of the 1000CU to SOCIE- Revaluation reserve. So, for the rest of the useful life of the asset, the gain and deficit must be adjusted against each and must be recycled between SPLOCI-PL and SOCIE. 

Finally, a word about Non-current assets held for sale: An asset which is held for sale is measured at lower of Carrying amount or FVLCD. The changes in FVLCD i.e., decrease in selling costs must be taken to SPLOCI-PL directly as a gain and vice-versa. In other words, any favourable value changes must be recognised as a gain and unfavourable costs as an expense in SPLOCI-PL. You can find a small example which covers 97% of both the standards. 

During consolidation, we have to revalue as per single entity financial statement like above and consolidate revaluation surplus/loss of parent with subsidiary's post-acquisition reserves. Hope you will find my upcoming new tutorials about consolidation in a nutshell pretty simple to understand through Excel and everyone can grasp some knowledge as this will consist of three standards: Consolidated P&L, Consolidated SOFP and Foreign currency translations.

Bye