Week_2_Chapter_6__Accounting_for_Property_Plant_and_Equipment__1_

1. Accounting for Property, Plant and Equipment: Revaluation

2. Objectives of the Lecture

  • Understand revaluation procedures for property, plant, and equipment under AASB 116.

  • Differentiate between fair values and recoverable amounts.

  • Learn to account for revaluation increments and decrements.

    • Treatment of accumulated depreciation upon revaluation.

    • Accounting for reversals of previous revaluations.

    • Understand impairment losses and how to account for them.

  • Work through relevant examples and illustrations.

3. Relevant Accounting Standards

  • AASB 116: Focuses on revaluations, depreciation, and determining acquisition costs for property, plant, and equipment.

  • AASB 138: Pertains to revaluation of intangible assets.

  • AASB 136: Outlines when to recognize an impairment loss.

4. Introduction to Revaluations

  • Revaluation involves reassessing the carrying amount of a non-current asset to its fair value on a given date, excluding recoverable amount write-downs.

  • Historical cost criticism: Many entities can revalue non-current assets in Australia; however, specific intangible assets are excluded from revaluation under AASB 138.

5. Measuring Property, Plant and Equipment

5.1 Measurement at Cost or Fair Value

  • Each class of property, plant, and equipment must be measured at cost or fair value.

  • A mix of measurement methods is permitted but must be disclosed.

5.2 Implications if Class Measured at Cost

  • AASB 136 requires recognition of an impairment loss if an asset's carrying amount exceeds its recoverable amount.

6. Fair Value Definition

6.1 Criteria for Fair Value

  • Fair value is the price exchanged between knowledgeable, willing parties in an arm's length transaction, defined in AASB 13 as the price to sell an asset or transfer a liability.

6.2 Regular Revaluations

  • Revaluations should occur regularly to ensure the carrying amount is not materially different from fair value per AASB 116.

7. Revaluation Increments

7.1 General Procedure

  • The journal entry for a revaluation involves debiting the asset and crediting the revaluation surplus.

7.2 Treatment of Accumulated Depreciation

  • All balances of accumulated depreciation must be credited to the asset account before revaluation. The journal entry follows:

    • Dr Accumulated Depreciation

    • Cr Asset

    • Dr Asset (new value)

    • Cr Revaluation Surplus.

8. Worked Example: Revaluation of a Depreciable Asset

8.1 Scenario

  • Machinery costing $40,000 with an accumulated depreciation of $15,000 is revalued to $45,000.

8.2 Journal Entries

  • Dr Accumulated Depreciation $15,000

  • Cr Machinery $15,000

  • Dr Machinery $20,000

  • Cr Revaluation Surplus $20,000.

9. Revaluation Decrements

9.1 General Treatment

  • Recognized as an expense per the conservative approach; relevant journal entries include:

    • Dr Accumulated Depreciation

    • Cr Asset.

9.2 Example

  • If a building's fair value drops significantly, a loss on revaluation must be entered accordingly.

10. Reversal of Revaluation Increments and Decrements

10.1 General Approach

  • Reversal recorded by reversing the initial revaluation entries.

10.2 Specific Journal Entries

  • If a revaluation decrement brings an asset back to its historical cost, the corresponding entries must include adjustments to accumulated depreciation.

11. Disposal of Revalued Non-Current Assets

  • Gain/loss on disposal calculated as net disposal proceeds minus carrying amount.

  • Revaluation surplus may be transferred to retained earnings upon sale of the asset.

12. Offset of Revaluation Increments and Decrements

  • Increments and decrements can be offset, but only within the same asset class.

13. Disclosures Related to Fair Values

  • Required disclosures for asset revaluations include:

    • Effective revaluation date

    • Involvement of independent valuers

    • Methods and assumptions applied in determining fair value.

14. Introduction to Impairment Losses

14.1 Definition

  • An impairment loss occurs when a non-current asset's carrying amount exceeds its recoverable amount.

    • Carrying amount is cost minus accumulated depreciation and impairment losses.

14.2 Recoverable Amount

  • Defined as the higher of fair value less costs to sell and value in use.

15. Measuring Value in Use and Present Values

  • Estimation involves calculating future cash flows and applying discount rates to derive present values, which determines recoverable amounts.

16. Economic Consequences of Asset Revaluations

  • Changes in asset values can have significant impacts on financial ratios and management incentives, especially in situations tied to management compensation.

17. Summary of Key Points

17.1 Revaluations

  • Carrying amounts must accurately reflect fair values to ensure compliance under AASB 116.

17.2 Impairment Losses

  • Must be recorded when applicable, reflecting a decrease in asset value.

17.3 Reporting

  • Disposal of revalued assets requires careful recording to ensure gains or losses are accurately reflected in financial statements.