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PPE Overview and Subsequent Measurement
PPE stands for property, plant and equipment and is accounted for under a cost model at initial recognition, with an optional subsequent measurement choice to apply the revaluation model. The cost model carries assets at cost less accumulated depreciation and impairment losses. The decision point for PPE is: initial recognition at cost, then the choice in the subsequent period between continuing with cost model or adopting the revaluation model. The revaluation model uses fair value as the basis after a revaluation date, and depreciation after revaluation is recalibrated accordingly.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. In the revaluation model, assets are carried at fair value less subsequent depreciation and impairment where applicable.
Revaluation movements are driven by changes in fair value and are split between two accounting outcomes: increases (gains) and decreases (losses). The treatment follows specific paragraphs and rules that distinguish whether gains go to OCI (other comprehensive income) or to P&L (profit and loss), and how decreases may be absorbed by prior gains in the revaluation surplus.
Initial Recognition and Cost
At inception, PPE must be recorded at cost. Cost is not just the purchase price but includes all costs necessary to bring the asset to its present condition and location for use. This can include: purchase price, transportation, installation, insurance during transit, testing, and any other costs that enable the asset to be used as intended.
Formula for cost basis (initial recognition):
ext{Cost} = ext{Purchase Price} + ext{Associated Costs}Example of capitalization vs expensing: if specialized equipment requires transportation and installation, those costs may be capitalized if they meet the asset recognition criteria; otherwise they would be expensed. The decision affects both the asset's carrying amount and depreciation expense.
After initial recognition, if impairment is later identified, impairment losses apply (not covered in depth here; noted for future topics).
Cost Model vs Revaluation Model (Subsequent Measurement)
Cost model: PPE is carried at cost less accumulated depreciation and impairment losses. Depreciation is calculated over the asset’s useful life, considering residual value where applicable.
Revaluation model: PPE is carried at a revalued amount (fair value at the date of revaluation) less subsequent depreciation and impairment. Regular revaluations may be required to ensure the asset’s carrying amount reflects its fair value.
When a company adopts the revaluation model, the revaluation must be applied to the entire class of PPE (paragraph 36), not just individual items within that class (e.g., all motor vehicles in the “motor vehicles” class must be revalued together).
Revaluation Movements: Increases and Decreases
Paragraph 39 (increase in carrying amount):
An increase in the asset’s carrying amount due to revaluation is generally recognized in OCI (other comprehensive income) and accumulated in equity under the heading of revaluation surplus.
Exception: if the increase reverses a previous decrease that was recognized in P&L for the same asset, then the increase can be recognized in P&L to the extent that it reverses that prior decrease.
Paragraph 40 (decrease in carrying amount):
A decrease is recognized in P&L, unless there is a credit balance in the revaluation surplus for that asset, in which case the decrease is recognized in OCI to the extent of that credit balance, reducing the revaluation surplus, with any excess charged to P&L.
Key concept: the same asset is tracked individually for revaluation movements to determine how much of the change goes to OCI vs P&L (the “same asset” requirement).
Illustration summary: if an increase occurs, it goes to OCI unless it offsets a prior decrease; if a decrease occurs, it goes to P&L unless offset by a prior gain in the revaluation surplus, in which case the portion of the decrease up to the surplus goes to OCI.
Practical Rules and Key Points
Track revaluation movements on an asset-by-asset basis to apply paragraphs 39 and 40 correctly. This means maintaining a per-asset record of gains or losses to determine OCI vs P&L impact.
When adopting revaluation, ensure consistency across the class; you cannot revalue only a subset of assets within the class while leaving others under cost model.
Revaluation surplus is a separate equity reserve (OCI-related). The surplus can be reduced by subsequent decreases in value, but only to the extent of the existing surplus for that asset.
If a decrease in value occurs that exceeds the existing revaluation surplus for that asset, the excess is charged to P&L.
The date of revaluation is crucial: the asset is restated to fair value on that date, and depreciation post-revaluation is recalculated based on the new carrying amount (fair value) and revised residual value and/or remaining useful life if reassessed.
After a revaluation, depreciation for subsequent periods is calculated using the revalued amount as the cost base, with any changes to residual value or remaining life considered in the depreciation calculation.
For the revaluation date, you must update depreciation up to the date of revaluation before comparing the carrying amount with fair value.
Tax implications are often ignored in instructional examples unless specified; revaluation movements affect equity via OCI and a separate revaluation surplus; tax effects are typically accounted for separately in practice.
Worked Example 1: Albury Limited – Motor Vehicle
Given: Acquisition date 1 July 20XX; cost = $60,000; useful life = 5 years; residual value = $10,000.
Step 1: Initial depreciation under cost model (first year):
Depreciation =
rac{ ext{Cost} - ext{Residual}}{ ext{Useful Life}} = rac{60{,}000 - 10{,}000}{5} = 10{,}000 ext{ per year}
Step 2: Revaluation election (on 30 June 20XX+1). Fair value (FV) on date of revaluation = $52,000. Carrying amount (CA) before revaluation equals cost minus accumulated depreciation to date:
CA = 60{,}000 - 10{,}000 = 50{,}000Step 3: Determine revaluation gain: FV − CA = $52,000 − 50,000 = $2,000$.
Entry for the revaluation increase (first revaluation):
Dr Motor Vehicle $2,000$; Cr Asset Revaluation Surplus (OCI) $2,000$.
After this entry, the asset carrying amount becomes $52,000$ (equal to FV).
Step 4: Post-revaluation depreciation (first revaluation): after revaluation, depreciation is recalculated using the new carrying amount and remaining life. If residual value and life are not changed, the depreciation for the next period is:
ext{Dep}_{ ext{post}} = rac{FV - ext{Residual}}{ ext{Remaining Life}} = rac{52{,}000 - 10{,}000}{4} = 11{,}250
ext{ per year}Step 5: Second year end (30 June 20XX+2) depreciation and revaluation scenario:
Record depreciation: Dr Depreciation Expense $11,250$; Cr Accumulated Depreciation $11,250$.
On the revaluation date 30 June 20XX+2, FV is $28,000$ and the CA before revaluation (after depreciation) is:
CA_{ ext{before reval}} = 52{,}000 - 11{,}250 = 40{,}750Decrease in value: $CA_{ ext{before reval}} - FV = 40{,}750 - 28{,}000 = 12{,}750$.
Apply paragraph 40: the decrease is charged to OCI up to the existing revaluation surplus (credit balance in the asset’s revaluation surplus), and the remainder goes to P&L:
Surplus offset: $2,000$ (the prior revaluation surplus for this asset) is first used to absorb part of the decrease in OCI.
Excess recognized in P&L: $12{,}750 - 2{,}000 = 10{,}750$.
Journal entries to reflect the downward revaluation (to the extent described):
Dr Revaluation Surplus (OCI) $2{,}000$;
Dr Loss on Revaluation (P&L) $10{,}750$;
Cr Motor Vehicle $12{,}750$.
After this process, the asset’s new carrying amount is $28,000$ (equal to FV on that date).
Key takeaway from the example: increases to asset value go to OCI (unless reversing earlier decreases); decreases are charged to P&L unless offset by existing revaluation surplus; any remaining effect beyond prior surplus reduces equity or P&L accordingly; depreciation post-revaluation uses the revised cost base (FV) and possibly updated residual value and remaining life.
Worked Example 2: KAGO Limited – Building and Vehicle
On 30 June 20XX, the company’s non-current assets (building and vehicle) are carried at some amounts after depreciation. The company uses fair value as the basis for revaluations and has a pre-existing revaluation surplus for the building of $56,000.
Revaluation on 30 June 20XX: Independent valuer assigns FV for the building and vehicle. The notes indicate the building’s FV is significantly lower than its carrying amount, necessitating a downward revaluation; the vehicle’s FV is higher than carrying amount, necessitating an upward revaluation.
Step 1: Downward revaluation for building
Suppose CAbuilding before revaluation = $1,200,000 and FVbuilding = $640,000. Change Δ = CA − FV = $1,200,000 − $640,000 = $560,000 (loss).
There is a pre-existing revaluation surplus for the building of $56,000. The portion of the loss that can be absorbed by the surplus in OCI is the lesser of Δ and the surplus amount: $56,000$.
Journal entries to reflect the downward revaluation for building:
Dr Revaluation Surplus (OCI) $56,000$;
Dr Loss on Revaluation (P&L) $504,000$;
Cr Building (PPE) $560,000$.
Result: the building’s carrying amount is reduced to FV ($640,000$), and equity is adjusted by the reduction in the revaluation surplus and the P&L loss.
Step 2: Upward revaluation for vehicle
Suppose CAvehicle before revaluation = $80,000$ and FVvehicle = $90,000$ (Δ = $10,000$).
The upward revaluation is generally recognized in OCI and accumulated in the asset's revaluation surplus (assuming no prior surplus for the vehicle).
Journal entry: Dr Vehicle $10,000$; Cr Revaluation Surplus (OCI) $10,000$.
Result: the vehicle’s carrying amount is increased to the FV of $90,000$.
Step 3: Depreciation after revaluation (year ended 30 June 20XX+1)
Remaining useful lives (given) are 25 years for the building and 4 years for the vehicle, with residual values of zero for both after revaluation.
Building depreciation for the year =
rac{ ext{FV}_{ ext{building}} - ext{Residual}}{ ext{Remaining Life}} = rac{640{,}000 - 0}{25} = 25{,}600Vehicle depreciation for the year =
rac{ ext{FV}_{ ext{vehicle}} - ext{Residual}}{ ext{Remaining Life}} = rac{90{,}000 - 0}{4} = 22{,}500
Step 4: Journal entries for depreciation (year ended 30 June 20XX+1)
Dr Depreciation Expense – Building $25{,}600$; Cr Accumulated Depreciation – Building $25{,}600$.
Dr Depreciation Expense – Vehicle $22{,}500$; Cr Accumulated Depreciation – Vehicle $22{,}500$.
Note: The above numbers illustrate the mechanics; exact figures depend on the specific CA, FV, and remaining useful lives at the revaluation date. The key ideas are: (i) apply the downward revaluation to the asset and absorb losses against any existing revaluation surplus to the extent possible; (ii) recognize upward revaluations to OCI (revaluation surplus) unless offset by prior asset losses; (iii) recalculate depreciation post-revaluation based on new carrying amounts and revised life/residual values.
Practical Implications and Disclosures
Disclosures for PPE under AASB standards include the measurement model, depreciation methods, and policy choices (cost vs revaluation). If a revaluation model is adopted, disclosures should explain the basis of fair value, the date of revaluation, the methods used, and the effects on OCI and the revaluation surplus.
When preparing policy notes or disclosures, reference to the relevant standards (e.g., AASB 116) and, where applicable, sector-specific paragraphs (AUS) may be included; for example, AUS paragraphs may modify or add guidance for nonprofit or governmental sectors, which are not the focus for profit-oriented subjects but are important for completeness in some contexts.
The approach to disclosures in practice often mirrors those in annual reports: detailed notes on depreciation policies, revaluation methods, the components of the revaluation surplus, and whether the company uses cost or revaluation for each class of PPE.
The course emphasizes the ability to apply these concepts to exam-style questions, including constructing journal entries for acquisition, depreciation, revaluation gains/losses, and the revaluation surplus, with explicit labeling of entries as OCI vs P&L to earn full marks.
Key Formulas and Concepts (Recap)
Initial recognition cost:
ext{Cost}_{0} = ext{Purchase Price} + ext{Associated Costs}Depreciation (cost model, straight-line):
ext{Dep}_{ ext{cost}} = rac{ ext{Cost} - ext{Residual}}{ ext{Useful Life}}Carrying amount (cost model):
CA_{ ext{cost}} = ext{Cost} - ext{Accumulated Depreciation}Carrying amount after revaluation (revaluation model):
CA_{ ext{reval}} = ext{FV} ext{ (on revaluation date)} ext{, then depreciate post-valuation as needed}Depreciation post-revaluation (example):
ext{Dep}_{ ext{post}} = rac{FV - ext{Remaining Residual}}{ ext{Remaining Life}}Increases in value (revaluation): OCI to equity (revaluation surplus) unless reversing prior decreases for the same asset.
Entry pattern on increase: Dr Asset; Cr OCI – Revaluation Surplus.
Decreases in value (revaluation): P&L, unless offset by existing credit in revaluation surplus for that asset; then use OCI to reduce surplus first, then P&L for the remainder.
Entry pattern on decrease: Dr Revaluation Surplus (OCI) [up to surplus], Dr Loss on Revaluation (P&L) [rest]; Cr Asset.
Class-wide application: If revaluation model is chosen, it must apply to the entire class of PPE, not only to individual assets within the class.
Final takeaways
PPE accounting blends policy choices (cost vs revaluation) with rigorous rules about how to apply gains and losses from revaluations across OCI and P&L, and how to handle depreciation after revaluation. Careful per-asset tracking and clear, labeled journal entries are essential to earn full marks in exams.
Revaluations require updates to depreciation, careful handling of residual values, and consistent application across entire asset classes. The interplay between prior gains (surplus) and current decreases drives whether a change affects OCI or P&L.
Real-world practice mirrors the exam approach: document the policy, perform the revaluation steps on the exact date, adjust depreciation, and present the accounting entries with explicit OCI vs P&L labeling to reflect the economic reality of the asset’s change in value.