This document continues the summary of PPE (IAS 16). This summary explains in depth, subsequent measurement. The Cost model and the revaluation model are explained with their formulas and examples. Revaluation increases and decreases as well as impairments are explained. Journal entries are provide...
1. Measure at cost.
2. Less accumulated depreciation.
3. Less accumulated impairment.
Revaluation model:
• Measure initially at cost
• Revalue asset to fair value.
• Less subsequent accumulated depreciation and impairment.
The choice between the revaluation model and the cost model:
• Entity can choose whether to subsequently measure items of PPE at cost or on the
revaluation model.
• Which ever model they choose must be applied to all assets in the class.
• E.g. all vehicles or all buildings, can't just be one.
• In applying the revaluation model, an item of property, plant and equipment is
carried at a revalued amount, which is its fair value at the date of revaluation less
any subsequent accumulated depreciation and accumulated impairment losses.
What is fair value?
• Fair value = amount received to sell an asset or the amount paid to transfer a liability
in an orderly transaction between market participants at measurement date.
, • On the revaluation model the item of PPE is remeasured to its fair value on the
measurement date.
How do we determine fair value?
• Given in tests and exams.
• Land and building = can look at quoted market prices and market values because
they are traded often and market prices are easily available.
• Plant and equipment = appraisals.
• Fair value does not include VAT.
How to calculate the revaluation:
• Revaluation amount = fair value at the date of the revaluation less the carrying
amount of the asset on the date of the revaluation.
• Compare CA to FV = this becomes CA @ date of revaluation.
• Revaluation increases are recognised in other comprehensive income (equity).
• Not recognised in profit and loss.
• Unrealized gain = will only benefit when asset is sold.
How often should items of PPE be revalued:
• Must be made with sufficient regularity.
Revaluation model:
• All assets of a specific class must be measured using the same model.
• NB! If one item in a class of PPE is revalued, all of the items in that class should be
revalued.
What is a class of PPE?
• Class of PPE are items of PPE that share similar characteristics
• Example of classes:
o Vehicles
o Furniture and fittings
o Land and buildings
o Plant and machinery
o Computer equipment
Timeline for revaluation:
1. Measure the item of PPE at cost initially.
2. Depreciate the PPE to the date of revaluation.
3. Calculate the carrying amount of the PPE at the date of the revaluation.
4. Revalue the item to the fair value at the revaluation date.
, 5. Assess the item of PPE for any indicator of impairment.
6. Continue to depreciate the revalued amount over the remaining useful life of the
item.
Treatment of the asset of revaluation date (par 35):
• On revaluation date = adjust carrying amount to the revalued amount (fair value).
• 2 methods can be used:
o Gross replacement - non examinable
o Net replacement method
Net replacement value method (par 35 (b))
• Calculate the carrying amount up until the date of the revaluation.
• Eliminate the accumulated depreciation and impairment of the asset against the cost
of the asset at the revaluation date.
• Restate the carrying amount to the fair value at the date of the revaluation.
Depreciation of a revalued asset:
NB!
Assets on the revaluation model will continue to be depreciated after the revaluation
date.
Treatment of revaluation increases (par 39):
• @ date of revaluation, Fair value is greater than carrying amount:
o Revaluation increase
o Recognise increase in Other Comprehensive income (equity).
o Accumulated in Revaluation surplus (component of equity).
Example 1:
At 31 December 2016, CW has land with a cost of R500 000. The land was purchased 2 years
ago. The land is measured on the revaluation model and is not depreciated. The land is
revalued to its fair value of R550 000 at 31 Dec 2016. The profit for the period is R120 000.
Workings:
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