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Revaluation of Non-Current Assets

revaluation
Accounting Basics IAS(International Accounting Standards)

Revaluation of Non-Current Assets

IAS 16 gives entities the option of using one of two valuation methods for non-current assets: the cost model or the revaluation model.

Each model must be consistently applied to all non-current assets of the same ‘class.’ A class of assets is a collection of assets with a similar nature or function within the business.

For example, properties are one type of asset, while plant and equipment are another.

Furthermore, if the revaluation model is used, the revaluations must be kept up to date, even though IAS 16 does not specify how frequently assets must be revalued.

When using the revaluation model, assets are carried at their fair value, which is defined as “the amount for which an asset may be traded between competent, willing parties in an arm’s length transaction.”

When a revalued asset is sold, any revaluation surplus can either be transferred immediately to retained earnings or left in equity under the title revaluation surplus.

The shift to retained earnings should not be done through the profit and loss statement.

IAS 16 permits (but does not require) businesses to shift ‘excess depreciation’ (the additional depreciation resulting from the increased value of the asset) from the revaluation reserve to retained earnings.

Revalued assets are depreciated in the same way that cost assets are.

If a revaluation results in a higher in value, this should be credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus,” unless it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised in profit or loss.

A decline resulting from a revaluation should be recorded as a cost to the extent that it exceeds any amount previously credited to the revaluation surplus for the same asset.

When a revalued asset is sold, any revaluation surplus can either be transferred immediately to retained earnings or left in equity under the title revaluation surplus. Profit or loss should not be used to move to retained earnings.

Shift any related revaluation surplus to retained profits if a fixed asset is downgraded. The amount of this surplus transferred to retained earnings is the difference between depreciation based on the asset’s original price and depreciation based on the asset’s revalued carrying value.

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