REVALUATION – IAS 16

PART I: KEY DEFINITIONS

COST MODEL Cost less accumulated depreciation and accumulated impairment losses
REVALUATION Revalued amount less subsequent accumulated depreciation and
MODEL accumulated impairment losses.
REVALUED Fair value at revaluation date or the depreciated replacement cost (sound
AMOUNT value).
If there is no market-based evidence of fair value because of the
DEPRECIATED specialized nature of the item of property, plant and equipment and the
REPLACEMENT
item is rarely sold, an entity may need to estimate fair value using an
COST income or a depreciated replacement cost approach. This is the
replacement cost at the date of revaluation minus the proportional
amount of accumulated depreciation on the original cost.
REVALUATION Difference of the revalued amount and book value recognized in other
SURPLUS comprehensive income rather than “profit or loss”
REALIZATION OF a) Revaluation surplus that is transferred to retained earnings when the
REVALUATION revalued asset is sold.
SURPLUS b) If the asset is depreciable, the amount transferred to RE is the
difference between the depreciation on the revalued amount and the
depreciation on cost or simply the revaluation surplus balance dividedby
the remaining life of the asset.
TAXABLE a) Occurs when the carrying amount of the asset is higher than the tax
TEMPORARY base, or the carrying amount of the liability is lower than the tax base.
DIFFERENCE b) Will result to a deferred tax liability.

PART II: The Revaluation Model

 After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried
at a revalued amount.

 Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the end of the reporting period. The
frequency of revaluation may be:

a) Annual revaluation for PPE that experience significant and volatile changes in fair value.

b) Every three or five years for PPE with insignificant changes in fair value.

 When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of
the revaluation is treated in one of the following ways:

a) Restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount.

b) Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset.

 An entire class of assets to which that asset belongs is required to be revalued. This is to avoid a
mixture of costs and revalued amounts within a class of PPE. The following are examples of separate
classes:
(a) Land (e) Aircraft
(b) Land and buildings (f) Motor vehicles
(c) Machinery (g) Furniture and fixtures
(d) Ships (h) Office equipment

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  The increase in value due to revaluation should be credited to equity under the heading "revaluation
surplus" unless it represents the reversal of an impairment loss of the same asset previously
recognized as an expense, in which case it should be recognized as income.

 Transfer of revaluation surplus to retained earnings depends on the asset being depreciable or
nondepreciable:

Upon Sale Through Use

The balance of Revaluation surplus divided by
The Asset is Depreciable
revaluation surplus remaining life
The balance of
The Asset is Non-Depreciable NONE
revaluation surplus

 If an asset’s carrying amount is decreased as a result impairment, the decrease shall be recognized in
profit or loss. However, the decrease shall be debited from revaluation surplus if the asset was
previously revalued.

Problem Illustration:

 Land and building with a cost of 5,000,000 and 20,000,000, respectively, with a useful life of 6 years and
a residual value of 2,000,000 is revalued at the end of the 3rd year.

 The land’s fair value is 7,000,000 while the building’s “replacement cost” is 30,000,000.

 The building’s revised remaining useful life is expected to be 5 years instead 3 years (6-3). At the same
time, the building’s expected residual value is now 4,000,000 rather the original estimate of 2,000,000. The
entity’s tax rate is 25%

The book value of the building is as follows:

Cost 20,000,000
Less: Accumulated Depreciation (20M – 2M) / 6 x 3 9,000,000
Book value at the date of revaluation 11,000,000

 The ratio of the accumulated depreciation of the asset based on its depreciable amount is 50% (9M
divided by 18M).

 The depreciation on the replacement cost of the building will be also 50% based on the revised
depreciable amount of 26,000,000 (30M – 4M).

Replacement cost 30,000,000

Less: Accumulated Depreciation (30M – 4M) x 50% 13,000,000
Depreciated replacement cost or sound value 17,000,000

 Adjustments to be made if accumulated depreciation is (1) restated or (2) eliminated.

(1) Proportional Restatement (2) Elimination Approach

Cost (30M – 20M) 10,000,000 Elimination on cost and AD (9,000,000)

AD (13M – 9M) ( 4,000,000) Inc. in Cost & RS (17M – 11M) 6,000,000
Net CA (17M – 11M) 6,000,000

 The reported values and corresponding accounts under both methods shall be as follows:

Proportional Restatement Elimination Approach

Gross CA 30,000,000 Gross carrying amount 17,000,000

Less: AD (13,000,000) Less: AD 0
Net Carrying Amt. 17,000,000 Net Carrying Amount 17,000,000

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  Transactions from revaluation, recording of a deferred tax liability and realization to retained earnings is
as follows:

Land Building Total

Revalued amount 7,000,000 17,000,000 24,000,000
Less: Book value 5,000,000 11,000,000 16,000,000
RS at gross 2,000,000 6,000,000 8,000,000
Less: Deferred tax liab. at 25% 500,000 1,500,000 2,000,000
RS at net Beginning 1,500,000 4,500,000 6,000,000
Less: RS real’n ( 4.5M* / 5) 0 900,000 900,000
RS balance, Ending 1,500,000 3,600,000 5,100,000

 The deferred tax results from the taxable temporary difference which is directly debited from the
revaluation surplus. While the revaluation surplus on the land is not realized or amortized to retained
earnings unless the land is sold.

PROBLEMS

1. The following account balances relating to property, plant and equipment of Kenny Company appear on the
books on December 31, 2021:

Land 8,000,000
Building 70,000,000
Accumulated depreciation 25,200,000

Plant, property, and equipment have been carried at cost since their acquisition. The land was acquired 15
years ago while the building’s construction was completed on January 1, 2013. The straight-line method for
depreciation is used and the building is depreciated over its 25-year useful life with no residual value. On
December 31, 2022, the company revalued the land and building. On the same date, contracted professional
appraisers submitted the following information regarding the fair value of the land and the building:

Land 11,000,000
Building 63,000,000

1. What is the revaluation surplus on December 31, 2022?

a. 24,000,000 c. 21,000,000
b. 20,500,000 d. 22,500,000

2. What is the revaluation surplus on December 31, 2023?

a. 14,000,000 c. 14,200,000
b. 22,600,000 d. 19,600,000

3. What is the depreciation on the building for the year ended December 31, 2023?
a. 3,500,000 c. 4,000,000
b. 4,200,000 d. 3,200,000

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 2. Larry Company acquired a building on January 1, 2018, at a cost of P15,000,000. The building has an
estimated life of 10 years and residual value of P2,000,000. The building was revalued on January 1, 2022,
and the revaluation revealed replacement cost of P25,000,000, residual value of P6,000,000 and revised
life of 12 years. The entity’s tax rate is 25%

1. What is the revaluation surplus on January 1, 2022?

a. 6,000,000 c. 5,700,000
b. 7,600,000 d. 4,500,000

2. What is the revaluation surplus on December 31, 2022?

a. 3,750,000 c. 4,750,000
b. 6,650,000 d. 4,987,500

IMPAIRMENT OF ASSETS – IAS 36

Part 1- KEY OBJECTIVES:

1. When to test assets for impairment and what does “test for impairment” means?
2. What is the basis of the recoverable amount?
3. When are cash generating units tested for impairment rather than single or individual assets and how
shall the impairment loss be allocated and what are the limitations to the allocation?
4. When should impairment losses be reversed and its limitations?

Part 2 – DEFINITIONS:

Carrying amount Amount at which an asset is recognized after deducting any accumulated
depreciation (amortization) and accumulated impairment losses thereon
Cash-generating unit Smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of
assets.
Costs of disposal Incremental costs directly attributable to the disposal of an asset or cash-
generating unit, excluding finance costs and income tax expense.
Depreciable amount The cost of an asset, or other amount substituted for cost in the financial
statements, less its residual value.
Fair value less Amount obtainable from the sale of an asset or cash-generating unit in
costs to sell an arm’s length transaction between knowledgeable, willing parties, less
the costs of disposal.
Recoverable amount The higher amount between an asset or a cash-generating unit’s fair
value less costs to sell and its value in use.
Value in use The present value of the future cash flows expected to be derived from
an asset or cash-generating unit.
Impaiment Loss Is the amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount

Part 3 – Objectives Explained

1. The timing of impairment test will depend on the following classification of assets.

Existence of Annual impairment

Impairment Indicators testing

1. Items of property plant and 1. Intangible assets with indefinite

equipment lives.
2. Intangible assets with definite useful 2. Intangible assets not available for
lives use.
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 3. Cash generated units that are tested 3. Cash generating units with
for impairment due to the inability to allocated goodwill.
estimate the recoverable amount of
an impaired asset within the CGU.

2. Indicators of Impairment

External sources Internal sources

 Market value declines  Obsolescence or physical damage

 Negative changes in technology,  Asset is part of a restructuring or
markets, economy, or laws held for disposal
 Increases in market interest rates  Worse economic performance than
 Company stock price is below book expected
value

3. Determining Recoverable Amount

a. If fair value less costs to sell or value in use is more than carrying amount, it is not necessary
to calculate the other amount because the asset is not impaired.

b. If fair value less costs to sell cannot be determined, then recoverable amount is value in use.

c. For assets to be disposed of, recoverable amount is fair value less costs to sell.

Fair Value Less Cost to Sell

a. If there is a binding sale agreement, use the price under that agreement less costs of disposal.
b. If there is an active market for that type of asset, use market price less costs of disposal. Market price
means current bid price if available, otherwise the price in the most recent transaction.
c. If there is no active market, use the best estimate of the asset's selling price less costs of disposal.
d. Costs of disposal are the direct costs only.

Value in Use

The calculation of value in use should reflect the following elements:

a. An estimate of the future cash flows the entity expects to derive from the asset in an arm's length
transaction
b. Expectations about possible variations in the amount or timing of those future cash flows
c. The time value of money, represented by the current market risk-free rate of interest
d. The price for bearing the uncertainty inherent in the asset
e. Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows
the entity expects to derive from the asset.

4. Recognition of an Impairment Loss

a. An impairment loss should be recognized whenever recoverable amount is below carrying amount.

b. The impairment loss is an expense in the income statement unless it relates to a revalued
asset where the value changes are recognized directly in equity.

c. Adjust depreciation or amortization charges for future periods to be based on the new carrying
amount of the asset.

5. Testing Cash-Generating Units for impairment:

a. The CGU includes goodwill that was allocated from the acquisition of another entity. This will require
the annual impairment testing of the CGU.

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 b. Factors of impairment indicate than an asset within a cash generating is impaired but all efforts
cannot determine the recoverable amount the impaired asset. This will result in a larger scope of
impairment testing that will involve the CGU.

c. If the CGU is impaired, impairment loss is allocated to:

 First, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of
units); and

 Then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata based
on THEIR BOOK VALUES except cash of the CGU.

 The carrying amount of an asset should not be reduced below the highest of:
 Its fair value less costs to sell (if determinable)
 Its value in use (if determinable) and
 Zero.

6. Reversal of an Impairment Loss

a. Internal or external indicators are present.

External sources Internal sources

 Significant increase in market  Changes in way asset is used
value or expected to be used
 Changes in technological,  Evidence from internal
market, economic or legal reporting indicates that
environment economic performance of the
 Changes in interest rates asset will be better than
 Market interest rates have expected.
decreased.

b) Individual asset – The difference of the increased recoverable amount is recognized in profit and
loss unless the asset is carried at revalued amount.

c) CGUs – Allocated to assets of CGUs on a pro-rata basis.

d) Goodwill – Impairment of goodwill is never reversed.

e) Limitation – The revised carrying amount after reversal should not exceed the carrying amount of
the individual asset and assets within the cash generating unit if impairment loss was not recognized.

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 PROBLEMS

1. On December 31, 2021, Martha Company determined that there had been a significant decrease in
market value of its equipment. This equipment was acquired on January 1, 2018, with a useful life of 10
years and no residual value. On December 31, 2021, Martha compiled the following information concerning
the equipment:
Original cost 10,000,000
Accumulated depreciation 4,000,000
Expected undiscounted net future cash inflows from the
continued use and eventual disposal 5,200,000
Expected discounted net future cash inflows from the
continued use and eventual disposal 4,500,000
Fair value less cost to sell 4,200,000

How much is the 2022 depreciation expense?

a. 800,000
b. 700,000
c. 900,000
d. 750,000

2. Moira Company reported an impairment loss of P400,000 in its income statement for the year ended
2021. This loss recognized at yearend was related to an item of property, plant and equipment which was
acquired on January 1, 2020, with cost of P3,000,000, useful life of 10 years and no residual value.
On the December 31, 2021, statement of financial position, Moira reported this asset at P2,000,000 which
is the fair value on such date. Moira also determined that there was no change in the remaining useful life
On December 31, 2023, Moira determined that the fair value of its impaired asset had increased to
P2,200,000 due to indicators for the reversal of impairment. The straight-line method is used in recording
depreciation of this asset. What amount of gain on impairment recovery should Moira report in its 2023
income statement?
a. 300,000
b. 800,000
c. 700,000
d. 0

3. On December 31, 2022, Claude Company’s only cash generating unit was tested for impairment.
Information to the assets of the cash generating unit is presented below:
Building 4,500,000
Equipment 1,875,000
Machinery 1,125,000
Goodwill 800,000
It was determined that the cash generating unit has a recoverable amount of P6,000,000 and the building’s
fair value is P3,800,000.

1. What is the impairment loss to be recognized on the building?

a. 900,000
b. 800,000
c. 600,000
d. 700,000

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 2. What is the impairment loss to be recognized on the equipment?
a. 375,000
b. 450,000
c. 400,000
d. 500,000

3. What is the impairment loss to be recognized on the machinery?

a. 300,000
b. 225,000
c. 600,000
d. 120,000

4. An asset was acquired on January 1, 2018, for P10,000,000 was revalued at the beginning of 2022. The
asset was depreciated over a useful life of 20 years using the straight-line method. A professional appraiser
determined the asset to have a fair value of P8,700,000 and was determined to have a remaining life of 10
years. On January 1, 2026, the asset again is revalued and is determined to have a fair value of P4,500,000
with no change in its useful life. In recording revaluation in 2026, how much revaluation decrease is charged
against income of 2026?
a. 300,000
c. 580,000
b. 720,000
d. 820,000

5. Felipe Company has been experiencing significant losses in prior years. On December 31, 2022, the assets
and liabilities are:

Cash 4,000,000
Accounts receivable 5,000,000
Inventory 6,000,000
Property, plant and equipment 10,000,000
Goodwill 5,000,000
Liabilities 8,000,000

On December 31, 2022, the fair value of the net assets of Felipe is P18,000,000. How much is the impairment
loss applicable to goodwill?
a. 3,000,000
b. 5,000,000
c. 4,000,000
d. 0

end

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