Chapter 5 Revaluation of non-current assets. Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and

Chapter 5Chapter 5

Revaluation of Revaluation of non-current assetsnon-current assets

Copyright Copyright 2003 McGraw-Hill New Zealand Pty Ltd. 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a PPTs t/a New Zealand Financial Accounting 2eNew Zealand Financial Accounting 2e by Deegan and Samkin by Deegan and Samkin

Slides prepared by Grant SamkinSlides prepared by Grant Samkin

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ObjectivesObjectives

Understand how and when to revalue a Understand how and when to revalue a non-current asset in accordance with non-current asset in accordance with FRS-3.FRS-3.

Understand the difference in Understand the difference in accounting treatments for upward accounting treatments for upward revaluations to ‘fair value’, as opposed revaluations to ‘fair value’, as opposed to downward revaluations to to downward revaluations to ‘recoverable amount’.‘recoverable amount’.



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Objectives (cont.)Objectives (cont.)

Understand how to account for Understand how to account for revaluations that act to reverse revaluations that act to reverse previous revaluation increments and previous revaluation increments and decrements.decrements.



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Understand how to account for Understand how to account for accumulated depreciation when a non-accumulated depreciation when a non-current depreciable asset is revalued, current depreciable asset is revalued, and appreciate that, subsequent to and appreciate that, subsequent to revaluation, new depreciation charges revaluation, new depreciation charges will be based will be based on the revalued amount of the on the revalued amount of the non-current asset.non-current asset.



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Know how the profit on disposal of a Know how the profit on disposal of a revalued non-current asset is revalued non-current asset is determined and understand how asset determined and understand how asset revaluations can affect an revaluations can affect an organisation’s profits due to changes organisation’s profits due to changes in depreciation expenses and in final in depreciation expenses and in final profits or losses on the sale of the profits or losses on the sale of the revalued assets.revalued assets.



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Be able to explain what might Be able to explain what might motivate motivate an organisation to elect to, or an organisation to elect to, or alternatively, not elect to revalue its alternatively, not elect to revalue its non-current assets upwards.non-current assets upwards.

Know the disclosure requirements Know the disclosure requirements contained in FRS-3.contained in FRS-3.



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IntroductionIntroduction

Within New Zealand, non-current Within New Zealand, non-current assets may be revalued upwards or assets may be revalued upwards or downwards to reflect the fair value of downwards to reflect the fair value of the assets.the assets.

Revaluation is the act of recognising a Revaluation is the act of recognising a reassessment of values of non-current reassessment of values of non-current assets as at a particular date.assets as at a particular date.

Asset must not exceed its recoverable Asset must not exceed its recoverable amount following revaluation.amount following revaluation.



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Carrying amount in Carrying amount in excess of recoverable excess of recoverable amountamount When carrying amount exceeds When carrying amount exceeds

recoverable amount, write-down to recoverable amount, write-down to recoverable amount is required.recoverable amount is required.

Governed by FRS-3.Governed by FRS-3.



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Measuring at cost or fair Measuring at cost or fair valuevalue

When an item meets asset recognition When an item meets asset recognition criteria, each class of non-current criteria, each class of non-current asset is measured at cost.asset is measured at cost.

Entity can elect to change Entity can elect to change measurement basis to fair value.measurement basis to fair value.

Entire class of asset must be recorded Entire class of asset must be recorded on the same basis.on the same basis.



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Measuring at cost or fair Measuring at cost or fair value (cont.)value (cont.)

Non-current assets must be written Non-current assets must be written down to recoverable amount when down to recoverable amount when carrying amount exceeds recoverable carrying amount exceeds recoverable amount.amount.

Write-downs not considered to be Write-downs not considered to be revaluations.revaluations.

Does not require write-down of entire Does not require write-down of entire class of assets in this case.class of assets in this case.



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Definition of Definition of recoverable amountrecoverable amount

Recoverable amount, in relation to an Recoverable amount, in relation to an asset, means the net greater of net asset, means the net greater of net market value and value in use.market value and value in use.

Net market value is the fair value less the Net market value is the fair value less the costs of disposal.costs of disposal.

Value in use is determined by discounting Value in use is determined by discounting the expected future cash flows obtained the expected future cash flows obtained from an asset’s continuing use and from an asset’s continuing use and ultimate disposal at an appropriate ultimate disposal at an appropriate discount rate.discount rate.



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Use of fair valueUse of fair value

Any revaluation must be to ‘fair value’.Any revaluation must be to ‘fair value’. Governed by FRS-3.Governed by FRS-3. Before issue of FRS-3, no specific Before issue of FRS-3, no specific

requirement to use fair valuesrequirement to use fair values– previously revalued amount was not to previously revalued amount was not to

exceed recoverable amount.exceed recoverable amount.



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Definition of fair valueDefinition of fair value

Defined as the amount for which an Defined as the amount for which an asset can be exchanged, or a liability asset can be exchanged, or a liability settled, between knowledgeable, settled, between knowledgeable, willing parties in an arm’s length willing parties in an arm’s length transaction.transaction.

Fair value determined on the basis of a Fair value determined on the basis of a going concern. going concern.

If active or liquid market then market If active or liquid market then market value equals fair value.value equals fair value.



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Valuation to be kept up Valuation to be kept up to dateto date

Once it is decided to revalue, Once it is decided to revalue, valuations must be kept up to date.valuations must be kept up to date.

If frequent material changes in value, If frequent material changes in value, then revaluation could be required then revaluation could be required each accounting period.each accounting period.

If no material changes, revaluation If no material changes, revaluation every three years would be sufficient.every three years would be sufficient.

Maximum interval between Maximum interval between revaluations revaluations is five years.is five years.



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Revaluation Revaluation incrementsincrements General procedureGeneral procedure

Dr AssetDr Asset

Cr Asset revaluation reserveCr Asset revaluation reserve Asset revaluation reserve is part of equity.Asset revaluation reserve is part of equity. Directors may approve cash distributions Directors may approve cash distributions

to shareholders, provided that, to shareholders, provided that, immediately after distribution, the immediately after distribution, the company satisfies the solvency test.company satisfies the solvency test.



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Treatment of Treatment of accumulated accumulated depreciation upon depreciation upon revaluationrevaluation If the revalued asset is a depreciable If the revalued asset is a depreciable

asset, any balance of accumulated asset, any balance of accumulated depreciation is credited to the gross depreciation is credited to the gross carrying amount of the item.carrying amount of the item.

Journal entry:Journal entry:Dr Accumulated depreciationDr Accumulated depreciation

Cr AssetCr Asset Subsequent depreciation based on Subsequent depreciation based on

revalued amount.revalued amount.



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Revaluation Revaluation decrements and decrements and deficitsdeficits In line with concept of prudence, In line with concept of prudence,

decrements go to statement of decrements go to statement of financial performance.financial performance.

Journal entry:Journal entry:Dr Loss on revaluation assetDr Loss on revaluation asset

Cr AssetCr Asset



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Reversal of Reversal of revaluation revaluation decrements and decrements and incrementsincrements

With respect to a class of assets, With respect to a class of assets, reversals of previous revaluations reversals of previous revaluations should, as far as possible, be should, as far as possible, be accounted for by entries that are the accounted for by entries that are the reverse of those entries bringing the reverse of those entries bringing the previous revaluations to account.previous revaluations to account.



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Reversal of revaluation Reversal of revaluation incrementsincrements

Where revaluation decrement reverses Where revaluation decrement reverses a previous increment it will be debited a previous increment it will be debited to the asset revaluation reserve to the asset revaluation reserve account and not to the statement of account and not to the statement of financial performance.financial performance.

Any excess over the previous Any excess over the previous revaluation increment is debited to the revaluation increment is debited to the statement of financial performance.statement of financial performance.



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Reversal of revaluation Reversal of revaluation decrementsdecrements

Where revaluation increment reverses Where revaluation increment reverses a previous revaluation decrement, it is a previous revaluation decrement, it is credited to the statement of financial credited to the statement of financial performance.performance.

Any excess over the previous Any excess over the previous revaluation decrement would be revaluation decrement would be credited to the asset revaluation credited to the asset revaluation reserve.reserve.



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Accounting for profit Accounting for profit or loss on disposal of or loss on disposal of a revalued non-a revalued non-current assetcurrent asset

Profit or loss on disposal of revalued Profit or loss on disposal of revalued item of PPE is measured as the item of PPE is measured as the difference between the carrying difference between the carrying amount of the revalued asset amount of the revalued asset at the time of disposal and net at the time of disposal and net proceeds proceeds (if any) from disposal.(if any) from disposal.



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Asset revaluation Asset revaluation reserve account reserve account pertaining pertaining to disposed assetto disposed asset No guidance on how to treat this in No guidance on how to treat this in

accounting standards.accounting standards. Options:Options:

– leave the balance as is;leave the balance as is;– transfer the balance to another reserve transfer the balance to another reserve

(asset realisation reserve or capital profits (asset realisation reserve or capital profits reserve); orreserve); or

– transfer balance to retained earnings.transfer balance to retained earnings.



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Consideration of Consideration of present valuespresent values Recoverable amount defined as the Recoverable amount defined as the

greater of net market value and value greater of net market value and value in use.in use.

Difficulties exist with the definition of Difficulties exist with the definition of recoverable amounts.recoverable amounts.

No necessity for net market value to No necessity for net market value to be discounted as it is already be discounted as it is already expressed at current value.expressed at current value.

Is the requirement that expected Is the requirement that expected future cash flows be discounted when future cash flows be discounted when determining value in use logical?determining value in use logical?



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Offsetting Offsetting increments/ increments/ decrements within a decrements within a class of assetsclass of assets

FRS-3 requires revaluation increments FRS-3 requires revaluation increments and decrements to be offset against and decrements to be offset against one another within a class of non-one another within a class of non-current assets.current assets.

Increments and decrements are not to Increments and decrements are not to be offset in respect of different classes be offset in respect of different classes of non-current assets.of non-current assets.



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Change in Change in measurement basemeasurement base Where a change in measurement base Where a change in measurement base

for a class of PPE has been made, this for a class of PPE has been made, this must be accounted for as a change in must be accounted for as a change in accounting policy.accounting policy.



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Economic Economic consequences consequences of asset revaluationsof asset revaluations If contracts in place are tied to reported If contracts in place are tied to reported

profits (debt or management profits (debt or management compensation), management may have compensation), management may have incentive not to revalue.incentive not to revalue.

However, if assets are increased, the However, if assets are increased, the revaluation may loosen constraints such revaluation may loosen constraints such as debt/assets restrictions.as debt/assets restrictions.

Firms subject to political scrutiny may be Firms subject to political scrutiny may be more likely to undertake upward more likely to undertake upward revaluation resulting in a reduction in revaluation resulting in a reduction in profits.profits.



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Disclosure Disclosure requirementsrequirements Detailed and contained in FRS-3Detailed and contained in FRS-3

– Where a class of PPE is stated at revalued Where a class of PPE is stated at revalued amount, the following must be disclosed:amount, the following must be disclosed:

revaluation surplusrevaluation surplus intervals at which valuations take placeintervals at which valuations take place dates and amounts of valuations supporting dates and amounts of valuations supporting

recognised valuationsrecognised valuations names and qualifications of valuersnames and qualifications of valuers bases of valuationsbases of valuations any special assumptions or limiting conditionsany special assumptions or limiting conditions where the cyclical basis of valuation adopted, where the cyclical basis of valuation adopted,

that fact and an explanation of the basis used.that fact and an explanation of the basis used.



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Disclosure Disclosure requirements requirements (cont.)(cont.)

– Where a class of PPE is no longer Where a class of PPE is no longer revalued because of a change in revalued because of a change in accounting policy, the following accounting policy, the following must be disclosed:must be disclosed: the fact that the class of items is no the fact that the class of items is no

longer accounted for under the modified longer accounted for under the modified historical cost system; andhistorical cost system; and

the basis upon which the class of item is the basis upon which the class of item is now accounted for.now accounted for.



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– Where items of PPE are revalued, the Where items of PPE are revalued, the following must be disclosed:following must be disclosed: as a separate component of total as a separate component of total

recognised revenues and expenses, the recognised revenues and expenses, the sum of all revaluation increments and sum of all revaluation increments and decrements recognised in the SOME decrements recognised in the SOME during the periodduring the period

the sum of all revaluation increments and the sum of all revaluation increments and decrements recognised in the statement decrements recognised in the statement of financial performance during the of financial performance during the period.period.



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– Where the measurement base for Where the measurement base for any class of PPE has been changed, any class of PPE has been changed, the following must be disclosed:the following must be disclosed: the change in accounting policy the change in accounting policy

in accordance with FRS-1in accordance with FRS-1 whether the measurement base has whether the measurement base has

been changed previously and, if so, been changed previously and, if so, when.when.

Documents

Chapter 5 Revaluation of non-current assets. Copyright 2003 McGraw-Hill New Zealand Pty Ltd. PPTs t/a New Zealand Financial Accounting 2e by Deegan and