Revaluation of tangible non-current asset
This chapter explores the revaluation of non-current assets under IAS 16. It explains the two subsequent measurement models and shows how revaluation helps assets reflect fair value. You’ll see how to account for upward and downward revaluations, how revaluation affects depreciation, how gains and losses are recognised, and how excess depreciation is treated. Practical illustrations show how revaluation affects the financial statements and equity, including what happens on the disposal of a revalued asset.
Learning objectives
By the end of this chapter, you should be able to:
- Record the revaluation of a tangible non-current asset in the general ledger accounts and illustrate how it is presented in the statement of profit or loss and other comprehensive income and in the statement of financial position.
- Calculate and update the general ledger accounts to record the depreciation on a revalued tangible non-current asset, including the transfer of excess depreciation between the revaluation surplus and retained earnings.
- Calculate the gain or loss on disposal of a revalued tangible non-current asset.
Subsequent measurement
IAS 16 requires businesses to choose one model for subsequent measurement and apply it consistently within each asset class (to support comparability):
- Cost model
- Revaluation model
Under the cost model, assets are shown at original (historical) cost less accumulated depreciation. This can understate value when market prices rise, especially for assets like land and buildings. For example, land purchased at $1 million may still be recorded at cost even if its market value increases significantly, which can reduce the “true and fair” representation of the financial statements.
Under the revaluation model, assets are remeasured so the carrying amount reflects current fair value.
Revaluation model
When a non-current asset is revalued, its carrying amount must be adjusted to the revalued amount (market value).
- If the carrying amount is lower than market value, this is an upward revaluation.
- If the carrying amount is higher than market value, this is a downward revaluation.
Journal entries: downward revaluation
Debit: Accumulated depreciation (to remove the existing balance)
Debit: Revaluation surplus via OCI, to the extent of the balance remaining in the revaluation surplus for this asset, and/or Revaluation loss in profit or loss for any remainder
Credit: Non-current asset account (cost), to restate it to the revalued amount
The revaluation surplus and loss debits together equal the excess of the carrying amount over the market value.
Revaluation losses and gains
How you recognise a revaluation gain or loss depends on whether:
- It is the first time the asset is being revalued, or
- It is a subsequent revaluation (i.e., after an initial valuation).
Revaluation model: Step-by-step approach
This is a general step-by-step process on how to approach a revaluation question:
- Identify the revaluation date(s) and the fair value (revalued amount).
- At each revaluation date, compute the carrying amount of the non-current asset (i.e., cost minus accumulated depreciation and any accumulated impairment losses to date).
- Compare the carrying amount computed with the fair value at the date of revaluation. Pass a downward or upward revaluation entry.
- Record revaluation gain/surplus when fair value is greater than carrying amount. Record revaluation loss when the fair value is less than the carrying amount.
- After each revaluation, depreciate the revalued amount over the remaining useful life. If the revaluation happens mid-year, time-apportion depreciation before and after the revaluation date.
Illustration: Revaluation model
JB Ltd purchased a factory plant for $100,000 on 1 January 20X0. JB Ltd uses the revaluation model to value its non-current assets. The asset has zero residual value and is being depreciated over its estimated useful life of 10 years. At 31 December 20X3, the asset was revalued to $80,000, but at 31 December 20X5, the value of the asset had fallen to $50,000.
Required: Calculate the amounts to be shown in the financial statements of JB Ltd for the year-ended 31 December 20X5.
Suggested solution
Step 1: What were the revaluation date(s) and the revalued amount(s)?
The plant was first revalued on 31 December 20X3 at $80,000. On 31 December 20X5, the plant was again revalued to $50,000.
Step 2: What is the carrying amount at the date of the first revaluation (i.e., 31 December 20X3)?
| $ | |
|---|---|
| Cost of factory plant | 100,000 |
| Accumulated depreciation ($100,000/10 years × 4 years) | (40,000) |
| Carrying amount 31/12/20X3 | 60,000 |
Step 3: What is the revaluation difference? Is it a gain or a loss?
| $ | |
|---|---|
| Carrying amount as at 31/12/20X3 | 60,000 |
| Fair value | 80,000 |
| Revaluation surplus or gain | 20,000 |
Step 4: How should the revaluation difference be recognised?
The journal entry to be passed will be:
Debit: Accumulated depreciation $40,000
Credit: Factory plant (cost) $20,000
Credit: Revaluation surplus $20,000
This removes the $40,000 of accumulated depreciation, restates the plant’s cost from $100,000 down to the $80,000 valuation, and recognises the $20,000 revaluation surplus as the balancing figure.
Since the revaluation gain arises on the initial revaluation, the $20,000 is presented in Other comprehensive income (OCI) in the statement of profit or loss and other comprehensive income.
Step 5: What is the carrying amount as at the second revaluation (i.e., 31 December 20X5)?
After revaluation, the fair value becomes the new carrying amount. This new carrying amount is then used as the basis for future depreciation.
Depreciation is charged over the remaining useful life from the revaluation date. The original useful life was 10 years. 4 years were used before revaluation, so the remaining useful life is 6 years.
From 31/12/20X3 to 31/12/20X5, 2 years elapse, so depreciation is charged for 2 years on the revalued amount.
| $ | |
|---|---|
| Carrying amount as at 31/12/20X3 | 80,000 |
| Accumulated depreciation (as at 31/12/20X5) - ($80,000/6 years × 2 years) | (26,667) |
| Carrying amount as at 31/12/20X5 | 53,333 |
Step 6: What is the revaluation difference as at the second revaluation?
| $ | |
|---|---|
| Carrying amount as at 31/12/20X5 | 53,333 |
| Revaluation loss - balancing figure | (3,333) |
| Fair value | 50,000 |
Step 7: How should the revaluation difference be recognised?
The journal entry to be passed will be:
Debit: Accumulated depreciation $26,667
Debit: Revaluation surplus $3,333
Credit: Factory plant (cost) $30,000
Any subsequent loss is charged to OCI up to the balance remaining in the revaluation surplus for this asset. JB Ltd transfers excess depreciation each year (see below), so after the 20X4 and 20X5 transfers that balance is about $13,333 ($20,000 less two transfers of $3,333).
The $3,333 revaluation loss is less than $13,333, so the full loss is presented in OCI. The entry removes the $26,667 of accumulated depreciation and restates the plant’s cost from $80,000 down to the $50,000 valuation; the $3,333 debit to the revaluation surplus is the loss presented in OCI.
The effect of the revaluation is presented in the financial statements extracts below. Statement of profit or loss and other comprehensive income (extracts)
| 20X3 | 20X4 | 20X5 | |
|---|---|---|---|
| Depreciation charge | 10,000 | 13,333 | 13,333 |
| Other comprehensive income: | |||
| Revaluation surplus | 20,000 | - | (3,333) |
Statement of financial position (extracts)
| 20X3 | 20X4 | 20X5 | |
|---|---|---|---|
| Non-current assets: | |||
| Factory plant | 80,000 | 66,667 | 50,000 |
| Equity: | |||
| Revaluation reserve | 20,000 | 16,667 | 10,000 |
The revaluation reserve above assumes JB Ltd transfers the excess depreciation to retained earnings each year (see the next section). The reserve falls from 20,000 to 16,667 in 20X4 (the 3,333 excess depreciation transfer), then from 16,667 to 10,000 in 20X5 (a further 3,333 excess depreciation transfer, plus the 3,333 revaluation loss recognised in OCI).
Treatment of excess depreciation
When a non-current asset is revalued, subsequent depreciation is calculated using the revalued amount and the remaining useful life. This often increases the annual depreciation charge compared with depreciation based on historical cost.
Total depreciation is still charged to profit or loss. However, the excess depreciation may be transferred within equity from the revaluation surplus to retained earnings (via the Statement of Changes in Equity) - IAS 16 permits this transfer but does not require it.
Illustration: Excess depreciation
- For example, using the illustration above, before the initial revaluation on 31 December 20X3, the annual depreciation charge was $10,000 (i.e., $100,000/10 years).
- However, after the revaluation, the annual depreciation charge increased to $13,333 (i.e., $80,000/6 years).
- The $3,333 (i.e., $13,333 minus $10,000) excess is the excess depreciation resulting from depreciating the asset after revaluation at $80,000 as against the historical cost of $100,000.
Where JB Ltd chooses to make the transfer, the excess depreciation at the end of each year is posted as follows:
Debit: Revaluation surplus $3,333
Credit: Retained earnings $3,333
Note: It is just a coincidence that the excess depreciation was the same as the revaluation loss.
Disposal of revalued asset
The procedure for accounting for the disposal of non-current assets (as explained earlier) remains the same for revalued non-current assets. The key difference is that, on disposal, the amount removed from the non-current asset ledger account is the revalued carrying amount (the latest valuation less any depreciation charged since that revaluation), not the historical cost. The gain or loss on disposal is calculated as proceeds minus this revalued carrying amount, and - like any other disposal gain or loss - it’s recognised in profit or loss.
Any balance remaining in the revaluation surplus for the asset is never recycled through profit or loss. Instead, on disposal it’s transferred directly to retained earnings.
Example: Disposal of a revalued asset
Continuing the JB Ltd illustration, the factory plant has a carrying amount of $50,000 at 31 December 20X5, with a revaluation surplus balance of $10,000. JB Ltd sells the plant for $55,000 on 1 January 20X6.
- Gain on disposal (to profit or loss): $55,000 − $50,000 = $5,000
- The remaining revaluation surplus of $10,000 is transferred directly to retained earnings: Debit: Revaluation surplus $10,000; Credit: Retained earnings $10,000
Answer: Gain on disposal of $5,000, recognised in profit or loss; $10,000 transferred from the revaluation surplus to retained earnings (not through profit or loss).