PROPERTY, PLANT AND EQUIPMENT Characteristics Tangible Assets Used in business (production/supply of goods and services, for rental and for admin purposes) Expected to be used for more than one year Bio Assets and Mineral Rights and Reserves are not PPE. → apply PAS 16 for PPE used to develop or maintain bio assets and mineral rights & reserves Recognition Probable future economic benefits Cost of the asset can be measured reliably Cost of PPE → cost incurred to acquire/construct PPE → cost incurred subsequently to add to, replace part of, or service it → Spare parts & Servicing Equipment Normally carried as inventory and expensed as consumed If major spare parts and stand-by equipment, qualify as PPE if used for more than one year → depreciated over a time period not exceeding the useful life of related asset → Safety and Environmental Equipment Not directly increasing the future economic benefit of any existing PPE Necessary to obtain the future economic benefit from the asset in EXCESS of what it could obtain if such equipment had not been acquired Recognize as PPE Measurement @ Recognition → initially measured at COST Purchase price including import duties and nonrefundable purchase taxes net of trade discount & rebates whether taken or not Cost directly attributable to bringing the assets to the location and condition for it to be capable of operating → cost of employee benefits from construction/acquisition of PPE → cost of site preparation → initial delivery & handling costs → installation and assembly cost → professional fees → cost of testing whether asset is functioning properly net of proceeds from selling any items produced during testing (samples) Initial estimate of costs of dismantling & removing the item & restoring the site on which it is located → the obligation for which the entity incurs when the item is acquired or as a consequence of having used the item Modes of Acquisition Mode Acquisition on Cash Basis Lump sum price Acquisition on Account Acquisition on Installment Basis
Cost of equipment Cash price equivalent @ recognition date plus directly attributable costs Allocate based on relative fair value of assets acquired Invoice price minus discount (whether taken or not) Cash price equivalent
If there is cash price given
No available cash price Issuance of Share Capital
Issuance of Bonds Payable
@ cash price (if installment price > cash price, recognize as interest to be amortized over credit period Present value of all payments using implied interest rate a. Fair value of asset received b. Fair value of the share capital c. Par value/stated value of the share capital a. Fair value of bonds payable b. Fair value of asset received c. Face value of bonds payable
Exchange → acquisition in exchange of nonmonetary asset or combination of monetary and nonmonetary *Commercial substance – if expected cash flows after the exchange differ significantly from the expected cash flow before the exchange With commercial substance: (gain/loss fully recognized) No cash involved
Cash is involved
No commercial substance (no gain/loss)
a. Fair value of asset given b. Fair value of asset received c. Carrying amount of asset given a. Fair value of asset given plus cash payment (payor) b. Fair value of asset given minus cash received (payee)
Carrying amount of asset given up +/- cash received/paid
*Trade in – nondealer acquiring asset from a dealer; usually involves significant amount of cash; exchanging property as part of payment and the balance payable in cash a. Fair value approach b. Trade in value approach (if FV of asset given can’t be determined) Donation From shareholders
From nonshareholders → if subsidy → if not subsidy (with restriction)
Construction
Fair value of asset given plus cash payment Trade in value of asset given plus cash payment
Fair value of items received (credit to donated capital) *Expenses related to the donation (registration fees and legal fees) are added to donated capital *Expenses directly attributable to the asset is added to asset account
Fair value of asset/item received (credit to income account) Fair value of asset/item received (credit to liability account until restrictions are met where it is transferred to income) Includes:
1. Direct cost of materials 2. Direct cost of labor 3. Indirect cost traceable to production → if not specifically identifiable, allocate overhead based on direct labor cost/hours *Income/loss from operations during construction NOT necessary to bring the item to location/condition for its intended use is not capitalized but is recognized in profit or loss. Derecognition Removal of cost of PPE with related accumulate depreciation Upon disposal or when it is fully depreciated Gain/Loss on disposal shall be included in profit or loss Gain/Loss on disposal = Net disposal proceeds – Carrying amount of asset Fully depreciated property When carrying amount is equal to zero or equal to residual value Do not remove accounts of fully depreciated PPE still used in service Property classified as held for sale Asset is available for immediate sale within one year from date of classification as held for sale Exclude from PPE but present as current asset Measured at lower of carrying amount or fair value less cost to sell Not depreciated Idle or abandoned property Do not classify as held for sale Carrying amount would be recovered through continuing use Does not preclude depreciating the asset as future benefits are consumed not only through usage but also through wear and tear and obsolescence To be included in PPE until the end of its economic life Optional Disclosures CA of temporarily idle PPE Gross CA of any fully depreciated PPE still in use CA of PPE retired from active use and classified as held for sale When cost model is used, the FV of PPE when this is materially different from the CA Government Grant (PAS 20) → assistance by gov’t in form of transfer of resources to an entity in return of past or future compliance with certain conditions relating to the operating activities of the entity. → sometimes called as subsidy, subvention, premium Requisites given by the government in return for past or future compliance with conditions Recognition and Measurement Measured at FAIR VALUE including nonmonetary grants Recognized if there is reasonable assurance that:
→ the entity will comply with the conditions → the grant will be received Receipt of the grant does not of itself provide conclusive evidence that the conditions have been or will be fulfilled Shall NOT be recognized on a CASH BASIS
Classifications a. Grant related to asset → condition is that the entity shall purchase, construct, or acquire long-term asset b. Grant related to income → grant other than related to asset Accounting for Government Grants Reason for grant Recognition of specific expenses (safety and environmental expenses) Related to depreciable asset (acquisition or construction of buildings) Related to nondepreciable asset (land) As compensation for expenses or losses already ncurred or for the purpose of giving immediate financial support with no further related costs
Pattern for Recognition of Income Over the period of the related expense (prorate) Over the periods and in proportion to the depreciation of related asset (divide by the useful life of related asset if using straight-line method) Over the periods which bear the cost of meeting the conditions Income on the period which it became receivable
Presentation of Government Grant If related to asset: a. As deferred income b. Deducting the grant in arriving at the carrying amount of the asset (lower depreciation expense) If related to income: a. As other income in I/S b. Deducted from the related expense Repayment of Government Grant → due to noncompliance with conditions → change in accounting estimate (prospectively) If related to income: a. Repayment shall be applied first against any unamortized deferred income b. Any excess shall be recognized immediately as an expense Deferred income-government grant Loss on government grant Cash
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If related to asset: a. Repayment shall be recorded by increasing the carrying amount of the asset b. Cumulative depreciation that would have been recognized to date in the absence of the grant shall be recognized immediately as an expense Deferred income approach: Deferred income-government grant Loss on government grant
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Cash Depreciation Accumulated Depreciation (Cumulative depreciation not recognized)
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Deduction from asset approach: Building Cash
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Depreciation Accumulated Depreciation
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Grant of Interest-free Loan → Difference between face amount of the loan and the present value is recognized as discount on note payable and grant income to be amortized over the term of the loan using effective interest method → Interest expense (discount amortized) and grant income may be offset against the other (zero interest expense each year) Government Assistance → action by the government to provide economic benefit specific to an entity or range of entities under certain criteria → the essence is that NO VALUE can reasonably be placed upon government assistance such as a. Free technical or marketing advices b. Provision of guarantee c. Government procurement policy that is responsible for a portion of the entity’s sales Disclosures a. Accounting policy adopted including method of presentation in FS b. Nature and extent of grant recognized and indication of other forms of gov’t assistance from which the entity has directly benefited c. Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized Name of the government agency that gave the grant is NOT REQUIRED to be disclosed along with the date of sanction and date when cash is received.
Borrowing Cost (PAS 23) → interests and other costs that an entity incurs in connection with borrowing funds Accounting for borrowing costs 1. If borrowing is directly attributable to the acquisition, construction, or production of a QUALIFYING ASSET, borrowing cost is capitalized as part of the cost of the asset (MANDATORY) 2. All other borrowing cost shall be expensed as incurred if NOT directly attributable to a qualifying asset 3. Excluded from capitalization are: a. Assets measured at FAIR VALUE, such as bio asset b. Inventories produced in large quantities on a repetitive basis even if they take substantial period of time to get ready for sale c. Assets that are ready for intended use or sale when acquired Qualifying Asset → an asset that necessarily takes a substantial period of time to get ready for its intended use such as a. Manufacturing plant
b. Power generation facility c. Intangible Assets d. Investment Property Types of Borrowing a. Specific borrowing → funds borrowed specifically for the purpose of acquiring a qualifying asset b. General borrowing → funds borrowed are generally AND used for acquiring a qualifying asset Accounting Treatment for Borrowing Costs For specific borrowing: a. Capitalize the actual borrowing cost incurred during the period b. Deduct any investment income from temporary investment of the funds For general borrowing: → Do NOT DEDUCT any investment income from temporary investment of funds a. Compute the average expenditures/carrying amount of the asset (if given amount is incurred evenly during the year, just divide it by 2) Date Expenditure Months Outstanding Amount Jan 1 400,000 12 4,800,000 Mar 31 1,000,000 9 9,000,000 June 30 1,200,000 6 7,200,000 Sep 30 1,000,000 3 3,000,000 Dec 31 400,000 0 0 . Total 24,000,000/12 Average carrying amount 2,000,000 b. Compute capitalization rate or average interest rate Total annual borrowing cost/total general borrowings outstanding c. Multiply average carrying amount of the asset by the capitalization rate. d. Capitalizable borrowing cost shall NOT EXCEED the actual borrowing cost. (Use whichever is lower) For both specific and general borrowing: a. Compute the actual borrowing cost for the specific borrowing then capitalize b. Compute the average expenditures/carrying amount of the asset c. Deduct from the average expenditure the amount of specific borrowing incurred d. Compute capitalization rate e. Multiply net average expenditures by the capitalization rate f. Capitalizable general borrowing cost shall NOT EXCEED the actual general borrowing cost. (Use whichever is lower) Construction for more than one year → use the same procedure for the first year → the beginning balance of expenditures for the second year shall include the capitalized borrowing cost from first year → use the same procedure of computation for the second year Specific Borrowing for asset used for general purposes → treated as general borrowing in determining capitalizable borrowing cost Commencement of capitalization Capitalize borrowing cost when the following three conditions are present: a. When the entity incurs expenditures for the asset b. When the entity incurs borrowing costs c. When the entity undertakes activities necessary to prepare the asset for the intended use or sale
→ Activities necessary to prepare asset encompass more than physical construction of the asset (includes technical and administrative work prior to commencement of physical construction such as drawing up plans and obtaining permits) → Merely holding the asset for use or development without any associated development activity does NOT QUALIFY for capitalization Suspension of Capitalization → if due to temporary delay which is a necessary part of the process of getting an asset ready for its intended use, continue capitalization of borrowing costs (eg. Period of high water levels that delay the construction of a bridge if such high water level is common during construction period in the geographical region involved.) Cessation of Capitalization → Ceases when substantially all the activities necessary to prepare the asset are complete Disclosures a. Amount of borrowing costs capitalized during the year b. Capitalization rate used Segregation of qualifying assets from other assets in FS is NOT REQUIRED to be disclosed
Land Account → recognize as PPE if: a. Used as a plant site b. Held definitely as a future plant site → other uses of land not recognized under PPE: a. For currently undetermined future use (investment property) b. Held for long term capital appreciation (investment property) c. Held for current sale by a real estate developer (inventory) Costs chargeable to land a. Purchase price b. Legal fees and other expenditures for establishing clean title c. Broker’s commission d. Escrow fees e. Fees for registration and transfer of title f. Cost of relocation or reconstruction of property belonging to others in order to acquire possession g. Mortgages, encumbrances, and interests on such assumed by the buyer h. Unpaid taxes up to date of acquisition assumed by the buyer (in general, outright expense) i. Cost of survey j. Payments to tenants to vacate the LAND k. Cost of permanent improvements such as cost of grading, leveling and landfill l. Cost of option to buy the acquired land, If land is not acquired, cost of option is expensed m. Special assessments made by gov’t (increase the value of land) Land Improvements → if additions to cost not subject to depreciation, charge to land account → if land improvements are depreciable, charge to land improvement such as a. Fences b. Water system c. Drainage system d. Sidewalks e. Pavements f. Cost of trees, shrubs and other landscaping
→ depreciate over their useful life Building Account If purchased a. Purchase price b. Legal fees and other expenses incurred in connection to the purchase c. Unpaid taxes up to date of acquisition d. Interest, mortgage, liens and other encumbrances on the building assumed by buyer e. Payments to tenants to induce them to vacate building f. Any renovating or remodeling costs incurred to put a building purchased in a condition suitable for its intended use If constructed a. Materials used, labor employed and overhead incurred during construction b. Building permit or license c. Architect fee d. Superintendent fee e. Cost of clearing and demolishing unwanted old structures, less proceeds from salvage f. Payments to tenants to induce them to vacate building g. Cost of excavation h. Cost of temporary buildings used as construction offices and tools or materials shed i. Expenditures incurred during the construction period such as interest on construction loans and insurance j. Expenditures for service equipment and fixtures made permanent part of the structure k. Cost of temporary safety fence around construction and cost of subsequent removal thereof (permanent fence is a land improvement) l. Safety inspection fee Sidewalks, pavements, parking lot, driveways → if part of the blueprint for the construction of the building, charge to Building → if expenditures are occasionally made or incurred not in connection with the construction of a new building, charge to Land Improvements Claims for Damages → if insurance is taken during construction of a building, charge to Building → claims for damages when there is no insurance for injuries sustained during construction, expense outright (it is due to management’s negligence) Building Fixtures → immovable shelves, cabinets, and partitions (attached to the building), charge to Building → movable shelves, cabinets, and partitions, charge to Furniture and Fixtures (depreciated over its useful life) Ventilating system, lighting system, elevator → installed during construction, charge to Building → otherwise, charge to Building Improvements (depreciated over their useful life or remaining life of building, whichever is shorter) New Provision (PIC Interpretation approved June 2013) 1. Acquisition of Land & Old Building @ a single cost a. Single cost is allocated based on fair value if the old bldg. is by itself useable b. Single cost is allocated to the LAND ONLY if the old building is unuseable and therefore to be demolished immediately 2. Old building is demolished immediately to make room for the construction of the new building
a. The allocated carrying amount of the old building is charged to loss if the new building is accounted for as PPE or investment property b. The allocated carrying amount of the old building is capitalized as cost of the new building if the latter is accounted for as inventory c. The cost of demolition net of salvage value (including payment to tenants to vacate premises) is capitalized as cost of building 3. If an old building owned by the company is to be demolished to make room for the construction of the new building a. The carrying amount of the old building is recognized as loss whether the new building is accounted for as PPE, investment property, or inventory b. The cost of demolition net of salvage value is capitalized as cost of the new building
Machinery Costs chargeable to machinery are as follows: a. Purchase price b. Freight, handling, storage, and other cost related to the acquisition c. Insurance while in transit d. Installation cost, including site preparation and assembling e. Cost of testing and trial run, and other costs necessary in preparing the machinery for its intended use f. Initial estimate of cost of dismantling and removing the machinery and restoring the site on which it is located, and for which the entity has a present obligation (required to be capitalized by law or contract) g. Fee paid to consultants for advice on the acquisition of the machinery h. Cost of safety rail and platform surrounding the machine i. Cost of water device to keep machine cool → if machinery is moved to new location, the undepreciated cost of old installation cost is expensed and the new installation cost is charged to new asset → if machinery is remover and retired to make room for the installation of a new one, the removal cost NOT previously recognized as a provision is charged to expense not capitalizable → VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax. Any irrevocable purchase tax is capitalized as cost of the asset. Tools → machine tools are those used in connection with the operation of machines → hand tools are those not used in operating the machines → segregated from the machinery account Patterns and dies → used in designing or forging out a particular product → if used for the regular products, recorded as asset (depreciated over their useful life) → if used for specially ordered products, expensed outright (form part of the cost of the special product) Equipment → includes delivery equipment, store equipment, office equipment, furniture and fixtures, and similar assets → Delivery equipments Cars Trucks Other vehicles used in business operations Motor vehicle registration fees → expensed outright → Store and Office equipment Computers Typewriters
Adding machines Cash registers Calculators For selling function → store equipment → Furnitures & Fixtures Showcases Counters Shelves Display Fixtures Cabinets Partitions Safes Desks Tables Returnable containers → bottles, boxes, tanks, drums, barrels, and similar items returned to the seller by the buyer when contents are consumed → if containers are in big units or of great bulks (tanks, drums, barrels) → PPE → if containers are in small units and individually involve small amounts (bottles and boxes) → Other Noncurrent Assets → if not returnable → expense outright Capital Expenditures Expenditure that benefits current and future periods Capitalizable cost
Revenue Expenditures Expenditure that benefits current period only Expense outright
Recognition of subsequent cost → if will increase future service potential of the asset → capitalized → if it merely maintains the existing level of performance → expensed Future Economic Benefit Extends the life of the property Increases the capacity of the property and quality of output Improves efficiency and safety of the property Subsequent Costs Additions
An entirely new unit
An expansion, enlargement, or extension of the old asset Improvement or Betterments
Replacements
→ modifications or alterations which increase the physical size or capacity of the asset → capitalized; depreciated over its useful life → capitalized; depreciated over its useful life or remaining life of the asset of which it is a part, whichever is shorter → modification or alterations which increase the service life or the capacity of the asset → may represent replacement of an asset or a part thereof with one of a better or superior quality → capitalized → if it do not involve replacement of parts, simply added to cost of existing asset → substitution but the new asset is not better than the old asset when acquired → replacement is a substitution of an equal or lesser
quality Replacement of old asset by new asset Replacement of major parts Replacement of minor parts Repairs
Extraordinary Repairs
Ordinary Repairs (Maintenance)
Rearrangement Cost
→ capitalizable as a new asset → extraordinary repairs, capitalized → ordinary repairs, expensed outright →expenditures used to restore assets to good operating condition upon their breakdown or replacement of broken parts → material replacement of parts, involving large sums and normally extend the useful life of asset; capitalized → minor replacement of parts, involving small sums and are frequently encountered; expensed → relocation or reinstallation of an asset which proves to be less efficient in its original location → normally increases the future potential of the asset; capitalized → if it merely maintains the existing level of performance; expensed
Accounting for major replacement Separate identification of the part is practicable → debit to asset account → cost of the part eliminated and related accumulated depreciation are removed and the carrying amount of the old part is treated as a loss Eliminate original cost of the part Loss on retirement of asset Accumulated Depreciation PPE
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Record the Replacement PPE Cash
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Record Subsequent Annual Depreciation Depreciation Accumulated Depreciation
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Assets original cost Less: Cost of part replaced Add: Cost of replacement Less: Accumulated depreciation (related to old part excluded) Carrying amount Divided by remaining life Annual depreciation (new)
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Separate identification is not practicable → use the cost of the replacement as an indication of the “likely original cost” of the replaced part at the time it was acquired (current replacement cost shall be discounted to estimate original cost of replaced part) → same accounting procedure with above
Depreciation Cost allocation in recognition of the exhaustion of useful life of an item → depreciation → PPE → depletion → wasting asset → amortization → intangible assets Depreciation Period → begins → when it is available for use (asset is in the location and condition necessary for it to be capable of operating) → ceases → when asset is derecognized → temporary idle activity DOES NOT PRECLUDE depreciating the asset → if asset is classified as held for sale, discontinue depreciation Kinds of Depreciation a. Physical depreciation → related to depreciable asset’s wear and tear and deterioration over a period → results to the ultimate retirement of the property or termination of the service of the asset 1. Wear and tear due to frequent use 2. Passage of time due to nonuse 3. Action of the elements such as wind, sunshine, rain or dust 4. Accidents such as fire, flood, earthquake and other natural disaster 5. Disease → physical cause is due to animals and wooden buildings b. Functional or economic depreciation → arises from obsolescence or inadequacy of the asset to perform efficiently 1. Obsolescence arise due to the following: a. When there is no future demand for the product which the depreciable asset produces b. When a new depreciable asset becomes available and can perform the same function for substantially lesser cost 2. Inadequacy arises when asset is no longer useful to the firm because of increase in the volume of operations Factors of depreciation a. Depreciable amount b. Residual value → may be equal to carrying amount where dep’n will be zero until it becomes lower than CA but never it becomes MORE THAN the carrying amount of the asset c. Useful life Methods of Depreciation 1. Equal or Uniform charge methods a. Straight Line
b. Composite Method (Assets are dissimilar in nature) c. Group Method (Assets are similar in nature)
→
Procedures: a. Depreciation is reported in single accumulated depreciation account b. Composite or group rate is multiplied by the total cost of the asset in the group to get periodic depreciation c. When an asset is retired, no gain or loss is reported. The asset account is credited for the cost of the asset retired and the accumulated depreciation account is debited for the cost minus
salvage proceeds d. When the retired asset is replaced by a similar asset, the replacement is recorded by debiting the asset account and crediting cash or other appropriate account 2. Variable charge or use-factor methods a. Working hours or service hours b. Output or production method 3. Decreasing charge or accelerated or diminishing balance method (
a. Sum of years’ digits
)
Annual depreciation= SYD fraction x Depreciable Amount
a.1 Sum of half years’ digits (eg. 2 ½ years)
→ multiply life by 2 to get “life” (eg. 2 ½ times 2 = 5 years) → use two fractions for 1 year (one fraction = 6 months) (eg. 5/15 and 4/15)
a.2 Fractional depreciation (eg. acctg period is from March 1 to February 28)
→ compute per years’ depreciation then prorate based on calendar period (annual depreciation x 9/12)
b. Declining balance method
→ √ *n = useful life Depreciation = Rate x Declining Carrying Amount
c. Double declining balance
→ *n = useful life Depreciation = Rate x Declining Carrying Amount
d. 150% declining balance
→ *n = useful life Depreciation = Rate x Declining Carrying Amount
4. Other methods a. Inventory or appraisal (assets with small value such as tools)
→ Depreciation = Balance of asset account, beginning less Value at the end of the year
b. Retirement method (depreciation only when retired)
→ Depreciation = Original cost of asset – Salvage Value
c. Replacement method (depreciation only when retired and replaced)
→ Depreciation = Replacement Value – Salvage Value
Change in Useful Life or Residual Value or DepreciationMethod(Prospectively) → depreciation charge for the current and future periods shall be adjusted → past depreciation is not corrected → shall be reviewed at least at each financial year-end → change in accounting estimate
Wasting Asset (PFRS 6)
Revaluation and Impairment Accounting method for PPE 1. Cost Method 2. Revaluation Method Cost Method
Revaluation Method
If: Carrying Amount < Recoverable amount = No Impairment Loss Carrying Amount > Recoverable amount = Impairment Loss
If: Carrying Amount > Revalued Amount = Revaluation Loss or Impairment Loss Carrying Amount < Revalued Amount = Revaluation Surplus
Recoverable amount = Fair value less cost to sell or Value in Use whichever is HIGHER Fair Value less Cost to sell → Fair Value → price that would be received to sell an asset → Cost to sell → incremental cost directly attributable to the disposal of an asset excluding finance cost and income tax expense Fair Value Hierarchy 1. Quoted price of identical asset in an active market 2. Quoted price of similar asset in an active market 3. Quoted price for identical/similar asset in inactive market 4. Price developed by the entity using best information from entity’s own data Value in Use → present value or discounted value of future NET cash flows (inflow minus outflow) expected to be derived from the asset using pretax cash flow and pretax discount rate Entries: Impairment Loss Goodwill (if any) Acc. Depreciation Nondepreciable Asset
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Depreciation will be based on RECOVERABLE AMOUNT
Revalued amount = Fair Value or Depreciated replacement cost Fair Value → Fair Value → price that would be received to sell an asset Depreciated Replacement Cost → replacement cost of asset minus corresponding depreciation (sound value of asset) Cost
Replacement Appreciation Cost Original Cost Replacement +/Cost (Salvage Value)* (Salvage Value) Depreciable Depreciable Amount Amount (Accumulated (Accumulated +/Depreciation)** Depreciation) Carrying Value Sound Value +/*Salvage Value → use new if there is change in SV; use old if there is no change in SV **Accumulated Depreciation → based on original amount Entries: Revaluation Surplus PPE Acc. Depreciation Revaluation Surplus
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Revaluation Decrease Acc. Depreciation Revaluation Loss Machinery
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Reversal of Impairment Loss
Depreciation will be based on SOUND VALUE Reversal of Revaluation Increase
If recoverable amount of previously impaired asset turns
If asset’s carrying amount is decreased as a result of
out to be higher than the asset’s current carrying amount, the carrying amount is increased to its new recoverable amount Rules: The increase in carrying amount shall not exceed the carrying amount that would have been determined had no impairment loss been recognized in prior years Reversal of impairment loss shall be recognized immediately as an income in P&L Any impairment loss recognized for goodwill shall not be reversed in subsequent periods. Entries: Acc. Depreciation xxx Gain on reversal of impairment
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revaluation, decrease is an expense Rules: Revaluation decrease should be applied first against any revaluation surplus then the excess to revaluation/impairment loss Entries: Acc. Depreciation Revaluation Surplus (if any) Revaluation Loss Machinery
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Reversal of Revaluation Decrease If asset’s carrying amount is increased as a result of revaluation, increase is a revaluation surplus Rule: Revaluation increase should be recognized first as revaluation gain(P&L) to the extent of previously recognized revaluation loss then the excess to revaluation surplus PPE
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Impairment Loss
Acc. Depreciation Revaluation Gain Revaluation Surplus Revaluation Surplus
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Impairment loss is part of income statement as an expense
Revaluation surplus is part of other comprehensive income Realization in whole → when asset is derecognized (retirement or disposal) Realization in part → in proportion with depreciation (revaluation surplus/remaining life of asset) Realization of revaluation surplus transfers it to retained earnings
