INTERMEDIATE ACCOUNTING 2

IAS 16 PROPERTY, PLANT AND EQUIPMENT

SUBSEQUENT MEASUREMENT – Revaluation

REVALUATION MODEL

After initial recognition as an asset, PPE shall be carried at a revalued amount provided its fair value can be
measured reliably. This revalued amount is its:

Fair value at the date of revaluation less any subsequent accumulated depreciation and less any subsequent
accumulated impairment losses.

✓ Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of
an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

✓ If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

✓ Revalued assets are depreciated in the same way as under the cost model.

✓ If a revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a
revaluation decrease of the same asset previously recognized as an expense, in which case it should be
recognized in profit or loss. [IAS 16.39]

Revaluation Surplus (Gain) – for the current period OCI

Revaluation Surplus – cumulative SHE

Asset 7M
RS 7M

✓ A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

RS 7M
Impairment loss 3M
Asset, net 10M

✓ In relation to revaluation gains on PPE, an increase or gain shall be recognized in profit or loss to the
extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss

Asset
Gain on reversal of impairment
RS

✓ When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss. [IAS 16.41]

✓ The frequency of revaluation may be:

o Annual revaluation for PPE items that experience significant and volatile changes in fair value
o Every three or five years for PPE with only insignificant changes in fair value

✓ When an item of PPE is revalued, any accumulated depreciation at the date of revaluation is treated in
one of the following ways:

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 o 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. This method is often
used when an asset is revalued by means of applying an index to its depreciated replacement cost.
o Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This method is often used for buildings.

PROPORTIONAL RESTATEMENT APPROACH

BOOK VALUE:
Historical cost XX
Less: Accumulated depreciation XX XX
SOUND VALUE/DEPRECIATED REPLACEMENT COST:
Replacement cost XX
Less: Assumed accumulated depreciation XX XX
REVALUATION SURPLUS XX

Asset (HC – RC) 10M

A/D (A/D-HC – A/D-RC) 4M
RS (6M x 60%) 3.6M
Deferred tax liability (6M x 40%) 2.4M

REVALUATION SURPLUS

• Revaluation Surplus is an OCI account to be presented in the OCI section of Statement of Comprehensive
Income and under SHE section of the Statement of Financial Position
• The Standard requires Revaluation Surplus to be presented net of tax effects
• For depreciable assets, the Revaluation Surplus, net of tax, is periodically transferred to RE systematically
following the same pattern that the asset is depreciated.
• For non-depreciable assets, Revaluation Surplus is transferred to RE only when the asset is sold.

Illustration: Cocomelon Inc. uses the revaluation model for its land and buildings. The company acquired Building
A on January 1, 2020 at a cost of P50,000,000. The building has an estimated useful life of 6 years and residual
value of P5,000,000. The building was revalued on January 1, 2023. The revaluation revealed replacement cost of
P75,000,000, residual value of P10,000,000 and revised useful life of 8 years from the date of acquisition.

Required: Compute for the revaluation surplus on December 31, 2023 assuming a tax rate of 40%.

✓ Replacement cost is the amount of money required to “REPLACE” an existing asset with an equally valued or similar asset at the
current market price. In other words, it is the cost of purchasing a substitute asset for the current asset being used by a company.

Revaluation, 1/1/23:

Book Value:
Historical cost 50,000,000
A/D (50M – 5M) x 3/6 22,500,000 27,500,000
Sound Value:
Replacement cost 75,000,000
Assumed A/D (75M – 10M) x 3/6 32,500,000 42,500,000
Revaluation Surplus 15,000,000

Revaluation Surplus, 1/1/23 (15M x 60%) 9,000,000

Annual transfer to RE [9M / (8-3)] (1,800,000)
Revaluation Surplus, 12/31/23 7,200,000

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Depreciation – 2023:
Revalued amount, 1/1/23 42,500,000
Revised SV (10,000,000)
Revised depreciable cost 32,500,000
/ Revised remaining life (8-3) 5 years
Annual depreciation starting 2023 6,500,000

REVERSAL OF REVALUATION

• If a previous revaluation increase is reversed due to changes in fair value, the decrease is first closed to
any existing revaluation surplus in the books. Any excess is debited to IMPAIRMENT LOSS and should be
recognized to P/L.

Revaluation Surplus XX – existing balance

Impairment Loss XX – decrease in excess of RS balance
Asset XX – total decrease

• If a previous impairment loss is reversed, the increase is first credited to GAIN ON REVERSAL OF
IMPAIRMENT (GORI) as part of P/L to the extent of the prior impairment loss. Any excess is credited to
revaluation surplus (OCI).

Asset XX - total increase

Gain on Reversal of Impairment XX – impairment loss previously recognized
Revaluation Surplus XX – increase in excess of impairment loss
previously recognized

Illustration: On January 1, 2020, LooLoo Company purchased an asset for P25,000,000 with an estimated useful
life of 10 years with no salvage value. The company uses straight-line method in depreciating the asset.

On January 1, 2022, the company has reliably determined that the recoverable amount of the asset is P16,000,000.

On January 1, 2024, the asset has a recoverable amount of P18,600,000. If the company uses the revaluation
model to measure the non-current assets, what are the amount to be reported in the profit or loss and
shareholders’ equity as revaluation reserve, respectively, on December 31, 2024? Ignore income taxes.

Revaluation, 1/1/22:

BV, 1/1/22:
Historical cost 25,000,000
A/D (25M x 2/10) (5,000,000) 20,000,000
Recoverable amount 16,000,000
Impairment loss, 2022 4,000,000

Revised BV, 1/1/22 16,000,000

Remaining useful life (10-2) 8 years
Annual depreciation 2,000,000

BV, 1/1/24 [16M – (2M x 2) 12,000,000

6.6M (Total increase)
Recoverable amount, 1/1/24 18,600,000 Gain on
3.6M (RS, 1/1/24) reversal
Would Have Been BV (WHBV), 1/1/24 of impair.
(25M x 6/10) 15,000,000 (3M)

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 RS, 12/31/24:
RS, 1/1/24 3.6M
Annual transfer to RE (2024) (3.6M / 6) (0.6M)
RS, 12/31/24 3.0M

DISCLOSURE REQUIREMENTS:

If property, plant, and equipment is stated at revalued amounts, certain additional disclosures are required: [IAS
16.77]

1. the effective date of the revaluation

2. whether an independent valuer was involved
3. for each revalued class of property, the carrying amount that would have been recognized had the
assets been carried under the cost model
4. the revaluation surplus, including changes during the period and any restrictions on the distribution of
the balance to shareholders.