Fixed assets revaluation is the process of adjusting to increasing or decreasing the carrying value of the assets. IAS 16 of the International financial reporting standard (IFRS) refers that initially fixed assets to be recorded at a cost but IFRS allows two models for subsequent accounting for fixed assets, cost model, or revaluation model.
Cost model states that the carrying value of fixed assets equals their historical cost less accumulated depreciation and accumulated impairment losses.
ABC Ltd purchased a building at the amount of $100,000 on January 1, 2019. The journal entry are prepared are as follows:
The building has a useful life of 20 years and the company uses straight-line depreciation. The yearly depreciation charges are $100,000/20 or $5000. Accumulated depreciation as at December 31 , 2019 is $5000 *3 or $15,000 and the carrying amount is $100,000 minis $15,000 which equals $85,000.Therefore building remains at its historical cost and is periodically depreciated with no other increasing adjustment to value.
Revaluation model under IFRS
In the revaluation model are adopted then the carrying amount does not differ materially from that which would be determined using the fair value at the reporting date. The difference between the cost model and the revaluation model is that the revaluation model allows both decreasing and increasing adjustment in the value of an asset while the cost model allows only decreasing adjustment due to impairment.
From the above example of ABC Ltd as a cost model. Assume on December 31, 2019, the company decided to switch to the revaluation model and carry out a revaluation model which estimates the fair value of the building to be $150,000 as of December 31, 2019. The carrying amount is $130,000 and the revalued amount is $150,000 so increasing adjustment of $20,000 is required to build an account. The journal entry for the following year are:
Revaluation Surplus 20,000
Increase in revaluation are not recognized income statement rather it is directly credited to a shareholders’ equity account called revaluation surplus. Revaluation surplus holds the increasing revaluation of a company asset until those assets are disposed of.
Depreciation after Revaluation
Depreciation in periods after a revaluation is related to the revalued amount. In case ABC Ltd depreciation for 2019 shall be the new carrying amount divided by the remaining useful life or $150,000/17 which equals $8824.
On December 31, 2019, XYZ ltd revalues the building again to find out the fair value should $160,000. Carrying amount as of December 31, 2019, is $190,000 minis 2 years depreciation of $22,352 which amount to $167,648.
The carrying amount exceeds the fair value by $7,648 so the account balance should reduce. The company has already had a balance of $20,000 in the revaluation surplus account related to the same building, so no impairment loss shall go to income statements. The journal entry is passed as follows:
Revaluation Surplus 7,648
The fair value been $140,000 the excess of carrying amount over fair value would have been $27,648. In this case the following journal entry cab be:
Revaluation Surplus 20,000
Impairment losses 7,648
Accumulated impairment losses 7,648