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The following question came up in my notes:
A factory was carried in its books at $1,200 on 31.3.08 On 1.4.08 it was revalued to market value of $1,350, the remaining life at that date was 30 years. What is the revaluation reserve transfer at the sate of revaluation, and what is the depreciation charge for the year? Year ends 31 March.
Answer:
valuation at 1.4.08 1350
remaining life 30 years, so depreciation charge (45)
NBV at 31.3.09 1305revaluation reserve at 31.3.09 150
What i don’t understand is this:
1) I thought IAS 40 said that there is no depreciation for land and buildings?
2) What difference does it make that the revaluation was at the start of the year? What would have happened if it was at the end of the year?Ah, I suddenly realised, please tell me if i’ve got this right. It’s only called an investment property if it’s not being used by the company for anything. Since this property was used as a factory, it’s not an investment and is therefore depreciated. Is that right?
but i’m still stuck on my second question.
The only time you mentioned investment properties was in your second post. Before that, there is no indication that this factory is or is not an investment property! If the factory is being used / occupied by the owner, then it cannot be an investment property.
As to your second point, the date of the revaluation dictates whether there is any (and, if so, how much) depreciation to be charged on the asset. If the revaluation had, for example, taken place three months into the year (on 1 July in your example), then depreciation would have been charged for 3 months based on the carrying value of 1,200. Then it’s revalued and estimated remaining useful life is re-assessed. For the next 9 months, depreciation will be charged on the revalued amount over the revised estimated useful life.
Additionally, it is seen as good practice (it’s not a requirement) to transfer out of Revaluation Reserve each accounting period an amount which represents the “extra” depreciation which has been charged on the amount by which the asset has been revalued. that transfer goes through the Statement of Changes in Equity Dr Revaluation Reserve Cr Retained Earnings
OK?
I see. So if the revaluation was done at the start of the year, there wouldn’t be any depreciation yet so the revaluation surplus would be small, but the year’s depreciation would be big because it would be from the new value.
If it was the year end, depreciation would come off first so the revaluation surplus would be bigger, but the year’s depreciation would be smaller because it’s the old value that’s being depreciated.
Wow…..thats a mouthful of a response
Let me see if I can clarify with number
Option A: Revaluation at start of year
– revaluation reserve credited with $150
– depreciation charge for year is $45
NB: There is depreciation of building under IAS 40, where ever you read that this was not the case needs to be dumped.Option B: If revaluation was done at end of year
– depreciation charge for year = straight line depreciation on the original carrying cost of building (lets say this was $12 for example)
– revaluation reserve would be $57Option C: if revaluation was done after 3 months had passed in the year
– depreciation charge for year = $3 ($12*3/12) + $33.75 (1350/30*9/12)
– revaluation reserve = $48Carrying value at the year end under revaluation/fair value model is the revalued amount, less accumulated depreciation from the date of revaluation.)
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