Non current assets

hie Mike,

May you please explain for me the logic behind this adjustment .

The policy of the group is now to state tangible non-current assets at depreciated historical cost. The group changed from the revaluation model to the cost model under IAS 16, Property, Plant and Equipment at the current year start and restated all of its tangible non-current assets to historical cost in that year except for the tangible non-current assets of Trigger. These had been revalued by the directors of Trigger on the first day of the current year. The values were incorporated in the financial records creating a revaluation reserve of $70m. The tangible non-current assets of Trigger were originally purchased on 1 December two years before the current year end, at a cost of $300 million. The assets are depreciated over six years on the straight-line basis. The group does not make an annual transfer from revaluation reserves to the retained earnings in respect of the excess depreciation charged on revalued tangible non-current assets. There were no additions or disposals of the tangible non-current assets of Trigger for the two years to the current year end.

Trigger’s accounting policy for property, plant and equipment (PPE) must be consistent with that of the parent. The revaluation of NCA must be removed and the assets reverted back to historic cost. To remove it correctly there must be two corrections. This is because Trigger has made two mistakes. First, we must recognise the realisation of the reserve and put through the transfer that Trigger has ignored. Second, we must remove the remainder of the revaluation reserve and reduce the tangibles back to their historical net book value. Revaluation reserves should be realised over their lives. The life of the Trigger tangibles was six years at the point of purchase. But the revaluation is one year after purchase and so the revaluation reserve has a life of only five years from revaluation. The first of those five years is this year. So one-fifth of the $70m must be realised, therefore $14m is transferred to retained earnings, leaving $56m in the revaluation reserve. This is set against the $256m in tangibles. The revised balance is $200m, which is where it would have been had Trigger not put through the revaluation. After all, the tangibles are two years through a six-year life and had originally cost $300m.

I dont understand the $14m transfer to the reserve