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Hi sir.
in example 1 of the notes on non current assets(chapter 5) i could not understand the last statement on your treatment of retained earnings.as per my understanding depreciation decreases the profit. increase in depreciation would have effectively reduced retained earning(distributable profit) because it is an increase in expense. i did tried to listen to your remarks but still don’t understand. can you please help with clear illustration? thanks.Hi,
Yes, you are correct that the depreciation reduces the profit and that the revaluation leads to a higher depreciation charge that further reduces the profits. It is this higher depreciation and larger impact to retained earnings that we are trying to adjust for.
As the gain on revaluation has gone through OCI, it seems unfair then that the profit or loss is hit with the higher depreciation charge. We therefore adjust for the excess depreciation as a reserve transfer, where we reduce the revaluation surplus and increase the retained earnings.
Hope that clears it up for you.
Thanks
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