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Question from Kaplan book:
Nash purchased a building for its own use on 1 January 20X1 for $1m and attributed it a 50 year useful life. Nash uses the revaluation model to account for buildings.
On 31 December 20X2, this building was revalued to $1.2m.
On 31 December 20X3, the building met the criteria to be classified as held for sale. Its fair value was deemed to be $1.1m and the costs necessary to sell the building were estimated to be $50,000.
Nash does not make a reserves transfer in respect of excess depreciation.
Required:
Discuss the accounting treatment of the above.
Kaplan book answer:
The building would have been recognised on 1 January 20X1 at its cost
of $1m and depreciated over its 50 year life. By 31 December 20X2, the carrying amount of the building would have been $960,000 ($1m – (($1m/50) × 2 years)).
The building was revalued on 31 December 20X2 to $1.2m, giving a
gain on revaluation of $240,000 ($1.2m – $960,000). This gain will have been recorded in other comprehensive income and held within a revaluation surplus (normally as a part of other components of equity). The building would then have been depreciated over its remaining useful life of 48 years. Depreciation in the year ended 20X3 was
therefore $25,000 ($1.2m/48). The building had a carrying amount at
31 December 20X3 of $1,175,000 ($1.2m-$25,000).
At 31 December 20X3, the building is held for sale. Because it is held under the revaluation model, it must initially be revalued downwards to its fair value of $1,100,000. This loss of $75,000 ($1,175,000 – $1,100,000) is recorded in other comprehensive income because there are previous revaluation gains relating to this asset within equity.
The building will then be revalued to fair value less costs to sell.
Therefore, the asset must be reduced in value by a further $50,000.
This loss is charged to the statement of profit or loss.
My question:
We previously have a revaluation gain of $240,000 relating to this asset, and then we have a $75,000 loss which we record in OCI because we have that revaluation gain relating to the asset. But when we revalue to fair value less costs to sell and the building needs to be reduced by a further $50,000, why isnt this also offset against the remaining revaluation gain we have relating to this asset? The book says this loss is charged to the SPL. I think I got confused somewhere, Can someone explain this part please?
ThanksFrom IAS plus:
Impairment must be considered both at the time of classification as held for sale and subsequently:
At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as held for sale, impairment is measured and recognised in accordance with the applicable IFRSs (generally IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets, IAS 38 Intangible Assets, and IAS 39 Financial Instruments: Recognition and Measurement/IFRS 9 Financial Instruments). Any impairment loss is recognised in profit or loss unless the asset had been measured at revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease.
After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognised in profit or loss [IFRS 5.20], even for assets previously carried at revalued amounts. This is supported by IFRS 5 BC.47 and BC.48, which indicate the inconsistency with IAS 36.
I think the second paragraph above answers your question – who would know it in the exam? Virtually no-one.
(In future please don’t copy and paste whole questions in this facility. Summarise your question in a few words).
Hi
Thanks for your reply.
So im confused about the inconsistency with IAS36, in the exam would we have lost marks if we had again offset it against the existing revaluation surplus instead of taking it to the SPL or..?
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