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PPE – revaluation downwards – ACCA Financial Reporting (FR)

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  2. Sir, ever so grateful for the material. Just a little clarification on the excess depreciation. I read in the ACCA technical articles on PPE that an adjustment for excess depreciation is unnecessary if the question does not specifically state that the entity has a policy for charging excess depreciation from revaluation reserve to retained earnings in respect of revalued assets. Is this correct, as I notice you make this adjustment though no reference to it being the entity’s policy is expressly stated in the example questions? Looking forward to your answer and pls keep up the great work.

  5. we are left with reserves 3850. Now we have a decrease in an asset by 4250(12250-8000), so we will charge 3850 from reserves and the excess 400 (below the historical cost) from P/L
    entry will be—-
    DR Reserve 3850
    DR P/L 400
    CR PPE 4250

    my question is that if we are decreasing reserves by 3850, how can we charge 3850 from OCI also in SPLOCI?
    Kindly answer

  6. Hi Sir,

    Why did $400 go to SPL and $3,850 go to OCI? I understand how you calculated the figures but I don’t understand the principle between placing these amounts respectively to SPL and OCI.

  9. Hi Chris,

    For this example, you mentioned removing $3,850 from Revaluation Surplus and the remaining $400 will be charged from P&L directly. Understood that the original Revaluation Surplus of $4,400 have been reduced by $550 due to the $1,750 Depreciation Charge occurred during the year, hence the balance of $3,850.

    Does this imply that the $550 have been reduced from the Revaluation Surplus and moved into Retained Earnings to offset the “additional” Depreciation?

    Thank you!

    Regards,
    YuSheng

  12. Hi Sir. Thanks so much for this detailed explanation but how are we going to do all these workings in time pressured conditions as in the actual exam? Aren’t these too many workings just for a small question that could come as a part of a larger consolidation question which would take even more time? Is there any way for us to make it shorter for exam?

  13. Hi,
    Had there been no impairment, this would have been the case. We would have transferred 550 to the retained earnings as compensation to the shareholders for increased depreciation which lowers their earnings.

    Now if its a case of impairment, we make up for the loss first from Reval reserve i.e. 3850 and 400 from P/L (or an adjustment from retained earnings i.e. 550-400). So hereby we are left with 150 in retained earnings even after covering for the impaired value. So basically we gained in total 4400-4250=150. Where is the treatment for it? And shouldn’t be it also included under the head OCI?

  14. Hi,
    Had there been no impairment, this would have been the case. We would have transferred 550 to the retained earnings as compensation to the shareholders for increased depreciation which lowers their earnings.

    Historic Cost Reaval. Model Reval. Reserve
    ———————————- —————— ——————- —————–
    Cost(1.1.13) 12000
    Acc Dep -2400
    CV (31.12.14) 9600 14000 4400 OCI=4400
    Dep -1200 -1750 -550 Dep=1750
    CV 8400 12250 3850

    T/f to retained earnings=550
    ————————————————————————————————–

    Now if its a case of impairment, we make up for the loss first from Reval reserve i.e. 3850 and 400 from P/L (or an adjustment from retained earnings i.e. 550-400). So hereby we are left with 150 in retained earnings even after covering for the impaired value. So basically we gained in total 4400-4250=150. Where is the treatment for it? And shouldn’t be it also included under the head OCI?
    Historic Cost Reaval. Model Reval. Reserve
    ——————————— ——————- ———————- ——————-
    Cost(1.1.13) 12000
    Acc Dep -2400
    CV (31.12.14) 9600 14000 4400 OCI (gain)=150
    Dep -1200 -1750 -550 Dep(SPL)=1750
    CV (Before) 8400 12250 3850 OCI(impairment)=3850
    Impairment -400 -4250 -3850 SPL(impairment)=400
    CV after 8000 Nil

  15. Hi Chris,

    It might be worth mentioning that a revaluation surplus (gain) should be credited to a revaluation surplus (reserve), via other comprehensive income, whereas a revaluation deficit (loss) should be expensed immediately (assuming, no previous revaluation of the asset has taken place).

    Thanks for all the resources

    Alex

  16. Hi Chris
    In example 2 on Revaluation decrease when the impairement takes place (on 31.12.2015) we have the following balances:
    PPE dt 14 000
    Acc.depr. ct 1 750 (Depr. exp. dt 1 750)
    Reval. reserve/surplus ct 3 850
    Retained earn. ct 550

    Is that right?
    So, we should credit PPE acc with 6 000 but where should go debits – to accum. depr. (1 750)and rev. reserve (4 250) accounts?
    Please, could you specify which accounts and with what amounts will be affected?
    Thank you!

  18. Sir,

    why we take -ve 3,850 ? how we can figure it out that this amount is impaired? what is the nature of revaluation account, is it represents income head or expense head cause of loss?

    Thanks

    • Hello,
      I think the easiest way to understand which amount is impaired to OCI or P/L is to always think about the “historical” carrying amount (CA). In the last year the “historical” CA was $8400 and the new CA was $12250. Any amount that falls up to “historical” CA is always imparment in OCI. If the amount falls below “historical” CA, then it is an impairment in P/L (loss!).
      In this example, the new CA falls from $12250 to Fair Value $8000.
      1) consider any impairment up to “historical” CA: $12250 – $8400=$3850 in OCI
      2) consider any impairment below the “historical” CA : $8400 – $8000 = $400 in P&L

      When I do the revaluation examples, I always imagine a waterfall which falls up to “historical” CA , stops there, and continues to flow below the “historical” CA.

      Bests,
      Marina

      P.S. CA is Carriyng Amount = Carriyng Value

      • Well ! Thank you for reply i understand but i need some clarity i am focusing on it again if i have any other dought will ask again.

        Thank You

  19. Sir,

    why we take -ve 3,850 ? how we can figure it out that this amount is impaired? what is the nature of revaluation account, is it represents income head of some expense cause of loss?

    Thanks

  20. Dear Sir,
    The asset was revalued for $14m on the last day of the accounting year, yet the dep. charged was for full year ($.55M). If the asset was taken into account on the last day, will we still charge dep on it for the whole year?

      • Hi,

        I’m pretty sure that this is correct as we are trying to find the carrying value at the end of December 2015 before the impairment down to $8 million. The revalued asset ($14 million) is depreciated over its remaining useful life (8 years) to give the $1.75 million for the year to December 2015.

        Thanks

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