[eni004]

That clarifies it, thanks!

[eni004]

Hi

I was wandering if there is any explanation/reasoning of the IAS 16 rule according to which revaluation reserve is transferred to retained earnings directly in equity rather than through income statement?

I was thinking of the following case:

Revalued asset with revaluation reserve in equity is sold and there is loss on disposal booked in P&L. The amount of loss on disposal is lower than revaluation reserve. The revaluation reserve is transferred from retained earnings to equity directly without influencing the P&L.

Effectively there is gain on sale of this asset when taking into account revaluation reserve, however loss is shown in P&L… I understand the treatment, however a bit confused about the logic here…

Any thoughts?

Thanks a lot

[eni004]

Perfect! It was not my intention to change your mind, just to challenge it!:)

Thanks again

[eni004]

These two sections of IAS 36 would say otherwise unless there is some other clarification or example:

The increased carrying amount due to reversal should not be more than what the depreciated historical cost would have been if the impairment had not been recognized. [IAS 36.117]

Reversal of an impairment loss is recognized in the profit or loss unless it relates to a revalued asset [IAS 36.119]

Thanks!

[eni004]

I am aware it is a stupid scenario, my intention was not to create a real life scenario, but rather a very simple one which can help clarify accounting treatments which are not very clear.

There is no need for an example at all its just simpler if there are some numbers to crunch.

So, I would appreciate and be grateful if you could answer me the two questions below:

1. When an asset is first revalued, then impaired and then revalued again – is the final carrying amount limited to what the depreciated historical cost would have been if the first revaluation and impairment have not been booked? Or limited to what the depreciated historical cost would have been if the impairment have not been booked? In your solution you used revalued (first revaluation) amount rather than historical cost. Why? Any reference to any document?

2. When an asset is first revalued, then impaired with part of impairment decreasing a revaluation surplus to nil and other part booked in P&L, and then revalued again – do you reverse impairment party in the P&L (limited to the previous Dr impairment) and partly in revaluation reserve or do you book the total amount in revaluation reserve? Why? Any reference to any document?

Thanks

[eni004]

Thank you for a quick reply!
I can follow your calculation- the NBV at the end of year 4 cannot be > than the depreciated amount would have been if no impairment was recognized.
Just to clarify, my question here is: the standard says that in case of reversal of impairment, the increased carrying amount cannot be > than what depreciated historical cost would have been if the impairment has not been recognized.
In your calculation of NBV at the end of year 4 you used the revalued amount of 600 and not the historical cost of 500 – why?

I want to know how to reverse an impairment of revalued asset that went through P&L? I will change the value at the end of year 3: end of year 3 there is a downward revaluation to the value of 50.

1. 1.11 Cost 500
31.12.11 Depn 100
31.12.11 NBV 400
31.12.12 Depn 100
31.12.12 NBV 300
31.12.12 Reval 300 (Dr TNCA 100, Dr Depn 200, Cr Reval 300)
31.12.12 NBV 600
31.12.13 Depn 200
31.12.13 NBV 400
31.12.13 Impair 350 (Dr Reval 300 Dr P&L 50 Cr TNCA 550 Dr Depn 200)
31.12.13 NBV 50
31.12.14 Depn 25
31.12.14 NBV 25
31.12.14 Reval 175 (Dr TNCA 150,Dr Depn 25, Cr Reval 175 OR Cr Reval 150 and Cr P&L 50)
31.12.14 NBV 200

I have applied your logic that the NVB should be 200 at the end of year 4.
My question is how to reverse an impairment here – partly through P&L and partly through RR or all goes to RR.

IAS 36 says that reversal of impairment loss for a revalued asset goes to revaluation reserve and not P&L. Just want to confirm that this applies to the example above.

Thanks a lot

[eni004]

What happens if we are to reverse an impairment for previously revalued asset. For example cost of the asset (UEL 5 years) was 500 at the beginning of year 1. At the and of year 2 asset was revalued to 600. End of year 2 we will book

Dr Accumulated depreciation 100
Cr Cost 100
Dr Cost 200
Cr Revaluation reserve 200

End of year 3 there is a downward revaluation to the value of 150. We will book:

Dr Accumulated depreciation 200
Cr Cost 200
Dr Revaluation reserve 200
Dr P&L 50
Cr Cost 250

End of year 4 the value of the asset is revalued again to 375. What will we book?

Dr Accumulated depreciation 75
Cr Cost 75
Dr Cost 300 or (275) or (175)
Cr Revaluation reserve 300 or(275) or (275)

IAS 36 says: The increased carrying amount due to reversal should not be more then the depreciated historical cost would have been if the impairment had not been recognized. Reversal of impairment loss is recognized in the P&L unless it relates to a revalued asset.

[eni004]

Thank you for correcting me! It is 1,600 instead of 1,200. Thanks!

[eni004]

No need to incorporate 900 at the beginning because in order to calculate allowance for receivables you start with your gross unprovided receivables. The confusion is maybe coming from Y Co – its receivable is 1,600 and the company provided 60% for this receivable – since the specific provision is made (1,600×0.6=960), there is no need to do a general provision as well (on the remaining amount (1,600-960=640) . So in order to calculate allowance for receivables in the statement of financial position you should start with your gross unprovided receivables (62,900) – receivable written off (2,000) – receivables for which specific provision was made – (1,200) and on this amount you calculate general provision. Total provision will be equal to specific provision + general provision.
The question is not asking about the movement in the allowance, but if it did then you would start with what is already in the books (900) and would compare it to what the company should have (6,890) – difference should be charged to the income statement.

[eni004]

No problem, I’m glad I was able to help…best wishes and good luck!

[eni004]

Actually we both made a stupid mistake!
The calculation goes like this:
Specific provision: 1,600 x 0.6 = 960
General provision (62,900 – 2,000 – 1,600) x 0.1 = 5,930
Total provision = Specific provision + General provision = 6,890

The point is there should be no general provision made on the receivables for which a specific provision was already made.

Hope this is clear…

[eni004]

I believe the correct answer is D.
1. Out of total receivables 62,900, 2,000 is written off to the income statement so the remaining balance of receivables is 60,900.
2. Allowance for Y Co is 1,600×0.6=960, however, there is already 900 provided for, therefore additional allowance required is only 60.
3. General provision is made to all the unprovided receivables amounting to 59,940= (62,900 – 2,000 – 900 – 60) x 0.1 = 5,994
4. Total provision is general provision 5,994 + specific provision 960 = 6,954.

Please let me know if this is the correct answer.
Thanks

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