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My questions about RoMM
The relevant paragraph in the scenario:
“Improvements in technology have resulted in efficiency savings in the Group’s central catering facilities, which supply the hotel restaurants. This has meant that the Group has been able to bring catering functions in its domestic, country together into one building. One building thus become surplus to the Group’s requirements, and on 30 September 2017, the Group contracted to sell this building for $5.5million. The building had last been revalued in September 2014,and had a carrying amount of $4.2milliom at the date of sale. The gain on disposal has been credited to revenue and balance of the revaluation surplus relating to the building, $1.7million, has been credited against other operating charges in the SPL.”I can only identify RoMM about wrongly recognised as revenue. Wrongly recognised revaluation gain in SPL, should be in OCI.
Here’re the some other answers from bpp answer which i don’t understand:
1.
“The sale should only be recognised in the year if contract to sell is binding. There is a risk of the sale being recognised incorrectly if this is not the case.
If the contract is not binding before the year end but is completed before auditor’s report is eventually signed, then it will be a non-adjusting event event after the end of reporting period requiring disclosure in the FS.
If the contract is binding but not completed at the year end, there will be a material receivable of $5.5m (1.5% of TA) ”What is the meaning of contract binding and not binding?
2.
” IAS16 requires that revalued assets are revalued with sufficient regularity that the carrying amount does not differ materially from that which would be determined using FV at the date of the SOFP. The valuation on sold building appeared to be out of date, as it sold at 31% above the valuation, which is material. ”It means that the selling price of revalued asset cannot be much different from its carrying amount? Is that mean it will not be possible to obtain much gain from sale of asset? Since the CA and selling price should not be materially differ..
1. This is assumed knowledge of contract law (F4). A contract is a formal agreement which binds the parties to it, in law. So if one party is in breach, the other party will be able to seek legal remedies. A contract is not binding (ie legally enforceable) until it is signed by the parties. A draft contract (unsigned) is clearly not binding.
2. The building is only ONE of many. Since revaluation model must be applied to a class of assets, RoMM is that all the remaining buildings are understated if their revaluations are similarly out of date. .2. How do we know the revaluation is out of date? Are we look at the date of revaluation? Or the big difference between carrying amount and selling price?
It is assumed knowledge of FA(F3)/FR(F7) and SBR(P2) that to use the revaluation model of IAS 16 is not a “one-off” exercise. This is what IAS 16 states about the frequency of valuations:
“The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property, plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be necessary to revalue the item only every three or five years.”So three years is one indicator that revaluations could be out-of-date – but it is the significantly different selling price (a fair value) that indicates that revaluations are out of date.
Understand. Thank you.
So is it correct to say that for asset measured at revaluation model(and it revalued with sufficient regularity) , the selling price of it normally will not be significant difference as compared to its carrying amount. Thus, the profit gain normally will not be huge amount.
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