- December 21, 2019 at 1:02 pm
As a general concept dividend is declared out of “accumulated realised profits less accumulated realised losses”.
What if we had bunch of revalued assets which are depreciated on their historical costs.
This really reduces our profits so a little left to be distributed as dividend. No?
I’d appreciate it if you could illuminate me.
Thank you.December 21, 2019 at 2:58 pm
The revaluation surplus is, of course, an unrealised profit and that surplus is depreciated over the remaining useful life of the revalued asset
But, of course, you’re correct! That surplus / excess depreciation is reducing the realised profits for each year and thus reducing the extent of profits available for distribution
But that’s where the law steps in! As each year passes that excess depreciation on the unrealised revaluation surplus is treated as though it were a realised profit
So when calculating the extent of distributable profits, in its simplest way, the year’s figure for profit after tax is then increased by the amount of that excess depreciation caused by the revaluation of the asset
Is that ok!December 21, 2019 at 3:38 pm
So…. you are telling that revaluation surplus is an realised profit and its subsequent extra depreciation is realised loss, ergo they have cancelling out effect???December 21, 2019 at 3:40 pm
So…. you are telling that revaluation surplus is “treated” as a realised profit and its subsequent extra depreciation also is “treated” as a realised loss, ergo they have cancelling out effect???December 21, 2019 at 3:54 pm
So each year, to compensate for the excess depreciation, we record the following entry:
Dr. Revaluation Surplus
Cr. Profit for the yearDecember 22, 2019 at 7:56 am
Your last post is correct
Your second post I shall ignore
Your first post is incorrect
The revaluation surplus is, at date of revaluation, unrealised
But as time passes, each year a part of that revaluation becomes realised
If I revalue an asset by $20,000 and that revalued asset has an effective remaining useful life of 10 years, then, over that 10 year period that revalued amount becomes realised … at the rate of $2,000 each year
So, as per your last post, we COULD, if we wanted to follow ‘good practice’, transfer that excess annual $2,000 depreciation out of Revaluation Reserve into Profit of Loss Reserve / Retained Earnings
But we may choose not to follow ‘good practice’ and simply not do that transfer
But, even though we didn’t make the transfer, for the purposes of calculating distributable profits, we treat that annual excess depreciation as though it were a realised profit and, thus, include it as distributable
OK?December 22, 2019 at 8:31 am
Oh thank you. Now I remembered it from F3 !
Dr. Revaluation Reserve
Cr. Retained EarningsDecember 23, 2019 at 7:53 am
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