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What is the purpose of transferring excess depreciation from the revaluation surplus to retained earning?
Thank you.
Because the excess depreciation is only resulting because of revaluing (and the revaluation reserve is not distributable). By making the transfer, the net amount charged against retained earnings will be the same as if we had not revalued.
Why is it treated differently to the gain on revaluation and not transferred to ‘capital’ in the SFP?
Because only the retained earnings are distributable as dividends, and by transferring the excess to retained earnings it means that only the original depreciation has effectively been charged against it.
Also, as we depreciate on the revalued amount, the excess depreciation is effectively reducing the gain on revaluation.
But why is the gain on revaluation not realised, whereas the excess depreciation is?
The gain on revaluation is only realised if the asset is sold.
The excess depreciation is not realised – because the asset is depreciated based on the revalued amount, the excess over the original depreciation means that amount of the revaluation gain (the unrealised gain) is being reduced.
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