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Please help – why in the question below we revalue Retained Earnings instead of Revaluation Reserves in the case of fundamental error.
“During 2009 it was discovered that certain non-current assets had been included in the records at 31/12/2008 at USD 500,000 in excess of their recoverable amount and that this situation was unlikely to change.” (Question is from the Opentuition course notes chaptar 4 example 1).
Thank you very much in advance!Accounting treatment of fundamental errors:
-Adjust the opening balance of retained earnings, and
-Restate comparative information
(Fundamental Errors, Chapter 5, Page 24, Opentuition Course Notes)Yes, thank you Najiya. I don’t inderstand why revaluation reserve is not a comparative information here. If for e.g. it would not be the error, but the revalue NCA in due course, we would put the revalue amount to the revaluation reserve, am I right?
If it was not an error, but revalued in due course…
here, it happens to be an impairment as the carrying value in the records is in excess of their recoverable amount.
the impairment loss should be immediately recognised in the income statement, unless the asset was previously revalued.
-If the asset was revalued by 500,000 earlier, then this loss will be deducted from the revaluation reserve.
-If the asset was revalued by 400,000 earlier & now the loss is 500,000; then only 400,000 will be deducted from the revaluation reserve and the remaining 100,000 will be recognised in Income Statement as an impairment loss.Hope that helps
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