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This is the Question..(3.6 question 2(c) June 2007)
Wader is reviewing the accounting treatment of its buildings. The company uses the ‘revaluation model’ for its buildings. The buildings had originally cost $10 million on 1 June 2005 and had a useful economic life of 20 years. They are being depreciated on a straight line basis to a nil residual value. The buildings were revalued downwards on 31 May 2006 to $8 million which was the buildings’ recoverable amount. At 31 May 2007 the value of the buildings had risen to $11 million which is to be included in the financial statements. The company is unsure how to treat the above events.
Why the ‘Reversal of impairment loss to profit or loss’ is $1.42m, not $1.5m?
In other cases, I always ‘Reverse a previous decrease which was recognised as an expense’. Why This Question’s answer is unique?
The Answer seems using IAS 36 while the question is saying cleary ‘they use revaluation model’…Help me Sir T.T
ThanksThe building’s “Cost $10m – Depreciation $0.5m” is $9.5 million, and revalued amount is $8 million on 31 May 2006. Therefore, on 31 May 2006, there were $1.5 million impairment loss recognised.
On 31 May 2007, “Valuation $8 – Depreciation $0.42m” is $ 7.58, and revalued amount is $11 million on 31 May 2007. (Differences= $3.42m)Text books said that ‘If company uses Revaluation model, the increased revalued amount shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss’
Therefore, I think that reversing the impairment loss (reverse the revaluation decrease in Revaluation model) $1.5m should be recognised in profit or loss, then $1.92m should be recognised as Revaluation reserve.Thanks for Quick Replying 🙂
i think it is because the company may be transferring the excess depn to retained earnings… so only 1.5-(.5-.42) would have been left in oce to be reversed. there is an option to transfer the excess depn. i am not sure if i am qualified to answer in this forum though or just the tutor
Sir I have the same question. The answer given was it is subject to depreciation. But why we need to charged a depreciation for a REVALUATION LOSS?
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