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Hi,
Please I would like to know why do we credit Retained earnings when calculating excess depreciation on revaluation. And also why do we actually debit the excess depreciation on the Revaluation Reserve.When we revalue upwards, the surplus is credited to Revaluation Reserve and the asset is restated at its revalued amount. That revalued amount is the basis upon which subsequent depreciation is calculated. Now, think about this – if we hadn’t revalued, depreciation would have been based on the original, lower value rather than the adjusted higher, revaluation figure.
But surely, that’s unreasonable to reduce this year’s profits by an artificially high depreciation amount and thereby reduce the retained earnings figure to carry forward into the future.
So (and this is only “good practice”, it’s not mandatory) we can make an annual transfer to Retained Earnings to compensate Retained Earnings to the extent that the depreciation calculated on the revalued asset exceeds the depreciation that would have been charged on the asset had we not revalued it.
That then explains why each year we (may) put through the double entry:-
Dr Revaluation Reserve
Cr Retained Earnings
with the amount that represents the excess depreciation for the yearOK?
Thank you very much sir,, I appreciate for yor timely response, your explanation is well structured, I got the concept. Thank you once again.
Hi there,
Thank you for previous posts and replies.
Can you please advise on a situation when there is a revaluation decrease and depreciation?
If there is a revaluation increase we do the following: Increase Asset Value, Increase Reval Reserve and Increase Accumulated Depreciation (Dr Asset, Dr Acc’d Dep,n & Cr Reval Surplus)
But do we do just the opposite of the above when its a decrease in value?
Thank you,
Art
Yes, you’re general idea is correct – it’s a change in an accounting estimate so there’s no retrospective adjustment
However, your stated entry for a revaluation upwards is not as you have written.
Debit Provision for Depreciation and Credit Revaluation Reserve.
If the revaluation is greater than the accumulated depreciation, the amount by which revaluation exceeds accumulated depreciation will be debited to the asset account
The depreciation from the date of revaluation is then based on the revised value and is charged over the estimated (maybe revised) useful life of this revalued asset
OK?
Thank you very much Mike! I get what you mean re upwards revaluation.
But I didnt quite get about downward revaluation – do we Dr Revaluation Reserve & Dep’n and Cr what?
Suppose the situation: A property is revalued at year end to 10K from 17K. Remaining useful life is 20 years and its depreciated on a straight line basis.
What do we do here?Appreciate your advice!
Cheers,
Art
It depends whether there is an existing upwards revaluation relating to this particular property within the revaluation reserve.
If there is no previous remaining upwards revaluation, this devaluation will be recorded as Debit Statement of Comprehensive Income and Credit the TNCA
If there IS a previous revaluation surplus still in revaluation reserve, then the current impairment will be recorded as Debit revaluation reserve (in so far as it covers the current impairment) Debit Statement of Comprehensive Income (if the impairment is greater than the previous revaluation increase – this debit will be the amount by which the current devaluation exceeds the previous revaluation) and Credit TNCA
Annual depreciation will be charged on the revised carrying value over its (potentially revised) remaining useful life
OK?
Hi there,
I have a problem with reversal of impairment loss – there is an exercise in my study text which I have a trouble dealing with.
We have a 15 years leasehold property acquired in 2007 at 30m and revalued to 25.2m which led to 2.8m impairment charge in 2008 (this figure of 25.2 is given in 2009 trial balance) and then revalued again to 24.9 at the year end 2009.
They show that in 2009 it should be dealt with as follows:
amount b/d per question as at 31/12/2009 – 25.2m;
dep’n (1.8m), which is 25.2/14
Reversal of impairment loss 1.5m
Total revised amount 24.9mNow I have a question re where have they seen impairment reversal? As far as i can understand we are talking of the value going down all the time.
Would appreciate any advice.
Thank you,
Art
25.2 brought forward at the end of 2008. Depreciate for 2008 / 2009 = 25.2 / 14 = 1.8
That brings the carrying value down to 25.2 – 1.8 = 23.4
But, after depreciation, we consider again the fair value and it’s 24.9
So, revalue UPWARDS from new carrying value of 23.4 to new revalued amount of 24.9 = revaluation increase of 1.5
Has this asset previously been impaired? YES! So reverse the previous impairment entries – Dr Accumulated Depreciation 1.5 and Credit Statement of Income 1.5
hai..
can you explain the IAS 16’s requirement regarding the revaluation of non-current asset and the accounting treatment of surplus and deficit on revaluation and gain and losses on disposal..
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