- This topic has 15 replies, 2 voices, and was last updated 11 years ago by
.
- Posts
Hello, I would like to know if the following is correct and if not please correct me.
If an entity values its asset under cost model but decides to change to fair value and there is an INCREASE, this difference shown as a debit to the asset and a credit to the revaluation surplus a/c. In subsequent years, if there is an increase or decrease in the asset’s value this would be shown as income or expense in the P&L only (the revaluation surplus a/c will not affected).
If however there is a DECREASE in the value when changed from cost model to fair value, this decrease can be debited to the revaluation surplus a/c (if it has a credit balance) OR it is shown as an expense in the P & L. In subsequent years, if there is an increase or decrease in the asset’s value this would be shown as income or expense in the P&L only (the revaluation surplus a/c not affected).Well that’s a much more detailed explanation of what I have always believed! If an asset is revalued upwards (whether cost model or valuation model) I have always understood the increase should be credited to revaluation reserve.
If it is reduced in value, that reduction is first charged against the revaluation reserve in so far as it still exists in relation to that asset and then any surplus reduction will be charged against profit or loss account
But your explanation now has me worried that I have been doing it incorrectly all these years!
I appreciate your sense of humor. However, what you are saying is what I am accustomed to. I got that info from the BPP text, at the top of page 82, along with section 4.8 which is directly below.
Hi, I don’t have the BPP text available, sorry. (I’m between house moves – and sadly have been fit the last three weeks! :-(((. )
The following is from the BPP text……
original cost 250,000
dep (47,500)
carrying amt 202,500 @30.6.x9
reval surplus 147,500
fair value 350,000 @30.6.x9The difference between the carrying amt and fair value is taken to a revaluation surplus in accordance with IAS 16.
However the building will be subjected to a fair value exercise at each year end and these gains or losses will go to profit or loss. If at the end of the following year the fair value of the building is found to be $380,000, $30,000 will be credited to the P & L.
I am embarrassed to say “that’s a new one on me”!
Previous post was “……sadly have been for” not “sadly have been fit”. I hit “t” instead of “r” and predictive texting turned “fot” into “fit”
Even more sadly, I doubt I shall ever be fit again!
ok, well now I’m definitely confused!!! ….sigh
Mike, the chapter was dealing with IAS 40 Investment Property, when they gave this example…. does that make a difference?Mike, I’ve been doing some research and I came across this which was posted on OT’s forum in 2012 but was not answered by a tutor, please see the link below…… https://opentuition.com/topic/ias-16-property-plant-and-equipment-ias-40-investment-properties/
Now then, here we go! If it’s a property that was previously held at depreciated cost and has now been reclassified as an investment property, it shall be revalued as at date of reclassification with any surplus going to revaluation reserve.
Subsequent movements (up or down) will go through P or L account (where was my brain in previous posts?)
It’s like having a financial asset at fair value through profit or loss – movements go through profit or loss!
What I find disturbing about the post to which you gave me the link is the repeated reference to depreciation of investment properties. Now THAT I have always said shouldn’t happen – once classified as investment property, there should be no depreciation on that asset
Is that better for you? With apologies for my stupid posts earlier!
Hello again Mike.
A “what if” situation came to mind. I know you stated that investment property is not to be depreciated but what if it is a building only (land not included)? Over time, lets say a period of 5 years with the building not being in use and nothing done to upkeep the building then it would deteriorate. What happens in such a situation?
Well, that would hardly fit the definition about capital appreciation if it’s left to deteriorate and presumably no-one is renting this neglected building!
That sounds to be a situation where there just happens to be a building situated on a prime piece of property (the land upon which the building stands)
It really is a non-practical situation that you have suggested in your what-if
🙂
- You must be logged in to reply to this topic.