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Hi There,
In the BPP Practice and Revision Kit, please explain why the adjustments are added to profit for the year and TCI for NCI calculation.
My second question is in note 6, the revaluation of PPE what does it mean when they say “it is company policy to make all necessary transfers for excess depreciation following revaluation”
My third question – I am pretty clued up with all the necessary calculations for the SOFP but what important calcns are required for the SOPLOCI. Is there a format like SOFP
Thanks for your assistance
Anisa
Hi
1 I don’t have a copy of the BPP revision kit
2 When a company revalues its assets, the increase is credited to a revaluation reserve and the company now charges depreciation on the revalued amount.
But that means that the Statements of Income from now on until the asset is fully depreciated will have an abnormal depreciation expense – and that’s just because the company revalued the asset.
So it is “good practice” to release some of the revaluation reserve each year back into Retained Earnings – through the Statement of Changes in Equity.
The amount to be transferred equates to the excess depreciation caused by the revaluation
3 No, the problems associated with the Statement of Income in a consolidation question are:-
time apportionment
cancellation of intra-group sales,
elimination of pups
impairment of goodwill
correct treatment of share of Associate profits / losses
ignoring dividend income in parent received from subsidiary
calculation of nci shareand that’s about it
I am sorry I confused your june 2010 question with december 2010 question
And about your 3rd question, there is no format but people use columnar approach to save time in the exam
columnar approach looks like this
Parent Sub Assoc Adjustment Group
Revenue xx xx xxx ………………………………………………..your 2nd question
Ashanti owned a piece of property, plant and equipment (PPE) which cost $12 million and was purchased on
1 May 20X3. It is being depreciated over 10 years on the straight-line basis with zero residual value. On 30
April 20X4, it was revalued to $13 million and on 30 April 20X5, the PPE was revalued to $8 million. The
whole of the revaluation loss had been posted to other comprehensive income and depreciation has been
charged for the year. It is Ashanti’s company policy to make all necessary transfers for excess depreciation
following revaluation.I copying this for Mike so he can answer it.
And for your 1st question why TCI is used for NCI calculation, when subsidiary grows, nci grows as well
Question 2 from original post
Purchased 1 May x3 12m
Depreciation to April x4 1.2
Cv at April x4 10.8m
Revalue at April x4 2.2m now cv is 13
Depn to April x5 is 1/9 x 13m = 1.444m (only nine years left) and cv at April x5 is 11.556m
Transfer “excess depreciation” from Revaln Reserve to Ret Ears – that’s the difference between 1.444 and 1.2 which is what the depreciation would have been if we hadn’t revalued – and the amount is .244
So now Revaln Reserve is 2.2 – .244 = 1.956
Revalue at 30 April x5 to 8m from cv of 11.556m = a fall of 3.556m
In so far as we are able, this fall in revaluation of a previously revalued asset is set against the balance left in revaln reserve = 1.956m
The rest (3.556m – 1.956m) is expensed through OCI and Retained Earnings and amounts to 1.6mOK?
2) The revaluation of PPE what does it mean when they say “it is company policy to make all necessary transfers for excess depreciation following revaluation”?
The idea of a transfer is that you realize a revaluation reserve,
For example If you buy some land & revalued it up by $100 m, you got a revaluation gain of a $100 m & that revaluation gain of $100 m goes into the revaluation reserve if you then sell that land that revaluation gain of $100 m becomes realized, so you take that $100 m out of the revaluation reserve & drop it into the retained earnings reserve so that would be the process of realization. That’s the REALIZATION on SALE.
There is another type of realization which is ”Realization on use”
For example: If there is a revaluation of some plant,. The revaluation at the beginning of the year is $80 & the remaining life of this plant is 8 years. Now the plant itself is depreciated from where it is now down to 0 over 8 years, the idea is that the revaluation reserve should drop at the same rate. So if the revaluation gain as at the beginning of the year is $80, that revaluation gain of $80 will go into revaluation reserve but its realized over the life of the plant, the remaining life of the plant of 8 years. So you take $80 divide by 8 & you get 10, what you will do is at the end of the 1st year you will release $10 of that $80 from the revaluation reserve into the retained earnings & you will be left with $70 & then you will do exactly same the following year when you will release $10 & you will end up with $60 then $50 then $40 then $30 then $20 then 0.
So the figure for revaluation reserve goes down to 0 over the period of use & that’s called Realization on use.That is what it means by ”it is company policy to make all necessary transfers for excess depreciation following REVALUATION”
“then $40 then $30 then $20 then 0.” Warren, after “20” comes “10” but otherwise, it’s fine
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