REVALUATION OF PREVIOUSLY DEPRECIATED ASSET

This process is basically about ensuring that the financial statements reflect the reality of the economic situation subsequent to the revaluation. The allowance for depreciation is designed to reflect the economic consumption of an asset’s benefits over its useful economic life. An asset will appear in the statement of financial position at its historical cost (plus directly attributable costs necessary to bring an asset to its intended working condition for its intended use in the entity’s actiities) minus the allowance for depreciation estimated for the asset. When an asset is revalued, subsequent depreciation should be calculated with respect to the revalued amount of the asset over its subsequent estimated useful life from the date of revaluation. This is best illustrated by example. If a building with an original cost of $10 million ten years ago and a useful economic life of 50 years is revalued at $40 million (for simplicity I am going to assume no residual amount is estimated for the building) and its expected useful economic life remains unchanged then the following accounting entries should be made.
DR Allowance for depreciation $2 million
DR Asset account $30 million
CR Revaluation reserve $32 million
This will ensure that the carrying amount of the asset subsequent to the revaluation is $40 million. Depriciation should then be charged at $1 million a year- 40 years subsequent useful economic life and revalued asset amount of $40 million.Previous to revaluation carrying amount of asset was $8 million.The “excess” depreciation, as a result of the revaluation, can then be dealt with by means of a reserve tranfer of $800000 from the revaluation resere to the profit and loss reseve.
Dr Revaluation reserve 800000
Cr Profit and loss reserve 800000