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Why is excess of depreciation transferred to “Retained earnings” after revaluation?
It was mentioned that since revaluation is unrealised we need to categorise the revalued amount under SOCI and SOCIE?
Then why is excess depreciation being taken to retained earnings?
You are, I assume, happy that the revaluation surplus itself goes to the revaluation reserve because it is not distributable as dividend. Therefore it is kept separate from the retained earnings, which are distributable.
However, after revaluing the asset it means the depreciation expense will be higher than it was before, and the expense reduces the profits (and therefore retained earnings) more than it did before – that means less distributable profit than before.
So to make it fair, as we do depreciation, the excess is transferred from revaluation to retained earnings, so that the distributable amount each year remains as it would have been before.
Thank you so much again Sir. I must say that you are undoubtedly an amazing teacher. We are glad to have a tutor like you Sir.
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