reversal of impairment loss of individual assets

This is incredibly easy!

Go back to impairment of an asset …

… first ask “Was this asset previously revalued upwards?”

So now we have two possibilities

1) It was the subject of a previous increase, or

2) It was not previously revalued

Dealing with the first, the journal for reversing (by say $2,000) that previous INCREASE (say $1,200) would be:

Dr Revaluation Reserve $1,200
Dr Profit or Loss Account $800
Cr Asset Account $2,000

If it had not previously been the subject of a revaluation and is now simply the subject of an impairment of $2,000, the entry would be:

Dr Profit or Loss Account $2,000
Cr Asset Account $2,000

Now, your post asks about the reversal of a previous impairment – let’s say the reversal is for $900

We simply undo the previous impairment entry!

In the first case we would:

Dr Asset Account $900
Cr Profit or Loss Account $800
Cr Revaluation Reserve $100

and in the second case we would:

Dr Asset Account $900
Cr Profit or Loss Account $900

There is a third possibility where an asset has previously been revalued ($1,200) and the impairment was say $700

The impairment entry would be:

Dr Revaluation Reserve $700
Cr Asset Account $700

and, to reverse that impairment by, say $400, simply undo the impairing entry

Dr Asset Account $400
Cr Revaluation Reserve $400

There is a bit of a problem here because, when reversing an impairment, we should not give an asset account an adjusted value greater than it would have been if we hadn’t impaired it in the first place

Consider these values:

Asset cost 2 years ago $4,000 and is being depreciated over 20 years at the rate of $200 each year

Its carrying value now is $4,000 – (2 * $200) = $3,600

Impair it down to $2,700

Dr Profit or Loss Account $900
Cr Asset Account $900

Expected life hasn’t changed so, at date of impairment, there is still 18 years of life left in that asset and now annual depreciation has fallen to $2,700 / 18 = $150

3 years later, we revalue that asset and it has a revised value of $3,100, so reverse that impairment

At the date of this revaluation, the asset has a carrying value of $2,700 – (3 * $150) = $2,250 and we’re looking to reverse the previous impairment

BUT we cannot restore the asset to a value greater than what it would have been without the impairment

Without the impairment, our asset is now 5 years old and was being depreciated at $200 each year so it WOULD have had a carrying value of $4,000 – (5 * $200) = $3,000

So, as a result of our decision to reverse that impairment, we are restricted in the amount that we can process

The revaluation / impairment reversal entry will therefore be:

Dr Asset Account $750
Cr Profit or Loss Account $750

and that restores the asset to a value that it would have had if we hadn’t impaired it

But what about the $3,100 valuation?

That remaining $100 would be treated as a ‘normal’ revaluation:

Dr Asset Account $100
Cr Revaluation Reserve $100

Is that OK?

(I can’t remember any past exam questions that asked for this, sorry)