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Hi Sir, I’m confused with some parts of the tech articles below.
https://www.accaglobal.com/my/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/measure-depreciation2.html1. in Example 2 solution: 2nd paragraph
1) Why $900,000 is “deducted” from equity?
I think $900,000 should be added to equity since it’s a revaluation gain?2) Why only $340,000 (1.24m-900,000) is charged to the P/L?
I think it should includes 2 yrs’ depreciation for the Revaluation amount=>
so 1.24m- (900,000-10,000*2) should be charged to the PL3) on 3rd paragraph, why $360,000 (1.24m-880,000) should be charged to PL?
I don’t really understand what’s is “transfer of excess is made/ or not made”.2. Why the excess of Depreciation caused by Revaluation can be transfered from Revaluation Reserved to Retained earning? What does that mean?
Does it mean that the excess of Depreciation doesn’t affect the total equity after Revaluation? (because Revaluation Reserved & Retained Earning are all under Equity.IAS 16 allows company to make a transfer of excess depreciation from Revaluation reserve to Retained Earning. What’s the difference between company choose to transfer the excess deprecaition resulated from Revaluation gain and the company choose not to?
In what senarion company would prefer choose to transer? & not to transfer?Hi,
In example 2 the asset has fallen in value and so there is a deduction to the equity. Yes, it was previously revalued where the would have been an increase to equity but now the opposite has happened when it has fallen in value.
If the fall in value is $1.24m and there is not transfer between the reserves then the balance on the revaluation reserve will be left at $900,000, it is not adjusted at all for any excess depreciation transfer. As such, $900,000 of the reduction in value will be charged against this amount in reserves and then the remainder will go through profit or loss, i.e. the $340,000.
In the other paragraph they have made the transfer for the excess depreciation and so therefore the $900,000 balance will be adjusted for each of the two years of the transfer. As this is $10,000 each year then the balance will have fallen to $880,000. We can now only use $880,000 of the reduction in value in reserves and the remainder of the full reduction will go through profit or loss.
Companies will always look to make the transfer as it will be more beneficial for the shareholders with it to be done as it is transferring some of anon-distributable reserve (revaluation reserve) to a distributale reserve (retained earnings).
Thanks
Hi Sir,
Thanks for the repy.
Btw, I still confused about “If the fall in value is $1.24m and there is not transfer between the reserves then the balance on the revaluation reserve will be left at $900,000, it is not adjusted at all for any excess depreciation transfer…. “.I think even if there’s no Reserve transfer of Excess Depreciation, the Balance on Revaluation Reserve should be also $880,000( $900,000-10,000*2. Take OP notes Chp 5 NCA example1 as a example, if we look at the Working for the Revaluation Reserve column, The excess of Depreciation (1,588) is excisted there and Value of the Revaluation reserve was 27,000, then deduct excess of Depreciation (1,588) and the final Revaluation reserve become 25,412.
In this case it’s not even discussed whether the Rereserve transfer of Excess Depreciation is made. That’s why I think the Balance on Revaluation Reserve here should be also $880,000( $900,000-10,000*2), not 900,000. Can you please expain why it’s wrong?Also, since company prefer to transfer excess Depreciation from Revaluation Reserve to Retained Earnings to increase the Dividiens to pay, but the solution shows that when there’s no transfer of excess depreciation made, only $340,000 charged to P/L, and when there’s a transfer of excess depreciation made there’s $360,000 charged to P/L. So that means although the excess depreciation of $20,000 was moved to RE, but the PL is charged $20,000 more (360,000-340,000). And then RE includes inclues the Profit for yr. How could the reserve transfer of excess depreciation increase RE and result in more Dividend to pay to SH?
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