Transfer of excess depreciation

This is past exam problem under the name of ENCA.

A director of Enca, a public listed company, has expressed concerns about the
accounting treatment of some of the company’s items of property, plant and
equipment which have increased in value. His main concern is that the statement of
financial position does not show the true value of assets which have increased in
value and that this ‘undervaluation’ is compounded by having to charge depreciation
on these assets, which also reduces reported profit. He argues that this does not
make economic sense.
Required:
Respond to the director’s concerns by summarising the principal requirements of
IAS 16 Property, Plant and Equipment in relation to the revaluation of property,
plant and equipment, including its subsequent treatment. (5 marks)
(b) The following details relate to two items of property, plant and equipment (A and B)
owned by Delta which are depreciated on a straight-line basis with no estimated
residual value:
Item A Item B
Estimated useful life at acquisition 8 years 6 years
$000 $000
Cost on 1 April 2010 240,000 120,000
Accumulated depreciation (two years) (60,000) (40,000)
––––––– –––––––
Carrying amount at 31 March 2012 180,000 80,000
––––––– –––––––
Revaluation on 1 April 2012:
Revalued amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalised on 1 April 2013 nil 14,400
At 31 March 2014 item A was still in use, but item B was sold (on that date) for
$70 million.
Note: Delta makes an annual transfer from its revaluation surplus to retained
earnings in respect of excess depreciation.