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COMPANY ACCOUNTING IN AUSTRALIA – 5th edition

Ken Leo & John Hoggett

CHAPTER 12 REVALUATION AND IMPAIRMENT

OF NON-CURRENT ASSETS

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Learning objectives1. To understand principles of AASB 10412. To prepare journal entries – revaluation

increments & decrements3. To account for depreciation subsequent

to revaluation4. To apply the disclosure

requirements:AASB 10415. To be able to account for the

recoverable amount test

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Revaluation & Recoverable amount

AASB 1041 allows companies to revalue non-current

assets to their fair values AASB 1010

states that assets cannot be valued at greater than their recoverable amount

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AASB 1041

Applies to non-current assets Does not include Inventories which have

to be valued @ the lower of cost or market value.

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AASB 1041 – measurement choices

2 choices cost basis or fair value basis

FV = current market price

by class of assets

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Net revaluation increment- example

An entity acquires land for $75 000. Asset is revalued to $100 000. Tax rate is 30%

Land Dr25 000 Asset Reval’n Reserve Cr 25 000

Asset Reval’n Reserve Dr7 500 Deferred Tax Liability Cr 7 500NB for increment the ARR must be the after tax adjustment

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Revaluation Increment– depreciable assets

Entity has depreciable asset at carrying amount of $100 000 – cost $120 000, accumulated depreciation $20 000. Revalue to $110 000. Tax base is $100 000.Accum. Depreciation 20 000

Asset 20 000Asset 10 000

ARR 10 000ARR 3 000

Deferrd Tax Liability 3 000

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Net revaluation decrement

Recognise as expense in P&LAsset carried at $100 000, cost $120 000. Revalued to $90 000.

Accum. Depreciation 20 000Asset 20 000

Expense 10 000 Asset 10 000

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Revaluation decrement – tax-effect

No tax-effect entry necessary- not adjusted via other equity account

- tax-effect worksheet will adjust for difference between tax base and carrying amount

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Net decrement reverses prior revaluation incrementFirstly adjust against existing Revaluation Reserve – consider tax-effectAsset has carrying amount of $50, previously revalued upwards by $10, now revalued down to $35. Asset Reval’n Reserve 7

Deferred Tax Liability 3 Asset 10

Expense 5

Asset 5

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Revaluation increment reverses prior decrement Asset carried at $100, accumulated depreciation of $20, revalued to $130. Previously revalued downwards by $10.Accum. Depn 20

Asset 20Asset 10

Revenue 10Asset 20

ARR 14Deferred Tax Liability 6

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Depreciation of revalued assets Both AASB 1041 and AASB 1021 require the calculation of depreciation as a process of allocation.At 1/7/02, asset revalued to $100. Useful life is 5 years..Depreciation is $20However company will need to look at the Fair Value @ end of the year may need to revalue

again.

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Disclosure requirements –where assets at fair value AASB 1041, paragraph 9:

Method used to determine fair valuesStatement re independent valuation If index of replacement costs usedBalance of revaluation reserve

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Disclosure requirements

AASB 1041, paragraph 4.1:Whether cost or fair value is used, show for each class of assets a reconciliation of carrying amount at beginning and end of period, showing: Additions Disposals Acquisitions via acquiring other entities net revaluation increment recoverable amount write-downs reversals of recoverable amount write-downs depreciation expense other movements--

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Disclosure requirements AASB 1018Net credit or debit to asset revaluation reserveNet increment/decrement for each class of non-current assetsAASB 1040Total reservesFor each reserve: description of nature and purpose amount at beginning of period nature and amount of each increase/decrease amount as at reporting date

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The cost method Asset recorded at cost of

acquisition

Depreciated as per AASB 1021

Recoverable amount test applied

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AASB 1010 AASB 1010 “Recoverable Amount of

Non-Current Assets”, issued 1999

Does NOT apply to: assets measured at fair value or

net market value inventories not-for-profit entities

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The recoverable amount testCompare carrying amounts of assets with recoverable amounts

Recoverable amount is the net amount expected to be recovered through cash inflows/outflows arising from continued use and subsequent disposal

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The recoverable amount test If recoverable amount < carrying amount

- write down the asset- recognise an expense- write-back accumulated depreciation

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The recoverable amount test An asset is carried at $12 000 - cost of $20 000 and accumulated depreciation of $8000. Recoverable amount estimated to be $10 000.

Accum. Depreciation Dr 8 000Asset Cr 8 000

Expense Dr 2 000 Asset Cr 2 000

Depreciation now based on $10 000

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Disclosures - AASB 1010 For assets written down in the current

period, for each class of assets:- carrying amount

- amount of write-down- assumptions made in determining recoverable amount

Assets measured at recoverable amount, less depreciation

Whether cash flows have been discounted in determining recoverable amount

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Impairment test ED 99 “Impairment of Assets”,

issued December 1999. <<Since Withdrawn>> Expect impairment standard to replace

AASB 1010 Recoverable amount in the future

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Tutorial Questions Exercise 12.1 Exercise 12.2 Exercise 12.3